This Week in Startups - Redpoint Ventures and Stepstone Group on VC Deployment, M&A, and Google's AI Strategy | E1934

Episode Date: April 19, 2024

This Week in Startups is brought to you by… Hubspot for Podcast Network. Looking to up your marketing game? Check out HubSpot's Chatbot Builder:  https://clickhubspot.com/s0u Chatbot Tutorial here: https://clickhubspot.com/mfx DevSquad. Most dev agencies only offer developers. Why? Because product management is hard. Get an entire product team for the cost of one US developer plus 10% off at https://www.devsquad.com/twist Mercury is the fintech startups use for banking* and all their financial workflows. Paying bills, staying in control of company spend, and closing the books doesn't need to be so complex — that's why Mercury powers it all from the one thing every business needs: the bank account. Join 200K startups who use Mercury to operate at their best at http://mercury.com *Mercury is a financial technology company, not a bank. Banking services provided by Choice Financial Group and Evolve Bank & Trust, Members FDIC. * Todays show: David Weisburd hosts Logan Bartlett, Hunter Somerville, and Jason Calacanis to discuss the fundraising market (3:07), M&A (26:45), Google’s huge investment in generative AI (58:15), and much more! * Timestamps: (0:00) David Weisburd intros Logan Bartlett, Hunter Somerville, and Jason Calacanis (3:07) Tiger's recent fund and fundraising indicators (11:55) HubSpot’s Chatbot Builder - https://clickhubspot.com/s0u https://clickhubspot.com/mfx (13:26) The challenges and realities of venture capital (25:14) DevSquad - Get an entire product team for the cost of one US developer plus 10% off at https://www.devsquad.com/twist (26:45) Startup acquisitions, due diligence, and unethical behaviors in the industry (31:27) Selling partial positions in startups and structuring the selling of shares (37:18) Mercury - Join 200K startups who use Mercury to operate at their best at http://mercury.com ⁠ (38:20) Cendana and Kline Hill’s $105M fund to buy stakes in seed VC funds (46:59) The correlation between capital consumption and equity value, and the dangers of excess capital (54:28) The role of private equity in tech M&A and the future of tech IPOs (58:15) Google's $100 billion investment in AI and competition in the AI ecosystem (1:06:30) The challenge of capacity in seed stage investing and the value of a strong community in portfolio management * Follow Logan: X: https://twitter.com/loganbartlett LinkedIn: https://www.linkedin.com/in/loganbartlett Check out: https://www.redpoint.com * Follow Hunter: LinkedIn: https://www.linkedin.com/in/hunter-somerville-2a24117 Check out: https://www.stepstonegroup.com/ * Follow David: X: ⁠https://twitter.com/DWeisburd⁠ LinkedIn: ⁠https://www.linkedin.com/in/dweisburd⁠ Check out: ⁠https://10xcapital.com * Follow Jason: X: ⁠https://twitter.com/jason⁠ Instagram: ⁠https://www.instagram.com/jason⁠ LinkedIn: ⁠https://www.linkedin.com/in/jasoncalacanis * Thank you to our partners: (11:55) HubSpot’s Chatbot Builder - https://clickhubspot.com/s0u https://clickhubspot.com/mfx (25:14) DevSquad - Get an entire product team for the cost of one US developer plus 10% off at https://www.devsquad.com/twist (37:18) Mercury - Join 200K startups who use Mercury to operate at their best at http://mercury.com * Check out the Launch Accelerator: https://launchaccelerator.co * Check out Founder University: https://www.founder.university * Subscribe to This Week in Startups on Apple: https://rb.gy/v19fcp * Great 2023 interviews: Steve Huffman, Brian Chesky, Aaron Levie, Sophia Amoruso, Reid Hoffman, Frank Slootman, Billy McFarland * Check out Jason’s suite of newsletters: https://substack.com/@calacanis * Follow TWiST: Substack: https://twistartups.substack.com Twitter: https://twitter.com/TWiStartups YouTube: https://www.youtube.com/thisweekin Instagram: https://www.instagram.com/thisweekinstartups TikTok: https://www.tiktok.com/@thisweekinstartups * Subscribe to the Founder University Podcast: https://www.founder.university/podcast

And so Tiger is used as this kind of almost meme for this. But what they were doing actually, founders appreciated the lack of diligence and the high prices and all that stuff. Now, were they giving the vegetables or just giving dessert to the kids? I think they might have just been giving dessert to the kids and they should have been better off giving vegetables. It takes too long to wait to a full exit and sell nothing along the way. If you're coming in at pre-seed seed, even early Series A, taking some percentage of your

position off of the table is the prudent thing to do. do. Otherwise, you're going to be sitting on funds four or five with zero DPI coming back to market and asking your LPs to support you again on the next fund. It's just not sustainable in this industry as hold periods continue to elongate. People need to use that as a mechanism for getting capital bank. This week in startups is brought to you by HubSpot YouTube Network. Whether you're a marketer, a sales rep, or an entrepreneur, HubSpot has you covered with its tutorials and AI-powered tools. Visit HubSpot's YouTube channel and activate your free chatbot builder today.

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Join over 100,000 companies banking with Mercury at Mercury.com. Welcome back to this week's liquidity podcast. With me today, I have Logan Bartlett from Red Point Ventures. Next, we have Hunter Somerville from Stepstone. Of course, we have Jason Calacanis from the Launch Fund. I'm your moderator, David Weisberg, co-founder of 10X Capital. Today, we have a couple great topics on the docket. We discuss the fundraising market in the venture space. We discuss increased activity in secondaries.

And finally, Google's Big Bet on Generative AI. Let's dive right in. Pitchbook is reporting that Tiger closed their latest fund of $2.2 billion, its smallest in over a decade. Tiger's previous fund raised $12.7 billion in 2022, the height of the bull market, during when Tiger led $92, $100 million plus rounds in 2021, and 33, 100 million plus rounds in 2022. This graph seems to mirror the Ernst & Young IPO graph that showed a very lockluster start

to IPOs in 2024. But there is light at the end of the tunnel. Earlier this week, Andresen Horowitz announced that they have raised $7.2 billion coming in 4% over their target. Hunter, you have a unique focal point in that you invest in funds, secondaries, and directs at the late stage. What do you think about these indicators? Yeah, I think from a fundraising standpoint,

it's really not that bad at all, particularly for the platform brands that are out there. I think there are big allocators, both domestically and internationally, that are looking for ways to get exposure in the asset class. View this is a very high-quality vintage year, a good innovation cycle, and therefore are naturally inclined to go with the bigger multibillion-dollar platform brands to get that exposure, both due to perceive safety and also because of the check sizes that they're writing. And so I think where you see struggles from a fundraising standpoint is anyone that has weighted heavily into late stage. LPs simply have gotten too much late stage. They don't necessarily want to be adding more. And in this market, a lot of the late stage players are either sitting on the capital and not

being overly active or are paying very high prices for late stage AI related deals. And so it's not a place that LPs are typically looking to be aggressive right now. but when it comes to the platform brands of which I'd say they're 15 to 20 that would count in that kind of category, we see them able to hit or exceed targets pretty consistently fund over fund. So I don't view it as a tougher fundraising environment for them. Where it is tough is in the long tail of smaller, more emerging managers that are on funds one, two, or three, and that aren't getting the time and attention from allocators and have a much different, you know, road to slog. Logan, I see you nodding your head. What are your thoughts on the fundraising

