This Week in Startups - PrayingForExits on the rush into defense tech, “innovator’s sprint,” & global VC markets | E1847

Starting point is 00:00:00 There's probably been like a softening of the American capitalistic machine in that kind of way where it's like, oh, we'll work from home. We'll do 40 hours a week. You know, and I think that like what's great about this is because it creates this massive chasm between the people who are actually desperately hungry and will are willing to do whatever it takes versus the people that pursue sort of these like capitalistic pursuits as a lifestyle almost more so than a, you know, like a imperative of their life. Yeah, exactly. This weekend startups is brought to you by Mbroker's startup insurance program helps startups secure the most important types of insurance at a lower cost and with less hassle. Save up to 20% off of traditional insurance today at Mbroker.com slash twist. While you're there, get an extra 10% off using offer code twist. CLA. Innovation takes balance.

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Starting point is 00:01:25 Welcome back to this week in Startup. one of my favorite guests of all time. Mr. Exits is here of the famous Instagram and Twitter accounts praying for Exits and the Twitter account, Mr. Exits. He's been on the show. I think this is his third appearance. He's one of two anonymous accounts I've ever had on the program. The other one was BitFinex, the guy who was trying to take down Tether on episode 1243. Yeah. Mr. Exits is a VC. He's an insider. I don't know who he is. I could know who he is. We sort of know who he is, but I'm trying to keep it up, Mr. X's that I don't know who you are. I appreciate it.

Starting point is 00:02:03 That's very kind of you. Kind of like the fantasy of you being anonymous, even though I see people know who you are now. You raised your own fund. You started investing. I did. Which is great. And your fund won investments include Andrew, my favorite startup by my favorite founder, Palmer Lucky, Verda, Delian, from Founders Fund Company doing science and space and science

Starting point is 00:02:26 I. A healthcare I. Company and factory. com. Autonomous coding. We'll hear all about that. But let's start off with what's life been like since you started the fund. You know,

Starting point is 00:02:37 it's been great. I've been an investor in venture capital asset class for about seven or eight years now through a variety of different vehicles. I'm really excited. I think that we're at the precipice of like a really interesting shift in the cycle. And I think that all of the vintages that are probably coming over the next year or two have a good shot of being, you know, analogous to. the ones that we saw in like post global financial crisis where we got a lot of interesting you know the Airbnbs and the ubers and the et cetera of the world so I'm really excited I think it's a great time to be have interesting ideas and also a great time to have dry powder to

Starting point is 00:03:12 follow those ideas you are 100% correct this is exactly like it was in 2009 to 2014 one of the most amazing vintages of all time my first fund when I was a Sequoia scout 600,000 or so deployed 120 million returned. So 200x fund probably won't redo that. But my next fund after that was is 5x on paper and I'm already in the black and got past the hurdle in terms of DPI. So this is the best possible time. And I think you're right about dry powder. The only folks who are investing right now and the only folks starting companies are super highly qualified people. In order to have dry powder, you either have to have it left over from ZERP or you have to great at raising a fund. And in order to start a company, the hurdle is what would you say,

Starting point is 00:04:02 two, three times harder to raise half the amount of money? Yeah, I'd say so. I think that the bar for the competency around the thing that you're raising around has become much higher. I think before basically anybody with a pulse and idea got funding. But now it seems like, you know, people are over indexing for subject matter expertise, second time founders, all of these heuristics that were probably pretty common back in sort of the original vintages we were talking about seemed to be coming to play again. And so, yeah, I think it's, again, it's, I think that having a higher bar leads to better outcomes generally. So, you know, I think that it's, it's probably the natural consequence of the pendulum swinging too far the other way the last couple of years.

Starting point is 00:04:45 And I think you nailed that there, the people who are getting funding, a lot of them are second time founders. Second time founders, they have more efficiency. they have talent they can tap that they've worked with before. So things that might become really detrimental to a first-time founder, like screwing up their cap table, screwing up hiring, not getting product market fit. When you're a second time at bat, you're going to do those things just 10 to 100 times more efficiently, which means the dollars go further. You mentioned also subject matter experts.

Starting point is 00:05:16 Explain some examples of that. Yeah, I mean, I think that like you're seeing this sort of came from an explosion of people who work at large organizations and are using sort of these paradigmatic shifts to their advantage to understand problems that large organizations have that won't necessarily be solved internally because of a variety of issues, whether it be red tape, just, you know, like whatever it might be. So I think that you're finding a lot of people in the same way that PayPal was like this amazing sort of like place for people to kind of spin out these new ideas and go on and pursue great and large scale problems.

Starting point is 00:05:53 I think you're going to start to see the same thing in places like SpaceX and Tesla and Anderil and all of these organizations, even Open AI. I think that what you're going to start to see is maybe not second time founders, but people who have established themselves as great operators within these large organizations, maybe take the leap of faith to go and, you know, solve something that they noticed while they were in, you know, one of these big companies. Yeah, that is the alumni factor, uh, is critical. This is why I tell young people, don't go into venture capital, like at a school.

