This Week in Startups - How Tiger Global is outpacing VC with better, faster, cheaper, capital ft. Founders Fund’s Everett Randle | E1207

Episode Date: April 30, 2021

Tiger Global, a crossover hedge fund, is moving at an unprecedented speed and scale in venture capital. Everett Randle of Founder's Fund joins Jason to break down Tiger Global's strategy, discuss the implications for the investing ecosystem (13:14​), explain his "Walmart of VC firms" mental model (24:42​), and more! Pod Notes: http://bit.ly/E1207Tnotes

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SOC2 compliance in weeks, not months. Get $2,000 off your first year by going to secureframe.com slash offer slash twist. Hey, everybody. Our guest is Everett. Randall. He is a principal over at the Founders Fund, which I'm lucky to be an LP, a limited partner in their fund, run by my friend Brian Singerman, and a bunch of other interesting cats working over there, founded of course by Peter Thiel and previously Everett worked at Bond Capital and Kleiner Perkins. He does an interesting substack at Randall.com. And he wrote a really interesting piece called playing different games. That piece was about Tiger Global's impact on venture capital. And we're going to talk about that today. So welcome to the program, Everett. Is it Everett?

Yeah, yeah, Everett. I'm bad at saying my own name, too, so I don't. I can't blame you. But thanks, Jason. I'm glad to be on. All right. So you're a young guy, it looks like, and you've been in venture capital, how long? It's four or five years now. I actually started my career at Vista Equity Partners. So even like the deep, dark candles of, of, you know, LBO and kind of private equity over there and then I actually went from there to Kleiner Perkins so I got to work with your friend Mamoon a little bit and Mary Meeker and the gang there and then we obviously spun that out into what is now bond capital and was there before coming and joining Brian, Keith and Peter and the gang here at Founders Fund. All right, fantastic. Well, congratulations on this epic run you've

had as a capital allocator. Let's talk about your piece. Explain to people who Tiger Global is. Yeah, so Tiger Global is what they call a crossover hedge fund. It's a tech-focused crossover hedge fund. So they invest in public tech companies mainly. So they have a very, very large, I think it's like 30 billion plus. I don't know the exact number. They have a very large public portfolio of tech stocks. But they also invest in private companies, just like you'd see in Excel, a Kleiner Perkins, a Sequoia, a founders fund, any of us else, kind of private capital markets folks, invests. as well, so they play on both sides. And so normally a hedge fund does the public markets or big buyouts, big, big, chunks. And then what we do in venture capital tends to be little bites. Early stage investing, you know, a couple of hundred thousand for a seed round, couple of low millions for a Series A.

And then Series B things start to heat up, but we're in a hot market. Things are getting very big. Public companies are staying, or previously private companies were staying longer before being public like, I don't know, Uber, Airbnb, taking 10, 11, 12 years to go public. So why is the Tiger Global going downstream, or I should say upstream, going upstream to where we all hang out at the source by, you know, where the well is of, you know, all this amazing startup attention? Yeah.

Why are they doing this? When you think about the evolution of what I call like the venture growth asset class, And so that's kind of like everything from Series B. So it's not, you know, two people in a garage at this point. It's kind of a real business all the way to the pre-IPO round and to the IPO. You know, as you mentioned, like the first part of that sequence was startups started being private for much longer. So gone were the days of like Amazon doing their Series A next year the IPO. Companies were now doing Series B, Series C, Series Ds, all the way to, you know, HIG, etc.

And at first, the folks really to provide capital to the entrepreneurs that were staying private longer was like a mix of the venture firms that were, you know, climbing up the stack and adding growth funds to their venture funds. So I think Excel, you know, had like, you know, raised their first growth fund in 2008. Kleiner Perkins, you know, brought Mary Meeker over from Morgan Stanley and started in 2011, their digital growth fund. And then you had kind of this like OG 1.0 version of the crossover funds in like TCV. and GA who were doing their thing all the way, you know, investing in Netflix in the late 90s. And then you had kind of these independent folks like Meritech and IVP, I think, that have been around since the late 90s as well working in this sort of part of the asset class. But that was pretty much it.

And like for the last 20 years and especially from kind of 2010 to 2018, you needed to have a good brand, like you needed to make sure that you had access to these entrepreneurs. But if you had a good brand and you had investors that had a pulse, it, it, it, it, candidly has not been that hard to generate really, really good returns in kind of the series B to series IPO because it just hasn't been that competitive. So you raise your series A from Kleiner Perkins, you're going out for your series B. And it's like, oh, like, I guess we'll just go with like Kleiner Perkins again. Or we'll go with Kleiner Perkins in Excel. There's wasn't that much competition on the supply of capital providers. So from 2010 to 2018, you have a fairly limited

amount of funds doing just insanely well. It's not been very, or it's been very, very common to see funds do, you know, 3x money on money. That means, you know, you put a billion in, you get $3 billion out, whatever the fund size in. That's the multiple of how much you put in. But three X funds, five X funds, sometimes, you know, 10x funds, even at the growth stage, have not been that uncommon. And just like any, you know, free market, any competitive market, if we learned any thing from Econ 101 when there's excess profits like this. And by the way, this is at the same time while people in the public markets, 15% a year IRA is best in class. That gets you the gold medal. That gets you happy LPs. And, you know, I think like a three X fund over five years in the private

markets, that equates to like a high 20s, you know, percent IRA. And so the returns were just much, much better in private tech than they were in a lot of other. places and it just wasn't that competitive for, for, you know, 15-ish years. And so, so Tiger then decides they're going to formalize this process and scale it. That's the next piece of this is they realize, wait a second, you kind of can't lose if you do the series C, D, E, even maybe down into the series B. And let's be honest, there's been an inflation. What is a series A is now a series B? What's a series B is now a series C in terms of the numbers? So, But they are not designed to write $20 million checks, are they?