environment today? Yeah, I mean, it seems like to Hunter's point, there's some water line, I don't know, the Mendoza line in baseball, I'm sure the baseball enthusiasts here would appreciate where if you're above it or below it is a determinant of how easy things are for you in the private fundraising market. And so I think what I've heard at least anecdotally from my peers in the industry is if you're above a certain threshold of returns and how you manage 2020 and 2021 was prudent and pragmatic, it seems like there's a real desire to concentrate dollars with those managers from the limited partner side. If you fall below that line, either because you deployed way too much capital over the course of 2021 at two high evaluations, or you're just not in the preferred

manager class for an individual limited partner, I think it's really hard time to fundraise. there were a lot of first-time managers that went out and got funds done in 21. And I know there's really a triaging going on on the LP side. It feels like where they maybe initially thought that manager was going to be more long for this world and that decided not. So it seems like people are really consolidating to the comforts of name brand firms across the board. Yeah, I would add. Hunter makes two really good points there. The platform brands are, you know, in our case, the flight to safety, right, for our industry.

So, of course, if you're coming out of some uncertainty and you work at an endowment or a sovereign and you work for somebody, they're looking back and saying to those fund managers, hey, let's really take a deep dive into Logan's point. How did you behave over the last couple of years? Did you sell in secondary when you had a chance? And to tie the stories together, when Tiger came and did $120 million rounds, did you sell any secondary? Did you take advantage of that opportunity for your LPs? And if not, why? And so this is where, you know, a lot of reflection is necessary as a GP. When you're a GP and you write checks, you can get very full of yourself.

You can get a little bit of a God complex. I'm the decider who gets money. And then when you have to actually get DPI instead of returns, you got to get humble and say, hey, am I good at this and really examine, you know, what is your decision-making process? When you place bets, what's your decision-making process? when you sell, um, equities,

et cetera. And so the, the second piece, uh, that Hunter, uh, pointed out about this is going to be a great vintage, I think is the really important point.

Just because the last two years were chaotic, um, and there was a lot of cleanup and there were a hundred and twenty, hundred million dollar rounds by one firm that didn't even join the board of these companies. Like, of those 120, hundred million dollar investments,

I'd like to know how many of those did Tiger join the board. I mean, does anybody have, that number because to put a hundred place a hundred million dollar plus bet and not take a board seat seems insane to me like where's the governance where is the you know follow through on these bets and so i wonder you know if if they're going to change their staffing requirements etc um but i do think the most important thing is the game on the field right now the game on the field right now is really serious entrepreneurs building great businesses with capital efficiency in mind and taking all

these gains from AI and essentially the super cycle starting over again instead of with cloud and SaaS and mobile. And then before that broadband and social networks and social graph, now, hey, here we are. We're going to start this over with AI and a new level of efficiency. And it's really exciting. You do have, to Logan and Hunter's point, a lot of scrutiny on the new funds. And so we talked about the statistics, something like 15 or 20 percent of first time funds are able to close are second fund right now. I mean, there were a lot of venture tourists. And I am glad to see that be over because the venture tourists were making my job. And I know, Logan, you probably had the same experience really hard. It's hard to like get to know a company when some lunatic is like, here's 100 million,

or here's 50 million, or here's 10 million, and I don't need a board seat. And yeah, uncapped note, sounds great. And you're like, did you do diligence? And I had founders complain to me, you're a seed fund doing better diligence or more detailed diligence than a Series A investor. And, you know, now that's changed. Now we have six weeks to get to know a company, maybe three months for a deal to close. And that's healthier. So I'm very excited about the game on the field right now. Yeah, it's so much better.

I mean, there's three different constituents I sort of think about on the, that all's incentives aren't totally aligned. And one is like the individual GP and what they might be pursuing and what might make them wealthiest, for example. Then there's what's best for. for the founder, and then there's what's best for the limited partners. And so Tiger is used as this kind of almost meme for this. But what they were doing actually, founders appreciated the lack of diligence and the high prices and all that stuff. Now, was it actually, were they giving the

vegetables or just giving dessert to the kids? I think they might have just been giving dessert to the kids and they should have been better off giving vegetables. But from that advantage point, you could argue it was a good product, right? Or people at least liked it on the entrepreneur side. On their own pockets, side of the house. I mean, raising big funds generates big fees. And I'll tell you, 2x on a $12 billion fund makes a lot more money than a 10x on a $500 million fund or something. And so from that constituent standpoint, at a selfish sort of capitalist level, I get it. Like, I actually think that's a very prudent decision. If you can make that much, raise that much money, raising it, I don't know, as a capitalist, maybe it's a good thing to do.

That's not my personal way of doing this business, but I at least understand it. But then there's a limited partner constituent. And Hunter, I'd be interested in your perspective on this. Like, that was the one that was worst served by this strategy, right? Like raise big dollars, not do a lot of diligence, just put the money to work. And that constituent, I think, is really who got burned over the course of 2021. Because the fee-in income is signed up for, what, 10 years, right? So these people are still going to do fine over the course of the next 10 years with

these big funds. Yeah, I mean, I think one area LPs will definitely ding firms on is pacing. And so if people were putting money out the door that quickly and coming back to market and doing like annual funds instead of the typical two and a half to three, regardless of who that firm was, you're going to have to make a harder case for why you should get a re-up. And you've probably stretched the budget of the LPs that you work with simultaneously. And there are people that will be perceived as stacking management fees and approaching their business that way. And ultimately, the best way to build trust with your limited partners is by finding alignment that really works across the three constituencies that you mentioned. And so that is all tied together by being long-term oriented and maximizing multiple and end-of-day carry, not a fee accumulation approach.

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And you need to make sure your customers are taken care of. And that's what these chatbots do. to learn more about HubSpot's chatbot builder, go to their YouTube channel, search for HubSpot, easy, breezy. This is like a tragedy of the commons, right? We have to have this common effort to build sustainable, large businesses, and then incentives really matter. So you put those two things together.

I think it's just such a great point, Logan, is like the incentives will drive behaviors among smart people, and yeah, they might drive themselves right off the cliff, and they might drive these companies off the cliff. And the founders, I think the eating, vegetables are also a pretty good analogy. What isn't the best interest of the founders? A lot of founders I know now have come back to me and said, you know, when you said you needed a board observer seat when you had 5% ownership and a board seat when you had 10 and I was, I fought you on

that, I've really appreciated having you on the board because when all this blew up, I came to you and you had really good advice and you picked up the phone on the weekend. And a lot of these folks, they're not picking up the phones on the weekend. And, you know, you have to be a good steward of capital and you have to be thoughtful about how you build these companies. And I was really lucky to be able to watch and be friends with Bill Gurley and Ruloff as he was coming up at Sequoia with Alfred and, you know, hanging out with Doug Leone and Mike Moritz. I got to see their approach. And everything came back to not the management fees, not the how much, how many assets under management they had. It just came down to like, hey, building this business. And what the founder was doing

to build their team, to build the product, to delight their customers. And every conversation seemed to go back to the same place. And then when I saw some of these tourists, and I LP'd some of their funds, you know, a lot of it was, you know, their paper gains, their press, midas list,

all this other stuff that is really superfluous. And what I've learned going into my second decade as a fund manager of a fund I created, which is very different, by the way. Like, all due respect, Logan, like you joined Red Point. and it's a great institution. You didn't have to like start from the cold start of saying like, hey, I inherited it.