Starting point is 00:06:24 I mean, you can try if you're really into it. It's your thing. But much better to go work at Andrew, learn, watch somebody like Palmer Lucky build a company, go work at SpaceX, watch that team build a company. Get some reps under your belt, put in your five years. And then, man, you're going to look at the world completely differently. And you're going to see opportunities in a way that you won't be able to understand until you've done it. Yeah?

Starting point is 00:06:47 Yeah, I think that's right. And I think that also, to your point, like there's a certain, level of osmosis working around incredible, like, conicalastic founders. And so if you get the chance to be around an Elon or a Palmer or a Collison brother or any of these types of guys, I think that it's worthwhile, especially early on your career, just to get a framework for what an amazing founder actually looks like. And then from there, decide if that is you or not. And when you now, as a capital allocator here, wrapping up your first decade and now you're making bets from your own fund, so your ass is on the line here. This is your reputation.

Starting point is 00:07:20 you look for what? When you describe those kind of iconoclastic founders, what does your signaling tell you is important in their personalities and approach? I pursue people who seem to have like clearly independent thought. You know, there's a bunch of founders, and I'm sure you see this all the time with the volume of companies that come your way. But, you know, there's a bunch of people who just kind of parrot the general talking points on Twitter or Wall Street Journal or whatever. And maybe they wrap it in, you know, some angle that is seems. you know, unique or whatever. But I think that there's groups of people that are just sort of like diametrically thinking when it comes to just broad ideas than most of the crowd. And I think that it's one of those things like there's this famous quote about pornography. It's like, how do you describe pornography while you know it when you see it? Absolutely. One of those things where it's like, you talk to these people and you're like, wow, the way that you framework the world and the way that you do kind of orient your own interests and stuff against the backdrop of what's happened.

Starting point is 00:08:20 in the world is entirely unique. And I think that value accrues to the people that are on the edges more so than the middle because in the middle, you know, it's it's kind of like democratized and accessible to everybody if it's obvious. And so if you go to these kinds of weird niche places where people are thinking in a unique way, I think that that gives you the best opportunity to, you know, if you're running a fund, return a fund, if you're starting a company, come up with an outsized idea. Yeah.

Starting point is 00:08:46 So that's kind of my framework for it right now. And I think Steve Jobs really did this perfectly in his think different campaign. Here's to the crazy ones, the misfits, the rebels, the troublemakers, round pegs, and the square holes, the ones who see things differently. Not fond of rules. And they have no respect for the status quo. You can quote them, disagree with them, glorify, vilify them. But the only thing you can't do is ignore them because they change things. They push the human race forward.

Starting point is 00:09:11 Some see them as the crazy ones. We see genius because the people who are crazy enough to think they can change the world are the ones who do. All right, listen, we work with startups, and they are all over the map. Most of them, very early stage. Pre-seed, seed, you know, going on to their Series A. But some of our investments have gone on to raise those late-stage funding rounds. They've gotten acquired. Hey, and a number of them have gone public. And there is one thing that unites them all. They need to have their business insurance tight if they want to succeed. This is obvious. A lot of founders ignore it, and they ignore it at their peril. If it's not tight, it's not right, and we need tight and right, and we send them to

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Starting point is 00:10:24 Thank you for all the amazing support over the years, both on this program and the love and care you give to our startups. I mean, it's just so accurate when you think about venture investing. These people can be difficult. They can be hard to work for, but they will not accept the status quo. they're just going to ask for more out of their team members and themselves and they're going to think differently. So it is a cliche, but it's a cliche for a reason. It's because it's accurate. Yeah, I think that's right. And I think that, you know, to your point, some of the most successful

Starting point is 00:10:55 people that I've seen are also the most abrasive. And that's because they just don't tend to operate within the same set of rules as everybody else because they see the world in a different kind of way. And so it's one of those things where I think that the best founders of this next generation we'll be looking at all these sort of rule sets in the same way that, you know, when the app store came out, there's all this disenfranchising of these, like, legacy things. I think it's going to be a similar shift in that, you know, even Elon with SpaceX and going up against NASA, JPL, all of these things. Like, there's going to be these people in these moments and times in specific verticals where they're just like,

Starting point is 00:11:27 you know, pardon my French, but fuck the system. Let's move on to that. Like, let's usher in the next thing, you know? Yeah. Sometimes you've got to force the issue, right? And Airbnb, Uber, in transportation and hospitality, they force the issue. They reinterpreted the law. They bent it.

Starting point is 00:11:41 Some cases broke it, whatever the case may be. They did what had to be done to force those products and services into existence. And sometimes you got to do that. And, you know, there was a very interesting threat. I don't know if you saw it on Twitter slash X this past week where I think they were quoting Reid Hoffman who said, listen, when you're doing a startup, you're compressing an entire average career into five years. So if you think about live, life, work, balance.

