This Week in Startups - Kevin O'Connor on backing visionaries, the future of VC, internet history and more | E1861

Episode Date: December 8, 2023

This Week in Startups is brought to you by… Northwest Registered Agent. When starting your business, it's important to use a service that will actually help you. Northwest Registered Agent is that service. They'll form your company fast, give you the documents you need to open a business bank account, and even provide you with mail scanning and a business address to keep your personal privacy intact. Visit http://www.northwestregisteredagent.com/twist to get a 60% discount on your next LLC. Vanta. Compliance and security shouldn't be a deal-breaker for startups to win new business. Vanta makes it easy for companies to get a SOC 2 report fast. TWiST listeners can get $1,000 off for a limited time at https://www.vanta.com/twist DevSquad. Most dev agencies only offer developers. Why? Because product management is hard. Get an entire product team for the cost of one US developer plus 10% off at http://www.devsquad.com/twist * Today’s show: ScOp’s Kevin O’Connor joins Jason (1:39), exploring the early days of the internet, its initial promise, rapid growth, and the recent pivotal changes brought on by AI (1:39). They also discuss tactics for building in a declining market, the emergence of “death-icorns” (19:30), what he looks for in founders (39:18), and much more! * Timestamps: (0:00) Jason welcomes Kevin O’Connor of ScOp Venture Capital. (1:39) Exploring the early days of the internet, its initial promise, rapid growth, and the recent pivotal changes brought by AI. (5:55) Discussing the impact and future prospects of AI as we approach 2024. (8:41) Delving into the potential influence of AI on sectors like Hollywood and the music industry. (10:03) Northwest Registered Agent - Get a 60% discount on your next LLC at http://www.northwestregisteredagent.com/twist (11:11) Transitioning from founding companies to establishing a fund and supporting new startups. (15:25) Examining the evolution of founding a company, market dynamics, and fluctuating trends since the 1990s. (18:22) Vanta - Get $1000 off your SOC 2 at https://www.vanta.com/twist (19:30) Tactics for building in a declining market, the emergence of “death-icorns,” and the pitfalls of debt-financed growth in unprofitable businesses. (27:57) The pendulum swings back after “the great reshuffling of America” and the phenomenon of over-employment. (29:53) DevSquad - Get an entire product team for the cost of one US developer plus 10% off at http://devsquad.com/twist (33:13) Identifying unique opportunities in AI investments. (36:50) Recounting a near acquisition of Kevin’s company Graphiq by Apple for Siri integration. (39:18) What Kevin currently seeks in entrepreneurs before making an investment. (47:35) Discussing current valuation trends and the competitive nature of losing deals in venture capital. * Subscribe to This Week in Startups on Apple: https://rb.gy/v19fcp * Check out ScOp Venture Capital: https://www.scopvc.com * Follow Kevin: X: https://twitter.com/kjpoconnor LinkedIn: https://www.linkedin.com/in/kevinoconnorsb Follow Jason: X: https://twitter.com/jason Instagram: https://www.instagram.com/jason LinkedIn: https://www.linkedin.com/in/jasoncalacanis * Thanks to our partners: (10:03) Northwest Registered Agent - Get a 60% discount on your next LLC at http://www.northwestregisteredagent.com/twist (18:22) Vanta - Get $1000 off your SOC 2 at https://www.vanta.com/twist (29:53) DevSquad - Get an entire product team for the cost of one US developer plus 10% off at http://www.devsquad.com/twist * Great 2023 interviews: Steve Huffman, Brian Chesky, Aaron Levie, Sophia Amoruso, Reid Hoffman, Frank Slootman, Billy McFarland * Check out Jason’s suite of newsletters: https://substack.com/@calacanis * Follow TWiST: Substack: https://twistartups.substack.com Twitter: https://twitter.com/TWiStartups YouTube: https://www.youtube.com/thisweekin * Subscribe to the Founder University Podcast: https://www.founder.university/podcast

The best line I ever heard, the hardest thing about being a VC is figured out their founder is delusional or visionary. It's a very fine line. If they're right, they're visionary. If they're wrong, then they're probably delusional. I'm willing to bet on the delusional ones for sure, because if you're delusional and you say, yeah, you know, I think there's something out there and you'll leave Spain on a ship with some provisions. Yeah, you've got to be pretty delusional to think you're going to hit land because you might not. I like the delusional ones because if they hit land, now they're visionary, like you're saying. Well, I'd say, put that in the visionary gap, right? Delusion are the ones that just refuse to listen.

This Week in Startups is brought to you by Northwest Registered Agent. When starting your business, it's important to use a service that will actually help you. Northwest Registered Agent is that service. They'll form your company fast, give you the documents you need to open a business bank account, and even provide you with mail scanning and a business address to keep your personal privacy intact. Visit Northwest Registeredagent.com slash twist to get a 60% discount on your next LLC. Vanta. Compliance and security shouldn't be a deal breaker for startups to win new business. Vanta makes it easy for companies to get a sock to report fast. Twist listeners can get $1,000 off for a limited time at vanta.com slash twist.

And Dev Squad. Most dev agencies only offer developers. Why? Because product management is hard. Get an entire product team for the cost of one U.S. developer plus 10% off at DevS.com slash twist. All right, everybody. Welcome back to the program. Our guest today is Kevin O'Connor. I met him 28 years ago in 1995. I was running a little magazine called Silicon Valley Reporter, and Kevin had just started an internet advertising company called DoubleClick. You remember DoubleClick, but by Google eventually. It was founded. I remember going to Poppy Tyson on 20th century. We talked about it the last time you were on the show, Kevin, which was episode 2, 3, 4. So here we are a decade since your last appearance on this weekend startups. And I guess we're getting close to 30 years since you and I met in New York at the dawn of the internet.

So welcome back to the program, Kevin O'Connor. It's good to see you again. It's been a long time. We see each other every 10 years. We do an episode. Yeah. You know, an interesting place to start would be when you look back on what's transpired since 1995, when we were on those dial-up connections and then we started getting T-1s and ISDN lines and the browser started supporting rich media.