Yeah. You inherited it. It's like it's really hard to cold start these things. And I was, you know, talking with my wife over and I'm like, God, this, you know, she's like, maybe you should have just joined another firm and you wouldn't have had to deal with all this. And I was like, now you tell me. Yeah, exactly. Now you tell me on Fund 4.

Now listen, we've hit all of our goals, which is great. And we've built a great team and I wouldn't have it any other way. but boy, you think this business is easy during the boom times and you realize how hard it is when this stuff blows up. Because now you're looking through a portfolio and you're saying, okay, what's good in here? Where can I squeeze out some DPI? Where can I find this? And you're like, God, if I had just made some better decisions when I was deploying the capital, I would be in a better position than now. And that pressure, it takes a little while for it to manifest, I find, with GPs.

So there's a little bit of time to manifest that you're not just getting a checkbook to drop money from the sky. You actually have to return the money and you have to return it faster than the public markets do or else you're out of business. And yeah, I just think a lot of people join this pursuit because of, I think, what it looks like for, the outside. And what it looks like from the inside is an unbelievable amount of shutdowns, suffering, pain, exhaustion, and just sheer force of will to get some things across the finish line. That's what this is about and then some luck. By the way, I am telling everybody who tells me they want to get to venture capital, don't do it. I know a lot of young people are watching this. Oh, it seems like the greatest job ever. It's a great job if you want to have every weekend be

phone calls from founders that you have to pick up the phone and that you cannot send to voicemail. There is no turning it off. So if you were thinking about venture, you better be thinking about 60, 70, 80 hours a week because it's going back to that. This idea that you could just be at both weekends of Coachella and go skiing for eight weeks, like, no. Sorry. And it's a big problem because people's boardloads and capacity is strained to the hilt because of the pacing point I just made.

So you're going to have a lot of passoffs. And even if you got the board seat or the board observer seat doesn't mean that, you know, you're going to have everyone fulfill their promise to be that person that's actually interacting with the founders and doing the hard yards and the hard work. And, you know, you've got a lot of pass-off kind of behavior and a lot of junior partners that are now saddled with tough vintage year portfolio companies that they're spending their time on instead of building their own track record and setting themselves up for future success. So I do think that board coverage and capacity issue is only beginning to become a problem and it's going to get worse. And no incentive, right? Because they're underwater on the carry. What are the odds that these funds are going to return, what they thought, you know, the senior partners sold them on this 3X hurdle. This is what you make when you deliver 3x. So it could be very demotivating for the junior partners in those cases. Jason, you mentioned how difficult it is to be a GP. Do you see a corollary between being a great founder and being a great GP? That's a great question.

You know, a lot of the people I know who got into being a venture capitalist have now gone back to being an entrepreneur because it's very hard to know, oh, you know, when you take this corner on the track, if you go too fast, you're going to flip it over. And the founder's like, yeah, let's do that. No, no, no, slow down. Slow down. If you go into that corner too fast and you hire that VP of sales or whatever, you know, you've got to be more thoughtful, you can flip the car over, and then you just

got to watch people flip cars over a crash. And, you know, I think some people, that's very hard to be able to let the founders make the decision when they know they're making a wrong decision or they suspect this is a suboptimal decision. So I think the people who are relentlessly supportive and inquisitive and have a lot of energy, you have to have a insurmountable, like amount of energy and enthusiasm, because, 80% go to zero at the seed stage. And at the Series A stage, it's like 60 or 70 go to zero. What other pursuit is there where the majority case is just abject failure every day

with moments of like unbelievable delight? Oh my God, I can't believe we were the third or fourth investors in this great company. Wow. You know, you really have to be built a certain way as a gambler, as a person who places bets, to have the wherewithal to lose and get punched in the face over and over and over again to have that one in 30 break out. And so, again, if you're listening to this in your young person, if you are relentless in terms of your intrigue and how much you want to be supportive of other people, yeah,

do it. But if you've got a low energy level, this is not the pursuit for you. What do you think, Jason, if somebody's considering being an entrepreneur versus being a fund manager and which direction should they go if they have it immediately go to an entrepreneur

be an entrepreneur 1,000% provide some value yeah I mean at least you know exactly how hard it's going to be and you've suffered and you've gotten punched

in the face over and over again I do think like you can get a skewed version of entrepreneurship and life by getting a cushy job in a VC firm

if it is in fact cushy you know our team works really hard people are doing three, four meetings a day with founders consistently every week. You know, we did 60 or 70 first meetings last week as a firm. So, you know, to do that requires a team doing a lot of meetings. You have to have a lot of energy.

So I'm now hiring based on like energy level on Zoom. That sounds crazy. But to be able to do four Zooms a day and keep your energy level and your positivity level high is hard. it's not an easy task and that's really what this is about is how many people can you meet with how many people can you say no to

and then when you do say yes how supportive can you be so be an entrepreneur for sure go work at a startup Jason do you think being an entrepreneur makes you a better investor or do you think it just makes you more empathetic to the founders

and therefore maybe a better board member or supporter along the way 100% it makes you more empathetic of course right and the thing I've learned also is you've got to be a little bit humble. What I learned 20 years ago doing Weblogs Inc and building companies like, is it exactly analogous? Well, hiring might be, but how you do development or how you do marketing's changed radically. And it changes, you know, some things are fundamental principles. Other things change. So, um, but there are people like,

I guess, you know, Fred Wilson, uh, and Gurley who are just career analysts. And, you know, they seem to have done pretty well, too. I think, Jeremy Levine. Like, you know, I mean, there's a fair number of... What do you think, Hunter? You place these bets for a living on GPs. What do you think, is there some dispassionateness that comes from not being an entrepreneur? What's the problem con?

No, I mean, I think there's no one size fits all. It's all all network and the ability to interpersonally and empathetically connect with people, end of day. And I think really be a true supporter and someone that can take the blow. and doesn't get, you know, affected or spooked too quickly. I think there's a lot of behavioral elements that go into it. And we've backed people that have been founders and then become VCs. We've done pure spin-out VCs who have never had the background. I think the best firms combine different profiles together and are able to bring both to the table.

But more than anything, a lot of it comes down to psychology, in my opinion. Can you say more about that? I thought that was like really fascinating. I immediately came to mind was tilt control. You know, like if your aces get cracked, right? You're not supposed to lose or an 80% chance of winning and somebody hits run a runner on you. You know, you can lose your mind and you can start betting too many hands or whatever. So tell us more about the psychology of great GPs.