Starting point is 00:12:06 If you do a startup, you get in five years what a person would get in a 30-year career. So then you get the other 25 years free. So you want to make that trade-off. Go for it. Work six days a week, 14 hours a day, be consumed by it, just like somebody might be consumed by being an Olympian or trying to get into the NBA or, you know, forming the Beatles or dire straits or Rolling Stones, whatever band it is. And you go on tour and you perfect your craft.

Starting point is 00:12:32 That's the kind of sacrifice it takes. The Mids don't like it. It's hard for people to hear, especially if you've decided that you want life work balance. It's just hard to hear somebody else say, no, I want to not have balance. I want to be extreme. And it's just very weird that we always have this conversation about it. It's kind of like the work from home versus being in an office debate. It's like both things can work.

Starting point is 00:12:54 You know, one works better than the other. What's great about this and to your point, I think that there's probably been like a softening of like the American capitalistic machine in that kind of way where it's like, oh, we'll work from home, we'll do 40 hours a week, you know. And I think that like, what's great about this is because it creates this massive chasm between the people who are actually desperately hungry and will are willing to do whatever it takes, versus the people that pursue sort of these like capitalistic pursuits as a lifestyle, almost more so than a, you know, like a imperative of their life. Yeah, yeah, exactly. And so, yeah, no, it's, it. And Travis and, you know, the hardcore founder, uh, which Elon sent that

Starting point is 00:13:33 email. I was there for it. You know, like, Click here if you're hardcore and there's the door if you're not. I think it's kind of like the hardcore founder is the founder that you want to bet on. And it's the one who changes the world. And yeah, they'll get a little bit of scorn from the mids or, you know, people who don't understand it, but that's just their choice. I don't want to say that as like a definite that like only those types of people make successful businesses because there's countless examples of not.

Starting point is 00:13:57 But I think that like as a rule of thumb, those people will get to the place that they want to go much faster than anybody else. Yeah. And so if you're on a, you know, a proverbial shop. shot clock like we are as capital allocators, you know, you have to over index for these kinds of people because you're also on a timeline, right? So actually, that's a good thing to point out because, yes, these are the ones who most often have outlier outcomes.

Starting point is 00:14:20 So yes, that you could be successful without being hardcore. It might take you 20 years instead of 10. Why is there a shot clock in venture? Explain that to the audience who might not understand the clock that's ticking for you as a first time founder, a first time fund creator. There's a metric by which a lot of funds are measured against, which is internal rate of return, IRR. And it's basically a function of time versus capital allocated that illustrates a number which you basically should put up against the risk pre rate of return, which I think in, I think JP Morgan is doing like liquid CDs for like five or six percent right now. And so as it's a function of time, it's in your best interest to have the quickest investment to exit.

Starting point is 00:15:04 metric as possible because that will raise the percentage of your IRA up. And so, you know, in this kind of market, you're looking for, call it like 20 to 30 percent IRA is probably top DeSile fund. And so it's in your best interest to find these founders the quickest, invest in them the quickest, and hope that they reach their sort of dreams and goals in the most, you know, rapid manner. Yeah. And this is where people don't understand the nature of our industry. We are not venture capitalists, given a bunch of money to just deploy to make people feel good about themselves or make society better. The money is being given by institutions that need that money to grow in order to hit their goals. If it's an endowment like Harvard's or Stanford's, it might be to build

Starting point is 00:15:49 buildings or give scholarships or operate. Ford Foundation, it might be in order to build wells or do educational things in the emerging markets or frontier markets. And if it's a family office, Maybe they're trying to preserve wealth or grow wealth. And there's a sovereign wealth fund. Maybe they're trying to get off oil and, you know, have another way to make money. So they all have expectations of returns. And if you don't hit them, then you don't get more money for your next fund. And you have to beat, as you said, the bogey is basically you got to beat what no risk, because this is high risk.

Starting point is 00:16:23 So no risk is putting your money in treasuries for 5% a year. You got to be 5%. That's not easy to do, especially, you know, with these kind of headwinds. So it's a really hard job. Moik is the other term. People use a multiple on a Vista capital. But Moik doesn't take into account time. So you could say, oh, I 20xed the capital.

Starting point is 00:16:41 But if you did it in 30 years, that would be, you know, maybe not as good as, you know, doing it in 10, right? Time. There's sort of value. You have to take into account how much money you made and over what period of time. It can't just be one or the other. You got to take both of those things into account. So let me ask you about defense. We had a period of time where people.