And you put some of the first ads on the internet. When you look back at what happened to the internet, what is the theme as an entrepreneur and now an investor that sticks with you the most? I think our original hypothesis. And, you know, when I first saw the internet probably early 90s, I wasn't impressed. You know, 2,400 bond modem, the browser hadn't come out. And I was not impressed. It really wasn't until the T1 lines came out in the web browser. I said, to have a system where anyone in the world can access the world's knowledge for free,

that's a big idea. It's going to be huge. I remember our original business plan. I forget what we had. I thought we forecasted some like 10,000 servers and maybe 100 million people would be on it, in 10 years, people thought that was crazy. And it was crazy. We were way off.

It's like 100 million servers or websites and a billion users online. So I think the theme is, you know, back in the old days, people talked about the new economy. And I always thought that was kind of BS. There was no new economy. It was just about reducing friction. And that's what I think then that's been. That's been the promise. And that's what, you know, what's happened, just made things more efficient, more timely, cheaper.

And when you look at that efficiency now, AI has emerged and all this information that was put online, three decades of people just pouring their parts out and scanning every piece of information, every piece of art, you know, mapping every nook and cranny and scanning every book and writing every comment under every video and every blog post now has resulted in what feels like some form of intelligence or knowledge processing. that could be very transformative. So what's your expectation here as we just wrap up the first year of chat GPT being a public phenomenon? Obviously, you know, 3.5 of Open AIS chat GPT kind of was the starters pistol last November. And here we are taping this November of 2023. Is this going to be a similar story or a bigger story than the internet? Well, you remember back in 9500 companies who are pitching AI even back then, right? they're going to predict everything that you're going to do and AI faded away because it just never delivered on this promise.

And I don't think chat GPT, the 3.5 version, it was interesting. It was the best chat pot out there. 4-0 blew my mind away. And definitely get into a realization that this is a fundamental shift. I mean, usually once every 10 years, there's some cosmic shift, you know, whether it's ECs, a network, to Internet, the mobile, to SaaS. And we were due for another seismic shift. and there seems to be two camps forming on AI, as there always is with technology. You know, it's the hand ringers, like it's the end of the world, you know, everything is over.

My God, chicken little to the, you know, optimist like I am, which is technology is great. Like what could possibly be wrong with something that can actually earn information into knowledge and make people smarter, you know, more intelligence and make better decisions. It's phenomenal. And when you look at the impact you think it's going to have, We can parallel it with the internet, and I'm with you. I mean, it seems like there's a ton of upside here. There's going to be some downsides, obviously. We used to have typing pools.

We used to have messengers. We used to have people sending postal mail, FedExes. A lot of those things got hit pretty hard when people got email. But, you know, when you look at the first year and you think, hey, in year two, because in the first year, it feels like people are playing with it and starting to implement it. But in year two, I think it's going to get more serious. So where do you think we're going to see this land in 2024? What industries will have the most impact on? Well, I think the surprising thing, at least in my mind, we always thought I was a developer for the last 10 years.

And computer science has exploded over many, many years. And everyone went into it. I think that job will never be at risk. And here we are now, the safe job. And now it's like, I remember being on a call with the company. they were telling us, I do venture capital now, they're telling us how complicated and sophisticated the technology was, and I was kind of calling bullshit on them. And I asked ChatGPT to write the code of their product that I posted in our chat. I said, there's your product right there. So, you know,

jobs like that where I think legal is going to be dramatically affected. I think accounting, it's so hard to predict technology. You know, the Internet, I mean, right back in the days, trying to figure out what was going to be hit the hardest. And when you look back, I'm not sure any of us predicted. Like, none of us predicted Amazon. Amazon was a bookseller. Yeah. So, you know, it has a strange, new technology has a strange way of affecting.

It's going to affect every industry to some point. I think large language models have its place as a foundational model. I think large language models are probably more like the Internet. It's going to be the stuff that's built on top of it or sort of the verticalization to highly specialized language models that are going to probably have the biggest impact. Yeah, it's quite paradoxical. If you narrow the scope of the language model to code, it does a better job. And if you point it at a code base, well, it's going to educate the new developer as to that code base. So starting day one at Slack or Salesforce, you're going to get up and running so much

faster. You're going to be, you know, it's going to complete half of the code snippets you write. it does make sense to me that accounting and legal also fall into that. There's a corpus of work that is finite, that is rule-based, and that is repetitive, right? I mean, there is some thread here we could pull. If it's repetitive and there's a finite rule set and there's a corpus of work, it could be, you know, automated and AI could do it pretty quickly, huh? Well, Hollywood's going to be greatly affected, right? You do think that, yeah, this is a big debate. Oh, it's going to be, I mean, think about it.

I mean, how many, it's a finite number of stories. It's the same story that, you know, came out of Greece. Yeah. But 3,000 years ago, you know, it's just being retold with different characters. The fact that any of us would be able to put that, we'll be able to build her own movie. I think then it becomes a little bit like YouTube, which is our Instagram, where the, the amount of content is exponentially increased. most of it is just total garbage, but there's going to be that

phenomenal ones that sort of rise to the top that go viral. Same thing with music. I mean, music is pretty, you know, you can imagine, I mean, my prediction is that definitely within the next five years, the number one song will be written by AI. That makes total sense. We've had many number one songs that were using samples, right?

And rehashes of old songs. So if AI can interpret all of that base of knowledge, yeah, it's going to hit one for sure. There's no doubt about that. And yeah, there's only a finite number of movie tropes, you know, quest, comedies, rags to riches, beat the monster tragedies. It's a certain, the hero's journey. It's a certain corpus that, yeah, I think writers are going to become bionic when they start using this. Starting a business used to be such a painful process. You needed to get a lawyer. There were tons of fees. It was a mess, but not anymore. Just check out Northwest registered agent. They're going to help you form your company fast. Remember, speed matters.