They're not. And they're not. But you're absolutely right that, yeah, basically, it's a free market. It's a competitive market. And so if we know anything from Econ 101, if there's excess profits in a market, you know, competitors are going to come in and compete the hell out of it until it's at an equilibrium. And so they basically came in and said, wow, you know, there's nothing that special or, you know, there's no moats in this market that will prevent us from coming in.

we know tech from investing in tech since, you know, 2000 or whenever they were founded around then, you know, why don't we come in and do this? And so, yeah, it's like, yeah, like a $20 million check isn't that interesting for them, but even the $20 million check that opens them up to potentially do $100, $200, $300 million check down the line. And by the way, it's like their very best companies, they still hold Zoom, we still hold Snowflake.

I don't know if they're able to get in those. I don't think they're able to get in those before the IPO. But it's like they can also hold these things and then put them in their public portfolio when they graduate from private to public. And so you sort of described that they're playing a different game than the VCs who are here. You did a little math around it, but just to give an idea, and I think that, you know, the information got some information from Pitchbook, which is a database for people who don't know of venture deals.

And right now, if you look at Tigers' 2021 private tech investments, it's outpacing traditional VCs handily. They've done over 60 deals to Andreessen's 49 or so, excels 40, Sequoia's 32. Now, it's not a race to throw money away here, but doing double Sequoia, Koto, and Dragonere, and Koto and Dragonere are part of this cohort of hedge funds dipping down, correct? Yep. So in a way, you have the top venture firms doing bigger deals and having growth, and now you've got the hedge funds coming down.

how does a founder make the decision here and how does it affect founders this is this week in startups after all not this week in capital allocators although you and I as capital allocators love to talk about this wonky stuff what is this due to a founder with a company doing

you know 10 or 25 million dollars in revenue yeah so when you get when you're a founder and you get to 10 to 25 of ARR or you know if it's a software business or you know other other sorts of revenue at that point especially these days, you've probably already raised your seed, you've probably already raised your A, and you've probably already raised your B. At that point, you should probably have the investors around

the table that are going to make up your board, that are going to be the people that you call it 3am when something's going poorly, and that are really helping you from that kind of like investor's strategic level. So oftentimes founders kind of get to this series C, DEF phase of their business, and they kind of sit there and say, we don't really need more folks around. the table. Yet. Around the table being the board room. Yeah, the board room.

Or it's just like there's honestly a lot of baggage that comes with a lot of venture firms. Like, you know, you, as an investor at a lot of these firms, when you invest in a company, you want to get involved because it also helps your career as an investor. You want to come in, you want to join the board so you can go and tell your other investor friends or other founders that you're on the board of this company. Well, it's also your fiduciary responsibility, right? So the less cynical assessment of that would be.

you know, you are responsible for the money you're putting in, right? That's very true. Yeah. So that is a much more charitable interpretation than I. But there is a lot of, I think like the simplest way to think about it in a framework that not many people think about is they think of kind of investors at any stage on the scale of like zero to 10. Zero is not helpful. Ten is like, wow, amazingly helpful. And I actually think that the scale is negative 10 to 10. Like 10 is still very helpful. Zero is not helpful. But an investor can actually mess up a lot. Of course. You can derive the whole thing. Yeah. Exactly. They can mess up a business. They can mess up a boardroom in a thousand different ways. And so if you have something good

as a founder by the Series C, you know, oftentimes the product that basically us as venture capitalists are providing what a lot of these firms are kind of selling founders just doesn't really resonate. And a lot of it seems like dead weight or there's a lot of risk that the founder doesn't want to take on. So if you look at Tiger and they're saying, we'll do the deal very quickly, We'll do very light diligence. We're not going to take a board seat. You basically will never see us again, but we're going to give you a very good valuation

and we're going to give you low cost of capital. I think that's a product that can be pretty attractive to some founders. In the past, selling your business was a miserable, miserable task. Months of negotiations, tons of legal fees, and sometimes you'd have to sit there and watch the new owners. Yes, sadly, trash your business. I saw this. I saw Weblogs Inc. to AOL, and they were good stewards