Starting point is 00:17:01 at Google were going to strike if they had to do anything for the defense department. And it looks like the industry has finally realized, like, gosh, the world is a dangerous place. And we need to innovate and Tony Stark are industries. And if we don't, the Chinese have already done it. And they got some sick weapons coming out of China on the supersonic front. And there's low-cost weapons coming out of Iran. I learned about this when I was on my Middle East trip. Iran, is making like these little drones and quadcopters that cost 100,000. And then we make things that cost 10 million, 100 million. And they can take down our 100 million thing with a couple of $100,000, you know,

Starting point is 00:17:43 swarms. There's an economic way to beat some of the best weapons in the world. And we have to catch up, huh? Yeah. I mean, I think that like, you know, if you're a student of history, guerrilla warfare has always existed to some extent, which is like, you know, these people who don't have as much as the opposing force. have some sort of like force multiplicative, you know, like whether it be, you know, like ambushes or

Starting point is 00:18:06 whatever. And I think that this just evolves over time in any war for the most part, you have one group that is vastly underfunded and one that's probably more overfunded. That seems to be just kind of like how wars over the last hundred or so years have played out. You know, I think that what you're starting to see is this kind of evolution into tactics where, to your point, you know, a javelin missile platform is what call it $350,000. And you're starting to see all of these people in like the Ukraine and like the Houthis in Yemen and start to use consumer drones that cost five grand off the shelf. And you attach some munitions to it and you don't have to go through ITAR because

Starting point is 00:18:47 they're all consumer. Yeah, we have this asymmetric thing going on here. People can use $5,000, $10,000 drones. Send up 10 of them. One of them completes the mission, $100,000, mission complete. nine of them didn't make it. And then we have some $100 million predator drone. You know, that's been downed or whatever it happens to be. So we need to really rethink everything we're doing. All right, everybody. Stephen Estes is a principal at CLA. Clifton Larson Allen is a professional

Starting point is 00:19:15 service provider that specializes in CPA, tax consulting and wealth advisory. Welcome to the program, Stephen. Thank you for having me. So what are some tax strategies for VC back startups? Well, I think first and foremost, when you're selecting an accounting firm and you're trying to figure out how best to grow this thing, you want to find a firm that one is specialized with regards to exactly what you guys do. You want to find a firm that works with venture capital-backed companies. I don't work with wineries. I don't work with manufacturing companies. I specialize in one thing, and that enables us to really go to market and help those clients as they grow. And then secondly, I would say, you know, it's kind of like buying clothes for your toddler.

Starting point is 00:19:52 You know in six months you're going to outgrow these clothes or this firm. So you want to find a firm that's maybe a couple sizes too large that you know you're going to grow into. The same thing. If you're trying to hire a CFO and that person specializes in companies in that 30 to 50 million ARR rate and you're already at 40 million, you're like, oh, great, we're right in their sweet spot. But it's like, no, that person's going to be completely out over their skis in two years when you guys are now at 200 million. So I think it's important to just find the right team and know that you're going to grow and grow quickly. Get started right now at CLA Connect. dot com slash tech let them know your boy jay cow sent you c l a connect dot com slash tech to get started right now

Starting point is 00:20:33 now we're seeing people being okay with investing in weapons uh what made the switch for people was it the success of space x do you think people are just more cutthroat or do you think and we got enough pragmatist in venture capital that they understand united states uh is going to have to fight wars unfortunately and despite not wanting to be the world's police officer cop. Until somebody else steps up, it's going to have to be us. Yeah, I mean, I think that like probably the largest tailwind for this is it became very obvious that the way of life that most of us enjoy is more fragile than we think

Starting point is 00:21:10 it is across a lot of different metrics. Like for instance, you know, the pandemic was one of those moments in time where it's like, wow, everything as we know, but very rapidly can change. And then you see what happens in like these, you know, semi-democratic places like the Ukraine and obviously like in the Middle East and you see that like, you know, your way of life can change very, very quickly. And I think that, you know, given that we have all these interesting distribution platforms for all types of content now, you get to see how quickly these things can change from like a user generated content standpoint. And so I think that like if you are a student

Starting point is 00:21:44 of history and you also are good at pattern recognition, which hopefully if you're running a venture fund, you're at least one of those things. There's a precedent to be said for you know, just like protecting, like I've always had this thesis and I've maintained this thesis for the last 10 years. They're like, well, everybody thought that we were going to like a more globalized steady state. I always felt like we were going to sort of shift back to more nationalistic perspectives. And I think that you're starting to see that play out right. You know, that globalization would revert to nationalism. How did you get teed off to that?

Starting point is 00:22:15 What was your warning signals? I mean, I just think that like, you know, if you saw like the trade deficit between China, you saw all of these different sort of macroeconomic backdrops happening. Like there's no way that they could have sustained for much longer than they already did. And I think that at the end of the day, you know, like as optimistic as like the idea of globalism is, you know, most people are tribal. They want to protect and do the best for the people around them more so than they do people that they've never met.

Starting point is 00:22:41 And so I always thought that at a certain point, there'd be like a breaking point where, you know, people in America would want to support American interests again. Yeah. over the interests of other countries. And so, yeah, I don't know. That's what I thought about it. I saw it because I thought, wow, if you give an individual complete power, whether it's over their startup and their company or a nation state,

Starting point is 00:23:03 it tends to go to their head. And then they tend to start behaving erratically or doing things that are against the interest of the participants in that system. So I'm starting to sound like biology now. But it was pretty obvious to me when Xi Jinping, was like, oh, we're taking over Hong Kong. And I was like, huh, I know Hong Kong. I've been there.

