This Week in Startups - Satya Patel on the state of VC, flexible investing frameworks & converting to evergreen | E1715

Episode Date: April 6, 2023

Satya Patel joins Jason to discuss the economics of being a self-funded GP and the structure of their fund (6:51). Then, they have an all-encompassing discussion about the challenges of running Google today, the state of VC, and much more (15:44). Before wrapping, they discuss their investing frameworks and when and when they will not break them (43:29).  (0:00) Nick kicks off the show (1:21) Satya's early days a Google (6:51) The economics of being a solo GP (9:29) Mercury - Apply in minutes and get up to $5M in FDIC insurance at https://mercury.com (10:58) The structure of a fund (15:44) The challenges of running Google today (17:51) The evolution of chat-based search  (22:55) Squarespace - Use offer code TWIST to save 10% off your first purchase of a website or domain at https://Squarespace.com/TWIST (24:25) The balkanization of AI data  (29:55) The pace of AI and the harsh reality of the private sector  (38:11) Clumio - Start a free backup, or sign up for a demo at https://clumio.com/twist (39:28) Saying "no" to external funds  (43:29) Flexible Frameworks (58:05) Founder Archetypes  (1:01:38) Being "founder friendly" and the importance of board meetings  (1:14:09) Screendoor  (1:22:25) Satya's thoughts on SVB  FOLLOW Satya: https://twitter.com/satyap FOLLOW Jason: https://linktr.ee/calacanis Subscribe to our YouTube to watch all full episodes: https://www.youtube.com/channel/UCkkhmBWfS7pILYIk0izkc3A?sub_confirmation=1 FOUNDERS! Subscribe to the Founder University podcast: https://podcasts.apple.com/au/podcast/founder-university/id1648407190

Today on this week in startups, Satya Patel from Homebrew joins Jason for a really deep discussion on the state of VC, generative AI's impact, why Homebrew converted to an evergreen fund with their own capital, what rules he and Jason have for investing in founders, and why they might break them, and so much more. It's a great episode. Stick with us. This weekend startups is brought to you by Mercury, where innovation meets peace of mind. Now more than ever, startups need a safe place to put their cash. Mercury offers a simple way to manage bank risk and protect every dollar with up to $5 million in FDIC insurance and a money market fund. Visit mercury.com to apply in minutes. Squarespace, turn your idea into a new website. Go to Squarespace.com slash twist for a free trial.

When you're ready to launch, use offer code twist to save 10% off your first purchase of a website or domain. And Clumio. When you're building a company, don't let backups and compliance requirements distract you. Let the data protection experts at Clumio help with immutable air gap backups that put compliance on autopilot. Visit them at Clumio.com slash twist to start a free backup or sign up for a demo. All right, everybody, we have an amazing guest on the program today. He's been on the program before, but generally busy working, investing in companies. And we ask them every year and we get them every two or three.

And that gentleman is Satya Patel, not Satya Nadal, a different Satya. There's two great ones I know of in our industry. And Satya Patel with us today is the co-founder of Homebrew. Homebrew is a venture capital firm. I think you've been out of for about a decade, right? Yeah, that's right. Same as me. I think you're on your fourth fund, third or fourth?

Fourth fund. Fourth fund, just like me. I just started raising my fourth fund. and Satya worked at YouTube. I worked at Google and Twitter. Google. You think about Hunter, my partner who worked at YouTube.

Hunter worked at YouTube. I know you both. Did you meet there? Is that way you were Hunter? We met at Google. Yeah. You did meet at Google. Right.

So one of you was at YouTube, Hunter, and you were at Google proper. And you've invested in dozens of companies. And let's talk a little bit about Google at the start of this. What did you learn most at Google? that you carry forward. And then we'll go to the second question, which I don't know if you've heard, Freberg, who also was there at Google,

I don't know if you guys. Yeah, of course, we overlap to him. He's worked together. Oh, fantastic. So you did. And he's been a little bit, I don't want to say critical, but his observation has been big company,

maybe playing on their heels a bit, maybe all this antitrust stuff. So I'd love to get your assessment of Google through the light of chat chippy T versus Bard versus Bing and the future of Google, but also those early, days and what you learned and then how that applies to company building today as you invest. And welcome back to the program.