I mean, I think when you look at a lot of the younger, less experienced VCs, they get rattled very easily. And you can just tell. And they make selfish decisions or they make rash. decisions and they end up creating a bad reputation in the founder community because instead of being supportive and helpful and solutions oriented, you know, they're worried about how they appear in their partnership or how they're going to be viewed externally. And it creates bad behavior and bad partnership and in a business where reputation and relationships are everything, that's not a good way to sustain success as a VC. And as you've mentioned, you know, today,

Like, there are all lots, a lot of up and downs in this industry. And companies that end up being successful had a bunch of weird twists and turns along the way. And if you don't have the stomach, the grit, the conviction, the ability to wade through all of that, it's a horrible business for you to be. And you're inevitably going to blow up your reputation in one of the different constituencies along the way. And so a lot of these personality and psychological elements, I think, become an increase. increasingly important. That's not even talking about how you interact and build and maintain credibility with, you know, other venture partners you work with within the firm. That's a whole other complication. Hey, take a moment. Picture the ultimate all-star team for your startup. You got that image?

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Hunter, have you seen, I'll ask you to do a composite, but the most challenging founder situation to deal with and then thinking about your reputation, the firm's reputation in dealing with, you know,

something that was crazy. And if you could be a good one, I'll give you a crazy one too. I mean, where I think you see the worst behavior from founders is when it's like a subpar acquisition and it becomes a fight among the syndicate. And then the earn out and you have people talking to the acquirer from four or five different angles and no one has full visibility on what's going on. And the partnership elements like end up disappearing very quickly. I literally have this one.

And, you know, it's always these like very minor single and double ones that it's so contentious. And we have this like situation and we, you know, I have the due diligence team when we have these aqua hire situations. You know, I see it as an opportunity for our team to learn. So I'm like, okay, here's the, and I like checklist. So I make a checklist, check all these items. And every time we go through one, you know, the checklist gets edited, you know, post. And one of the things we check is like, you know, obviously just for hygiene. What's the, what's the stock option plan for the management team? And then also can we get the vesting schedule of that?

I'm going to give a composite here. I'm not talking about a specific company, but imagine a company where 90% of the sale values in the equity for the management team, and then, or 95% even, and then imagine like half of it's on signing. And you're like, wait a second. And I just said to the first,

I was like, I want you to win. Just can we give this? investors, RLPs, you know, just X consideration. And it was like this big thing. And I said,

you know, just for your own reputation over time, just so you know, this is not going to move the needle for our fund. And it'll give you the ability to come back to us and other people.

And, you know, they'll feel really good about backing your next company. And you'll feel pretty good about it. It's not going to be that much of a haircut for you. It's just like a little,

a little buzz on the side. It's not a big deal. And, you know, I wind up, like you're saying, talking to the founder of the,

company. And I just say, hey, you know, do you want to be perceived this way? And Zuckerberg used to do this all the time. And Chris Socker called him out publicly on this podcast or on this week startups. He called Zuckerberg out on the podcast for doing this. And you know, you do see this like weird trends. And so I've had to deal with that. And that's always a problematic, Logan, because you don't want to be like the bad VC who's, you know, arguing over the minor employment contracts. but totally but yeah you can't do things that are unethical I don't know but it seems people like lose their minds over fairness is a big one or insecurity and when you have to flip it on the VC side if you have someone that feels like they're being treated unfairly like I will lose my mind over

the dumbest things but if I feel like I'm getting screwed immaterial to the dollars or whatever it is It will drive me insane. But then the insecurity one's an interesting one. And Hunter, to your point on like the partnership dynamics and how comfortable someone is in their seat, generally when I'm dealing with other board members that are maybe newer or are, for whatever reason, maybe less embedded into their firm or they haven't had a history of returns or whatever, that's where you tend to see really perverse acting and things going on because they're insecure to their partnership. And so one of the things I think when you're taking a great investor, it's, yes, the lessons learned, sure, that might be helpful that they've sat on the board of XYZ company.

But the best thing I think you're getting is that person will be a rational, iterative thinking actor of what actually makes the most sense for you as an entrepreneur, for their limited partners. They're going to play that long game. And if you have someone that's optimizing for a local maximum along the way, like, oh, well, if this sells, then I become a part. partner or a general partner or I get into the management company or whatever. That's where you really see this weird behavior. And it can lead to just really interesting board dynamics or conversations because people are solving for something that isn't congruous with the ultimate outcome of the company. Yeah.

It's also interesting. You have some of these people now who had a company go public or went public through a SPAC and they got promoted for it. And now the equity value has been crushed. And you almost wonder if it's deserved in retrospect. respect, then that's an interesting partnership dynamic too. It's getting liquidity. It's an easy.

And when you have the opportunity, man, I feel so smart right now with some of the secondary transactions we did. And yeah, you know, and it comes up in LP meetings now. Oh, wow. Yeah. You made that decision. Okay, that seems like that's what was a good trade. Even when I sold Uber, I sold Uber shares back to Uber, you know, maybe a 30 bucks a share,

five years, four years before they went public, and then I sold some at $37 a share to Masayoshi's son. Like, I really was thoughtful about pairing that position on the way up, just a little bit, and then holding some amount. I held all my Robin Hood. That was a challenge because I just believe in that company so much, and then watching Kathy Wood and all these folks run it up to 60 bucks a share while we were locked up.

That was like a new experience for me, and I'm happy I held it now, because I just got my Robin Hood gold credit card today. and I just watched them continue to execute and I guess the stocks recovered a bit and I'm like, it's going to be a $200 stock someday. I don't know what my LPs did with their shares.

I'm holding mine. I still believe in that management team. And that's the second part of, I think, being good at this job is just knowing like if this team is truly special, this product is truly special and if it's going to stand the test of time, something stand the test of time

is really interesting to say, see that like Airbnb and Uber and even Coinbase, which I thought like, huh, I wonder if that one's going to stick around. Like, you know, a lot of these things have staying power. And if you don't, if the business doesn't die, it's a good chance it could fraud. I know it's a weird observation, but I keep seeing it. Your first point, I couldn't agree with more. Every, you know, of every 3,000 long-tail seed investor that's listening to this needs to

sell partial positions into large growth rounds. It takes too long to wait to a full exit and sell nothing along the way if you're coming in at pre-seed seed or even early Series A. Taking some percentage of your position off of the table is the prudent thing to do. And otherwise, you're going to be sitting on funds four or five with zero DPI coming back to market and asking your LPs to support you again on the next fund. It's just not sustainable in this industry as hold periods continue to elongate. People need to use that as a mechanism for getting capital bank. Jason, did you have a structured way that you went about doing it? I know Fred Wilson, I think, had like some structured framework on the way up that he would

trim positions, or did you just sort of do it ad hoc with intuition? I started making phone calls to people and saying, what should I do? And when I had phone calls with Ruloff, Bill Gurley, Doug Leone, you know, that cohort. Logan Barlett. Logan Barlet. You know, the All-Stars. The Mount Rushmore. Yeah, exactly.

The Who's who of venture capital. Yes. No, we got work to do with Logan. We're going to be in this business for another 20, 30 years. We got time. We have time. You know, people retire. At some point, LeBron and Steph are going to retire.

And that it'll be on time. A whole new generation. Luca and, yeah, Jalen. I got some good advice. And, you know, 10, 20 percent in each of those rounds on the way up. seemed like the right number. So I did that. And then I had some situations.