Starting point is 00:23:23 I love going there. I wonder how that's going to work. It's a pretty proud region of the world. They have their own independent spirit. And it was like, oh, yeah, we're shutting down Apple News, which was like the New York Times. And a couple of these people who are selling books are going to go to re-education camps. They'll be back in two years to apologize. And, yeah, we're going to take over the court system.

Starting point is 00:23:42 And you're watching it like, wow, this is like watching the prequels in Star Wars, when they just take over countries and they create trade blockades. And you're like, yeah, why, George Lucas had his moments. Like, they literally did a communications blackout, like in the panamettas. And they just took over Hong Kong. And I said, ah, that's interesting. All of that wealth and prosperity in Hong Kong has, and all the trust that got built up there has been evaporated. Because one person is jealous of, you know, some, you know, CEO of this Alibaba group and financial and can't handle there being another.

Starting point is 00:24:19 other person who is larger than life. They can't have their Jeff Bezos over there because it takes away from Xi Jinping's position. And I just thought, wow, this person's going to act erratically more and more often, I think. And sure enough, here we are. I don't know what China's thinking, but doesn't seem to be a very well-thought-out, prosperous plan at this point. Yeah, no, I agree.

Starting point is 00:24:41 And I think that, like, what you're starting to see is that, you know, even in the Russian example or even in the sort of Israeli-Palestinian example, example, there's all of these efforts to consolidate power in one way or another. And I think that you're, that's going to be like a directionally, a true thing moving forward. People are going to try to consolidate power back internally as much as possible. And, yeah, I think that if you view that as a backdrop of what's likely to happen, there's more than enough reasons to invest in places like defense and space and, you know, manufacturing, onshoreing, near-shoring energy, all of these things that kind of insularing

Starting point is 00:25:19 you from, you know, the effects of other people and other places. In fact, you want to be anti-fragile, right? Not only do you want to be resilient, but I believe anti-fragile is, hey, in times of chaos, you become stronger, right? It's a, I think people think anti-fragile means you're just protected from downside. I think that's not how it was intended. Anti-fragile is during chaos, you're stronger, right? You're more resilient.

Starting point is 00:25:43 You're more powerful and, you know, Uber having Uber eats and having. the ride-sharing business versus people who had just one or the other was an example of that during COVID, right? It just made them actually do better. That to me is the benefit of us drilling for more oil and fracking in the United States. And obviously we don't want to destroy the environment. But since we started doing that, and if we can get nuclear online and we start building chips here, well, not only will it make us resilient, but maybe we start selling those chips or exporting that and we become even more powerful in times of trouble, right? And I think that's actually in some ways exciting is to start thinking about how can we be anti-fragile, you know, and, you know,

Starting point is 00:26:24 Morrison. And I think it's very interesting you bring up Putin because that was also like completely self-inflicted wounds. He decides to invade another country for what purpose. Everybody knows it's going to be a stalemate in all likelihood. Everybody knows it's going to just be death and dismemberment and the outcome's going to be not great for either party. And sure enough, here we are in year two. It's a stalemate. Both parties lose. And what does Russia gain from this? They lost Germany and the EU as a client forever. They're never going to go buy their oil.

Starting point is 00:26:55 They're never going to trust them again. And then the West pulled out all of its businesses from Russia. And Russian people suffered. I don't, you know, it's hard to understand the thinking of a geriatric dictator, right? Like, dictators in their 70s, like, what are they actually thinking? Well, I think that they realize, and it's to your point that there's like a fragility to life, right? And if you're, you know, if you're a dictator of a place, it would be very hard to not become extremely ecosensit. about you and your legacy and what you're there for and how people should remember you.

Starting point is 00:27:23 And so I think that a lot of these guys, you know, are on in the final quarter of their lives. And they're thinking, hey, like the things that I wanted to do, the things that I want to accomplish, the timing in the window for that is rapidly coming to an end. And so now is the, like, if I really care about my legacy, if I really care about how I'm written about in the history books nationally within my own country, there's certain things that I need to pry to do to cement sort of. of like how I view myself from an egocentric perspective, right? Absolutely. And if that means Jack Ma's got to go, and if that means I need to claim some

Starting point is 00:27:56 small amount of land for some previous glory to make people love me a little bit more, sure, I'll jump the fence. I'll go do it. And it doesn't matter what the ramifications are, which makes you actually appreciate democracy as messy and sloppy as it is. Everybody was saying two years ago, China's going to trump the U.S. It's going to, you know, we're going to be beholden to them and that didn't happen. And you look at AI and you look at all the greatest, you know, public companies and the market caps of companies. I think the United States is 19 of the top 25 market cap companies in the world.

