This Week in Startups - Liquidity: Recession fears, AI market shifts, and the future of tech hubs | E1994

Starting point is 00:00:00 I do think there's a really interesting alternative approach to buyouts and rollouts where you're getting enormous leverage on the teams or assets that you're buying through Genitive AI. But then you have to do a very strong rip and replace technology cycle. You have to rework business process against AI. And again, traditional bio firms tend not to be very good at that kind of stuff. They tend to be more. We'll bring in an operator who will, you know, cut some costs or maybe optimize some things versus we're going to rethink the whole thing through the lens of technology. A lot of the stuff that happened in the last three or four years, really around capital formation and not necessarily organizing product market fit.

Starting point is 00:00:35 I think we're getting back to that. It's clear that the YC stuff is evolving in a good way. And I think that's all positive. But we've run into them all over the world. And I worry that there's just too many folks starting companies and really spending their wheels in a way that's not going to help us. This Week in Startups is brought to you by Squarespace. Turn your idea into a new website. Go to Squarespace.com slash twist for a free trial.

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Starting point is 00:01:32 Twist listeners can get an extra 20% off any plan for your first six months at openphone.com slash twist. Welcome back to this week's liquidity podcast. Today we have an all-star lineup. With me today, I have investor, Elad Gill. Next, we have David York, founder of VC Fund of Fund top tier, which has roughly $9 billion in assets. And of course, we have Jason Gallaghanes from the launch fund.

Starting point is 00:01:54 I'm your moderator, David Weispert, co-founder of 10x Capital. Today, we have several interesting topics to discuss. We discuss how recession fears are affecting Silicon Valley, where we discuss the different incubator and accelerator market, as well as we break out cities and their dominance in certain startup sectors. Let's get right to it. Recession fears are taking over Silicon Valley with NASDAQ officially in correction territory after being down 2.43% late last week.

Starting point is 00:02:24 Stock market fears come as a result of recent data from the labor department, which saw unemployment rise and non-farm payrolls rise by only 114,000 versus the 200,000 economists predicted. David, you've been investing in the venture asset class for over 24 years. In your experience, what effect does the overall economy have on the startup ecosystem, and what impact should we expect here? The impact is basically in two areas. One is the flow of capital, and that's impacting on the investor's. side, investors tend to worry about their balance sheets and slow down the pace of investing.

Starting point is 00:03:00 The other area at impacts, which I don't think people think about completely, is actually the spend on the enterprise side. And we're going through a correction, if you will, the enterprise space, especially after the cloud computing era, kind of morphed enterprise spend. And so that part of the ecosystem is actually slowed down pretty materially. And I would say that we'll continue to correlate as the economy goes through. it's sorting out post-COVID. And is the startup ecosystem more greatly affected by that, or is it kind of on par with the

Starting point is 00:03:31 rest of the economy? How does that play out? What we've found, I guess, through that, I mean, I've lived through several of these, unfortunately or fortunately depending on you think about it. But, you know, what happens when we have corrections is people reinvent themselves and innovation percolates and ultimately takes hold and creates a new economy. A good example is if you go back and when social media really got started and around the internet correction in the early 2000s, 2001, 2, 3 time frame, that was an obvious to most of us, primarily because it was happening at the household level. If you think about people going on Facebook or Groupon or the like, they were really on their PCs.

Starting point is 00:04:13 They weren't on mobile phones. The iPhone had not come out at that point. And so you're going to have the same thing happen here. I think one of the things that makes this correction, at least from our view, more palatable and easy to kind of sit through, is that what's going on with machine learning and artificial intelligence is becoming compellingly obvious in a way that for the first time we're having essentially a pull, if you will, in innovation as we get through this correction. And the other thing, which I talk about a lot with investors, but, you know, COVID convinced us all the technology was actually a good thing as opposed to a bad thing. A good example is this podcast, for instance. we weren't doing these before COVID. Today we are pretty regularly. And I would say that most people in the world are pretty comfortable with new technologies,

Starting point is 00:04:57 which coming out of the Internet level again, that wasn't quite so obvious. And so I think those two things make this correction feel like something we can swallow and we'll get through it. A good example of that is kind of where the chatter is around interest rates. I think that'll help for growth investing as well. So all those things would make me feel like it's a good time to be putting money to work, it's supposed to be pulling away. And, Eli, you're in the eye of a storm when it relates to AI. Is the latest economic news having an effect on AI, or is it just too hot to care?

Starting point is 00:05:27 Yeah, to some extent, AI is almost like four market segments instead of just one. And maybe we can touch on two of them just, you know, to talk about them in more detail. What is the sort of semiconductor chip layer? Everybody knows Nvidia is one of the dominant or the dominant player in that market segment, or at least the biggest player right now. And if you look on a five-year horizon, their stock is still up 20, 25X. If you look on a one-year horizon, it's up to two and a half X right now relative to where it started just a year ago. So despite the drop at Nvidia stock from recent highs, it's still doing quite well.

Starting point is 00:06:00 And that's because people are still buying a lot of chips to power AI applications. If you go up a level and you talk about foundation models with your companies like Open AI or Google or people like that, people I think kind of misunderstand some of the incentives in the system for those companies, funding, their utilization, etc. And so, for example, VCs have invested hundreds of millions of dollars in companies like Open AI are Anthropic, but it's really the big cloud providers who've invested most of the money, and they're investing billions and billions of dollars, in the case of OpenAI, $10 billion plus to drive these companies forward.

Starting point is 00:06:31 And one of the reasons they're doing it is it really drives their own cloud businesses. So, for example, Azure had a $28 billion quarter of recently, of which 8% of the quarter was new left from AI. So AI generated $2 billion a quarter in incremental revenue from Microsoft for Azure. And so these are really big meta trends, and those are sort of the very big companies participating on it. Obviously, there's all the startups doing applications

Starting point is 00:06:55 and infrastructure and other things, and there's just this enormous lift happening right now across these various segments of AI. So I think it has an impact of the segment very much, if at all. And my anticipation actually is that the segment will continue to accelerate because enterprise adoption of AI, despite being $2 billion a quarter just on Microsoft, Despite that, we're in the very early days of enterprise spend,

Starting point is 00:07:16 and enterprise has basically done nothing there so far. So it's a very exciting time, I think, from an AI market perspective. The place of enterprises are really slowed down to spend as in the SaaS ecosystem. There's not as many seats today as there were before. And so we've seen SaaS revenue growth really collapse over the last year or so. And I think these are all great thoughts. And, you know, if you pull back a bit, great companies are built through all kinds of markets typically. So whether it's Google or Uber, you know, or pick the company, Airbnb, up and down markets don't really matter for the truly great companies to get product market fit because consumers in the United States love amazing, exceptional products.

Starting point is 00:07:55 Now, average products, mid products, they will have a harder time because consumers or businesses might do less sampling. They might tighten their belts a little bit. So that's just a way to think about the two groups of consumers we're talking about enterprise consumers and regular consumers. If they feel rich, they'll be loosey-goosey, you know, getting a purchase order through in 2018, 19-20, 20, through your CFO or your head, if you're printing money, your valuations going up, of your company, your stocks going up, you know, just, yeah, sure, whatever, go to a conference, buy some software, who cares, we're printing money. Then when people feel bad, they tighten even beyond they need to, right?

Starting point is 00:08:32 And so they just said, we have 50 SaaS products here, it's got to be 20. Why 20? Like, is that going to cut into the bone? or doesn't matter. Somebody said to one, we've got to cut this much. And then zooming back a little bit and looking at what's actually happening

Starting point is 00:08:45 in the market, you have companies like Airbnb or Amazon saying, hey, we got softness with the consumer, specifically consumer consumers, not enterprise. And, you know, if you look at why,

Starting point is 00:08:57 those are discounting brands. Those are people looking for discounts. Then you look at Uber, which is actually, despite what people might think, a high-end brand, because, you know, that's versus taking public transportation

Starting point is 00:09:08 or versus making your own food, generally speaking. And they're saying, hey, consumers great. Things could change, but the consumer's great because they have high-end consumers. So there's a lot of granularity here. And when you start getting into macroeconomics, which I don't suggest founders do, or even venture capitalists, I really think you have to focus on product, market fit, and team building above all else and product. Those are the three things that actually determine your success.

Starting point is 00:09:32 So, but just on a macro basis, you know, inflation going up is good for companies in some ways because they can charge more for their products. It's bad because their inputs go up, so it's a mixed bag. And then with interest rates going down, well, obviously that could be great for the market because it could increase the amount of investment and have people say, well, if I'm only getting two or three percent in the savings account, I should go for venture. I should go for stocks and I should move money out of these, you know, five, six percent accounts people are getting. And so all of it is a long way of saying, you know, there are aspects to fundraising that are impacted, I think. So timing your fundraising, it is good to be.