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week and they're going to let you know in a couple of days. That's tiny capital.com slash this week. Okay, let's get back to this amazing episode. To recap, Tiger says, when you're comparing us to a venture capital firm, we are not going to be on your board, we're not going to bother you, we're going to overpay and go away. Now, overpay and go away sounds like a great deal, but that means what happens to governance or there be. being an adult in the room to use a slightly condescending term, but, you know, an experienced person in the room, you want to bill girly on your board or you want to rule off both of or Michael Moritz, somebody who's, or Mary Meek or somebody who's done this before and seen

this movie before, they, the counter argument would be if Tiger's just going to throw $40 million into a company, $30 million go away and not care, then when things go wrong, who's responsible for that LP's money and then who helps the company and who's doing the work? Because Tiger just gets all the benefit of buying this equity and then they don't have to do any work? That's very fair. And I think there's a very fair argument to be said that there's

there can be negative impacts of kind of the loose, cheap capital product that a crossover like Tiger can provide. Honom, who's a co-founder of Altos Ventures, actually had a very good thread on this on Twitter that maybe we can dig up. That was very good. I think ultimately, and it's true, it's like, you know, at times and there's going to be certain circumstances where a founder impacts them negatively psychologically and the team negatively psychologically. Because if you have to build less of a company and you have to do less in order to get rich, and there's always just this tiger that's like, we're not going to look under the covers. We're not going to actually diligence this thing, but we're going to give you a high. evaluation. There's going to be situations in which they fund fraudulent companies. There's going to be

situations where, you know, the company gets lazy or you just attract the wrong people to that sort of capital. At the end of the day, I think it comes down ultimately to founder trusts and the best founders and any good founder should be able to kind of control the effect that it has both on themselves and on their team. And so, you know, if you're as an early stage investor, let's say, if you're having to ask yourself the question of if Tiger comes in and gives my founder a really, really good price, is this going to screw up the company? You're probably investing in the wrong founders. Possibly. I mean, we work was on quite a tear. And then the sort of wild money with no, you know, conditions came in and most people would argue that was putting jet fuel behind a maniac.

So you might actually prove your point. Yeah, that is exactly who I'm talking about when I mean. Like if you're up at night, like, huh, should I have given this guy? $4 billion, absolutely not. Like that, you should not have given him $4 billion. But, you know, there's other people, one of our own portfolio companies, Flexport, Ryan Peterson. Yeah. Ryan is a machine.

He's an A plus plus entrepreneur. You know, I trust that guy with a billion dollars any day of the week. And so, yeah, I think it comes down to quality of the founder and making sure that they're at a place in a quality level where they can kind of, you know, do the damage control if that happens. And they seem to be deploying. at a pace that is much faster than we've seen before. So explain the velocity of what they're doing, because obviously they're outpacing some venture firms here in the Valley,

and those are venture firms that have massive infrastructure in this space. They don't have that same infrastructure, do they? They don't. And it's funny. So for this, I pulled some data from Crunchbase, and this was pretty funny. So through April 20th, just this month, Tiger has been the leader co-lead on investment rounds totaling $2.5 billion. Wait, you're saying in the first four months of the year?

No, the first 20 days of this month. The first 20 days of this month, and of course, they didn't do all of these rounds, but even if they just did 30% of that $2.5 billion, that's $750 million announced this month with 10 days to go left in the month. That's an entire, like, you know, medium-sized growth fund at this point. So you're right that the, that the, pace and the velocity is completely unprecedented. And I think the best way to explain it,

I actually loved what Brad said on the All InPod, your last episode when you brought him on. Brad Gersner from Altimeter. Yes, yes, Brad Gersner from Altimeter. And he said something like, I believe if you own an index fund of the top 30% of technology companies over the next 10 years, you will be incredibly well rewarded. And so that kind of goes to what I think Tiger is ultimately doing, and I didn't touch on this that much in the essay itself, but ultimately they're, on a micro basis, yes, they might overpay for a deal or they might, you know, invest in one deal that ends up being a fraud or a couple deals that end up being fraud. But if they're able to invest in basically the broad asset class and get a well-diversified, basically create an index fund

of the series B kind of pre-IPO asset class, I think that is a product that is very attractive to LPs. And like if you came to somebody and said, hey, if you could invest in an index fund of this type of asset, would you do it? A lot of folks would say absolutely yes. But the only way that you can do that is by adopting a strategy and adopting a way of investing where you are investing at, you know, you're turning the dial to 11 and you're, you're not doing as much diligence. You're not joining boards. You have basically this product to founders that allows you to come in, be like, okay, I like this founder. I'm going to write them a term sheet today, which is what developed. Well, you know, and it's not unprecedented. We obviously had WeWork do this. Before that,

we had Uri Milner do it. We've had this tradition in Silicon Valley when things are super hot, people zip in and just say, I'm going to overpay. What was the last round of Twitter? What was the last round of Facebook? I'll come over the top. I'll pay more. It does not matter. I'll look like a sucker today. And I'll look like I'm overpaying today. But in the future, I might not. So thinking out loud here, the ramification for our industry is that that zone before the IPO, but after, let's say, product market fit and getting to $25 million in revenue to pick a number, because are they dabbling in companies under $25 million in revenue, you think? You see it very occasionally, but very rarely are they leading around. They'll participate with somebody, but very, very rarely. Addition will do it more.

Addition's been doing some A's and stuff, but Tiger very rarely. So when you have Tiger sort of taking over the space, and they're not the only ones. Obviously, Dan Rose, formerly of Facebook and Amazon, the only person I know who worked for both and Zuckerberg, both in their formative years. And he'll let you know. And he'll let you know that. And he was a great guest on the podcast where he explained it all. Great guy.