Starting point is 00:28:29 Totally. LVMH. I think there's two e-commerce companies in China that have bigger market caps and obviously Aramco. And it's pretty, it drops off pretty quick after that in terms of who's got a company that's worth hundreds of billions of dollars, whereas the United States has so many of them. And it seems like we're getting better. Yeah. So I'm long America. Same here. And somehow that was like a contrarian perspective five years ago in the valley. If you were just deeply long America and you

Starting point is 00:28:57 loved America and you just wanted to see, you know, 25 out of the 25 top companies in the world be American. That was somehow kind of like a, you know, you were some sort of pariah. If you were some sort of like colonist, racist. Yeah. And it was like, well, how about we want to spread to democracy and economic strength is a key component of that. And innovation is a key component of that and making people want to come here as a key component of that. When you're a founder, you need to be able to do every job, but you can't be an expert in everything all at once. And one of the hardest things to scale is customer support. So here's your solution. InTouchCX will help you to create a custom support strategy designed around your unique challenges, all powered by AI and automation.

Starting point is 00:29:40 InTouchCX provides automated solutions in voice, email, and chat. support to enhance customer experience. Again, the experts at InTouchCX will design a customer experience strategy tailored to your brand and your goals. When you use IntouchCX to automate repetitive tasks, you'll deliver faster customer support resolutions and you'll boost customer satisfaction. Ready to ignite your startup growth? We'll book a free consultation with an automation expert at intouchcx.com slash twist. That's intouchcx.com slash twist. To me, I'm like, deeply reverential to the democratic system, deeply reverential to America. It's given me everything that I have and it's given most of the people that I know everything that they have. And so I've

Starting point is 00:30:22 never really understood the logic behind abstracting that away and saying, hey, maybe there's like, you know, maybe some sort of, you know, pseudo-socialism or communism or whatever is somehow better when, you know, everything that you enjoy on the daily basis, yes, it's not perfect. Yes, there's ways you can improve. But by and large, you travel to any other country around the world. And, you know, it's a worse experience. So go ahead and try and change. systems in some of those other places and see how that goes for you. Right? Like, how did it go for, I forgot the name of the guy who's been Putin's rival who kept,

Starting point is 00:30:53 you know, every year they put 10 more years on a sentence. Yeah, exactly. By the way, newsflash, they put him in for like three years and then it became like nine and then now it's 20 and I think it's like six life sentences now. Every time he's in jail, he commits another crime that they find and he just doubles a sentence. Yeah. Good job. Yeah.

Starting point is 00:31:10 See what it's like to change. Yeah. Yeah. good luck with, you know, marching in support of, you know, Hamas, you know, in another country that's a dictatorship or the equivalent thereof. Totally. See how that goes for you. You're going to wind up in jail and be reeducated.

Starting point is 00:31:26 It's not going to be pleasant, especially if it's China or Russia, particularly statistic. Yep. All right. So what do you think is, what's the end game here between the U.S. and China? Because you do have Xi Jinping coming to San Francisco to meet with Biden. Mm-hmm. And the reports are maybe China wants to do some business because business ain't very good in China right now. And they're watching a lot of factories. And I got left on all in by Chmoth laughed at me when I said like, you know, I think India is going to start making iPhones and they're making the 12s already. And, you know, and sure enough, India and Vietnam and some other places are taking over a lot of the manufacturing that we previously had in China. So that seems to have been escalated. What do you think happens here? Do you think China saw,

Starting point is 00:32:11 Offensive stance in the U.S. and China try to make some music together here? I mean, I think that that's probably very likely. And I think that if you think about it, like China is one of the most capitalistic places in the world. And so the second that you start hurting the bottom line of the Chinese economy in any way, shape, or form, I think it incentivizes them to play ball in more of a way. And I think it's been quite obvious that, you know, to your point, there are these other manufacturing hubs that seem to be coming online that present interesting alternatives to China. You have Mexico, you have Vietnam. You have Sri Lanka, you have all of these different places that are arguably more willing to play ball, more democratic processes, easier to be able to set up businesses in those places and have them flourish in a way where you don't have this overhang of like, you know, governmental oversight.

Starting point is 00:32:57 And so I think that to your point, the more that America starts to diversify its bets in this way, I think that the more China becomes incentivized to play ball. And I think that you're seeing it right now with Xi coming, you know, to America. Yeah, I'm encouraged by that. You had questions for me. I know you always like to ask me a question or two about how I look at things. Did you have any questions for me this time? Yeah, yeah. You spent a fair amount of time over the last couple of months or maybe the last month in the Middle East.

Starting point is 00:33:28 Yeah. What was your interpretation of it? How do you think they're going to be playing ball with America moving forward? And like, what's your sense of the venture ecosystem there? Great question. I went in the spring, I think it was May, to Abu Dhabi and Dubai for the first time, had a really interesting experience there, met a lot of people, and was blown away by just how it felt like New York in the 90s. People were having fun, drinking. It wasn't people in Burkas, you know, women not driving cars. You would go to meetings in Dubai, Abu Dhabi, an equal number of men and women and very progressive, safe, you know, now, so it's still a monarchy, right? So it's not a democracy. But if you look across maybe three vectors, personal freedoms, check, and then you look at economic freedoms check, and then you look

Starting point is 00:34:18 at your ability to change who's running the country in political freedoms, okay, yeah, that's not going to change in the short term. But massive changes on those other two fronts and high functioning societies that really want to bet on moving from a petrol economy in the next 30 years to something else. And then this time I went, I got to visit Riyadh for the first time and spend time in Saudi. It's something I would not have considered 10 years ago. Personal safety, I've been super critical of the region, not knowing, you know, how progressive it is. And what they've done in three years there is extraordinary. Women in meetings, not in Burkos, driving, people dancing at parties, music, you know, people having cocktails, perhaps.