Starting point is 00:10:07 thoughtful about macro. But what we do day to day as capital allocators and as company builders and founders and hopefully there's a little bit of overlap between those two things, you know, at its best. It really is about staying focused on your customer, your product and the team that builds that product tells them to like those customers. And I'm constantly trying to talk to founders about this. And then they, you know, it's incredibly frustrating when a founder says, I can't raise money because the market crashed. And it's like, no, that's not why you can't raise money. The reason you can't make raise money is because you do not have strong product market fit. You have, you know, pretend product market fit where you're spending $100 to acquire

Starting point is 00:10:45 a customer that makes you 50. So, you know, let's never blame the outside market. Always focus on your customers is what I've learned hard. All right, founders, we all know you have too much to do. So I'm going to save you time and money. The two things that you value, no matter what you're building, you got to have a website. We all know that. and everybody judges you by your website. People judge a book by its cover. That's what they say. Don't judge a book by its cover.

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Starting point is 00:11:33 They got Blueprint AI. It's a tool that's got to be a tool that's to help you tweak your website by answering five quick questions. And once you have the design sorted out and it's beautiful, it's stunning, man, they got all these other AI tools that's going to help you with all the copy you need. You're going to save time, save money, and you're going to get that site online. And wow, you're customers. Squarespace is the longest running partner here on this week in startups because they love startups. Squarespace.com slash twist for a free trial. When you're ready to launch, you go to Squarespace.com slash twist. You get 10% off your first website or domain

Starting point is 00:12:05 purchase and it's already affordable and it kicks butt. They're awesome. They're constantly adding new features. That's all I have to tell you. I love it. We use it. Squarespace.com slash twist. Thank you to the team over there for making great products for startups. Elad, you're oftentimes the best friend to the CEOs that you invest in. They must ask you, are we in growth mode? Are we in defensive mode? How do you look at macro factors? And what advice do you give founders during different economic cycles? You know, it obviously differs a lot because if you're in the middle of the zero interest rate environment that we had during COVID, and capital is incredibly cheap, that was a great time for people to raise money.

Starting point is 00:12:42 And often during that period, it's actually counseling people to not raise too much and keep their valuations within some range so that they could always do an upround if things collapsed. And unfortunately, things, you know, have largely collapsed. In times like today, the startup ecosystem is really segmented into three pieces. There's the AI step, which we already talked about. And then there's all the companies that got started before the AI wave. and a small percentage of those companies, say 10%, 20%, have started to match or grow out of the valuations that they set

Starting point is 00:13:09 two or three years ago. And so they're finally hitting their stride that's companies like Rippling and Figma and others who've announced these sort of up rounds relative to what they've done before. There's probably 20, 30% of companies that hit their terminal value two, three years ago. They'll still exit or they'll do well, but they're kind of going to flatline in terms of they've hit their peak, right?

Starting point is 00:13:28 And then maybe half of the companies should still either sell or a subset of them will go under. And they just raise so much money that they have this enormous runway ahead of them. And so to some extent, the question there for some of those founders is if these are some of the best most productive years of your life, do you want to keep working on something that isn't going to work because you have the money to do so? Because if you sell or you shut down the company and return capital or do whatever it is that makes sense to do in that context, you may be able to go and do your next startup or join a company that's working really well and really take advantage of these incredibly productive years that you have ahead of you.

Starting point is 00:14:04 And so, you know, there's a lot of kind of conversations along, along those lines between those three different types of companies. What are some options there? So let's say somebody raised $100 million during the ZERP era and, you know, they're not going to be able to clear that preference. What are some options that startup founders have? And how have you seen that play out in the real world? Yeah, there's four or five options.

Starting point is 00:14:23 Option one is to sell if you can, right? And some people will buy you for the cash. Some people will buy you for what you've built, what they do that can accelerate it. Two, as you shut down and return the money. Often founders who've sold secondary themselves find that to be a more troublesome option, and part just because they feel bad about taking the money. And often I tell them, it's okay, like, that you've, you know, the person on the other side was an adult, they knew what they were buying in two, you know, they knew that they

Starting point is 00:14:45 were giving you liquidity, so it's okay to shut down. The third is to use the cash to buy something that is working and help scale it or accelerate it with the money that you have. And the fourth is change direction, but that tends not to work once you've raised that much money and you're at that scale because the amount they have to catch up to for an entirely new business is so large that it's extremely hard to do that. But those tend to be the four options. Yeah, those are really good options. And it's very hard for people to reconcile. I sold 10 million, 20 million in secondary and this company's going to be worth zero. But, you know, you in some cases,

Starting point is 00:15:20 you make a trade and you get the better of the other person. They think they're getting the better of you, obviously, when they bought those shares because they thought they were going to get all that acceleration. So I think it's very good advice to understand that the precious unit here is not the money. It's exceptional entrepreneurs time. And if they just waste five years kind of letting the money run down, it is more problematic than just returning it because everybody wants to get on to spend their time on something that could break the power law and be, you know, be something exceptional. We have so many companies in our portfolio that are great founders who raised a ton of money who are now sitting there. and the last three years have been, I don't want to say depressing, but, you know, really depressing for some of them because their revenue went down 30, 40 percent. They did three riffs in three years.

Starting point is 00:16:12 And now maybe they're still losing customers, adding marginal customers, and it just kind of nets out to a sideways business. And you're like, well, why am I doing all this effort to have the business every year do the same amount of revenue? you. And the only way I make a profit is if I hire people who I love. And so, you know, weird things happen. And it's very hard to tell a founder, even, you know, as a capital allocator who's been through this so many times, like a lot, it's like, you're going to tell a founder who's being offered some huge secondary, some huge rounds, some huge valuation not to take it. I know when I was in their shoes, I probably would have almost definitely would have taken advantage of that moment. And, you know, then the ramification becomes, if you don't figure it out, it gets weird. So you took the option to have a pile of cash. You took some chips off the table. Both were great decisions. But now you have to make another hard decision. And that is the challenge, you know, I think for a lot of people.

Starting point is 00:17:06 It's just hard to put things to bed. The thing is clear, just based on our experience, because we did fund a couple of funds after the internet bubble births and a couple of funds after the global financial crisis. We're really focused on this turnaround notion that Elad was talking about. And at the end of the day, it doesn't have the right. right outcome. It turns in you can turn around and sell it, but it's still, it's kind of mediocre outcome, no matter how much you try. And there's a lot of folks in the financial sponsor realm that kind of think those are opportunities too. But I don't know, I found it with technology. If it's, it's, it's, it's a really hard to find it. And ultimately, you've kind of tarnished what your

Starting point is 00:17:46 efforts are. But I'm curious both you guys, how you think about financial sponsors in this environment, or is that also kind of a lost leader at this point because companies are too small? What would you mean by financial sponsors in this? Oh, buyout firms. I'm sorry. Oh, I see. Yeah, the bio firms. Sorry.

Starting point is 00:18:01 I was being politically correct. I ask people all the time about what deals they've actually seen, what deals they've completed. And I haven't had many case studies. I don't know you a lot if any of your portfolio companies have actually gone to a successful buyout. Yeah, there's been a couple of circumstances, you know, optimising got bought by insight, which is effectively a private equity firm.

Starting point is 00:18:18 And there's a few others. You know, the one that is kind of the shop. Azure right now is actually bending spoons, which bought Evernote and a few other companies. And, you know, the rumor is that they've basically taken very large teams. It's kind of like Elon Musk on steroids, right? You take a 100 or 200 person company and you collapse it down to a dozen people and you move the engineering to a cheaper geo, and you have this asset that you run and you print cash, right? And so I actually think that's very underdone. And one of the things that Elon really showed through the context of Twitter is that you can

Starting point is 00:18:50 cut the team 80% and still have it before. and company, and traditional private equity just hasn't done that, that aggressively in tech. And so I actually think the experiment hasn't been fully run. We've seen roll-ups. So in the cyberspace, for instance, or various other sort of what are commoditizing software sectors with the big tech shops like Vista or home with Bravo. And I still think that's going to play. But they typically want to buy stuff that's, you know, has an enterprise value of three or

Starting point is 00:19:18 400 million. And I think they can turn into three or four billion. and they'll bolt two or three together and try to get economies of scale. But it is another piece. It's about a third of the liquidity that's making its way into venture land over the last three years. Yeah. One thing I've actually been experimenting with, which I think is really kind of interesting, is the rise of AI has actually created a new potential form of buyout.