Yeah, I love you, Dan. Sorry. Love you, Dan. Sorry. I didn't throw the elbow there. That was a young gun here throwing elbows off the bench. But what is interesting there is that area then becomes

let's say non-differentiated capital. It's just, as I would tell founders 10 years ago, when you get to that time, it's like you look at the term sheets, whoever gave you the best deal, highest valuation, lowest rights and change in anything to do

with the company's charter and you know, how it's run. You kind of just take whatever the best deal is because they're buying one to five or maybe 10% of the company and they're typically overpaying for it. So that means the venture game is now going to be $25 million and under. That's the game. Or is this mean that that game, $25 million in revenue to when you go public is the game. If you see what I'm saying. I do. And I think both are correct. Like I think the game has completely changed and now there is a separate game on the post,

kind of like series B or post-mark product market fit post-25 million. And now there's a new game at the early stage. I think the early stage still resembles a lot of kind of what we thought of is like this traditional venture asset class where, you know, you build really strong relationships, you join the board, et cetera, et cetera. Whereas the growth market now, it's funny. It's like the hilarious truth is that the like one of the best investment strategies in venture growth is series B and beyond over the last five years is looking at a SaaS company. just meeting every SaaS company you can and finding the one that is growing the fastest

and paying whatever the market clearing prices. Some of the best SaaS investors I know can barely do algebra. They are not quants. They're not digging into spreadsheets, but they can connect the dots on a net new AR chart and they know how to do net dollar retention and logo retention.

Those three things are all that have mattered for the last five years. And so it is this entirely new game at the growth-ish stage that is defined, think by scale and by the ability to move very quickly. And that is why you've seen Kootoo kick a lot of ass in the last three years, or you've seen Tiger kick a lot of ass in the last three years, because they're built for it. Like their firms literally have been doing high velocity,

high scale investing for decades in the public markets. And they are much more, much more kind of able to bring that down into private markets and play this sort of game than folks that, you know, really look like venture firms, but have been dabbling and growth just because it's an easy way to make returns and kind of bolt on. So I do think it's a different game on both sides. But I also think that there's plenty of situations and plenty of founders that are still not going to go with the Tiger crossover type product at any round. And we can go into that as well, but I'll stop there.

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You did make a nice analogy here to retail with Tiffany, JCPenney, and Walmart. So I'm sure this made you a lot of friends, but you're basically saying Tiger Global is the Walmart of this. I could say Amazon. I had to make it like a backhanded compliment. You know, I can't give them too much credit. You've learned well. So, and then benchmark or Sequoia being the Tiffany. Or Founder's Fund. Or Founders Fund. Yes. I'm, you'll say, I'm an LP and both Founders Fund and Sequoia. So I'm not in Benchmark. Happy LP. Yeah. Yeah, I'm very happy, actually.

I just got a couple of shares in a company called Uber because it turns out Founders Fund was in this other company called Postmates, so it worked out. Okay. I was like, oh, more Uber shares coming in. Okay, well. Okay, I could take some more of those. Sure. I know how those work.

So tell me a little bit about this analogy here. I'm pulling the graphic up for those of you watching on YouTube or the video version of the podcast. Awesome. Yeah, so when I was thinking about what was happening in venture, really what came to mind. And this came from kind of like my PE days thinking about like non-tech businesses. But over the last two decades, you've seen something called the middle squeeze in kind of consumer retail. And it was driven by these really low cost, really hyper-scale, really convenient new businesses that popped up,

or at least scale to kind of the scale that they're at. So Costco, Amazon, Walmart. And what happened was you have this bifurcation of consumer spending where, you know, people that want to spend on luxury brands are going to spend on luxury brands because it's a flex, because they get to show off to their friends, because it makes them feel warm and gooey inside. Like, they're going to buy the iPhone. They're going to buy the Tiffany ring for their girlfriend. They're going to do those things. And then on the other side, you now have the Walmart's, Amazon's, Costco's of the world, which not only are of such scale that they can pass on a ton of cost savings to you, They're also just way more convenient.

You know, with Amazon, you're getting the shirt or the jeans or whatever you want, the toilet paper in one to two days. And so what you saw in retail was there was all of these retailers, JCPenney, Macy's, all these things that kind of just existed mostly because Amazon, Walmart, etc., didn't exist. Like you didn't really have another place to go and get, you know, a cheap sweater that was still pretty high quality. But with the emergence of Amazon and Costco and Walmart, there really ceased to exist to be a reason to go to a JCPenney. It's like if you get just as high of a quality of a shirt from Amazon and they ship it to you in one day,

why the hell are you going to go to the mall 30 minutes from your house and go buy a JCPenny sweater? Which by the way, JCPenny, Professor Galloway's number one pick to beat Uber and Airbnb. That guy. So dumb. You just go, yeah, whatever he's doing, you take the other side of the trade and that might be. like the best hedge fund in the last 20 years. For sure. I mean, he thought JC Penny was going to crush everybody.