Thanks. And thanks for having me back and being patient with me. We try to focus our time and energy on our founders. So we don't often get to talk about what we do. But I appreciate you having me on once again. I play the long game with the great guests. Indeed. You just ask every six months until you tell us to stop asking.

Well, you've got the right satcha if you wanted the great guests. I mean, the wrong satch if you wanted the great guests, but I'm here anyway. So let's see. Yeah, and I was worried you were going to want to spend a lot of time on Twitter, which I don't want to do, even though I have fun memories of my time there as well. But let's see, at Google. Yeah, so the early days of Google were incredible because the people who joined there in those days didn't join because they thought they were going to make a boatload of money. It wasn't clear like what Google was going to become. It was exciting because people joined, one, because during the interview process or as you were talking to the company, you met.

the smartest people you'd ever met before, who you knew you could learn from and that you wanted to work with. And two, you really believed in the mission, this mission of making the world's information universally accessible and useful. And the company was created in such a way that there wasn't a lot of management oversight. So when you joined the company, you were kind of let lose to go do work. And so all of that led to a few things that I think about in the context of company building. One is the importance of culture and values early in the days of company building. We're big believers that that culture and those values, if you're thoughtful about them and intentional about them, can be really powerful tools for long-term value creation

and that whether you're intentional or not, the values and the culture of a company get set within the first 20 employees or so. So you can choose to be intentional and be deletionial. deliberate and build a culture that's defined and kind of authentic to the founders, or you can choose to be unintentional and something's going to get built anyway, which you may not have any control over influence or influence over and may not reflect the will or the personality of the founders. And we think there's a lot of power in the former and being intentional about it. So that's number one. Number two is that you can define the culture and values, but none of that matters if you don't

hire people that match up with that culture and those values. And so the quality of the first people that you hire and the fit with the culture and the values. And really a lot of that translates to alignment with the mission of the company is a really powerful lover in the building of startups. And then the last thing is, you know, a culture of trust. We think a lot about that in company building as well. And what we find is that if you work with people who assume the best in the decisions that you make, in what you say, and give you the opportunity to kind of go hang yourself, right? Like, it's not a culture of no, it's a culture of yes.

Those tend to be the companies that move the fastest, learn the quickest, and have the highest likelihood of success as well. and Google had a well-defined culture and set of values hired really intelligently and for a long time was a place where everyone always said yes and you rarely heard no. You could take action and apologize after the fact. And for me, those were the things that stood out about the early days of Google and things that we think about now at homebrew in the context of company building and the advice and council that we provide to companies at the early stages. And you did something radical around the third or fourth fund. You decided to use your own capital and not raise from outside LPs. Yeah. This was, yeah, I was shocked and impressed because I've never seen anybody do that.

How has, when did you start that? Was it fun three or four? Fun, fun, fun, fun, four. So we made the decision in late 21 when we had to make the call on whether we wanted to raise a fourth fund. or not. And so it's been about 18 months or so since we've been operating with the new LP model, which is no LPs and just our money. Scary, intense. Did you become a better investor? Are you more risk-taking or less risk-taking when it's your own money?

Really good questions. I guess at a high level, we'll see if it's a good decision or not. It's kind of the dumbest economic decision we could have made in the short term, right? We don't have a large fund, we don't have management fees. We are 100% putting our capital at risk. So tough to know whether it's a good decision economically, at least in the short term. But in the long term, our view is as venture capitalists, you have to believe that you're good pickers, right? Like, you've believed that about yourself for a long time when it was your own money and then scout money and then the fund. And if you believe that and if you are fortunate enough to have the financial wherewithal, why wouldn't you want to be 100% of the LP? That's the best

economics you can have in terms of return is if you're putting your own capital work and you're 100% of the LP and you get 100% of the returns. So assuming that we're reasonably good at this, then in the long term, it should work out better for us. Now, to answer your question, are we more risk seeking, has it been more stressful, like those kinds of things? I'd say, one, we arguably are more risk-seeking. And the reason for that is because when you don't have a fund, you don't have to worry about check size. You don't have to worry about ownership.