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they'll form your LLC corporation or non-profit. So visit Northwest Registeredagent.com slash twist today. Northwest registeredagent.com slash twist. So you've recently become a venture capitalist, I understand. Congratulations. This is 1990. This is 1995, by the way. Well, I mean, I thought of you more as a company builder than a venture capitalist, but I was both.

I did the VC and my sort of spare time or in between jobs. But you are right. The last three years, first time I actually did a fund. Got it. With other people's, well, a lot of my money, but a lot of other people's money, too. So why start a fund and why do that? here, you know, at this point in time. What stage you're trying to invest in and what's the thesis of the fund? I do think that doing a startup, which I love doing, it did three of them.

It's, let's say, it's a young person's game. It takes a hundred hour weeks. It takes a lot of focus. As you get older, you get more wise. And I think that's sort of, you know, I've been doing venture for, since 95. I've done really well at it. I love technology. So our thesis has really been on If I just sum it up, it would be SaaS slash AI companies with about a million dollars in revenue. So let's call it CED, sort of early A. And our specialties, we're all operators and we help these companies get to the next level, which would be sort of growth, growth equity. So if they have a million in revenue, that's when you want to meet them or you want to put a million dollars into them.

When they have a million in revenue. So we feel like the pre-seed is, I've always said ideas are cheap. There's a billion really bad ideas out there. For someone to actually get to that million-dollar level, it means they've proved product market fit, which is a big risk. They've been able to track people, some capital. So they really de-risk it in our eyes.

What they don't know is how do they take it to the next level? There's a lot of unanswered questions. A lot of its founder-led sales. A lot of it is how do I scale? How do we deploy a capital efficient? efficiently. And so, you know, by being operators, having sort of been in their shoes, that's attractive to founders. They like it. You know VCs. A lot of VCs come from sort of the opposite extreme. Yeah, I mean, there's an argument for people who understand finance

and who haven't been in the trenches in some ways they can really have a good analysis like Bill Gurley of, you know, the marketplace dynamics. They can be thoughtful about making the share price go up. And then there's no substitute for people who actually have run a business, right, and been an operator and know exactly how hard that is. And I think at our level, by the way, I think Bill Gurley's always been one of my heroes. I met him when he was an analyst. He was covering us double-click back in the mid-90s. What was he like?

Tell me when you met him, what it was like. He was still, he was very tall, even back then. Still, yeah. He's consistently remained tall. That is one thing I will say about Bill Gurley's career. You made a lot of research analysts, and most of them are good. Bill Gurley was just, he was a new level. He was the one guy that really, really understood.

That's just our business, but he just had a great sort of macro view of what was going on. We always enjoyed conversations with Bill, where she wasn't retired. Is he retired? I guess that's a really interesting question because he's theoretically not at benchmark. He's not at benchmark. He's not in the new fund. He's still on the boards he was on. And he's still frisky and likes to hang out with founders and meet founders.

so I don't know that he's exactly retired. And there was something about the venture community where they wanted to kind of set people out to pasture at a certain age, maybe it's 60 years old, etc. And like hand over the firms to younger folks. I think that was a key component of benchmarks philosophy is kind of forcing people out and letting young people take over. But I think that for really great investors,

maybe sticking around would be pretty great for the founders and people live longer now, and they're healthier and sharper in their 50s and 60s and 70s. Like, Benoosa, he's like, yeah, you can basically drag me out of here. I'm not going anywhere. But No, Costa's as active as ever,

so I don't know what Bill's deal is. I think he should just do seed investments. Yeah, $2 million seed investments. When you look at how being a founder has changed, when you and I were starting in the 90s, the idea of building an internet company was, well, you're going to have to spend, a million bucks, a half million bucks on setting up your servers and hardware. You're going to need

to put a half million dollars down on an office space and get a lease, put a letter of credit down. I mean, you were blowing a couple of million dollars just firing up a startup now. Two or three people go to an accelerator. They get some free credits from Azure or whoever, and they're up and running and they build something on the weekend and get 10 customers. So it feels like many more startups are being built at a much lower pace. So how is that going to change things as we go forward here. And then it's quite possible AI makes things even faster for founders in terms of finding product market fit. I think you had two things going on. One is there was a long drought of entrepreneurs after the dot-com crash, right? Everyone kind of fled to safety. And then things

came back. And I came back roaring with free money. And I think the venture market was over-saturated. There was just too much money. He was kind of back at like the dot-com days where people are just chasing any deal and any price. I actually think downturns like this are going to be good because there's just a lot of junk out there. And I'm amazed and sort of amazed at what people are investing in. So I think raising money is much more difficult. Now, we've shifted, I think, more from, you know, grow at any cost, which I never understood. I think that's just where people, you take a large sum of money for a model that's not quite

perfected and you just lose more money. And I think those days are over and it should be over just a bad way of doing business. You know, but a year and a half ago, back to the sort of the age thing, one of the things you do get with age is, I believe to do like four of these cycles. Like you know, you know what's in the basement. You know, when things go bad, they're way worse than you ever expect. You remember those days. Yeah.

So getting people to cut back early, you know, and convincing them that, look, you got to, you got to conserve money. We got to trade off growth with burn. And that's okay, you know, if you get through the cycle, it's better. I do think with the AI, the fact that any person can describe a business model at some point, not today, but can describe what they want to do and not go to expensive off and overpriced engineers to get it done. And like you said, all the groundwork is there, you know, putting up data centers. I don't know if you remember the data center that we had. You had one, yeah.

And then you had the building on 32nd in the West Side with the basketball courts. on the roof. Was that 32nd Street or something? I remember it was west of the... Yeah, 33rd. 33rd. West of Madison Square Garden, you had a basketball. I remember we played hoops on the roof one time where we shot some hoops.

We did. Double-click you did a couple... You brought your team. Yeah. You brought your stacked West Fourth Street. Yeah, we had a... Well, you know, we used to play at Chelsea Piers a bit and we had a pretty good team. They did.

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Vanta.com slash twist. That's V-A-N-T-A dot com slash twist. to get $1,000 off your stock too. The key thing you did right, talking about boom and bus cycles, you raised that secondary for double-click. You also were able to sell some shares yourself and lock down a win.