It's like literally the dead zone. The dead zone. Yeah. It's literally the dead zone. And just to put, you know, a number on this, my research team said in Pitchbook they saw that in April, Tiger had done 26 deals, which is a deal a day, including weekends. So, you know, how does one?

Not a whole lot of sleep. Yeah. I mean, I'm trying to figure out how many people do you think. they have addressing this? I mean, there's two or three notable people mentioned in their information story. But what do you think the scale of their company has to be? They're not negotiating and they're doing clean terms, which is really smart on their part, because that takes, what is that, two-thirds of the work out of it? And they said they're not, they're going to do light diligence, which is a little dangerous, but okay, they do light diligence, they do standard

documents, they overpay. I mean, you probably took, you know, 60 or 70 percent of the work, out of traditionally coming to a deal. Right. Because, you know, getting to the price is half of it and then paperwork and rights are the other half or, you know, another quarter. So what do you think it takes them to do a deal, to find a deal, to process a deal? Or are other VCs just calling them saying, I hear you overpay, there's a company for you to overpay.

I don't know if there's, I'm sure there's some of that. But I think there's two things that are necessary in the market for this to work. And then there's their infrastructure. So the two things, the first is the fact that there's this filtering mechanism. Sequoia does a Series A, Founders Fund does a Series A, Graylock and Drescent. These firms do a Series A or Series B, you're probably okay in terms of like, you know, like the founder's probably good, the financial, it's probably not a fraud. It doesn't mean it's totally not a fraud.

There's definitely been frauds that really great firms haven't picked up on. But there is this really nice filtering of like, okay. You buy them. Yeah. Oh, yeah. I don't think Founders Fund got caught up in that one. I think that was an Andreessen Horowitz jam. Yeah, I do not believe we were in that one.

So yeah, hopefully we keep a clean track record. But yeah, so you have already this filtering mechanism. And then what we talked about earlier around, there's also this like excess returns in this market, at least there has been. Who knows if there will be in the future? But there's been a lot of kind of like room for error where it's like even if you overpay a little bit,

sure, maybe you get 20% IRA instead of like 30%, but that's still fine. So those two things need to, exist in order to do all this. And then the infrastructure, which I think, and some of this will probably be hearsay. So I apologize to the Tiger folks, if any of this is wrong. But it starts with outsourcing. So they outsource basically anything that is not an investment decision. And so for research, you know, they hire consultants. I think it's Bain. The rumor is that, you know, that they're Bain's largest like, you know, financial services client, you know, eight figure contract with Bain.

And so Bain is just coming to them every month and is saying, hey, here's this market. that, you know, all these good VCs just invested in. Here's every single competitor. Here's all the emails of the CEO. Here's everything that you need to know. Like, that alone is rid of a diligence work. Yeah, so they teed up. It's almost like Bain is their associates.

Exactly. It's very much like you have, you know, 30 associates. They're just off of your balance. I mean, they're still on your balance sheet as an expense, but like, you know, you're not having to like mentor them or anything. They're not in the office. Yeah. They're not in the office.

They don't have your email address. Exactly. Exactly. So you have a lot of outsource work. both on that side and then also on like the NDA diligence. I think they have, you know, probably like an army of lawyers to do all that. And so you get this really efficient engine where if you already have the filtering from good venture firms and you already have a lot of this other stuff, you can kind of

just go in, meet a founder, say, hey, I want to see X, Y, and Z off the shelf financial metrics. And then you can kind of make the decision right there. And that is what allows them. I mean, if you think about it, it's like you could do a couple of investments a day. If all you needed to do was meet with with folks and take. an hour to look at financials and then everyone else does everything else for you, you know. It's almost as if they figured out a way to take the serious CD and E companies and make them publicly traded securities where they can just throw a check into them like through the Robin Hood

app or something. Yeah, maybe they have an app that they've built out. That's Robin Hood for private companies. Tell me about who loses in this. Who's the loser in all of this? Because clearly the companies benefit, the employees of the company's benefit because they don't suffer dilution. They build a war chest.

obviously as an angel investor and a person who owns an accelerator and does series A and maybe sometimes keeps your parrata in series B. This is like, mark it up. Let's go. Yeah, let a ride. Let it ride. Sure. You want to take like, you know, my little, my little plot of land here and you want to build a skyscraper on it? Build away. Yes. Let's do it. Break round. So who loses? Yeah, Yeah, who loses? So the reason why I really wrote this piece was every single week for probably the last six to nine months, I would talk to an investor friend at some fund and we would have the tiger conversation. And it was like, oh my God, we lost a tiger. Can't believe this founder's taking the term sheet. You know, oh my God, they're overbidding. They, you know, we couldn't get through

our diligence. Just all these excuses. And, you know, eventually I kind of stopped like, you know, nodding along. And I respond and I'm like, well, one, do you really think that these people that have been very, very successful for two decades in the public markets, just come into the private markets and lose 50 IQ points? Probably not. And then two, like, what are you really offering founders that they can't offer founders? If you don't have the brand, if you don't have the signaling, if you don't have a lot of