Starting point is 00:19:43 And so I've now backed one or two sort of AI-driven buyouts where the idea is you have a variety of companies. in some cases in traditional services industries where they have a lot of what I call like white collar or email jobs, right? You're kind of moving data, you're synthesizing it, you're writing stuff, and that's exactly the type of stuff that generative AI can really impact.

Starting point is 00:20:03 If you look at, for example, the Klarna example of cutting their customer success team by 700 people and replacing it with an AI system that's suddenly available 24-7, higher MPS score, etc. And so I do think there's a really interesting alternative approach to buyouts and rollouts where you're getting enormous leverage on the teams or assets that you're buying through genitive AI.

Starting point is 00:20:23 But then you have to do a very strong rip and replace technology cycle. You have to rework business process against AI. And again, traditional bio firms tend not to be very good at that kind of stuff. They tend to be more, we'll bring in an operator who will, you know, cut some costs or maybe optimize some things versus we're going to rethink the whole thing through the lens of technology. And so I think that's a very exciting area as well, you know, while we're on the topic of buyouts.

Starting point is 00:20:44 I was there for the first 30 days of Elon's Twitter takeover. and zero-based budgeting is what was being done. And here's a blank sheet of paper. How many people should be in the PR group? And Elon asked me that question, and I went and talked to them, they had 54 people doing PR at Twitter. And they, you know, what was the need?

Starting point is 00:21:04 We weren't going to do, you know, Elon wasn't going to do press interview. So why do we have 54 people here? And these were not 54, you know, these were 54 very expensive people. And it went to zero. Like, not like one or two. like it went to zero. We're not going to have a PR function.

Starting point is 00:21:20 If you have a question for Elon, go ask it on Twitter was our rule. And so any journalists can go ask him. And if you want to answer it, he'll answer it. And it doesn't need to be 54 people around the world, you know, on the phone managing these relationships.

Starting point is 00:21:36 It's just a question from the press. We'll answer it if we want to. And so, yeah, that kind of thinking is really powerful if you do it across 20 groups. And like the Spending Spoon example with Evernote, like people love Evernote. people will keep paying for it, but what do you do with a company that's making $10 to $50 million?

Starting point is 00:21:51 It's too small for private equity. I love this idea of somebody coming in and buying 10 of these, having really good product teams and just delighting users and having a huge margin. It's really smart. And that's how this next generation of companies is being built anyway. I don't know if you see that on the game on the field, but I'm seeing so many companies that are like, yeah, we're just going to raise 500K for now. We don't really want to raise $2 million.

Starting point is 00:22:14 We want to just keep the equity. So we're going to just dilute 7%. We're raising 500 million at 5, 6, 7, 8 million. And we just want to bill for 18 months. It's four of us. We don't need more money than that. We're going to pay ourselves 125k each. Done.

Starting point is 00:22:27 And it's really admirable this new set of companies that are just like, yeah, I don't want the distraction of raising a bunch of money and having a bunch of investors and being on this never-ending fundraising trail because I'll tell you, by the end of 2020, it felt to me like many of the founders I was working with their primary skill set was raising money and not running the company. And they were just getting really good at raising money. Like, unbelievably good at it. I mean, coming back every, I don't know what the cadence was for you, but I mean, I had people coming back to me every six to nine months telling me they were raising at up rounds. And I'm like, why? I mean, we have, do we need this money? I was like, no,

Starting point is 00:23:05 but somebody called us and they offered it. So we're taking it. All right, everybody, welcome back to the program. Stephen Estes is with us again. He's a principal at CLA. They're a professional services provider. They specialize in CPA, tax consulting, and wealth advisory. His areas of expertise lie in VC-backed startups, VC funds, high-growth startups with complex tax issues in multi-state and international filings. Welcome back to the program, Stephen. Hey, thanks, Jason. Appreciate it. Let's talk a little bit about the differences between venture capital and private equity. Are you seeing private equity people kind of dip down into the venture capital space, as we're starting to see in Silicon Valley? I think so, absolutely. I mean, we definitely see those lines been blurred, especially in the last five, ten years. But, you know, VC, traditionally a bit earlier stage. I mean, it can also be later stage, but private equity, it depends to come a little bit later. VC, a bit more high risk, high reward. PE prefers to engage with startups after they've become EBITA positive. But that being said, I think that there's been some shifting there. And the lines have definitely blurred for a later stage company, private equity can be a great way to monetize the value that you guys have already created. And you can kind of roll over the equity with the PE buyer. So that's a great.

Starting point is 00:24:13 way to potentially get a second bite at the apple, if you will. I love sports. So I would say PE firms like the dink and dunk, you know, down the field, it's a high percentage play, minimal risk. VC firms are really kind of geared towards throwing the ball deep down the field, making the splash plays, right? They're both trying to put points on the board, but they're definitely taking different approaches to the game. All right. You need a trusted advisor. Tax is accounting. You don't want to play games of this stuff. Get it right. Get a great partner like CLA. Go to CLA connect.com slash tack and let them know. Your boy, Jake Al, sent you. Once again, CLAC connect.com slash tech.

Starting point is 00:24:44 Next up, tech crunch is reporting that Bill Gates' breakthrough energy, which has both a for-profit nonprofit arm, is going early, oftentimes reaching into universities to find their most promising investments. Universities, accelerators, incubators have all started to really heat up. And, Eli, you've really been in the center of the storm there. And we've seen a significant amount of entrance in the form of accelerators and incubators going into pre-seed. outside of YC, which one of the ecosystems are you most interested in?

Starting point is 00:25:14 And what are ways that different groups are differentiating in the space? You know, it's a really interesting question. YC is obviously still incredibly central and important to Silicon Valley. There have definitely been a variety of other things that are either AI-specific programs or others that have risen recently. There's OpenEI Runs a Grant program, South Park Commons, there's AI grants, there's a convictions program. Jack Altman has started one for SaaS-related AI companies.

Starting point is 00:25:38 There's a variety of these. I think at a meta-level, the really interesting, thing is that Silicon Valley turns over in these five to seven year cycles where the companies that founders aspire to be like shifts, the CEOs that they look up to shifts, the companies that they try to emulate shifts, and the key networks that spawn most of the founders shift. And so right now, I think a lot of key networks include OpenEI, DeepMind, Palantier, Stripe, Andrewill, probably fair out of Facebook, SpaceX for hardware, you know, there's a small number of places that are spawning all the founders who are doing the really interesting companies.

Starting point is 00:26:10 And so I think that has shifted really over the last two to three years. I think between the COVID era and the sort of AI era, we've seen a lot of turnover and who's relevant. And I think that's been a very exciting period of time, because that's usually when you have these systemic changes in terms of, you know, what's happening in an ecosystem. Can you explain, and maybe you could unpack, why are ecosystems like the PayPal Mafia,

Starting point is 00:26:33 where you have 10 people produce such extraordinary returns, unpack that? Why do they have such a competitive advantage after being in these ecosystems? I think there's almost three aspects of it. PayPal's kind of weird because almost all the companies started by the PayPal folks except for YouTube were started by executives at PayPal and that's really under discussed. The founder of Yelp was VP Nge. Reid Hoffman was initially on the board and then he ran BD. He was like a SVP there. Elon Musk was CEO. Peter Thiel was CEO. Max Lepchin was CTO. They were all executives. And the rank and file in people actually didn't start much, which is kind of odd. Nobody ever talks about that. But I think what you had is, a dense network of highly competitive individuals who both helped each other, but also wanted to see who's going to do better or who could do equally good or surpass the outcome of PayPal. The second sort of aspect of it is also often just like talent density. The third is just like are people entrepreneurial or not. And some companies like the first, I don't remember it was 20, 30 employees of Stripe, a really big subset of them were former founders that they hired in. So of course, there's people make it and start things again.

Starting point is 00:27:36 And then there's to some extent wealth generation and what's the balance between people becoming, wealthy enough that they can take risk, but not so wealthy that they don't want to work again. And that's also an aspect of it in terms of how big are the cohorts that you see? And so at some of these companies, you often see almost cohorts of founders that come out over time where they're almost time dependent where at Google, I think there was two or three cohorts. And sort of the second one was the one that had founders that started Twitter and Pinterest and Instagram and all these things. And the first cohort had so much money that often they didn't do very much.

Starting point is 00:28:09 Yeah, I think the competition is one of the key things there in inspiring each other and these collisions and small groups of people. If you look back on what happened in rock and roll as an analogy, you know, when you had Bob Dylan and the Beatles, you know, they really influenced a whole generation of musicians. And then you saw, you know, whether it was Led Zeppelin, Dyer Shrates, the Eagles, Jackson Brown, Bruce Springsteen, Mark Knopfler, Diochrates. They were all trying to look at each other's songs. So their medium wasn't startups. It was a song. And they would look at each other's songs and be like, I need to do something better than that. I need to do something better than blowing in the wind like a Rolling Stone. Really hard to top Bob Dylan. But, you know, Thunder Road or, you know, pick your song, iconic song that came after it.