I saw another trend happen, which was founders saying, hey, we had this opportunity to sell on secondary. You're cool with it. I'm like, that's great for all of us. And they're like,

ah, yeah, it's one more thing. Would you waive your selling of the shares? And I was like, yeah, so you're waiving yours? So none of us are selling.

They're like, no, no, we're selling. We want you to not sell. And I said, ah, I said, but we're pari pari pari,

and so, let's just do that. Let's be part of parsu. What do you want to sell? And they're like, we want to sell 20%. I was like, right, I'll sell 20%. But like, uh, well, if you sell 20%, we probably can only sell 14%. That's great. So we'll sell 14% sounds great. And then I'll see at the next board meeting. And I just held firm. Um, and I think other folks didn't. I know the other folks who didn't. And now they probably have some regrets because, you know, we locked in in, I'm just taking one case, something to the effect of like a 15 or 20x, by selling 20% or 14%

and we still have the 86% of the shares. So it's 86% of the shares on today's market might be worth the same as the 14% we sold. Wow. So, and now I do think it's going to come back, but will it come back fully? I don't know. And that's...

And that end up being contentious? Because as we talk about those three constituents, you definitely did right by your limited partners there, right? You might have done well by Jason Callicanus there. But like, did it become contentious with the entrepreneurs at all in getting that done? I said to them, I said, listen, you know, I've been with the, since the beginning.

We happened to have incubated the company that went to our incubator. I said, I need to get liquidity for my LPs in order for me to invest in the next generation of companies like yours and founders.

So I hope you understand it's the business I'm in is getting some early liquidity. They're like, totally get it, Jake Al, totally get. And when I wanted to sell some Uber because I personally had money but I wasn't, you know,

where I am now, I just went to Travis and I said, hey, I heard there was like a secondary thing. He's like, how much you want to sell? And I was like, here's a number. He's like, no problem. I got you. And I was like, thanks, Travis.

He's like, is there anything I can do? And he's like, yeah, there is something. Can I have the voting rights to your shares? And I was like, you got it, boss. I literally physically saluted to him. I said, oh, captain, my captain. And I literally gave the voting rights. And nobody knows the story.

But I told Travis, you can, my shares are your shares. Now you vote my shares. which turned out to be pressing in if you know the history of the company. Being a founder can be overwhelming. Don't I know it? You know, I get those phone calls on the weekend. Sometimes people are a little overwhelmed. They need to talk to J-Cal. They got my phone number. I know the reason why. There's a hundred different things you're responsible for. You've got to take care of your office space or remote workers, HR, software, raising money, product, customers. It never ends. And I know you just want to focus on your product and your customers.

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Join over 100,000 startups that trust Mercury. for financial excellence, growth, and of course, the community. Mercury, the art of simplified finances. Apply a minutes, Mercury.com, and start transforming your startup's journey today. Next up, Sendana Capital announced that they have raised $105 million fund in partnership with Klein Hill in order by secondary stakes and seed funds where LPs are seeking liquidity. Logan, what do you think about the Sendana Klein Hill strategy? I mean, to the earlier discussion, I think finding liquidity,

is the name of the game for managers. And I assume this is going after, is this going after manager liquidity or it's going after company liquidity? It's going after manager at the early stage, roughly the seed or early stage. I mean, I think you, these time horizons keep getting longer and longer, right, of when these companies are going to go public. And the bars keep going up higher and higher of what you need to go public, right?

I think people have probably seen, I think it was Philippe Lafant said pretty publicly from KOTU that the new bar might be a billion dollars in revenue for a company to go public. And if you're an early stage seed investor or angel investor in this, I mean, it starts to be a different product when you're talking about companies raising at 10, 20, 30, 40, 50, $50, $100 billion in the private markets. Like, once upon a time, Microsoft back in the day went public at like a $500 million dollar valuation. You can look at these charts of how much value is created in the public markets versus private markets for a lot of tech companies and you look at it for Cisco and you look at it

for Facebook and you look at it for Microsoft. And then you compare it to like some of the companies today. And most of the value is actually getting created in the private markets versus the public markets once upon a time. And so if you're an early stage investor, it makes sense to me that you would want some liquidity or some product to get out and change hands. So someone else is taking more of that risk along the way. So I think it's, I think it's smart. I do think there's a lot of people that have been doing this as a part of their strategy at different points in time. And so I don't know how it's probably needed more than it has been today. I don't know if it's necessarily like a totally novel concept, but certainly seems that it's more prudent than ever. And Logan, I'm curious,

we talked earlier in the show, Tiger is raising 2.2 billion down from 12.7 billion. You know, the late stage is essentially disappearing more or less. So how do these companies get to a billion dollars? Because the way that I look at it is companies go public when they decide to go public when they file an S-1. So how do we reconcile this dearth of late-stage capital with companies want to go estate private longer? It's hard.

I mean, if you look at what the number of public companies, I don't know, in tech or in general, back in the 90s or 2000s, like as we've increased the regulatory hurdles for these companies to go out. There's a lot of benefits to it for sure, right? There's a lot less fraud going on in the public markets. The disclosures are a lot better than they were once upon a time. But as the bar goes up higher and higher, the number of companies that go public keep going down. And so you have retail investors that aren't able to access these products or access these companies that once upon a time would have already been public. And so I don't know, there's obviously tradeoffs. And it's one of these things like whenever someone tells you

something and all the upside. It's, everything sounds great, right? Of course we want more disclosures on public businesses so people won't get the fraud. Right. Like, of course, why would you argue against that? Well, there is a counter side to all of these things, which is, well, as regulatory bar go up, like the number of companies going public will go down. And so there's always two sides to any coin. And so I think that this was well intentioned, but led to some perverse incentives. Jason, where do you land on this philosophical argument? You know, we've had some great companies go out like desktop metal, had a SPAC, and, you know, it's been tough for a lot of these companies. I don't know the public markets understand the venture business, and I don't think they think in it in decade-long windows.

I don't think they even look at it in one-year windows. And so it's very hard for a company that's not yet profitable to go public. And I think the excess that's got taken out of the system now could make it possible for people to feel more. comfortable doing later stage rounds where the money is not going to just be incinerated in a unsustainable burn rate. So hopefully this time when the late stage money comes in and it will come back. There'll be another Masa Yoshi-San. There'll be another Yuri Milner.

And listen, Yuri made some of the best trades in the history of venture in investing. Moss has made some of the best bets in the history of investing. And people will come in and just hopefully they're thoughtful and they don't just drop money and not take board seats. have a thoughtful approach to it. And then the founders and the boards have to be thoughtful about how to deploy capital. I cannot tell you how many times I've watched this, you know, money get dropped on a company, and then all focus is lost.

All focus is lost. And great art requires constraint. And I think, you know, there's just great interview, you know, one of the seminal works and Bob Dylan's catalog is an album called Blood on the Tracks Shelter from the Storm Simple Twist of Fate

I mean there are some incredible tracks on there along with Tangled Up and Bloom and they asked him Hey why did you write that album Tell us what was the motivation and what was the inspiration He said well I owed

Columbia Records and a record and they paid me in advance and they were going to sue me and I was going to lose the house if I didn't get them that album So I went to the studio and I recorded the album in two weeks.