these like really special things that really only like five to 10 firms have in, in the US at least, I don't know about Europe or other places. is like if you don't have those things like what are you really giving them that is better than what tiger can give them and when when you dig even just on those things a tiny bit it was very clear that many folks in the industry just hadn't thought critically at all about the state of this the state of this asset class so for me it was kind of like wow like a lot of people are kind of riding blind and are asleep at their wheel and so you know I'm not going to like name names I don't at founders fund we try just to care about our LPs or founders and

ourselves and we don't really care what other folks are doing in the industry. But there's kind of these common attributes. And so you can kind of tell a firm if they are really, really pitching a lot of value-ed services. If they don't have the brand of like a top five or top 10 brand where you're really signaling to the market, wow, you know, Founders Fund is investing in this company. There's probably 10x upside left after this. There's probably something very special about the business. And if you haven't, if you're not nimble, if your organization structure isn't set up such that you can adapt to these new competitive realities, that is what, like that is what happened to JCPenny. Like JCPenny, you know, they went through bankruptcy, they tried to come back, but they couldn't. They didn't have the management.

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Go to secureframe.com slash offer slash twist. That's secureframe.com slash offer slash twist for $2,000 off. Okay, let's get back to this great episode. When I saw your piece, it immediately was cathartic for me because when I came into the industry 11 years ago, as an angel investor scout, and I started placing bets, I was amazed that the VCs

over the last 10 years just decided to go downstream. And they were like, you know what? We're not going to demo days anymore. We don't care about, you know, Y Combinator Demo Day and stuff. Just literally had somebody at a very high profile firm,

who you know, but I won't say to me, that's an awesome company. I totally want to be on the cap table. Get to product market fit, and I will overpay for the series A or series B. But I don't want to do all the work for these first two or three years of that product, market fit journey. And I said, you know, I happened to like that.

And I was offered to go to one of the firms that had like more of a growth thing. And they were like, you know, you could instead of trying to put 25 or 50 million to work a year and 50 companies, J-Cal, you can make one bet or two a year and then just hang out the rest of the year. And it's the same amount of money being deployed. And it's like, yeah, I just kind of like the early. stage better. So basically now there's just going to be this demarcation. If you have product market fit, if you've got tens of millions of revenue, you're basically going to like a bank and getting financing as opposed to in the early stage when you really do need to have some help in terms of, hey, what's the business model here? Or, you know, why is our design suck? Or how do we

grow this thing? Or do you know anybody who could be a CFO? Or at least it's an option, right? Like, you know, maybe, you know, every time you want money, maybe you don't go to the bank of cheap capital because maybe there is somebody that can really move the needle with your business. Or really, you know, you really get along with an investor and you're like, you know what, we're going to be a $100 billion company. You know, two extra points of dilution doesn't matter. But I think it's a healthy thing for founders. And that's all we really care about, at least is like, it's a healthy thing for founders

that this is available. And if they want to take it, they can because it's a better product than what a lot of folks are putting out there. In the early stage, people were lamenting, oh, my God, angelists and syndicates, nobody, no founders will ever do those. That's going to be negative signal. And now, of course, syndicates are a vibrant part of the ecosystem. And then equity crowdfunding, people are looking at that going, oh, that's just silly.

And then we saw Sahil raise $5 million a day with no, there's no venture partner in that model. When you do a republic or a seed invest, there's no investment. there's no investor. That's just the founder selling directly to the public. So do you think there's something similar or analogous here that could happen a little bit earlier? Or is the earlier stage just so much work that it's not as easy as a, you know, how much, what's your revenue?

You know, send me your P&L. Here's your, some of your cack. Here's your, here's your check. I think it'll be a mix. And I think that because the every round size is getting bitter. bigger, you know, like seeds. As you mentioned, there's kind of this like, you know, what a seed is today used to be an A, what an A is today used to be a B. So you just have a lot more room to work with. But I do think that there might be this kind of like mix of where you get the institution that you

want. You get the signaling of the institution. You get the board member that you want. You get the brand. You get all that stuff. But you still have room to involve either if it's individuals or people with rolling funds, angelist, et cetera, also in the round. And so maybe now instead of, you know, a seed fund or a seed A fund doing all of a round, you have them be the lead. And then you have 30 to 40% of the round also allocated to all the other things that are popping up. Because I think there's a lot of individual value add that some of these folks, especially it's like, yeah, it's like you have some people that are just absolute experts, whether it's in a sector or at a function. And you're like, wow, like, I just want to know their, you know, marketing network because you don't know any marketers. And that's what you're going to be focused on for the next 12 months.

not give them a little bit of allocation. Like, I think that makes a lot of sense. And there's just a lot more room to work with these days than there was previously. It does feel to me like the middle layer of this capital stack is just been absolutely squashed. You know, it's just there's really, if you don't get into those early rounds, you're not getting into the startup end of the day. Like, if you look at something like, I don't know, Clubhouse, the hottest deal of the last year. I mean, kind of weird to have Indrisen do three rounds in 14 months from $100 million to $4 billion with no revenue and collapsing downloads. Putting that aside, you're not in that deal, I take it.

We are not. We are not. Yeah. If you didn't get in in that $100 million or seed round or whatever it was, like, you're not getting in now, right? It's like the ships, unless the founder just absolutely loves you and wants to carve out a little 25K or 50K check for you, Either you get in early or you don't, which in a way, I kind of like because it makes investors take risk, which I took huge risk in my bets. I invested in Com and Uber and Robin Hood and these things before they had product market fit. And then everybody wants to be a hero and invest in them when they're at a billion and then put them in their bios.