So explain how founders should ride the cycle. I am in agreement with you. The valuations I'm seeing on startups, because we do do pre-seed with our accelerator, and we do seed right around the point in time you're talking about, typically 500K, but 500 to a million is pretty close. And the same kind of thesis, right?

you figured something out, you got some traction, you can't fake it, generally speaking. So this moment in time is the time to build. And there are some advantages to building in a down market. What are the advantages to building in a down market? And then, hey, you know, in another 5, 10, 15 years, if it's a crazy up market, what's the proper thing, rational thing for founders to do in both markets? Compound question there. I mean, like I tell CEOs, your never one job is not run out of money.

So the three main reasons companies go to business. The first one is they solve no known problem, which I think gets back to the dot com as well as today where people are investing in cool technology. Let's say crypto and FTs exhibit, you know, our current examples. They solve no known problem. Black chain. Okay, great. Another ledger been around.

Nothing new. So a lot of money goes towards that. So, yeah, I think people are focused more on you solve a problem. The next reason they run up, they go out of businesses, they don't raise enough money. And then the third reason is they've raised too much money. Look at all the, we were calling death of corns. I don't know if that's a word we made up or that's a word. Yeah, they made that one up.

Yeah, death of corn. Okay, death of corn. So all these companies that raised $100 million last year, they're going out of business. It's like, what the hell kind of governance is that? I don't understand. Yeah. That's just not responsible. So those are just bad, you know, again, business doesn't change.

Economics doesn't change. And we really push that on the founders. You've got to build business is really simple. You solve, you find a big problem, you solve it better than anyone else, and good things happen. You know, people give you money. And if you do a really good job, they give you a lot of money, and then you get this thing called profit. And then once you get profitable, then you don't have to depend on anyone. But on the flip side, if you do get into a, as we tell founders, you get into the growth phase where you have a playbook, it's replicatable, and you have a high degree of conviction, then you've got to use capital.

A lot of people are like, well, I can borrow money. That's a lot harder these days. But, you know, the whole debt financing, like debt financing of a tech company is just, I'm sorry. It's absurd. Get some debt. Get some debt as sort of a insurance policy. But if you got to use debt to grow an unprofitable business, you're a. screwed. Everyone's good.

It was incredible, I guess, in the ZERP environment, I had series A companies that didn't really have product market fit. They were truly seed companies figuring out product market fit, but they were getting serious A valuations. And then, yeah, different banks were like, well, we have this money sitting here. So we'll give you, you raise 20, we'll give you five million. You raise 30. We'll give you a 10 million. And then the founders just tacked that on to their runway. Okay, I have 18 months of runway. I'll just, you know, I'm spending a million a month, so I raised this 10. I raised 20, so I got 20 months, and then I got 10 million in venture debt or seven.

That's seven more months. And I say, no, you're not supposed to use it for that. Rainy Day Fund, but don't use it as runway, because then a VC has to look at your deal and say, okay, I'm paying down $7 million in debt. I'm putting another $20 million in, and $7 million goes out the door to pay a bank. That doesn't make any sense. And in a Dow market, with this globalization happening, how do you think about work moving around the planet? Because there's something unique that happened with remote work. You and I

were in the in-office culture for two-thirds of our career, and here we are. You know, a lot of people want to work from home. So do you believe in work from home? Or do you think people should be in offices? We'll start there. Yeah, I mean, I was talking to the, I'm going to forget his name now. He's at the Hoover Institution, but he's like the expert and sort of this whole work from home. And I was like, what's the answer? We just ended up a binary answer. There is no answer. I'm really torn. And I think for certain jobs and for certain types of people, working at home is great. I think that it's really bad socially. And I think you get more done when you're in the office.

For our work, I can do board meetings now with a five-minute notice. I'm in a board call as opposed to traveling three days and wasting time. That's great. But most people aren't that discipline. A lot of people are disciplined. They need mentorship. They need help. They need socialization.

Yeah, there's a socialization part where people get weird working from home. staying at home all the time. They need mentorship. That's a lost part of this. And I'd say the top 20% of performers are more effective at home. It's probably about another 30% that are equally effective in the bottom half are not nearly as effective as if they were in an office being mentored and part of the, yeah, I'm trying to reverse this at my companies and it's just incredibly hard because you have such a great talent pool of people at my venture firm with 22 people. And then we can hire people faster than in Silicon Valley. People don't want to be here anymore. and it's too expensive to be here.

So I would get a lower quality person who wanted to be here versus this incredibly high quality person at a lower price will stay longer. It's incredibly frustrating in some ways, but it does seem to be reversing. I'm curious for you. I mean, you're an opposite side of the spectrum of as I am.

You're extroverted, very extroverted. It's got to drive you crazy not to be socializing. It's maddening. It's maddening. and I am now reversing it. So I'm going to get like a space just so I could have like a co-working type space for my founders in my portfolio

because I do need to be out and about. I host events. I do jam sessions. One of the things that I learned from Travis. From Uber, he'd have these like jam sessions. Chris Sok would do them too. We're just five or six founders. We'd just hang out, have dinner

or just hang out at somebody's house and talk about their businesses for a couple of hours and try to help each other think through problems and strategies and blind spots. And so I'm sort of codifying that where I do these jam sessions every couple of weeks, bring together 20 founders, you know, go to our law firm, Wilsonson Senior, Femmwick's office, get a big conference room and just talk for four hours. And it's really, really energizing for me. And then doing the pod, you know, I get to talk to you and other, you know, investors, founders from around the world. And that does fill my bucket and give me that energy. But I think this has been great for introverts who, you know, they get to focus more. And getting rid of commutes. If we didn't have the commute issue, I think, this would be like people would be much more open to coming back to work. Here in the

Valley, Apple, I think, is four days a week now or four days a week in the year. There might be three or four right now. Zuckerberg's kind of forcing people back. And then Roblox said, either come back to the office or, you know, resignation accepted. So I think they did it like a gentleman's riff, basically. We're going to reduce the force by the number of people who don't want to come back to the office. So I think it'll start changing. I also notice that people looking for work from home jobs are saying that they're having a hard time finding them.