I said, yeah, no, no, I, okay, you had a commitment, but what did you, you know, the songs you wrote? And he's like, yeah, I needed to get them those songs. That's why I wrote them, because I owed them the money, and they were going to take it back. And this person couldn't reconcile. The point of this is, sometimes pressure and focus is important, and a deadline and goals.

You drop $100 million onto a, a 28-year-old team. And they were just cranking and they were growing at 14% month over a month, 12%, 20%, and then all of a sudden, they hire this VP of sales, they get this incredible signing bonus and this incredible severance package. And when I see that, all the alarms go off. Oh, signing bonus. Oh, severance package.

We've never done those things. Yeah, but we can afford to do it now. And sure enough, that VPS sales is gone. The next VPS sales is gone. still paying two VPSLs. The third VPS is in here. Everybody's looking to this thing like a piggy bank. Somebody's debating the goddamn reception area of the office space and what the logo and the desk and the architect. F*** does the architects have to do with our customers or the team, right? And I'm sorry to get on fire about this, but this is one of the great tragedies of

capital. You know, the best thing about this industry, was the milestone-based funding system. You have to clear market every 18 or 24 months, which makes you focused. If you don't have to clear market, how many times did we have founders, Hunter, Logan, say to us, we've got 97 months of runway. We've got infinite.

We've got 272 months of runway. It's like, that doesn't mean you should be burning $3 million a month. It's not required to burn three months. million a month. And then all of a sudden, oh, people are churning. Customers aren't resigning up. And the churn goes from $3 million to $4 million. And then we do a layoff and that increases the burn. It's like, it's really hard to get the magic back when you start spending at that level. Just like it's hard for people who start flying private or business class or they start staying in four-star hotels. It's hard to go back. Hard to go backwards. It's hard to go from playing, you know,

in the $25,000 buy-in poker game or the $25,000 hand-blower. blackjack down to $500 a hand blackjack. But that is, I think, what I'm most concerned about, um, you know, watching the cycle. And I think, you know, it's going to take a while for these scars. I know the dot-com scars took forever. Fred Wilson has dot-com scars big time. And Jerry Colon, his partner, the dot-com scars were so, I think he checked out after it, a friend of mine, Jerry. And so I think the scars are pretty deep on this one. I think they're going to West. There's a fascinating chart that I would need to dig up, but it's basically equity value created by capital consumed. And if you look at it, there aren't many companies that have

consumed a lot of capital and created a lot of equity value. Now, part of that's a product of history and venture capital wasn't as big of an asset class and all that. But if I remember the chart correctly, it was basically like Uber and Snowflake were kind of the two businesses that have ever consumed a lot of capital and created a lot of equity value. But if you go down the list like Microsoft, Facebook, Amazon, you know, Atlassian, Salesforce, you like go down the list of names. And a lot of these were like pretty capital efficient. And they just kind of worked, right? And constraint to your point, Jason, like breeds tradeoff and breeds focus. And in absent of that, you know, you get the opposite of it. You get the opposite of constraint. You get the opposite

of focus. Yeah. And I think a lot of these companies that didn't show that are going to have slow deaths or have to seek M&A or private equity to effectively fix them in a very difficult kind of way. But it does create a lot of opportunity for new companies in each of these categories to come in and be much better capitalized, much more frugal, much more efficient, and have a real opportunity to displace some of these that you would have viewed as incumbents with real moats. And so going back to what we said up front, this is a very interesting innovation cycle. for many reasons, but that's another one. I think tying it back to the secondary part of this,

it also creates difficulty in what you would consider buying, at least on the company side, because a lot of the companies that are at a point where duration is shorter and you'd want to buy into them, have these horrifically messed up cap tables or structure or debt or whatever else has been put into them. And then on top of that, they're not growing at rates that allow them to get above the last round

price before the runway runs out. And so as a secondary buyer, and that's an area, we've always been very active. You know, company secondaries, you've got to be really careful around. That's only one of the three areas that we focus on. We're also very active in LP interest purchasing, where LPs, because they've been in a fund for eight to ten years, eventually need to seek liquidity or trim their positions. And then I think the most interesting category is really the discussions around doing something more strategic and scaled, whether that be a strip sale, a tender offer, or a continuation

fund. And our counterparts in Brethren and private equity and buyout have been doing this forever. But everyone in venture needs to start thinking more strategically about it. And funds don't have to stay in existence for 15 to 20 years. Like you can do something more interesting around that, assuming you have good companies and can find a good partner on the other end of that. And so to answer the original question, I'm surprised there hasn't been more competition in this space until now. And maybe you need a big reckoning to have people who realize there's arbitrage and there's an opportunity to take advantage of distress and do something on a secondary basis.

But I've always said I thought there would be more competitors to what we do in this category. And now there are, whether it's this one or whether it's, you know, other other. firms that have popped up or other GPs that are now considering doing it as a component of their platform extension. Yeah, I'm fascinated by it. I'm glad it's out there. We would consider it, I guess, you know, at some point we have a, our first fund is like 4.9x on paper and we've distributed 1.X.

And I don't know, what is reality right now? Three in between? And so somebody came to me and said, under, hey, how about 3x? I mean, I'd have to take a look at it and be like, huh. that does solve a lot of problems for me because now I'm in the top quartile and I can wrap that up and you know it's an opportunity for you to take that you know strip and and and go nurture it and you know give somebody else the opportunity so yeah with and the thing we didn't even talk about was M&A I don't know if you saw Andy Jassy talking about on CNBC talked about the high robot or whatever the Rumba blocked you know acquisition. He's like, what are we doing here? This is nothing. This is a tiny little tiki-tacky M&A, and it's being blocked.

And then Figma getting blocked, like to your point before Logan of like, hey, you know, we want to protect people. We want to have a competitive marketplace. Is Figma getting bought and Adobe buying Figma going to change the landscape? No, it's not. Sorry. Is Rumba getting bought? If Lyft got bought, you know, would anybody care? I don't think so.

You know, like maybe we just have to say the top five players in tech, they're under a certain level of scrutiny because of their scale. And any acquisition that's under X amount or mergers amongst equals is fine because that creates more bigger players and more competitive.

So if you take Google, Microsoft, and Apple and Facebook, and you make them play one set of rules for acquisitions and then the long tail, let them go at it. You know, what if Uber and Airbnb merged? I mean, it's a crazy idea, but okay, they would block it. Of course, they'd block it.

They're blocking everything. But if you put Instacart, Uber, and Lyft and DoorDash together, I'm just throwing a bunch assets in there on Airbnb and you made this like on-demand mega corporation worth $500 billion, that sounds pretty great to me. And they would block it. Of course, they would block any combination of that. Nobody would even try. and this is freezing capital markets in a way, you know,

not having these singles and doubles, and it's going to screw up innovation because, you know, there's a ton of companies in our portfolio that I'm sure we get bought for $500 million to $5 billion, and we'd be totally okay with it, but they're just, what are the M&A department's doing?

They're coming up with obscure ideas, like what they did with Mustafa's company. They're like, inflection. Yeah, let's just gut the company. Yeah. Oh, we can't buy the store. Great.