You don't have to worry about whether this investment can return the entire fund. And as a result, if you're just thinking about that investment as an individual investment and can we earn a return on this particular company, you can afford to do things that you wouldn't be able to do within this strategic defined box of a fund. And so, you know, by definition, I think we can take maybe not more risk, but different kinds of risk than we took before. As a founder, ensuring that your cash is safe is priority number one. And the $250,000 FDIC limit is just not enough for most businesses. We all know that. So let me tell you about Mercury. Through its partner banks and sweep networks, Mercury customers

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their database. I signed up, and I get all these great founder pitches from the Mercury Race project. So in Mercury Race, they help founders connect with investors like myself and then, you know, boost their fundraising. So here's your call to action. Head to Mercury.com to join more than 100,000 startups that trust Mercury for banking. If you're interested in Mercury Raise programs, applications for both seed and Series A are open from April 3rd to April 20th. Disclaimer, Mercury is a first. financial technology company, not a bank. Banking services are provided by Choice Financial Group and Evolve Bank and Trust members FDIC. The structure of a fund is such, if I can unpack that, have you unpack that first, is that you're trying to put maybe 30 names into a fund, 30 logos,

as we say, 30 companies, and then have one return the entire fund by hitting 40, 50, 60x, right? And you have some dilution maybe along the way. So a 50x, 30x, 40x, whatever it happens to be. can return the fund, the fees, and then get you into the black. You don't have to think that way. Right. In a fund, you have to live by the power law, right? And we don't have to think about that. You know, as long as we'd like to, of course, have investments that return $500, $200,000,

but if we feel like we can earn 3 to 10x on an investment, we could choose to take that risk if we want because, you know, we're not limited to just the seed stage anymore either. We can invest at any stage we want as well. well, with our own capital. And historically, Humber is a seed stage fund. And it still primarily is,

but we have more flexibility in terms of when we enter an investment as well. And as a result, our return expectations may be different. And you were going to continue on in terms of you don't have to, you're not a slave to fund dynamics. Amazing. No. And then what else?

And then in terms of kind of the stress, I think it's more stressful to manage other people's money than it is just to manage your own. So sure, we're taking more risk because it's our money, but the responsibility and the burden of managing other people's money and having to return, you know, ideally 5x in a seed stage fund and hopefully a lot more, that's really stressful. And it also, when you have a fund and other people's money, creates this feeling that you need to be competing for every opportunity

out there. Like, you can't miss the one that could end up being 100 or 200 X returner. You're a slate to a power law. Yeah. If you miss the Uber, if you miss the YouTube, whatever you miss, that's the defining moment of your career is the omission. That's right. Right. And again, with our money now, there's no FOMO, right?

There's no fear of missing out. Right. If we happen to miss an opportunity, it's not like we're failing all these people who gave us money. We're failing ourselves, certainly. But it's just not the same level of stress as when you have other people's money, especially other people's money like we did. We had institutional money from, you know, endowments and family foundations who are trying to do really good work in the world.

And when you have that kind of responsibility and that burden and that opportunity to contribute to their legacies, that's a stressor. So we don't feel that anymore. How did the first couple of funds do? And was this decision based upon the returns of those funds, good or bad? and how did that your performance then in those first three funds contribute to your thinking for fund four? And then how much of your time on a percentage basis was taken up by fundraising, management, just overall over the last decade. If you had 10 years, how much of your own Hunter time was actually managing the LP base and raising from them?