You know, as... You get a thousand applications because anyone could be... Exactly. You can do that job. Right. So now, and then if you're a Silicon Valley person who wants to work from home,

you've got the expense of Silicon Valley, but you want to work from home. You don't want to get on the bus. I understand it. But now you're competing against somebody in Portugal, Argentina, Manila, Canada, whatever it is. And those folks are going to have a cost of living. That's one-fifth,

one-tenth, one-tenth. of the cost of the you have so they can accept a salary as much lower and all the management Kevin have learned how to manage remote workers and that's actually the thing that is really mind-blowing to me once you learn how to manage

a remote worker in South America, Canada, Portugal, Manila, whatever, it's no different. It's all the same. You're in a Slack room, you're on Zoom,

you're doing huddles, you're using Notion or Coda. It's all the same. So I think it also increases efficiency. You could have somebody in the job, in the role within two weeks, Whereas what would a job spec take getting somebody to New York? Double-click you paid people to move to New York.

You paid them to come out for an interview. Like, think about those days, the concept of a $30,000 relocation package. That was a thing, right? Yeah. Danny Siegel, a guy used to work with. He had a great observation when COVID first started hitting. He's called it the great reshuffling of America. And his theory was that people were going to move to server where they wanted.

But once that pendulum swaying back, what you're going to see is that people in the office can promote it. because they're there. It's FaceTime. People who are remote, you send them an email and they're gone. You have no personal relationship with them. So I think you're going to probably see a bit of a pendulum. I think a lot of it comes from the top down. You have executives who have second homes that don't want to go back. They want that. We all thought community would be easier now that everyone works at home, but it turns out no one's actually working. They're all driving around to go to go off and do stuff. We have plenty of examples in our companies that where people have multiple jobs.

That's the crazy part. They're not doing a job. You know, it's just, we'll see. I think it's going to swing back. There's a Reddit. It's either overworked or overemployed. And it's overemployed. Overemployed.

And if you read this Reddit, it is awesome because it's people trading strategies on how to fool their bosses and have two, three, or four simultaneous jobs. There's a lot of times as developers or, you know, marketers. And they're like, here's all the techniques to be on two conference calls at the same time, but have the line of sight on your two laptops. And I had this happen where somebody said, hey, we got this great Google executive who wants to come work for us. And so that's great. Yeah, he's willing to take a pay cut.

I'm like, oh, that's amazing. Wow, it's entrepreneurial. So Donnie wants to keep his job at Google. And he'll says he has 40 hours a week for us, but he'll do it at like a third of his salary from Google. He said, uh, is that ethical? Well, it's his problem, not ours. And I said, is it? Because when Google finds out, and he's writing code for you during work hours, do they own that code?

Well, there's a word for it. Yeah. It's called fraud. Fraud. Are you looking to build a SaaS product? You need help on the technical side? Listen, developers, expensive. We all know this.

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devsquod.com slash twist. That's D-E-V-S-Q-U-A-D-com.com. slash twist to get more details and to get 10% off your first month. In fact, I'm in Berkavich, whatever partner just wrote an article on the over-employment problem. And we're getting a lot of pushback of people saying, well, that's just the employee-employee relationship is transactional now, so there's no meaning to it. So it's okay to commit fraud? Like, what's the limiting factor here?

You know, he's stealing? The reason you see this transaction because you're a negative, pessimistic person. Right. And that it just becomes self-appelling prophecy. How can you possibly compete with a full-time employee, an equivalent full-time employee? You can't. So you'll be the first one to go, as they should be.

And they'll end up, I used to say, when you have two girlfriends, you have zero girlfriends. You know, it's like, it's, when you have two jobs, you'll end up with none. Yeah. Very, very weird moment in time that, yeah, the relationship between employers and employees is quite transactional. And it, this is one of the things that loss is loss is the culture, right?

The culture of companies really mattered. people would stay with a company. And now switching is taking one laptop, putting it in a box, sending it back to your old company, opening up the new laptop, logging into a new Slack, logging into a new notion, Coda, Salesforce, whatever it is, HubSpot, and then just starting over. And you do it in like the same day. There's no culture to, I guess in some ways that is efficient, but another way something's lost, yeah?

Yeah, I'd be looking at the tech market. It's tech employment. Like you see these number of jobs filled every month going up. Those are people with part-time jobs. Everyone's trying to avoid the full-time. So they're taking another part-time service-oriented job. I mean, the tech industry is in a full-on recession right now, that depression. You know, I think a lot of people moved when the moving was hot.

You know, that became very transaction. I'm going to take who's paying me the most. The best advice I had in college, you guys says, whoever never take the job that pays you the most because there's a reason they have to pay you the most. It's like because it's a crappy job. So find a company. Like, I don't think it should be transactional. I think it's easier when, when you're remote and you have no personal connection to the person.

Yeah. When you look at AI companies, there's this derogatory term, AI wrappers. Hey, they're just rapping chat GPT or Claude or, you know, whatever language model with some accruedmont. But they're going to be displaced by the primary model. Open AI wins it all, destroys all competition. What's your take on that? So we have probably five AI companies now that were doing it before. You know, my last company, we ended up being bought by Amazon and Alexa doing natural language

processes. Large language models can answer some of those questions, but they can't answer all of them because you have to actually have the data. You have to have real-time data. A lot of the AI companies we're invested in now are using the large language models for classification purposes. Like they have their own models, but they're using it for sort of the long tail. And it's quite good at that.

But it doesn't build the application. So people are seeing it as, again, as a technology to be used. And it's a very good technology, but it's not the app. I mean, it's not the total solution to the problem they're trying to solve. So one of the companies called Rogo, what they're doing is they're taking, to give it as sort of a investor analyst, junior investor analyst, they're taking all the proprietary research from an investment bank, all the decks, all the thousands of decks they've done for clients,

and they're adjusting all this private data. You forget, large language models are all public data. All the LLMs are going to look pretty similar. It's going to be that private stuff, the stuff that no one else has that's going to be the differentiator, I think, AI. Whether it's medical, less so, because most legal stuff is public, I think legal is going dramatically changed. But again, I don't think large language model, maybe they'll shift in that.