We're going to go in. We're going to take everything out of the store. We're then going to like the store on fire. And then there'd be a bunch of smoldering ash, but we'll have the team that works at it. And we're going to put them in the store next door. And you can't stop us. And what constituents are being served in this? I mean, I understand the, if we could go back in time, like Instagram, should it have been acquired by Facebook.

You know, we can have that debate. like Instagram is an Instagram without Facebook being Facebook empowering it to where it is today. And you guys remember that acquisition was totally made fun of at the time. And everyone's like, oh my gosh, this photo sharing app and all this. And you watch clips of like John Stewart making fun of it in 2011 or 12 or whatever. And now he's got, you know, Linda Kahn on. And they're talking about how did big tech get this big and all that. And it's like we're trying to relitigate decisions we made in the past doing so in the future. And we're just over. extrapolating these things like i robot and amazon like who cares we need that capital in the in the

ecosystem to be able to continue to spur entrepreneurship forward and and so it's just like we're who are we serving by doing this did whole foods suddenly become a bad product i don't know i'm not like i'm asking it as a question i'm not like a whole food super fan i still shop there yeah i don't know did walmart go out of business because whole foods got bought by amazon doesn't seem like it i don't Hunter, what do you think about Eminet? Yeah, I mean, I think it's going to be tough. And you'll also start seeing more scrutiny on the financial buyers, too, you know, with people thinking through what is or isn't appropriate from private equity.

And that will become a problem, too, because they've stepped in and have become more of the liquidity provider as strategics become more scrutinized from an antitrust standpoint. But I don't know that they'll remain immune as well, whether it's in take private situations, or in buy and builds or in combining companies together. And frankly, that would be a good thing with some of these categories where there's just too many Me Too Companies. You would love to have good private equity people come in and start putting those together thoughtfully instead of continuing to have 10 of them exist

forever doing nothing. And hopefully there's a way to bring M&A back. It's critical to our industry. It's the predominant exit avenue or at least has been, historically, and IPO windows are always cyclical. And so if you don't have M&A to fall back on, the liquidity situation becomes more and more dire, which I think actually feeds into David's first question and also into the second, because that's where secondary once again comes in as one of the only legitimate options in an environment where liquidity is still a big problem.

And while fundraising doesn't appear to be a problem, at least for the bigger group, groups, liquidity is a problem for everyone. I do think there is a fundamental and a underpricing of future liquidity. If you looked at the graph we showed earlier, Q1, 2024 IPOs were the lowest amount in over decades on the M&A front. You know, there's probably a 50, 50 chance on the next election. So I do think people are a little bit over optimizing on his historical. Ultimately, on the IPO front, companies, there's such a large pipeline of companies that have

to go public. somebody's going to start going public and my thoughts that could open up sooner than people think. Yeah, no, I agree. I mean, eventually, Hunter, your point, like 99.999% of companies eventually get acquired, right? That's the terminal state. And so if we freeze M&A, it's just going to lead to this liquidity crunch that we've all been talking about. And so, yeah, I don't know to what end. Well, we got Reddit out, and that seemed to have done well.

And I guess we'll see what happens with Stripe. How's it actually held up? I know it was sort of a blood death in week two, but has it flattened out a little bit more? It's a great question. I haven't looked at on a day-to-day basis, but pulling it up right now. The first week seemed like it was good. It seemed like it was. Yeah, 39 bucks.

And rubrics filed to go out. So hopefully there's this stream of folks that are going to start trickling out. I mean, you know, you end up with your arrows in the back if you run ahead. But hopefully we get some of these more business. that want to lead and get out and manage the public market. I think that will happen, but to your earlier point, Logan, the scale that's required to go out is just ridiculous in comparison to what it's been historically. And it seems to keep getting bigger in terms of what companies need to be at in order to

consider doing it. And so all of that still elongates things further and leads to an even more robust secondary opportunity. However, you're buying it at the company level, the fun level. or through more of a strategic solution. Next up, Google appears to be all in on generative AI. At last week's Google Cloud Next conference in Las Vegas, nearly the entire conversation was dominated by AI and its Gemini platform.

Earlier this week, the chief of Google's AI business, Demis Hasabas, said that Google plans to spend over $100 billion on AI. Logan, with companies like OpenAI, Anthropic, Databricks, competing against incumbents such as Google and Microsoft, give us a lay of the land and how do you look at the AI ecosystem today? What of my friends at Benchmark, Eric Fisheria, said that these foundation models are the most rapidly depreciating asset in human history. And I thought that was a funny line that like the incrementality by all these dollars and the

step function change that seems to happen with every model, it just seems to be. demonstrably better than the one before. And so maybe this is an infinite rat race that we're on and there will be a handful of winners like there were in cloud where it ends up with Google owns part of the market and Amazon owns part and Microsoft owns part. And then sure, there's this digital ocean thing over here, but it's small in comparison to the overall ecosystem. And maybe that's how it ends up.

But it feels like that's a hard game to play when open source keeps pushing its head as strong strongly as it is. And obviously, Facebook has a lot of incentive to keep pushing open source. So I don't really know how all this plays out. It sort of seems like there's a prisoner's dilemma going on between Google and Microsoft and Amazon and Open AI and Anthropic. And all of them are sort of beholden to the decision that the next one makes. I guess it's the game on the field and you have to play it. But it seems like it's going to be very, very expensive. And to what prize? I'm super impressed by AI in general like anyone else. It's hard not to look at this stuff and be super impressed by it.

But is the difference between GPT 7 versus GPT 8 going to be such that it creates that much more equity value? I don't know. I don't know how that's going to play out. It just seems like we're seeing a lot of parallels to the internet craze, which I think everyone believed in the trend. But it doesn't mean every company created a lot of equity value along the way. I'm coming to the conclusion that we might look back on. language models like we look back on fiber and storage, which is to say, we don't really think about them all that much.

Yeah, I'm sure there's a lot of money being made in storage, but it seems like a commoditized market. I don't think anybody's going, am I on a Seagate Drive or a Western Digital? Can we talk about my fiber? Are we going through a Cisco router or, you know, I just want to get an idea of, you know, the packet size? And, you know, it's like, does it work or not?

Does it give the answer or not? And then what product or service can you build around it? What dataset? that what reinforcement learning can you do? And then to your point, Logan, you know, it might turn out that an open source project around the narrow, you know, focus of photography and, you know, might beat chat GPT4.

So, you know, chat GPT and OpenAI may run the table for a little while or Google might run the table. But these open source projects that Apple's working on and the ones that meta are working on, they have access to a lot of data. data is the new oil. They have unique access to consumer data, whether it's chats or DMs or emails

or YouTube videos, whatever they happen to have access to. I think the verticalized items could commoditize these broad ones. And so, yeah, I'm glad that they're doing it, though, because like the fiber buildout of the dot-com era, a lot of the great businesses like Amazon or YouTube were based upon this incredible buildout.