Yeah. Listen, we started the fund 10 years ago at the beginning of the greatest bull market in history, right? Right. So we were really fortunate with the returns from the fund, but the returns of the fund didn't have anything to do with why we decided to make this decision. That was a more strategic decision about what we felt was necessary to be competitive in this market and how we wanted to spend our time. We can get more into that if it's interesting. But we had the financial wherewithal to be able to do what we're doing because of the returns of the funds. But that wasn't the decision maker. Then in terms of how much time we spent on things tied to having a fund, fundraising, fund administration, reporting, all those kinds of things, it was probably a good 20% of our time at least, if not more. I mean, that even with a outside fund administrator with outside fund council, you know, our view is like you're always fundraising as a fund manager.

Yeah. Right? You're always building and maintaining LP relationships. you're trying to do a good job of being transparent about the work and reporting. And of course, you have to provide financial information and annual audits and all those kinds of things. And so it is time consuming. It's one of the underestimated things about being an investor that a lot of people who

are angel investors or want to be fund managers don't appreciate or understand is how much time you devote to things that are unrelated to investing. Probably, I would say on average, people spend 20%, maybe 30%. It depends on where you're at in the cycle. So let's go back to Google for a second. Amazing learnings that you brought forward. If there is something challenging about running Google today, what is it? And then how does having this incredible money printing machine then become, in some ways, a blocker for pursuing opportunity, specifically this AI chat, you know, chatbot sort of functionality?

have you been thinking about that and where does it lead you? Yeah, probably not as much as Friedberg, but I'd say it becomes a huge challenge. One is you develop a culture of no, as I talked about kind of the opposite culture in the early days. Even in that, I would argue, kind of 8,000, 10,000 employees, Google became a place where the default answer was no. Whether it was, you know, a manager signing off on a new project, the executives kind of greenlighting an effort, wanting to make a small change or release it to experiment, all those things became much more difficult to do. And certainly at the scale that they're at today,

when everybody's job has been thin-slice, right? Like, when you're a young company and there are a few people, everybody's got lots of scope. And over time, like, job rules get defined really thinly. And as a result, people are very protective of their jobs and their responsibilities. And so it becomes easier to elbow people out. say no. So I imagine like when that's the case and you're trying to protect protect your fiefdom, it stifles innovation, right? No stifles innovation. And so that's one thing. The second thing is at

their scale with the moneymaking machine that they have, like anything that potentially cannibalizes the existing business is really difficult to invest in. And certainly AI and chat GPT and all these things can have a profound impact on the core businesses, especially one that's reliant upon in some ways, in lots of ways, the volume of searches that happen, right? Do you see chat-based, you know, back and forth AI chat interfaces as a replacement for Google search and for, you know, hey, here's some data plus some links to go deeper?

Or do you think it's complementary? in some ways. Are you yourself using Chat Chapti more than Google searches? Is it replacing some number of searches for you yet? Yeah, I do think that the challenge with it in relation to searches, one, it's going to be in both those categories.

There'll be types of searches that ChatGPT is just going to be better for. And so it's going to encourage and travel in new types of searches, things that you maybe wouldn't search for before, like you will search for now with chat and AI. The second will be areas where it replaces existing searches that you already did and now you'll get a better result. And third will be where it complements them. And so there are, I wouldn't say like I've been more playing with chat, GPT and some of the other AI platforms out of curiosity. So I wouldn't say that there are a normal course of my behavior yet.

But I can certainly envision scenarios in which they can be better. So, for example, I've been playing with lots of travel-related searches. Travel is always one of those great searches or great ways to judge a service like search or this because it's ever-changing. There's so many facets to it. Yeah, unpack what you learned. And travel is always one of those areas, like every new founder when they're thinking about their first business idea, somehow wants to solve like social travel or making travel better. and it's been really difficult to do.