Starting point is 00:28:53 You can follow it back to Dylan almost universally, including the Beatles. And, you know, obviously he got his stuff from Woody Guthrie and a bunch of other interesting people. Now you fast forward to the 80s in New York. So, like, you know, I grew up in New York and I remember rock and roll in the 70s and punk rock and all that stuff emerging in the Lower East Side. And at the same time, I watched Basquiat and Warhol and then this whole generation of artists do the same thing. And then when I came up in the 90s, magazines was the medium. And I created the Cyber Surfer Magazine and then Silicon Alley Reporter, but I was inspired by Spy Magazine and what they were doing over there or I had run into the

Starting point is 00:29:28 Esquire people and my first job was writing for this startup magazine paper. And it is this sharing of knowledge that occurs. So, you know, when I was writing at paper and I went to their offices, I got to learn how it all worked. Oh, that's distribution. Oh, that's how the cover gets made. Oh, this is the graphic design department. Oh, this is where the photographers are. Oh, here's ad sales. And people share information. It's one of the most beautiful things about Silicon Valley over our career is it went from being like very, people held all this information very close to their vest. And then two things really happened, blogging, podcasting, where everybody just got in a competition of who could share and be the most helpful. And I'm happy to have played a part in both of those

Starting point is 00:30:05 blogging and podcasting. And so I think that's what drives these networks a lot. And then I think right now, you know, if there's another factor that's occurring, which is, you know, if you can get in early at a company, you don't face competition. And I've been saying this for over 10 years with our accelerator and we're doing 100 companies a year. People don't really know it because they don't know about Founder University or they may have heard of the launch accelerator, but they're not really watching it too much, but we're meeting now founders in year zero. So, about half the people coming to Found University, which is 200 companies now, haven't incorporated yet. So we're just like, if you have two or three developers or technical people,

Starting point is 00:30:44 a product people, we'll accept you into the program. And at any point in the program, you can raise your hand and say, can we have 25 or 125K? And we'll just write that check if it's a reasonably good company. And man, that's just given us this tremendous advantage. We are literally the first investor. So now, you know, if I hit another Uber, instead of saying on the third or fourth, I can say we were the first, right, like I was in Thumbtack and Athena. that's a really great fun feeling as an investor to be the first second or third,

Starting point is 00:31:09 and you're not competing. People always ask us when we're raising from LPAs, like, how do you compete for deals? And I'm always, like, very confused because there's no competition in years one and two. It's only till you get to, like, the slate seed or series A that it gets very sharp elbowed. 99% of the companies are passing the hat, trying to get the first check. So I think a lot of people are looking at what a Combinator did, what I'm doing, tech stars, and some of these other programs saying, you know, that seems like a good life.

Starting point is 00:31:36 That seems like a really good way to get in there. Now, what they don't realize is running these programs takes about 10 to 20 times the resources as running a venture firm. So just pause for a second before you do it. It's between 10 and 20. I have 21 people on my team right now. So let's you think that this is easy.

Starting point is 00:31:56 And we're a $50 million fund with 20 people. Which is a lot. And David, you have, you have roughly $9 billion. to deploy. How do you play the accelerator incubator space? Are you guys too big for that? Are you able to invest in the space? No, we've looked at some of those. We've tended to bring fats around the ones that are interesting with the preceded seed managers. What I keep hearing and seeing is that there is a sort of a tale of two cities. There's a founder who really doesn't want that help because they kind of bent down the road before and they kind of, they actually want

Starting point is 00:32:29 somebody's going to give and bring some leverage to the cap table, if you will, from their relationships or knowledge or the like. And then there's the ones that actually want to be in the incubators because it's going to help them get organized. But as Jason was talking about earlier, I mean, a lot of the stuff that happened in the last three or four years was really around capital formation and not necessarily organizing product market fit. I think we're getting back to that.

Starting point is 00:32:53 It's clear that the YC stuff is evolving in a good way. And I think that's all positive. But we've run into them all over the world. And I worry that there's just too many. folks starting companies and really spending their wheels in a way that's not going to help us. Do you see in this environment, in these difficult to fundraise environment, kind of more of a resorting of talent into top companies? Do you see that in your GPs and your portfolio? It hasn't taken hold, but that's typically what happens, or at least that's what's happened

Starting point is 00:33:25 after the internet bubble burst, as we had a whole bunch of companies get started. And then within, it took about two or three years, but in that period of kind of between, kind of Between 02 and 05, there was reality and it was like, you got to get started again, which is what Hillad was talking about earlier, about, you know, selling and taking your chips off the table so you can put your effort into things that might work in the future. And I do think that's coming. Yeah, it's kind of been deferred because people raise so much money on the company side that well, and then AI has created this.

Starting point is 00:33:54 And then AI, yeah, yeah, it's created this sort of tailwind about enthusiasm. I do think that, you know, the software stack gets regretting on a lot of things that started with the old stack probably are going to have to be rewritten. And that's a question of economics at the board level as well as the founder level. And that's not quite. There is a lot. It has been deferred. But I think that's coming.

Starting point is 00:34:16 We frame Founder University as a place to run experiments. We frame our accelerator as a place to grow and accelerate the growth of a company. And if you just have that proper framing, you can really just not worry about the fact that there's too many people or are these people qualified or not? Are they going to quit? It's really frustrating when you put. a 500K seed check or a million dollar seed check into a company, instead of them going through an accelerator, and then they quit. And they just burned through the money. And they should never

Starting point is 00:34:42 have been entrepreneurs. And you realize, oh, my God, we gave 500K or a million dollars to a team that, you know, really presented well. Or we, maybe we got drunk on the idea or the market size. And we kind of filled in the blanks without really knowing this is a gritty team. That's not going to quit. Go on a two-year sabbatical and then go back to some cushy job at Google or you know, meta, if those jobs even exist. I don't think those jobs exist anymore. So that's kind of a question you didn't ask, but, you know, I'm really been watching these layoffs. And it's been the greatest thing ever for my business. I have to say, you know, so many of the teams we have are ones who are like, yeah, I think I'm going to get laid off. So I'm starting a

Starting point is 00:35:21 company on the sign. And you're like, have you been laid off? It's like, no, I've made it through four rounds of layoffs that, you know, include big company. But me and my two friends from that same company have been working on this thing on the weekend. One of us quit. We're doing a full time. The other two, we're kind of saving up and we're about to quit when we hit this milestone in our you know, vesting or something. And this disillusionment with working at meta or Google or Microsoft that you're only going to get laid off. So what's the point? And they're not loyal to you. Has created a little bit of a chip, you know, a little bit of like, F these guys. They're not loyal to us, you know, and everybody's gotten a little bit mercenary, which I kind of like.

Starting point is 00:35:59 Those companies were offering such huge packages for so long to anybody that it just was draining the startup market, you know? And now with people just not trusting going to work at VETA that they're going to get, you know, or not trusting going to work at a company because they're going to get, why should I go work at this company? If I'm going to get laid off six months from now or 12 months from now, like all those TikTok videos, it's really putting young people's head, you're on your own, you know, and AI is going to kill your career. So you better be resilient and you better figure it out for yourself. I like it. I like this natural tension that's in the market right now. Between AI, ending careers and jobs and then big companies getting fit and not needing people, well, what are you going to do? Give up. Some people are doing that. There's a whole movement fire. I don't know if you've heard about this. Like, financial independence retire early. Like there's a whole group of people trying to get to a million in net worth. It's like a whole subgenre on Reddit. They're trying to get to a million dollars in net worth and then take 4% out a year, which then means you, you know, if you get to this number by 42, or 38, you'd never have to work again. Like, people are saying capitalism is screwed.

Starting point is 00:37:06 I'm just going to be a homesteader. I'm going to be a nomad. And I'm going to quit. And then another group of people saying, you know what, I'm going to compete because that's the only way I'm going to survive. I'm starting a company. And the revenge startup thing is like very palatable right now. I think that'll be a big trend in the coming years.

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Starting point is 00:38:42 openphone.com slash twist and get a free trial and get 20% off. Jason, have you seen any changes to people starting companies with the FTC ruling on non-competees, basically making non-conpeats non-forcible? Have you seen that play out? No, California has always been this way. I think that's like a northeast thing, like a Boston, New York, you know, where these things exist. And I think Lincoln is like taking, like, the finance companies and stuff like that. And also media companies, you know, like the reason why so many of these media people, Megan Kelly, Tucker, Don Lemon are not like getting other jobs. And network television isn't because they're not talented.