And I'm like, I kind of know that you bought secondary shares on like some website. You don't get to call yourself an angel. in Airbnb because you bought it three months before the IPO? Well, I think it brings up another good topic, which is the third avenue, which is they can come in and come in over the top and really overpay, just like Tiger. And I think what some of these JC penny funds are already doing and we'll see a lot of them do, which I think is a bad response to kind of the Tiger phenomenon or the crossover phenomenon, is they will try to emulate it.

They're going to say, you know what, we need to get in these hot deals. let's overpay, let's quicken our diligence process, let's keep getting into these deals. And when you don't have the scale of Tiger and you don't have the index fund where you're invested in a hundred of these things instead of six, you can get wiped out if you miss the if you miss a swing or two. This is going to be the risk of ruin. Yeah, it's going to be the risk of ruin, right? Like you're going to overpay and entry price does matter in a smaller fund, whereas a big

fund, they can withstand it. You know, they hit one Zoom or one Airbnb or one Coinbase. Like, they can withstand this. And they're also playing with, you know, tens of billions of dollars in capital, of which this is, you know, going to be $5 billion, right? And it's just not going to be as much of an impact on it. Yeah, what do you think of this, the clubhouse at $4 billion? How does one reconcile a company going from $1 billion to $4 billion as,

the number of installs goes down. There's no revenue. And just to put it in perspective, Slack, Reddit, Twitter, Facebook, and LinkedIn all launch competing products. How does that, how would you explain that to somebody who's your friend from back in, you know, private equity days when they say,

how do you explain that? What's going on in your industry? I mean, my friends from private equity days, they ask me about like snowflake and they're like it's losing money how's a good business and so I'm like you were like there there's no hope explaining this to you but yeah on on on clubhouse I don't spend that much time in consumer social and so I won't have like a super nuanced view here I will say that you know the last time um there was this many people laughing at a consumer social raise it was probably Instagram um 500 million 500 million and being obviously I mean I was only two X

when Facebook bought it but it was amazing IRA and everyone was like, oh my God, Facebook is, you know, so dumb, no revenue. What are they going to do with this thing? Now probably top five acquisition of all time. 100%. And so I think that I would just be- The difference is Instagram was growing like a weed. That's true.

Yeah, I would just be very, very hesitant. Like, Indreason has gotten closer on this company than I think many VCs have besides incubations. We do a lot of incubations. Other people do some incubations. But besides like a true incubation, they've been very involved in that company. And so I would just be very hesitant to throw too much mud. Not that you're doing that.

I'm just saying like the general investor sphere. When they're so close to it because it's like you just know as soon as you tweet, oh man, these dummies, like I wish I could short this company. It's going to get bought for like $15 billion or something crazy like that. Well, I mean, it is a very good point. When you don't have complete information, we don't know, like maybe the top 20% of users are spending five hours a day in the app. right? Like Snapchat was one of those apps that had some level of usage that was just not seen before. It was revolutionary how much people were using it. So we'll see. I mean, the thing that makes me super confounded about that is also looking at like Discord and how great they're doing and they have the same product. And I've been using all of the products. And I actually think Twitter spaces is better than Clubhouse.

I haven't used spaces yet. It's good. The reason I think it's better is because you're kind of living. on Twitter while you're doing it. And when you already have your social graph there, you can, you know how, I don't know if you're addicted, you seem a little addicted to Twitter like me. Most investors are. Yeah, a little bit. A little bit.

Put it this way. Do you drink and gamble more or less than on Twitter? You do Twitter more. Definitely Twitter more. Exactly. Me too, which is good. It's saving me money. Exactly.

And I'll live longer. But, you know, you start to look at that and it's like, oh, you know, when you're on Twitter, all of these blue check marks all of a sudden come into your room because they're already there. And that's kind of, you know, like, you remember like, do you watch Game of Thrones when it was coming out? It was like, you couldn't be anywhere else, but like you were watching Game of Thrones and you had Twitter because everyone was there with you. Yep. Talking about Game of Thrones.

And so it's the same. It's like everyone's there hanging out, but you're also getting commentary. Twitter's awesome. Long Twitter. And they know that at Twitter. So when you're in that conversation, it minimizes it. and so you have this little bar along the bottom with the conversation and then you're zipping around and you're clicking on people in the conversation

and looking at their tweets and then you find an interesting tweet and you can share it with the group and then Discord I've just like gone down the Discord rabbit hole recently and it's deep rabbit hole it is a deep rabbit hole and it's sort of like discord is like if slack and Clubhouse and Notion and Zoom had a baby and it's like all well maybe not notion but it's almost like Zoom Clubhouse and Slack put together. And it is so compelling. And I don't know if you saw Casey

formerly of the Verge interviewed Zuck. And I guess Duck was like, I'm not going on Clubhouse. They didn't sell to me. And they did it on Discord, which has the stage feature now. So you can keep everybody in Slack room

and then pop up a clubhouse. It's really, really fascinating. That is super interesting. Yeah. That's why I don't spend that much time in consumer social. I'm just like,

there's so many rabbit holes. You focus on SaaS? pretty much everything else. We're all generalists at Founders Fund, but we try to go to the places where there's not that many people. I don't know. If you've ever read zero to one or listen to Peter's talks on competition, we're not fond of competition either for our portfolio companies

or for us when we're looking at investments. Yeah. I like this Logan Bartlett quote you put in from August of 2020. VC, we only invest in businesses with defensible moats and competitive advantages. Founder. And what differentiates you, VC? Mostly our brand. What's the brand?