And so it seems like one of those things that machines should be able to do better or in interesting ways. And so I've been playing with these products and comparing results related to travel. But that's a category of searches that does exist today. I would argue that most consumers would say that the experience is not great. And that that's a category in which certainly traditional search can be complemented, but I think potentially replaced in some powerful ways. So that's an example where, and then as you know,

travel is a very monetizable category. Oh, yes. So that's a vertical in which I have to believe Google sees itself in real risk if it doesn't address that with chat-driven products. And they had that to a certain extent. If we look at the mobile, how disruptive mobile was, you used to do a search maybe in Google for travel or for shopping and then or for a restaurant, which is kind of related to travel.

And then you said, you know what, I'll just open Uber and I'll do my travel there. I'll open Southwest. I'll do my travel there. I'll open Amazon. I'll do a product search and a purchase there as opposed to going to Google. And of course, if I'm looking for a restaurant, do I need to do a Google search and then click on Yelp or do I just open Yelp? So they did see some headwinds there, but they still grew because they had, I guess, all this other, I guess the search pies kept growing. Right.

So is there an argument here that even if this happens, even the chat AI interfaces, they could be monetizable, number one. You could figure out a way to embed links in there or close the transaction at the end of the thread. Hey, do you want to buy this? And the default would be Expedia or orbits or whoever it is. So it seems like it still results in a transaction. So would it, is there an argument that it won't cannibalize it, that it'll just be a better experience for users that still results in a transaction? I think if you're Google, that's what you're hoping, right? Yeah.

That you can build it in such a way that Google, because consumer behavior is hard to change, still becomes the default place you go to start your AI-driven chat experience or your search, however you want to describe it, because people are used to going to Google. And if you can deliver a good enough experience, maybe people don't switch, right? Consumer behavior is really hard to change, right? Most people think of a particular product used in a particular way, right? Like one use case addressed really well for one type of problem. It's why we have different apps for Uber versus OpenTable versus, you know, orbits, right? Like people don't use the same service for all of that, unlike in other parts of the world.

And I think people think of search and they think of Google. So if you, you know, the reason that search works at Amazon, I'd argue they were able to build search there is because people thought of Amazon is shopping. And search is helpful in the context of the shopping use case. But I don't think people, you know, went to Amazon to start searching. Google has that behavior. And so can they harness that behavior and deliver a good enough AI-driven experience that makes it so people are less likely to switch to other search or chat services? Okay, we're about to announce the winner of our second show us your space competition. Elise runs a digital sports nutrition business built on Squarespace called Whoa,

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and then Google could have an advantage in that, my gosh, they have all that YouTube information, they have all that Gmail information, Google Docs information, and other places like, say, chat GPT wouldn't even have access to it. So what do you have thoughts on the pools of data being the new oil? Reddit, Twitter, and Quora, I believe we're all used to train chat GPT. I believe all of those have now said, hey, Ixnay on the using us as a training data. So that stuff's going to have to be ripped out of GPT for. So based on what you know and we live through in terms of fair use of content, what do you think

the outcome is here in terms of. who gets to scrape whose data and train their model on it? Yeah, it's a great question. I know you guys have talked about this a little bit already, but generative AI and copyright law and who's the real owner of IP, what happens when you mix these things? It's a really fascinating question. But I do think there's something to be said for having access to proprietary data

that lots of people care about. If Google is able to maintain the proprietary nature of, of YouTube data, of certainly your G-Drive data, your Gmail data, and help you have a personalized algorithm based on your private data, that's going to be really powerful in terms of an experience, right? But that, you know, it remains to be seen whether that personal experience is a compliment or a substitute for a broader search experience. But I do think that for some of the most interesting kind of areas for innovation and potentially for investment are how do you take the foundation models and combine them with proprietary information. What's the infrastructure

needed to do that? And then how do you make that accessible in a product experience that is differentiated because of that proprietary data? You know, I think that's where there's room for innovation. Yeah, this does seem like the big opportunity. You've got chat GPT, which is kind of like saying cloud computing, if we want to say an analogy or mobile operating systems. Then what do you do with it? Well, here's my data set. Here's the natural language model or here's stable diffusion, whatever it is, images. So here's my data.