Starting point is 00:39:23 It's because they've been bought off the market. So I think it will affect exactly what you're saying. the Northeast publishing media, hedge funds, etc. But even trying to stop somebody leaving and going to a direct competitor is hard in our industry. Like, people leave the company and the next day they're working at the direct competitor. And it's like, they took secrets and documents. It's like, prove it. And it's like, yeah, we can't.

Starting point is 00:39:46 They didn't. David, I want to come back to your question about incubators, though, just in accelerators. One of the things that we run into, and I think some of the LPs that look at this space run into as well, is that we do have a duration clock. ticking. You know, our funds have a certain amount of life to them. We can't hold things forever. And so it's been hard to actually enter where Jason's entering at that formation stage today because of the fact that it's kind of a 15-year-old. We actually like to see the liquidity in years earlier than that. So the Series A funds have typically been where we've spent most of our capital, although we do have a bench of seed managers and the like. But that's usually

Starting point is 00:40:25 usually one of the reasons why it's harder for LPs to do that. Yeah, it's definitely a problem. I definitely see that. And I've been told that by people who want to be LPs, and they're like, when did Robin Hood? When did Uber exit? And it's like, you're 12, you're 11, 14, you know, it's kind of rough. You know, I don't know if we're going to talk about uniforms,

Starting point is 00:40:44 but there is a lot of highly valued private companies today that don't feel like they're going to exit the next three or four years. And what do you think, David, we talked on the show about the striped, buyback by Sequoia and these kind of different novel structures. Is there anything practical being done about liquidity? You're in a lot of these conversations. What is being proposed and what do you see in the future? I mean, the intro of really the normality of private market secondaries and, you know,

Starting point is 00:41:13 successful private companies is, I think, here to stay. I mean, it's a ecosystem that it's kind of evolved really since the Jobs Act and some of those things is allowed people to talk to private companies without interfering their ability to go public. So I don't see that changing. It's also a way for folks to get, you know, more exposure to things they want to own. And what's going to probably evolve and continue to get more efficient is the option market where employees can exercise options and actually transact in a batch in a way that helps the companies manage liquidity for their employees. You know, we used to do that all in the public marketplaces. And so it doesn't, it feels natural that it's

Starting point is 00:41:52 happening in the private marketplace. I don't see it going away. It's also where a lot of the growth capital that was raised during the COVID period. A lot of those managers are applying that in those. And so they're very good performing private companies to get more exposure and, frankly, at better pricing. I think there's going to be a set of companies, too, that never go public. Yeah, SpaceX. You know, I invested in Stripe, I guess, 14 years ago now, something like that,

Starting point is 00:42:18 at least my initial investment there. You know, I don't know. Have you sold chairs? In secondary? I have not. I have not, no. Look at you. So long.

Starting point is 00:42:25 I'll keep going. Stripe is one of those that I'll hold as long as they don't kick me off. As long as they don't kick me off the cap table. He's, uh, yeah. But I mean, it is the, it's now the canonical example is just, you know, people who are in that thing since 2009, 10, 11. Like Sam Malton and I did Stripe and Uber as Sequoia Scouts in 2009, I think. And like, that's what's being sold. Or part of what's being sold now, I think is that position in this, uh, the cell.

Starting point is 00:42:54 and I do think secondary is something I'm getting more and more interested in. We took advantage of almost every secondary opportunity we had during peak Zerp. And I'm very happy we did that, obviously. But we didn't proactively do it. I was never taught by, you know, Sequoia or Bill Gurley, any of the people I've had as mentors, like, that I should be proactively looking for secondary opportunities. So it was always ride your winners and, you know, hold for, you know, the last couple of double-ups. I'm actually thinking we should have a secondary, a person in our organization who's very focused on looking for secondary opportunities, both buying things maybe and selling things and just be monitoring that monitor more, monitoring that more actively.

Starting point is 00:43:38 And that's my point, David. I think that what Jason just described is going to become more table stakes within these venture firms because it's just duration is going to kind of kill the investor base if they don't work but manage towards it. Don't worry. Lena Kahn's out. She's going to be working at it. My prediction is Lena Kahn's working out a venture capital firm

Starting point is 00:43:58 at this time next year. I think that's why she's spending so much time in the Bay Area. Yeah. I could see A16Z. Yeah. I was going to suggest. I could see Klinear A16Z.

Starting point is 00:44:06 One of the big ones. Who likes politicians, you know. And or policy. Yeah. People who care about policy and want to get closer to that because you notice she's been speaking at Y Combinator and talking about

Starting point is 00:44:18 tech, like little tech with a, you know, she's basically pandering knowing she's not going to have her job and that she's going to get some million dollar a year job as a partner on one of these firms. It's going to be like an Al Gore type situation with Glennor. I agree. Elad, you mentioned the perpetual private startup. How does that work in actuality? Yeah, I mean, typically what happens is the companies have to do two or three things. And by the way, there's lots of companies that have actually been private, either since

Starting point is 00:44:45 their inception or generationally Bloomberg is an example, Cargill is an example, Coke and industries, so DuPont. So, you know, this is not a new concept. I think it just hasn't been applied as aggressively in tech. You know, there's all sorts of arguments in terms of why you want to go public. And often those has those come down to things like a liquid currency that you can use to buy other companies who do M&A or compensate people. It sometimes comes down to ability to raise money if you need it very easily. You know, so there's two or three reasons that you often decide to go public. And if you're one of these companies that is really viewed as sort of a generational winner. In some cases, you don't have to go through all that, right? You may be profitable or

Starting point is 00:45:24 close to it. There may be enormous market appetite to own your shares. So if you need to raise money, you can do it pretty easily. And then people will accept your currency effectively, your stock, either for compensation or M&A, and they'll sort of believe your price. And so if you have those things, the pressure to do it sometimes goes down. So the way that people often do it is they, if they started off as a B.C. back company, they need to basically buy out two types of people. They need to buy out early investors who want liquidity or need it. And so often they do that in the form of tenders or their own buybacks. Some companies have bought back their own shares themselves. And then the other way to do it is, or the other thing you have to focus on as a constituency as your

Starting point is 00:46:04 employees, and in some cases, options have some extra period on them where you'll lose the option if you don't use it. Or if you're issuing RSUs, which are a specific type of structure that you often use as you go towards getting public, those often have a clock associated with going public on them. And so sometimes you need to come up with a way to buy those out. And so often there's tax implications to your employees in doing that. And so you need to raise money to help offset the tax basis for that. So usually it just becomes a series of tenders or stock purchases by new investors coming in and clearing out prior stakeholders. I think one of the issues to really solve around is the cost of capital. When you look at kind of venture, you need to get at a minimum mid-teens, really low-20s

Starting point is 00:46:45 return. So the company needs to be able, needs to be really like a SpaceX that's able to compound continuously at 20%. There's just a finite amount of companies that do that. And then implicitly, the public shareholders come in and they're able to do like a lower teen return and normalizes. Well, just as like a thought experiment, what if Google, you know, or Uber, I'm trying to think of a company that eventually became a money printing machine. So Uber just, that just happened for the last couple quarters, but take Google as an example, or Apple, an even better example, what if they had never gone public or they went private at some point? Instead of doing this massive stock-based com, they just gave people 50% bonuses in a great year, 100% bonuses in whatever incredible year.

Starting point is 00:47:29 Like, these companies would be worth much more. Their enterprise value would be much more, and I don't think people would have quit. And I think now that talent is looked at a little bit differently in, you know, and the pendulum swings back and forth, but in the age of AI, like, It feels like talent is going to be treated much differently. This idea that you need tons of stock options and incredible chefs and Neiman ranch steaks to, you know, to get the great talent just seems farcical. You know, Uber and Airbnb and Meta have less employees or the same employees as they did three years ago.

Starting point is 00:48:03 And their revenue is, you know, up somewhere between, you know, whatever, 15 to 20% a year. So, you know, up 60, 70%, percent. Smaller headcount or same head count. So I think this idea of like just dumping, just dumping tons of stock comp on people, that might be coming to an end too. Yeah, to combine two-year points, because I totally agree with you. I mean, and that's these long private companies. That's what they do, right? Bloomberg and Coke and others, they basically create almost like synthetic stock and they paid out as cash.