Maybe they'll get a vertical component, something that's more real time. I don't know. do you think the language models become commodified and you know it seems like open source models on hugging phase are getting better and better and falcon out of the UAE is you know available uh in an open source way and it just feels to me like all these language models are going to for 90 percent of tasks be good enough and they're going to be indistinguishable in the same way you know you open up any laptop and you fire up a browser it's all the same right the browser doesn't matter it's the content on the other side the service service on the other time. So it feels to me like it's all going to get commodified and, you know, like bandwidth. It feels like bandwidth in some ways. Remember, they built out all that bandwidth. We're all common everybody and then they overbuilt it. They all went out of business and then people bought the bandwidth on pennies on the dollar. It feels like that's what's going to happen to me. I could be wrong. I don't know. No, I think you're right. I think it's going to be,

it's going to be very, someone trying to get us to invest. They want to do it at an LLM. And they needed a hundred million dollars. Like, are you kidding me? So it's going to be, it's going to be two or three players at the most. They're going to have the L. them, it's going to be like text to speech APIs or speech to text APIs. You know, it's kind of magical in the beginning. And there just becomes a, you know, single API call or translation services or something. It's such a good analogy, Kevin, because I bought Dragon Dictate three times in my life. Just, you know, as a writer and a communicator, I was like, you know what?

When my hands are tired, I just like to be able to talk into it, spent hours training it when I was running the magazine and the blogging company. And it, you know, it worked well for me. And then now you open up your iPhone. I don't know if you saw like the latest version. My lord, when you hit the microphone key, it works flawlessly. And Apple's not good at this stuff. They tend to be like the worst at it.

And the Apple's latest version of speech to text is better than any dragon dictator or anything I've used over the years. And it's free. It's built into your phone. And so it does, I think it's a very good analogy. That's something that used to cost $5.99, $3.99 is just essentially free now. So if you remember find the best turn to the graphic, we were building, unbeknown so us, until Google talking about the knowledge graph. It turns out we were like, well, wait a second.

We got a way bigger knowledge graph than Google does. And we were basically collecting all this sort of real-time information, everywhere from stocks to colleges to you name it. We had it. And trying to convince people, we were talking to Apple at the time and Amazon and Google. And Apple is about the bias for Siri because Siri had. a problem, it couldn't answer a lot of stuff. We always approached a problem as it's more like jeopardy. You have to know the answer first and then figured out the question's easy. Everyone in the AI area was focused on understanding the question. And it was a asked backwards way of

approaching it. And we got in this big political issue. Apple was going to extend an offer for us and then they pulled it to last second. And it was because their head of engineering at the time was convinced that AI would solve all problems. And he ended up, I don't know if you got fired or losing his job not that long after because AI does not solve all the problems, especially at that time. You have to have the answers. And you started as find the best. And you were organizing, hey, these are the best headphones.

These are the best laptops. This is the best ski mountains. And by putting all of that into tables, that's when you kind of had the aha moment of, hey, this semantic data is going to lead us somewhere. No. We thought we could connect the two together, and it would be interesting. We were trying to convince those companies that we had, they could use our data to power their voice services. They didn't believe it.

Somebody, it was actually, Ivor Berkovich and Dylan Winslow did a hackathon, and they ripped out Alex's brain, and they put our brain into it. It literally just took an afternoon to be able to tap into our knowledge graph, and they took a video of it, and they said, to Jeff Bezos and I guess Jeff sent an email with somebody saying, who the hell are these guys? Why are they better than we are without anyone knowing about them? So it really came down to the data. Understanding wasn't a problem. That was trivial.

It was the massing of the data turned out to be a pain of the ass. You have to tap into, I think we had some like 600 different databases, datasets that we were pulling in from all over everything from help data, the real-time BLS data, stock data. How do you think about entrepreneurs? today, not to be crumudgeonly old men here, but the traits that are timeless across the decades, across the generations that you find are lead to just incredible outcomes and incredible, the incredible founders who have incredible outcomes. What are the traits that you see?

What I typically look for all employees, I call it Sega, which is smart athlete, great attitude. So you can't teach IQ, so you've got to have, you got to be smart. You've got to be competitive as hell. Not, you've got to hate losing. I love that question. Do you value winning more or do you hate losing? It's to hate losing. It's like you can't fail. I think with entrepreneurs, I have this sort of test I give people to colleges and there's 10 questions and how they score. It whittles down to just a couple of people. And the final question is, are you delusional? Because no one's sort of like a perfect 10. But a lot of it is just this sense of urgency. It's not maniazza. It's today. I got to get I got to get out. this now, this is an opportunity. It's somebody who's willing to sort of look at data that has a high conviction in what they believe, but are also open enough to realize everything in life is a hypothesis. If the data shows you wrong, then you change it and being able to know that you can switch. I look for charisma. You know, charisma is a bit of a pejority term, but charismatic

people are, you know, they're visionaries. People believe in them. The best line I ever heard, the hardest thing about being a VC is figured out their founder is delusional or visionary. It's a very fine line. If they're right, they're a visionary. If they're wrong, then they're probably delusional. I'm willing to bet on the delusional ones for sure, because if you're delusional and you say, yeah, you know, I think there's something out there and you'll leave Spain on a ship with some provisions, yeah, you've got to be pretty delusional to think you're going to hit land because you might not. I like the delusional ones because if they hit land, now they're visionary, like you're saying. Well, I'd say, I'd put that in the visionary camp, right? Delusional are the ones that

just refuse to listen. They just, they're just held bent on. I am right. Everyone else is wrong. I don't care how much information is coming. You know, your bias, you know, they just won't listen at all. Oh, I see. Yeah, that's a, yeah, I thought delusional as in like, I could do something that nobody's ever done before. But yeah, I get your point. If you define delusional as they're pig-headed and they will not change their mind in the face of new data. You know, that is what's wrong with American politics today. You could have new information and people will just not change their position in the face of new information. You look at what happened to science and COVID, what happened to media, what happened to politicians. The data was so obvious, I mean, I haven't got argument right now with a COVID, you know, health expert,

how they completely screwed up our country based on by just simply not looking at the data. the data was so obvious from day one why they didn't listen to it. It just became so political. It became political. And then once you give advice, you can't say, well, you know what?