Here's a model. And then here's some software interface to wrap those two things together. Does seem like a unique investment opportunity. Are you seeing any way to invest in the area? or do you think a lot of the, because of the pace that chat GPT is going and Bard is going at Google, that a lot of these ideas will just be subsumed into those motherships? Well, I think every enterprise of scale is going to want to be able to incorporate its proprietary data into these LLMs or foundation models, right? So there was an announcement of an investment in a company called Pine Cone that a lot of venture firms in the Valley competed over entries and netted up winning it, I believe.

And Pine Cone is a vector database that allows for the aggregation of all kinds of different information in the context of building these models. And that kind of infrastructure is going to be really powerful and helping bridge the gap between models trained on public data and proprietary data and leading and then combining those two to develop a proprietary model effectively. And so you can see that, you know, companies like Salesforce will want to have a proprietary model, right? And it sounds like they're working with OpenAL already and chat GPT to help build the foundations of Einstein, which is their AI platform. And every, you know, Disney is going to want its own foundation model, especially around generative AI and its IP, which is going to try to protect really.

hard. Can you imagine like kids going and being like, you know what, make yourself into a Jedi, tell a Jedi story, and then publish it to Disney Plus, and then they have a contest. Because they used to, you probably remember this in the YouTube days. I know you weren't at YouTube, but there were like these moments and times where fans started writing fiction on the internet. Then the fan fiction gave way to fan stories. And one of them was Lucas where people would dress up in robes and do lightsaber battles. And Lucas embraced it. Star Trek fought it. Paramount fought it. And to this day, you can see all kinds of creative stories that are getting, I would say, 70%, 80% of the quality of the Disney Star Wars collection. That gaps should close and you would be able to make your own Star Wars stories. It's already closing. I don't know if you've seen some of these short films that people have been making from these generative AI platforms, but they're incredible. There was a short AI film, a sci-fi AI film. I'm going to probably one you saw as well on Twitter that was trending as well.

Yeah, people are starting to make these short AI stories through AI, generative AI. It's crazy. Does this feel faster than any other technology revolution that we've lived through? Is this moving faster, or is it just, we were kind of bored and Web 3 was so, didn't deliver much product that we now are just enamored with this?

Or is this actually moving as fast as it feels? We were desperate for a new platform, for sure. But I think with the launch of ChatGPT3, the pace of innovation is unlike anything we've ever seen. We are certainly in an AI bubble, but it's also certainly true that there's going to be tremendous value created by virtue of AI. and the biggest challenge as investors is figuring out where is where is that value going to accrue? Certainly it's going to accrue in the foundation models, which ones are you know, TBD. Certainly open AI seems to have a leg up on a lot of other folks right now. But outside of the foundation models, you know, where is their value going to be captured?

And I think that's the question that every investor, whether they've been investing in AI for a while or new day I is asking. and trying to figure out. That's pretty wild. When you look at companies in this space, and you look at companies just in general in 2023, what's the market like today? Because you and I have a very similar trajectory. We worked on technology companies.

I had a little stint as a journalist, too. And then we started as capital allocators, literally as the cycle started. Okay, here we are. the cycle ended. Do you feel the cycle has restarted properly? And what would you qualitatively say life is like for a capital allocator in 23?

We're a couple of months in now, so I think we got enough data compared to when you started, which was probably 2010, 2009, 2011. You might remember, Jason, my first VC job was in 1997 when you're doing Silicon All right reporter. Oh, right. So, you know, this is my third cycle. Third cycle, for sure. Yeah.

So let's compare the start of this cycle and the start. Like 97's pretty close to the start of the doccom era. Let's go through these and compare what you're experiencing. Maybe work backwards. What's it like today? What was it like last time? Yeah. So today, I don't think we're in a cycle yet, honestly,

because outside of generative AI and maybe a couple of other areas, there's no investing happening. The seed market is as busy as ever. But if you're looking at Series A and later, again, outside of generative AI, there's either inside rounds or there's down rounds and recaps. There's nothing else happening.