Starting point is 00:48:33 And when you leave, that gets recycled back in. And honestly, that's how a lot of partnerships work in terms of law firms or other types of firms. But to combine two-year points, Jason, like there's the, um, capital efficiency argument. And then there's sort of like, do you stay private argument? And the reality is a lot of the best, biggest companies in tech traditionally have been highly capital efficient. Microsoft raised around right before we went public,

Starting point is 00:48:56 not because they needed the money. They just had somebody at the venture firm that wanted as a board member. Right? So there was a pre-opier round. Dell bootstrapped, and they did a small run right before they went public for similar reasons. So they never needed to raise money. eBay took all of its money and just kept it in the bank.

Starting point is 00:49:11 Yahoo took all the money and just put it in the bank. So a lot of the businesses across multiple generations were incredibly capital efficient, and they didn't touch the venture capital that they raised anyhow, right? And so I think people forget historically that a lot of the best businesses for long periods of time printed cash, in some cases from day one. Mid Journey is doing that now on the AI side where they're entirely bootstrap. You know, there's other examples like that. And so I think to your point earlier, too many people get on the venture capital train when they really shouldn't. Well, and the VC model

Starting point is 00:49:42 those companies was much different. It was but you basically let others above you pay for the performance and so you kind of worked your way out of the company. The other thing was different and we haven't touched on it, but again, back to the Jobs Act, you know, if you had a certain number of shareholders, you had to go public. And so that was certainly Facebook, right?

Starting point is 00:50:01 Was the best example of that? Yeah. So, I mean, that's been changed in a way that is not quite so rigorous, risk, but those are some of the things that motivated these businesses to go public, public currency to buy stuff. If you go look at the premarkets on all the companies that, a lot of mentioned, they're all, you know, sub-500 million. And so it was just a different time.

Starting point is 00:50:23 You know, we'll see what happens. You know, I could see the regulators getting back to making these companies go public. You know, time will go. And David, you run a fund of funds, so you invest in venture funds. And in the last five years, the amount of ownership that the time, top fund or series A, series B lead has gone down. How do you see that? How do you see the future of venture capital in terms of ownership versus efficiency,

Starting point is 00:50:46 you have less dilution? Like, how do you see those playing out? And will we always see the same model that we've had the last, you know, 10, 20 years? I don't think the venture capitalist model's going to change a lot in the near term unless we change some other components like taxes or regulatory environment and the like. It's just been in place for a very long time. and the limited partnership as a concept has been in place for such a long period of time.

Starting point is 00:51:12 And I think capital itself is kind of wedded to it. And if you think about it, sort of at its root level, but ownership is an issue as far as venture models are concerned because, you know, at the end of the day, you know, no matter how good you are, there's only a handful of companies that really drive a material amount of an outcome and a fund. And to make that really work, you need enough ownership that when you do get your liquidity, it's relevant. And so I worry about valuations, essentially pricing to venture firms out of that performance.

Starting point is 00:51:44 You know, it's part of the reason why we focus primarily at early stage is so that the manager and the underlying company actually are starting at the right spot, which is reasonably high teens ownership. The incubations that are done inside those shops tend to have a lot better ownership. But again, the outcomes aren't quite as, you know, not always reliable. Some of them really work quite well, especially in the life science space. we're starting to see some of this in the cybersecurity space, but, you know, incubation is hard at the venture fund level because there's not enough, essentially shots on goal with those incubations.

Starting point is 00:52:15 So, but the ownership's very attractive. And the other thing that happened during that time period of people forget was this Delaware Section 220 requests, which, you know, if you own but one share of Facebook or whatever company, and you have a decent reason, it doesn't have to, I mean, you can't do a fishing expedition, they specifically carve that out. you can just say, I want to know the revenue.

Starting point is 00:52:36 I want to know the employee account. I want to know how you're spending money. I want to know the travel and entertainment expense. I want to know, you know, whatever. And this happened to Facebook. A lot of folks started suing Facebook who had bought secondary shares. And I think they did the same to Zinga.

Starting point is 00:52:50 And then they had these people coming in and they reconciled it by having like a documents room. So shareholders could come and inspect the documents, you know, P&Ls, whatever, revenue charts in a room with a lawyer president, with their lawyer president, got all contentious during that time period. And, you know, it's great that now that there's, you're able to have more private companies, but more private ownership and private companies

Starting point is 00:53:13 without triggering, uh, going public, but you still have this 220 request that can occur. And I've seen it, um, where things get contentious. And it's like this precursor to,

Starting point is 00:53:22 um, litigation or discovery through litigation and, and, you know, it's like, it's almost like people are trying to hack the, the public markets with this new secondary concept. It's one of the things I've learned now over this last decade is like if you put your

Starting point is 00:53:38 thumb on the scale and you try to mess with capitalism, capitalism finds a way. It's literally like nature finds away from Jurassic Park and we're seeing all these aqua hires, you know, that make no sense. Like, yeah, we're just hiring the people. We're not buying the company, but we gave the company a licensing deal. And I'm like, how does that work? How does the tax flow through if Microsoft or Google are buying character AI and they, give them some deal, but they're not buying the shares in the company? Like, what's the tax treatment on that? Does anybody understand that?

Starting point is 00:54:09 Because they're not LCs, you're going to pay double? That's actually like, yeah, I know that it's interesting because the M&A team used to work for me at Twitter, like, I don't know how many years ago now, you know, over a decade ago. And we actually would use that structure quite a bit because while that team was working for me, we bought, you know, two, three, four companies a month at Twitter for some period of time, a big chunk of, I think like 25% of our engineering and product work came through that.

Starting point is 00:54:31 And there was basically two ways to do at M&A. You would just buy a company and buy all the shares out and then integrate it in. And the other structure that you'd use was basically this license and release form structure where basically instead of having hundreds of pages of documents, you'd have a really slim 10, 20 page thing where you would license the IP and code from the company, in some cases, non-exclusively. You'd get a release to hire the team in. and then the company would continue to exist. And maybe somebody was still running it. So it's a very old structure that we did years ago because it was a very fast,

Starting point is 00:55:11 easy performant way to acquire things. And in some cases, you know, the founder, whoever wanted to keep running the business or, you know, some subset of the team wanted to keep going with it or the acquired and see value necessarily in maintaining that asset. So, or the liability of that asset at some cases. And oftentimes, Elad, you were, you were hiring teams that had a cohesive way of working together. You would have three to five people that are really effective in producing products together. And they, they weren't going to continue working on whatever they were working on, right?

Starting point is 00:55:42 Was that one of the strategy? Yeah, I mean, that's part of the strategy. And there's all sorts of ways or reasons that we would do this, even years ago. And so I think this is an older structure than a lot of people realize. And I think there's been some high profile things that have happened more recently. And in some cases, they may not be acquisitions. They may be different structures, right? I don't know the details of what's happened recently in the market in AI relative to these other things, right, that were mentioned.

Starting point is 00:56:06 I'm just saying years ago, people would use these sorts of structures for effectively onboarding teams that they were. I wonder how the LPs and the GPs and everybody got paid then, like, they would just pass the revenue through through some agreement when the board approved it. And then I guess they had to pay tax, corporate tax, then you have to pay. It's a different taxation, so often you wouldn't end up with capital gains treatment. Again, the things that I was involved with at Twitter, which may be very different. I have no idea how some of these latest things were structured. AOL did this kind of asset purchases as well. And when I saw Weblogs Inc to them, they kind of topped us off based on the tax delta from buying the company.

Starting point is 00:56:43 And they did an asset purchase. And it was much easier for them to get it through. Next up, Carter has put out a report detailing cities in their dominance in certain startup sectors. Not surprisingly, cities like New York. York had a strong presence in FinTech, Boston, San Diego, and biotech. David and Elod, you both still live in the Bay Area following COVID. How much of a startup investing is still local game and how much does geography matter today? Larry Paul, some data.

Starting point is 00:57:09 So every six months or so, my cheapest staff basically pulls data on where is unicorn market cap aggregating over time. And it's a unicorns are, of course, companies worth a billion dollars or more. This tends to be a backwards looking indicator because ultimately you have to be a couple years old in many cases to hit unicorn status. But basically what we ask is from a geographic perspective, where are things? So this is just, the U.S. traditionally is about 55% of global unicorn market cap. That's about $2 trillion in private company market cap. The Bay Area alone tends to be about a quarter of global unicorn market cap. So it tends to be very concentrated.

Starting point is 00:57:44 And then there's kind of a tail of cities as that sort of drops off from a global perspective. And if you look over time, you see these things tend to be reasonably consistent. The U.S. has roughly been 50 to 55%. China has actually decreased over time in part because they're really big players like Alibaba and others have created their own subunits that effectively play the role of startups in the U.S. So AliPay versus Stripe, you know, AliPay is a subsidiary of Alibaba, things like that. And Europe has actually been increasing over time from something like 8 to 12%.