Now based on the statistics we have, hey, we're six months into this, we're nine months into this, you know, if you're surfing at the beach and you're outside and you're healthy

and you don't have comorbibilities, you're going to get COVID at some point, but you're going to be fine. And if you're old and you've got comorbidities, you really don't want to get this thing, so stay home and limit your interactions. And yeah,

if you get a cold, make sure you come to the hospital so we can give you one of these drugs. But yeah, it was pretty crazy how nobody could think sensibly for two years. Well, a lot of people could think sensibly, but they were shot it down. You know, if you remember the great Barihan, you know, Jay Bakaria of Stanford, I mean, he was great. He was just seen as ridiculed as, you know, crazy and exe dust. And it was completely right.

You know, we all knew. Remember in Amicrom? That's talking about COVID. Yeah, no, it's okay. They said, they said, oh, the vaccine will stop you from getting COVID. And we all had amicron. Like, every we do had amicry. Like, literally, it happened to me three weeks after I got the vaccine.

I got the vaccine. I went to Saxe's Christmas party, his super spreader spectacular, as I called it. I got Ammocrat. And I didn't know I had it. My wife said, I sneezed twice. We were skiing. And she said, you got COVID. And I said, I don't feel anything.

I went to bed. I had a little bit of hot sweats. I went skiing two days later. I felt fine. I tested positive of COVID for 19 days. I felt it was the meekest cold for 12 hours I've had in my life probably. Oh, I'd rather have COVID than it cold. We were in the Caribbean.

We couldn't get back to the country because we kept testing positive. I mean, the worst thing that happened. The nurse made so much money. Yeah, just every day, $300 test, $300 test trying to give back to the States. I mean, it really is. is like I'm now moved to the point where I'm very resentful of, I don't resent the first year because I think people were trying to do the right thing and it was unprecedented. It was spreading. But I'm really resentful of like year two and how they position the vaccine. Like it's absolutely,

you have to take it because you're going to become a blocker. And I was like, you know what? That makes sense to me. If I don't spread it and I'm a blocker, great. We go to a party. There's eight blockers. There's two people could spread it. Hey, chances are spreading get go way down. And even that wasn't true. Yeah, look, we got it. We end up traveling all over the world. By the way, it's the best time ever to travel. Every place we went, there was no lines. We went to airports would be no people. It was great. When I looked at the data, I'm going, okay, not old, not morbidly obese, no comorbidities. My probability dying is zero. Yeah. Like, it's not going to happen. So we just went all over. It was fun. But, you know, I convinced my kids to get it just

because they were in their 20s. I was like, you don't need it. I think there's no way you need it. but your life is going to be painful. Like you won't be able to do any. You won't be able to travel the whole thing. All right. No more about COVID. Yeah. No,

I mean, I'm going to do some lessons there too from like the censoring on YouTube and stuff like that. It's very interesting having a podcast. And then having your podcast flagged. And I'm like, but we're having an intellectual discussion about this. You don't need to flag my podcast.

It's just like, oh my God, we have to, here's what you have to believe. And I'm like, really? I have to believe that. And you have to put this warning on your content.

I'm like, on this week in startups, really? Okay. So I wrote an editorial at the Wall Street Journal defending big tech probably about three years ago. And my argument is like, a very libertarian argument.

You don't want to go to their site, don't go to their site. It's their property they can do whatever they want. I didn't realize that the government was actually interfering, you know, basically doing censorship. Yeah. Using them on their behalf.

To me, I was like, I want to retract that editorial it was unbelievable that they were doing censorship. And I think that's why people have lost trust, lost trust in so many, many of our institutions. I think what Elon Musk was, you know, for freedom of speech, you know, he can be a bit crazy often. But, you know, you got to love the freedom of speech. There's downsides to it. Yeah, I mean, it was, it's a very hard thing to champion freedom of speech because that means you have to champion some things that are pretty gnarly.

and you have to tolerate some things that maybe are ugly and that you don't agree with but our generation I think that was like a core tenant and it's just very weird to watch generations feel like they're going to be like

absolutely disturbed because somebody said something they don't agree with it's bizarre you don't need to be protected from words like they're just words like we're in the dictionary yeah it's weak

very weak like there's there's no trigger warnings in life you know bad bad stuff happens to very suddenly. That's the thing I look for in entrepreneurs. Back to the entrepreneurial question is some amount of resiliency and some core beliefs that you believe in that you're not going to just be shaken from.

If you believe that this thing should exist in the world and you're resilient and you're going to fight the fight for that thing and you have that belief in the thing. Now, of course, you have to have some amount of smarts and some amount of hatred of losing and you'll get there. But man, I do like principled people. And then, you know, they can be hard to get along with. but the world absolutely needs them. What do you think about valuations now,

just to go on to another tangent? You know, things have gotten crushed in the public market. It's starting to come back. We had a pretty good year here. It feels like things are stable. But private market comps, public market comps, is pretty norily for SaaS, and you've chosen SaaS.

Where do you think this all winds up? You said you wanted to invest in companies with a million dollars in ARR, let's say. What should they be valued at today? And what will they ultimately be valued at? So we invest in companies outside Silicon Valley, primarily for that reason. I just don't.

You know, we're down in Santa Barbara. If a company comes to West, you know, they can throw a rock and kill 10 VCs. You know, why are they coming to us? Why would they take money? Clearly most, you know, huge percentage of great companies come out of Silicon Valley, but it's also even a greater percentage of money is in Silicon Valley. So the competition is extremely fierce. I look at some of the valuations where people have given like 250 times revenue.