Starting point is 00:35:04 I don't want to rat anybody out, but it's a pretty progressive society all of a sudden. And then they too are looking at, you know, trillions of dollars in wealth over the next 30 years. And then how do they shift it to and to what businesses? Now, they've been involved in private equity. They've been involved in just starting to do venture. and then just starting to build companies. And what I was actually, as a company builder, was really interested in is how many entrepreneurs there are.

Starting point is 00:35:33 So they are not just trying to be the dumb money in venture funds and private equity. In fact, I think they're kind of done with that reputation. It turns out the people who have the money in those countries, family offices typically, they were hard-foot businesses being like the Pepsi retailer or the money exchange or the Toyota dealerships. And of course, oil wealth.

Starting point is 00:35:55 and over time, they diversified, and these families built huge family offices with billions and tens of billions of dollars, doing grinded out businesses. Then they started doing private equity and real estate. And now they're looking at venture. And these are like, remind me of American entrepreneurs, you know, Ray Crock, you know, Phil Knight, you know, McDonald's and Nike kind of entrepreneurs, grind it out, entrepreneurs, salt of the earth, blue, collar in a way, just running operationally hard businesses. And they see venture and they're like, oh, wow, this is delightful. Wow, you bet on all these things and some of them become multi-billion dollar businesses. What an interesting place. What an interesting place to put money.

Starting point is 00:36:38 And so I think they're going to be the number two player in venture capital by 2030. I think it's going to happen in under 10 years. They've just gotten started the last two or three years in earnest, like looking at funds. And they know how to assess a fund, how to assess fund managers in the way that Harvard and Yale and Ford Foundation do. They've been educated in the United States. They've gone to Stanford. They've gone to Harvard, business school. They went to Wharton. They come back. They understand venture. They've hired, you know, people who've worked in venture before. And now they're opening offices up in the U.S. So not only they're going to be LPs, they're doing co-invest now, and I think they'll be doing direct investments. So, and then I saw a lot of entrepreneurs

Starting point is 00:37:18 there. It wasn't just fund managers running around. It was entrepreneurs looking to raise money for their companies. Adam Newman was running around. He was obviously he was raising money. He was talking to everybody shaking hands and taking pictures. So I think we got a, I think they're going to be, like I said, the number two player, whether you want them to be or not, they've made their decision. Venture and hospitality, you know, travel and hospitality to their region and then sports. And they've already got real estate and private equity. But I think that's where they want to play. So they want to buy soccer teams and they want to buy golf league. and they want to do real estate and buildings, private equity.

Starting point is 00:37:55 They've already done that, but they really want to play in venture and tourism next. Yeah, that makes sense. And like, this is kind of maybe a bit off the beaten path of what's typically discussed on this weekend startups. But like, do you think that this sort of level of progressiveness comes at a detriment to kind of like the moral fabric of society that most, you know, Middle Eastern countries operated under? Because, you know, what I find is like amazing about these types of countries is, you know,

Starting point is 00:38:21 you have a $100,000 watch and you go for a swim on the beach and you leave it on your chair and you come back and it's still there. Whereas in San Francisco, you drink half a smoothie and leave it outside for two seconds and it's gone, right? And so I think that I just wonder what's your sense of like, you know, how it affects the sort of fabric of. Yeah. You know, you had moments in time in Saudi where, you know, the place was pretty progressive in the 70s. They had movie theaters, et cetera. Then Shriola and, you know, the church was, you know, very much. much involved in people's lives and how the country operated. And now young people, I think,

Starting point is 00:38:56 are more interested in personal freedoms, expression, and entrepreneurship. And so I think economic opportunity and entrepreneurship is driving those societies to want to have that play a bigger role and individual freedom to go do those things. And then they realize, well, that's a better opportunity for us because I don't know how long people want the oil here. And so I think there's like a little bit of a crisis there. So to hear a point, like, society's going to change. There's so many young people in Iran, Saudi, other places, you know, in the region, that the change is coming. And those young people, they don't want to live the way maybe their grandparents or great-grandparents did. And they're modernizing naturally as every generation does. And I think, yeah, they might

Starting point is 00:39:40 have, you know, somebody get drunk and make a fool of themselves on the street. But you'll probably get picked up and talk to. It's kind of like Singapore, maybe, is. where this all winds up, which is, yeah, you know, you can't chew gum in Singapore. Okay. You know, that's the price you have to pay. You can make a decision if you want to live there or not, right? Right. So people move there and they make that decision.