Starting point is 00:58:11 So 50% growth over the last five years, which is impressive. And you see that on the AI side. The big shift that we've seen over the last year or so is an AI market cap. So the U.S. is now 90% of generative AI Unicorn Market Cap, well, it's only 58% of other market cap in general, right? So AI is very concentrated in the U.S. Europe is next at about 4%. And if you look on a regional basis,

Starting point is 00:58:37 the Bay Area is about 80% of Gen.A.M. Market Cap. And these numbers are the latest sort of public marks for many of these companies. New York is next, although it's really a small number of companies. And then the Paris London Corridor is really emerging, I think, is one of the other hotbeds between Mistral and a few other companies. But in reality, it's very concentrated. And Gen AI is actually making even more so. If you do break it down by industry, like what Carter has done, we actually find that some cities have very clear clusters. For example, most of the market cap in New York is really fintech and crypto.

Starting point is 00:59:13 Most of the market cap in L.A. is basically SpaceX and Anderil. which is basically Arrow and Defense. And so, you know, these things really do cluster in a deep way. And we see a bunch of cloud startups and things of that nature up in Seattle, for instance, as well with Amazon and Microsoft.

Starting point is 00:59:29 The only other thing I was going to add to this, which I thought the slide would have a great intro, we continue to hear from our managers about the talent in San Francisco is really two to three times, if not four times better on the AF front than other parts of the country. and so we're seeing sort of a graduation and gravitation to the Bay Area like we did, really around the Internet. So it feels like, if anything, if you want to really build a really good AI business, you've got to have some presence here, if not start your business here.

Starting point is 01:00:00 Yeah, I would agree. The Bay Area is still number one. We'll still be number one for a long time. But we see founders coming from anywhere, and most of these teams now are distributed teams anyway. And so what you'll find is the founders in San Francisco, they got teams. in Miami, Austin, whatever, people are spread out to the five points. And I do think, you know,

Starting point is 01:00:23 if you're looking at startups in general and the early stage, they're very willing to move around. That's actually another really interesting part of this. So it used to be, we only ran our accelerator in person. If you weren't willing to spend the 12 weeks in San Francisco,

Starting point is 01:00:37 then we just wouldn't accept you. Why, they're just not enough room in San Francisco for everybody as crazy as that seems. And so people are, you know, wanting to, you know, I'm talking about these young folks outside of the AI movement, like the language model movement. People building verticalized apps. They're in L.A., New York, you know, Miami, Austin. And so I made the decision I'm going to be in Austin for personal reasons, largely, but also because I think this is going to be the next big tech hub. I truly believe that with what's happening with Tesla here and just watching Venture come here, Joe Lonsdale or, you know, Joe Jebbya from Airbnb, based in. here and doing his new startup here. The sense of being able to build a large team in a location, I think people are going

Starting point is 01:01:25 back to offices, teams that are together are going to do great, and then when companies scale, they're going to need to look at places other than the Bay Area. And I think it's going to be Austin is going to be the place that wins long term, you know, as that sector of their city, just like New York did. I think New York became like a really viable option for people. And I was early to that one, too, with Silicon Alley. people thought, New York's never going to have a presence in tech. And it's like, well, where do young people want to live?

Starting point is 01:01:50 And, you know, I think they want to live in basically four cities, five cities in the United States are really interesting to them. But with our accelerator, the other thing we've done is we're having people do two or three weeks in Austin, a week in New York, two or three weeks in San Francisco. So I'm actually right now re-architecting how these teams work, which is they need to spend a couple of weeks in the bay. They need to spend a couple of weeks. in New York. And, you know, if you're in New York for a couple weeks, yeah, your chances of

Starting point is 01:02:19 meeting with Fred Wilson and Union Square go way up because you're there for four weeks or two weeks. And so I think that's going to be the big advantage is people who are willing to spend a little time in each city meeting that capital. And that's the bet I'm making. Elad, I brought your book from my home to into the office today. You wrote high growth handbook. You deal with a lot of late stage companies. How common is it for a company like a SpaceX to up and move when it's mature. And what are some use cases on that? And how does that work?

Starting point is 01:02:52 Yeah, I think the Bay Area in part due to policy has actually seen a number of companies leave recently. You know, obviously X is moving to, it's headquarters to Austin, but also actually the office is moving down to South San Francisco. Stripe moved to South San Francisco. Coinbase basically went remote. You know, Block has sort of discontinued some of its base in mid-market and SF. And so I think there's been a real transition.

Starting point is 01:03:15 Palantir, I think, moved to Colorado from the Bay Area. And so sometimes you see companies move. Often they're moving for a variety of reasons. And sometimes it's driven by regulatory changes or extra taxation or other things that some of these cities or state governments are imposing on them or they feel like it's a bad place for them to do business for political or other reasons. And entire workforces are just supplanting and moving. And what's the retention look like?

Starting point is 01:03:45 Yeah, often what you see is either people just move wholesale, and in some cases it's just you're moving a city, right, in the Bay Area. And so that's a little bit less disruptive. In some cases, you're saying, hey, we're going to stop hiring in certain regions and we're just going to open up new job wrecks elsewhere and we'll kind of let it a trit out or we'll, you know, if we do a layoff, we'll concentrate it in a certain region that our intention is to exit over time. And so it's a mix of both. I do think many companies really overhired during the Zurp era. It wasn't just Twitter. And it's many of the big tech companies, you know, like I think Google went from 120 to 190,000 people in two years. And so despite the recent cots and everything else, they're still quite large relative to where they started just a couple years ago. And so I do think there's still room for some of these companies to shrink. And sometimes it's decided to differentially shrink based on region. And they're throwing the gauntlet down. I saw Dell recently, Penske Media, a number of companies, even traditional ones, I think Target or Walmart, have just said, you know, we're coming back to office and then people write a petition.

Starting point is 01:04:50 And then I say, okay, you know, I guess we know who we're laying off. Or if you're not here at that time, we take that as your resignation. And Dell actually, the Dell story is fascinating. It seems they told everybody, listen, if you don't come back to office, you can't get a raise and you can't get a promotion. And people are like, I'm okay with that. It's more valuable to me to live at Lake Tahoe or Colorado, wherever the, you know, Aspen, wherever they're at. And I don't mind. I'll stay at 150K for the next five years. I'll keep the job. If that's the deal, I don't need to get a raise or a promotion. My lifestyle matters more. And so this, what happened during COVID and this, you know, sort of war between capital and management and with rank and file workers in the age of AI, you have the superstorm occurring. You know, people are hiring people internationally. So all of our operations now is done by Athena. We can scale it up. We can scale it down. If we don't like an employee, we flip it. And why would we do any? operations and they're training them all on AI. Great. We don't need to worry about like what would

Starting point is 01:05:50 be kids out of school operations people. That whole thing's been abstracted away and it's going to go away because of AI or be like a, you know, human, you know, doing a lot with AI. You know, and then you look at marketing. You know, you look at sales. Like these jobs are really at risk and people are tightening their belts. Those things go away. If you don't want to come to the office, you don't have to. And so I think, you know, there's going to be a major movement to back to office. And all it took was a crisis and a little bit of bravery, what happened with Twitter. And then obviously Zuckerberg followed Twitter and got rid of 25,000 people. Google followed them. And now, you know, listen, there is no question that if you're a manager in 2024 or a public

Starting point is 01:06:35 company, the greatest way to make your stock go up is to do a riff. And then the people who are remain, get more comp and they're more efficient, and then you get them to come back to an office. That's the strategy. And, uh, you know, we call it the gentleman's riff internally. We don't want to do a riff. We're just going to tell you you have to come back to the office. Amazon is doing it too. You know, now, of course, if the CEO doesn't come back to the office, it's a little bit weird. So like Zuckerberg's like, we're coming back to the office and I was talking to some people who work for him and, you know, the wider group. And they're like, Yeah, but he's in Kauai and Tahoe, you know,

Starting point is 01:07:12 Yellowstone Club, and he's not here. Well, but he's not in the office, so it's kind of like, well, what are we doing here? You know, or Bennyoff said, you know, Salesforce was never going to go back, and they totally flip that. Now, like, we're coming back, the end. And I think what people are realizing is you can't manage a team at scale remote, not, and if you have competitors or you have activist investors, it's just not going to get the same results.

Starting point is 01:07:37 Now, I do think the top 20% of people probably work better at home. There's probably another 20 or 30% who are equal. But the bottom 50% is there anybody on this podcast who thinks the bottom 50% do better at home? I don't, you know. There's no mentorship. There's no camaraderie. There's no, you know, espri de corps. What do you think about?