I think we're going to be sitting here with possibly a surplus of H-100s and all these things, because this idea that we're going to use all the compute, the software may need some time to catch up. We might have, what if we have too much compute? Is it possible? Is it possible that so much capital is running into chip design that like the fiber build out, we just overbuild it? And we're sitting there going, hey, software is not actually solving the problem.

the self-driving is not working, you know, door-to-door yet. It's doing 87% or 92%. So I'm pretty happy with the application level. And that's where I think a lot of the opportunity is going to be. People are going to build consumer apps that just work and brands that just were on top of this technology. And the YouTube and the Amazon, the actual application that people use is what they remember, not that it's on AWS or that, you know, the bandwidth came from, what was it, WorldCom. I think a hundred, you might have caught the tail end of this as an investor.

The WorldCom? Did you catch the tail end of someone? I did. Yeah. Was there a lot of pain and suffering? Yeah. Yeah. I mean, I think playing the game of continuing to come into growth rounds in these businesses, for me would be pretty scary. They obviously consume tons of capital, but being an investor who has to figure out which the winner will be and then, you know, getting comfortable with whatever price you're paying and what kind of multiple that could look like in the future is pretty tough. So I don't disagree with you. I think playing the application side of it, although might still be slightly early there, playing elements of infrastructure around it, playing the intersection of AI and security and what that can look like,

or playing someone that's sort of an arms dealer to all of them and doesn't have to make a choice in order to do well, are to me more interesting ways. to do it. And fundamentally, even beyond that, just companies utilizing AI to be more efficient and provide a better product and solution, I think is a great thing too. So all the discussion gets centered in one or two of these areas. And hopefully that begins to broaden out a little bit more. Logan, I don't know if you caught Sam Altman's interview earlier this week where he said that 95% of startups are building on GPT4 and they should be building on GPT5. because GPT-5 is going to crush their business model.

How do you invest into startups in such a rapidly changing space? I mean, it's really hard, right? I think that if you go back and look at the internet bubble, I'm sure if you got into Google was basically started at the very tail end or kind of on the other side of it, but if you got into Amazon or eBay or PayPal or Yahoo or whatever it was, you probably did extraordinarily well. And for a long time, you looked insanely prescient and smart with your decisions.

But there was a big blowup on the other side of the journey to what those companies are today. And if you didn't get into those names and you got into the web vans or the pets.com or whatever it is, and not to disparage those names, but it wasn't broad-based that everything that was indexed to the internet worked. It was actually quite the opposite, right? If you go look at the, I don't know, the 10, 15 names created an enormous amount of equity value over a very long period of time. But just because the trend is happening doesn't mean the totality of the outcomes are going to be successful. So I think it's really hard right now. And it doesn't mean that it also needs to happen this second. Google came a little bit later.

Facebook certainly came a lot later. Jason mentioned YouTube. I mean, one of the biggest beneficiaries of the internet infrastructure was YouTube kind of building on top of what had already happened. And so just because you believe in an inevitable state of a trend, doesn't mean you have to go all in at that moment in time. And you need to cherry pick, like, where those opportunities present themselves. So I guess the short answer to you is, I don't have to. And I'm going to try to be patient in finding the things that really resonate in the entrepreneurs I really believe in, rather than trying to index or basket the AI ecosystem,

which hopefully esteemed LPs like Mr. Somerville here appreciate from a perspective standpoint. Seems like Hunter, you're in the best seat to capitalize on AI. You're able to access it through multiple different investments across managers. Yeah. I mean, our business model is always interesting because we can do fun, direct, and secondary. But specific to AI, actually specific to most of the things I like in venture, I bias towards seed and early stage as much as I can because then you don't have to be playing the cyclicality game or the run-up game.

And with anyone that we decide to back in late, stage, like a Logan and the Omega team, we want people that are super thoughtful, do more early expansion than crossover late stage, and are pragmatic and, you know, view this as a craft where they're doing like two or three things per year instead of creating a basket artificially in whatever trend is viewed as a must have at that given time. So, yeah, the flexibility we have, I think is a real advantage, and we don't take that for grand. in terms of how we can structurally pursue it. Hunter, I'm going to make that our website description, what you just said. That's going to be point by point how we describe ourselves and any future fundraising

deck. We're just going to say Hunter said this. Happy to be helpful, Logan. Speaking of which, Hunter, you know Jason talks about his 5X TVPI, but he does have kind of a more diversified strategy. He doesn't have high ownership. What do you think about funds like Jason's? Well, I mean, specific to a 5X, yeah, I like that from anyone.

And I think the conversation around that TVPI DPI differential is interesting. And frankly, that is where you see the most secondary activity is funds that have done well, but there's a difference between the TVPI and DPI. That being said, if you've crossed over a 1X, you have a little bit more optionality than others do. On the diversification piece, you know, it's not a one-size-fits-all to see. I have more of a bias towards concentrated portfolio construction approaches and building positions of impact through reserve and follow-on management. But there are plenty of people that have done an incredible job at diversification,

not being as aggressive and follow-on. I just think you then need to prove your ability to be additive and hands-on with founders. And for many of those that take a high-velocity, high-top-funnel approach, I really just question that or have a hard time believing it. The fact that Jason's talking about taking board observation or board seats, even with a big portfolio, I think is the right way of doing it. I have just been jaded by so many that take tons of positions and aren't even really involved between Seed and A.

I'm not expecting him to be involved from Seed to IPO, but I at least want to see a high level of involvement from Seed to A and bridging it to a good next partner and being a thought partner at the very early innings. And it's just hard to do from a capacity and time and attention standpoint. That's the key is capacity. And I'm super lucky to have podcasts and events that throw off a lot of revenue. And I'm able to underwrite a team that's three times the size of a typical seed stage fund.

So for a $50 million fund to have 21 people, kind of like unprecedented. Because I, instead of taking an extra, I probably take, I take a million dollars less and profit out of the media side of the business to underwrite the venture side of the business. And that, you know, means I'm doing a $5 million commit to my funds every four years, million dollars in cash, $4 million in not taking profits out of the media business.

But you do need, to your point, Hunter, you need to have more people. It takes more processing power to do 60 meetings a week, 70 meetings a week. We have people who can do 15 in a week, if they don't have any vacation that week. You know, that's five people on the front line.

just meeting with companies. A seat stage fund has two people. They don't have, you know, I have 21. So I'm lucky to have an army, but most people are not lucky to have an army to sort through all that. And I think you've also done a good job at building a community approach to it, which is the other way you can deal with a massively large portfolio is having a community of very high quality that can connect and learn from each other and utilize each other as resources.

and by working with, you know, whoever you decide to on the VC side, if they have a good community, then you're buying into that too. Yeah. So many times I'll go into our Slack and somebody will have asked me a question, hey, on this legal issue,

and then I go, oh, I know the answer to that, and I click on it, and six other founders have answered the questions, 800 founders in our founder Slack now that we've invested in, you know, 400 companies over 12 years, and, you know,

they have two or three founders each. We don't kick them out. I mean, if they do something bad, we do, but generally we don't kick them out. So they're sitting in there on their third or fourth company. They went to work for Google. We just leave them in there. They help each other. Pretty amazing to watch them help each other. If you have a great community and then you apply technology thoughtful to really piece all of those nodes together, it can be a pretty interesting way of doing it. Well, it's been another great episode of the liquidity podcast for Logan Bartlett, Hunter Somerville,

Jason Callicanus. This is your host, David Weisberg. Thanks for listening. Thank you.