Starting point is 00:40:01 You make that trade off. For me, at my age, watching what's going on there and thinking about the peace dividend, I don't have any business there right now. But I'm considering doing like this week in startups from the region and doing like 12 episodes from there, meeting the people, telling the stories over there. And then maybe doing my founding university or my accelerator. there and getting to know the companies and maybe investing in some of the companies. I think if we do business together like China and the U.S. did for a while, that'll be better for everybody

Starting point is 00:40:28 in terms of the peace dividend and building relationships. And if we don't build those relationships in that region, you can be sure China, Russia and other dictatorships will want to court them, right? And already are, right? So it kind of has softened my view of it a bit because they've made so many changes. And I just think to myself, well, if we actually want to reward people, what is the reward for societies evolving towards more personal freedoms? I think doing business together is a pretty good reward, right? Yeah, no, I think I think that's right. And like from your perspective, just being on the ground there the last couple months, what do you think for entrepreneurs and maybe even capital allocators, the biggest opportunity is to work

Starting point is 00:41:10 with these types of countries in the way you just described? They're offering golden visas, which is a 10-year visa to Dubai. And they're all copying this general concept. But so just think of golden visa as you can come here, pay no taxes. We'll give you, you know, the ability to come here right quick. And then we'll pay for your apartment, your office space and give you $250k in funding or maybe $100,000 in grants for R&D credits. So imagine you're a founder. You went to YC or you went to launch accelerator or tech stars. You got $100K. Your seed round didn't clear yet. You know, you're raised another $100K from Angels. And then all of a sudden, you know, Qatar, UAE. or the kingdom of Saudi Arabia offers you 250 to 500,000 in seed funding and incentives, hey, maybe that's pretty good. And I want to build an international company and I put it in Dubai or or Riyadh or UAE. That's what they're playing for. They're trying to get founders to move there and put their companies there. And they will underwrite them to the tune of, I think, a quarter million or a half million dollars to try to get, you know, just but two or three more employees living there. And then

Starting point is 00:42:18 maybe it grows to 10 or 20. So after the success of Kareem and some other companies there, they're all in trying to build an ecosystem in the way Australia did and the Nordic countries did. So I think that's what's going to happen is I think we'll see American companies, Asian companies, Australian companies from the EU decide, hey, Dubai is a pretty central place. It's four billion people within two-hour flight of Dubai or Riyadh. They're all like pretty centrally located when you think about it. You can get to Asia, you can get to Europe. You can get to Africa very quickly. The only place that's hard to get to is the U.S. 15-hour flight from San Francisco.

Starting point is 00:42:50 So that's a bummer. But for everybody else, it's pretty great as a location for a startup. So I think that's what's going to happen is a lot of start. We'll see a lot of startups move there. And there'll be LPs and people's funds. They've already announced, you know, who they're L-Ping. So that's been answered already. If you look at American funds, everybody has money from the region.

Starting point is 00:43:09 I don't think there's any funds in the U.S. that don't have money from some combination of UAE, Saudi, Qatar, Kuwait, Oman, they've decided they're going to play here. And they also fund fund to funds. So if you have a fund of funds in your fund, you probably have some Saudi family or Oman family, Kuwait family who backed that fund to funds and you don't even know. Right. Yeah, that makes sense. So if people want you to invest in their company, how does that occur now, Mr. Egguits? They DM you or is the name of your firm now? Are you going to come out? Are you coming out today?

Starting point is 00:43:44 No, I'm not coming out today. I mean, my firm is called. my firm is called Exits Capital. Okay. I run it as a solo GP. I'm very widely available on the internet through a bunch of different mediums, whether it be Twitter or Instagram or email. You know, I check everything. And so if you're interested in working with me in some capacity,

Starting point is 00:44:05 I'm easily reachable. And yeah, I'm excited to find interesting things to do together. Awesome. Well, listen, I'm fascinated by these tech, military tech companies. I would like to invest in a couple and at least review the opportunity.

Starting point is 00:44:19 So what's your typical check size? $100, $250K, $500,000. What are you doing in this? Yeah, I'm ripping like $350 to $750K checks. Love it. Yeah. How many names will you try to do in the fund? 30.

Starting point is 00:44:31 Perfect. Then you got a chance of hitting the power law. Most people, when I ask them, how many investments do you need to have a chance at hitting the power law and having an outlier? They say 30. Some say 20. Some say 50. The average is always 30.

Starting point is 00:44:44 All right. There you have it, everybody. Mr. Exits, if you don't follow Mr. Exits on Twitter slash X, he's Mr. Exits there, and on Instagram where he will take the piss out of everybody, including me. And Mike and Patriots on the All-InPod, and we love it, praying for exits. And we'll see you all next time on this week's service. Bye-bye.

This Week in Startups - PrayingForExits on the rush into defense tech, “innovator’s sprint,” & global VC markets | E1847

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