Starting point is 01:07:58 And David, in this return to office culture, you back GPs. Do you see a trend in the top GPs asking a, everybody come into the office or is it different for venture capital? It's slowly getting there. We don't see 100% in the office, but I would say the blend is greater than three days and probably going to four. It feels like either Fridays or Mondays are kind of, you know, a sacrilege, but it does feel like everybody is starting to get back in the office. We have very few remote only firms in our ecosystem, released in our book. I'm going on the four plus, yeah.

Starting point is 01:08:34 Yeah, I think on the startup side, the early stage startups, you know, seed and A that I, that I'm seeing that are the best companies, like 80, 90% of them at this point are fully in office or there are four days a week or something. As things get later, it's more mixed, you know, three, four days a week. And then there's some companies that have always been five days a week no matter what, you know, applied intuition is a good example where. That was a bit. Yeah, he was just, that's the way we're going to do it. Yeah. The second, they could be back in the office or back in the office and there are five days a week. So it's very cultural and you can just set the cultural tone and people will do it. You just have to be consistent. And it feels like those companies hold it out in a way that it ultimately attract the right kind of people for their culture.

Starting point is 01:09:14 As part of my move to Austin, I am building an in-person culture again. I'm grandfathering and a lot of people in my team who are amazing remote workers. And we have some arbitrage with Athena, you know, and people in Manila. And we have a lot of people in Canada, which is another arbitrage. They stay longer. They cost 25% less because of the currency exchange. and they're more loyal. They stay at your company longer.

Starting point is 01:09:35 But I'm only hiring people in person and then I'm giving incentives for people to move in and we're going to five day a week and having the accelerator be in person because I think it's going to be a massive competitive advantage to have and I haven't discussed this

Starting point is 01:09:51 but I'm going to build like a retreat center or buy one so I'm currently looking for like a retreat center here. They have these like places where people have weddings and they have 20 cabins. Like my master plan here is to get one of those. I'm going to buy it personally and then have my founders come and spend two weeks here and then have VCs here, have people who do growth, you know, have all the talks, have the collisions, have them work with each other, and then do it by vertical. So we have

Starting point is 01:10:16 about 40 marketplaces that have gone through our accelerator that are active. We're going to have a marketplace week where I'm bringing them all together, all 40 companies, you know, in Texas for two weeks with their teams and then talks, et cetera. And, and I think this is the advantage of the future is getting people back with other, you know, driven folks, just like I was talking about, you know, Andy Warhol had the factory and people were welcome to just stop by the factory. And some weekend he'd be painting. Other weekends he'd have Bob Dylan stopping by. He'd have Ginsburg stopping by to do poetry.

Starting point is 01:10:51 He had people painting in the space. You know, I think those collisions, there have been cafes in France where different authors and, you know, hung out with each other, you know, and we're competitive with each other. I believe in this collision thing and I believe in this kind of artists, you know, looking at each other and, you know, getting motivation to build the future.

Starting point is 01:11:10 And so it's a big part of my master plan for our firm. I think it's important to double click and unpack why in person is so important. Obviously, you don't have your distraction. You don't have your dog running around. You don't have your significant other, you know, distracting you. But also obviously, social isolation. It's just, it's like one of those things that seems, like it's fun to stay inside and stay by yourself, but after a while, it becomes very socially

Starting point is 01:11:35 isolating. But most importantly, for early stage startups, the success of a startup depends on the speed of which it's able to iterate. And if you are remote, you're only really going to call other team members and other people when you have a very good reason to interrupt them. But when you're in person, you're able to just be around the office, especially with open office cultures, and you're able just to iterate quicker and get feedback quicker and get motivated by other people working. So I think, you know, if you take away the speed of a startup early on, you take away a startup's main advantage. And I think that's why we're seeing that probably the top startups are going to go to five days a week. Obviously, four days a week is probably a better lifestyle

Starting point is 01:12:19 perk. But if you're competing in something like AI that's changing every month on such a fast pace, I think if you want to be the winner in a winner-take-all market, you have to really go to a five-day-a-week model. A lot of the startups that I know that are what I consider almost like the hardcore startups in AI are some of the ones that are doing best are actually six days a weekend right now. I was about to make that joke. It's not a joke. When we came out, five days a week was a short week.

Starting point is 01:12:49 You know, VCs used to come to people's offices on purpose. This was like a Michael Moritz thing. He would come on a Saturday or come at night. And after they finish their day at Sequoia, they would go to their startups at 7 o'clock, 8 o'clock after they had family dinner. And they would just go hang out with the management there. And they would just know how the company was doing based on how many cars were in the parking lot and how much buzz there was at 8 o'clock at night. I know, I wasn't joking.

Starting point is 01:13:14 I'm actually serious about it. And I remember I used to visit Square sometimes and I'd go see Keith or Jack and they'd always ask me to be it on Sunday. You know, and so I think a lot of that has come back. I think there is a nuance, which is how many days a week you're working or hard, how hard are you working early on? And then there's, are you remote or not? And before COVID, there was a very, very small number of companies that were actually fully remote. And the only ones are really hit scale were GitLab and then automatic.

Starting point is 01:13:42 And then there was like one other one. And that was it. That was the whole world of remote companies. I actually invested in GitLab when it was four people. And I think one of the things that they did that was really smart is they rethought all their systems and processes to actually be able to deal with remote effectively and to be able to scale that. And they started doing that. I remember when I funded them 2012 or 14 or what that was. And so they made it work. And I think, you know, the later this stage the company gets and the more

Starting point is 01:14:10 repetitive what they're doing is or repeatable it is, to some extent you could argue the less you need to be in the office. Although the, you know, most motivated teams often are. But you don't have to be that way as you get quite large. And so it's really that question of tradeoff. Are you doing something new or not, you know, because if you're doing something new in a big company, you actually want to be in person more, if you can be, are you doing something highly repeatable? What's your role? So, you know, before COVID, sometimes you'd make exceptions for exceptional employees. Or if you were a sales team, you were remote, but often remote meant you were at the customer site,

Starting point is 01:14:43 right? Your office was the customer. And so you kind of have to, I think, also look at these nuances relative to some of these rules. I always think, like, when you have a great discussion like this, I can always tell when I have action items to go do stuff after. You're like, fire everyone. Well, I'm just kidding. I'm just kidding. I think I think the future is really like,

Starting point is 01:15:06 smaller teams, more elite teams. And I think stat should. Really intentional. Yeah. Static team size is, you know, I keep telling my team. They're like, who's going to do this? I'm like, we're going to do it. We're going to automate it.

Starting point is 01:15:22 We're going to deprecate it. it or we're going to delegate it. And I just, and they're like, did you just say ADD? I'm like, yes. Automate this shit. There's no reason for us to be, you know, doing this manually or delegate it to somebody at Athena or, you know, some outside firm or whatever we can do to delegate it or, you know, and then ask yourself, are we, why are we doing this, right?

Starting point is 01:15:45 That's like one of the things I noticed. People just keep doing repetitive work and they, they don't say, what is the value of this thing we're doing. Or the busy to be busy thing kind of stuff is still prevalent. Efficiency versus effectiveness. Yeah.

Starting point is 01:16:00 I mean, this essential is. I mean, you're not working. Maybe we need to automate what you're doing so you're not so busy. And essentialism is so critical. Like,

Starting point is 01:16:09 you know, especially when you're running a venture firm. It's like, who are the winning companies in our portfolio? How do we make them win bigger? Like, once you really truly grok the power law, it's like,

Starting point is 01:16:19 yeah. Okay, we made 30, 300, whatever the number is in your fund or firm, which ones are going to actually materially impact DPI? How can we rally as many resources into that while finding the next one? And, you know, that's hard for people to do

Starting point is 01:16:35 and to be that cutthroat, but I've watched some of my peers where, like, they just know this investment's not going anywhere. Yeah, and they just leave the board. Like, yeah, this isn't going to work out. We're leaving the board. I'm like, but you put $4 million in. And they're like, yeah.

Starting point is 01:16:50 And we have another company that we need to put our attention on. That's more intentional with the bigger firms, yeah. I do think there's going to be a lot of that. I think we're going to see some automation in our category. I still think it's about people. So you're not going to lose that per se, but we're going to be a lot more fishing, I think, as an industry. Yeah. It's great to see everybody.

Starting point is 01:17:10 Thank you. Great seeing, everybody. Good to catch up. Yeah, great to see all. Thanks for including me. Let me know when you're in Texas. Get some rims. Yaha.

Starting point is 01:17:17 Come by the horse ranch. Well, it's been another great episode. Great All-Starcasts, thank you for joining. For David York, Elot Gill, Jason Calacanus, this is your host, David Weisford. Thanks for listening.

This Week in Startups - Liquidity: Recession fears, AI market shifts, and the future of tech hubs | E1994

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