What's the brand? They're wearing a JC Penny sweater. Exactly. They're wearing JCPenny vest. All right. Listen, it's great to meet you. And thanks for coming on the pod. You're right.

Three more of these. I think you're going to get, I don't know, what's up from Princeton at Founders Fund? Yeah. I guess I become Mike Salana Jr. I don't know if you read Mike Salana stuff, but he is our. Yeah. He's our writer-in-chief. He's the king of all of our content.

And so, you know, maybe if I write a few more, I can become his protege or something. Well, I just, I apologize to all young VCs out there because I was the original investor, podcast, or blogger. And now you all have to do podcast and blogging in order to get a job. So sorry, sorry, no worries. No worries. It's fun stuff. Did I miss anything?

Do we miss anything important here? I think we get a pretty, yeah. Yeah, I think we pretty much went over everything. Yeah. Yeah, there's a few other nooks and crannies, but I think we pretty much did it. And how do you work with startups? You find deals yourself and then you bring them to a partner and then you have to get some buy-in. Do they let you write checks?

Do you write checks under a million? How do they – I'm curious how a young gun working for Peter Thiel gets to, you know, find their way in the world. Yeah. No, no, it's a great question that one of the beauties of founders fund, and it's a way we invest to is just – one, it's like, you know, like Peter, I don't know when he invested Mark, I think Mark was probably like 21 or 22. I'm not 21 or 22. I'm much older than that now. But it's, you know, faith in youth is one principle. But also just there's immense autonomy. And so all of of us have checkwriting ability. It's very not like we don't have Monday morning I see. We're not, you know, always trying to look for consensus. Everyone's out there running their own strategy. They're,

finding things that are interesting to them or they think are going to be accrued to the portfolio. And then you kind of build like a coalition. And so like if I am looking at, I don't know, something that sells to, you know, SMB restaurants, like, I'm going to loop in Keith because Keith was the CEO of Square and he's going to know everything about that market. So, like, I'll loop him in. Or if I'm looking at something in health care,

like I'm going to loop in Brian Singerman, board member at Oscar. So, like, we kind of just team up a little bit like that, but a lot, you know, the young guys are doing a lot more of kind of like the sourcing and hunting, I would say, like we're running out there and trying to find what's going to be the next, you know, what is going to be the next tribe, what's going to be the next Airbnb in our portfolio?

and then obviously like Peter, Brian, Keith, Napoleon, all these partners, Trey, who co-founded Anderil actually, they have just like this very diverse, but like vast wealth of knowledge and experience that we kind of get to pull from and can actually really move the needle with companies.

So it's kind of like this... How many hours you work a week? What is the... In order to make a go of it out of founders fund, what, were you working six days a week, seven days a week, you put it in 60, 78 hours a week to make it out there? Yeah, I mean, it's all up to you.

I think it's the other. beauty is that like, you know, there's weeks that I work, 40 hours a week, there's weeks that I work, you know, not 140, but, you know, 100, 110. But it's really all up to you. It's like, you know, when I, when I first got hired, I'll never forget, Brian Singerman basically was like, yeah, man, like, we're excited to have you on. Basically, if you, if you do right by our portfolio and you find and do really, really good investments, you're going to have a long, happy career. If you don't, you'll probably just get fired. And I was like, well, at least, you know, at least I know the rules up front. And don't a lot of your contemporaries not want to work hard.

I heard all these kids at Goldman Sachs were now one of the weekends off. I know. I don't know what is about that. They have to do the indentured servitude thing for at least a decade before they can stop working weekends. How did you break into venture? I'm curious. So it's funny. I don't know.

I didn't go to business school. Well, so I went to Boulder, actually. So I was very, very not in this ecosystem before. So I was at Vista doing software buyouts. And at Kleiner Perkins, there was a partner named Alex Curlund. I don't know if you know. know Alex at all. He's now a general partner at Meritech. And he, he basically needed somebody to basically just cut SaaS data. And like, that's all I did all day at Vista. And so that was my wedge in.

I was really looking for a way to get, you know, a little bit more upstream, as you called it, into the, and just really enter the venture ecosystem. And it's quite hard to do that from basically anywhere else or if you don't already work in tech. And so he was looking for somebody that was just a monster at, you know, analyzing SaaS businesses. And that's all I did all day. So I was basically like, I will work as many hours as you want. I will be your API for analyzing SaaS businesses. You give me data. I give you a nice PowerPoint.

And that was kind of my opportunity in. All right, listen, great job on the blog post. Great job breaking it down. Good guess. Nicely done to my producers. And we'll see you all next time on This Weekend Startups.