I just don't get it. I don't know how you grow up going to it. Maybe I'm missing something, but we tend to look at, you know, obviously growth rate, retention, churn. We just, and then we do, you know, what we think is a reasonable number based on growth rate. You know, it's above, you know, most public, no public company growing at 200%, 300% anymore. But we just don't go crazy evaluations. And maybe we lose some deals. Yeah.

That's our part of venture is you lose deals and those deals. Some of those deals go off and do great things. And founders have kind of figured it out too. They know how to, in today's day and age, back in our day, it just wasn't a lot of information or insights into how the whole system worked, to even understand how a convertible note worked or how rounds were priced. It was all kind of in a black box. You had to really go discover that information.

Now it's all out there and how to run a process is all out there. So founders know how to run a process and get the valuation they want if they're trying to optimize for valuation. But I'm not sure optimizing for valuation is a great idea. idea, like you said before, about optimizing for your salary is not a great idea. Well, I have a lot of sort of canned speeches I give to entrepreneurs. You know, I think some of the biggest mistakes you'll see like on these death of cornes. They've piled on so much preferred, they'll never see a penny, right?

They could build a great company, you know, a hundred million dollar company, not bad. Right? I'd take one of those. Yeah. And they'll receive nothing. So taking out too much money is just as bad as not having enough money. It causes bad habits. You know, we can usually get around the valuation.

I mean, what, it's a tough, it's a tough market to raise money. You know, if you've got a great company, it's pretty easy. You know, there's a lot of VC funds that are not able to raise, raise another fund. There's going to be, I'd say 50% of VC funds would be gone, you know, within a year. I'm raising my current fund, and we're halfway to our target. We hit our first target, and now we're going for the stretch goal. And it has been 10 times as much work. is when I raised the previous funds,

and a lot of the other fund managers I'm talking to have given up. They're just out of the market, and you're starting to see the layoffs happen quietly at venture firms. You wouldn't see it because people stay as, you know, their partners, but they're not getting paid anymore. They're getting a small draw, whatever. They're kind of winding down, I would call them zombie funds, and then they're maybe hoping next year they can go raise a fund or the year after.

But for those of us who have money to deploy, this feels like the greatest time ever because you get to see a lot of companies people are running their companies in an intelligent fashion and they're focused on what matters product market fit, customers, revenue so it feels to me like this is the best possible time

to be an investor. I mean, that's always irony, right? When the market, our fund was a 2021 vintage and it's doing great. Yeah. Yeah, on a relative basis. But when valuations are high, people will only give you money when they're low, you know, everyone's service. We're but a half

through our our fundraise as well. I've never understood why one of the models, I think that's broken adventure. I don't know what your GP commit is, but most of these VCs, there's not a big GP commit. No. Well,

why not? Yeah. It's, to me, it's the best place, best place I can put my money is. I'll have a couple of million dollars into my fund. Yeah.

So it's, yeah, it's not, it's, I've got a lot of skin in the game. And if you believe in yourself, yeah, there,

there, I think there were a lot of folks who were putting in like, well below 1% of their fund. Like the entire partnership, five people might be like 1% of the fund. It's like, really? You have a quarter million dollars in your fund?

Wow. That's incredibly risk-taking of you. Yeah. How much is your second home cost? I think I'll be like 20. The first fund was probably, yeah, about 30%. Yeah.

20%, third percent. I don't take salary because I want to use it to invest in other people. I mean, I just, I don't have a, income. I'd rather have capital gains, Kerry. Yeah, Carrey's the way to go. Absolutely. Are you, have you moved to the institution, raising money from institutions yet? Yeah, we're just

starting that process. So I have meeting with sovereign wealth funds, family offices, you know, like larger family offices. So I guess those aren't institutions, fund to funds. But yeah, you know, we're not going to at a hundred million dollar funds size ever be a fit for CalPERS or Harvard. You really need to get to like, they need to put in 50 million dollar checks as my understanding. And they're reducing the number. So those institutions are pretty hard. I think family offices, fund of funds, to the extent they exist, and sovereigns are,

you know, the likely route for any sub $500 million fund. We haven't done. We're about trying to raise it, but roughly the same. We just started the first time going to our fund of funds institutions. We haven't done sovereign. I haven't done anything offshore. Yeah. Are you having any success there?

Yeah. I think it, well, not yet. But I've been meeting a ton of people, and I think that they are very interested in having a seat at the table. And the people who have a seat at the table are on pause. So then you have this interesting market dynamic. Okay, the people who in the U.S. are overcommitted, they have the denominator problem. Stock market came down. Their venture portfolios didn't get marked down.

So they went from 10% allocation and venture to 25%. They haven't liquidated their TikTok or their stripe or other companies that need to go public. and so they need to get their venture commit down to 10% again or 15% from 20 or 25. And that's going to take equities going back up or returns coming in and clearing some of that venture position. So I think they're largely on pause for 22, 23, and 24. So, you know, if you're Harvard, if you're Yale, if you're Stanford, it's just going to be a big long pause while you. And then you've already committed to great firm. So you don't, there's no rush here, right?

They're thinking in decades. So for fund managers who need to raise during these two or three years, it's going to be very hard. It's going to be very hard. And I have a track record, so I think I'm, you know, in a good position. But I would say it takes 10 times as many meetings to raise half as much. Yeah, the first phone was a bunch of emails. Say, doing a fun, you interest it? Boom.

Yes. That's okay. We're finding there's like the smaller fund of funds or the smaller, smaller institutions that they don't have it, much venture exposure. So, but you are right, the larger ones. massive checks. As people are saying pencils down right now. Yeah, people are pencils down right now, and that's okay.

It'll come back. And as long as you have some money to invest, you and I have our own money. So you keep investing, and you're going to get the pick of the litter right now. It's not like deals are taking, you know, five days, two weeks to close. They're taking two months, six months to close a deal.

So on the buy side, when you're investing, you have plenty of time to get to know a founder again and do diligence, which is good for everybody. It's great for the ecosystem. All right, I got to jump. Kevin O'Connor, great to spend time with you and let's catch up next time you're in the Bay Area.