So we certainly are not in another bubble or another up cycle yet. I think we're in a bare cycle for an extended period of time now. Certainly the implosion of SVB doesn't help things. No. So it feels very different.

So late stage is indigestion, working out all of this craziness. Resetting evaluations, resetting the expectations. How much long does that go on for the rest of the year? Easily. Easily. Easily the rest of this craziness. Okay, so two years of this craziness and then maybe even into 2024.

I expected to go well into 2024 at least because the other thing you're going to see is there's just not going to be a lot of liquidity. The IPO market is shut, feels like for this year. and then you'll start to see it open up next year. And then the question is, like, how do these companies trade? And if they trade in historical multiples, then there's still going to be a lot of cleanup that has to happen in the private markets before companies are in a position to earn a return for investors. What happens if the private companies, these ones that have these incredible series B, Cs, and Ds, the market opens up for IPOs, but the prices, for those private rounds in 2021 are not supported, and the companies are still underwater

four years later in 2024 and 2025, and they're still underwater. But they decide, hey, we're going to go public anyway. What happens to all that money? Those late rounds just convert and they get one times back? Yeah, and they hope that they accrue value and grow in the public markets, right? Got it. You know, Square is a perfect example of that. it went public at a price lower than its last private market valuation.

And then as a public company, until recently, it did really well. What a lot it had. Yeah. And I think that's what people are going to hope for. There's no question in my mind. I'm 100% sure that come 24, 25, there will be a lot of companies who still have not grown into their private market valuations from 21 and early 22. And so there will be companies that have to go public in order to generate some

liquidity and get access to capital, who will do it at prices lower than their prior round valuations. And those folks will not have a choice because the way the documents are done, they just get dragged along into the public market and they just take their 1X and that's it. And maybe they have a coupon. Could it also result in chaos on those boards? Are you on any of those boards where it could get chaotic? What's it like?

Yeah. And I think there's going to be a big divergence in points of view around the investors from the very latest stage and those who invested at the middle stage and those who invested at the early invested at the earliest stages, right? The economic incentives are completely different and their points of view around liquidity in the short term versus a long term are completely different. So there is going to be a divergence in cap table battles around how to approach some of these decisions. But founders in general have a lot of control in these situations because of how these rounds have been structured in the last few years.

And so they're going to have to pick sides in some of these battles. And it's going to lead to some hurt feelings and bad blood, absolutely. And certainly bad behavior, which we're already starting to see. The bad behavior is crazy. I mean, I'm already having this in my portfolio. Like just predatory rounds, people jumping the fence, blocking things. It's just, it's gnarly. And it's not fun.

It makes being a seed stage. investor a lot easier in these situations. I think you appreciate this, Jason, but for a lot of investors, this is their first down cycle. Yeah. So they don't know how to behave. They're still trying to build their track records. They're still trying to make a partner at their firms, and they're scared. Yeah.

That's, I mean, the bad behavior almost always roots itself in a lack of confidence in your career and the fear that your career is going to end because the returns are going to be so terrible. And it is, this is where people, it's easy to make fun of venture capitalists. It's an incredible job in the world to anoint winners and losers and to write checks and get this 20% carry on the upside. It's magical and it's easy to hate on it as well. But the truth is, you know, if you're a first or second time fund manager through the cycle, it could be over for you. Yeah, absolutely. And listen, this is, it's not bad behavior only on the

parts of new investors. There are plenty of people who are at established firms who've been in this business for a long time, who for different reasons, It can also act poorly, right? Because they're fighting still for their share of the management company at their venture fund or, you know, they have some kind of carry structure that has some deal-by-deal component. They are worried about an LP relationship that is on the rocks or unstable. There's all kinds of reasons that people can be scared or can lead. them to bad behavior, and it isn't limited to people who are relatively new to this business. We're seeing it kind of up and down the cap table and across firms.

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wanted to come into launch fund four. And did that make people like 10 times more interested? And I know you're not taking anybody's money. But how about I just give you some of my money? Yeah. I mean, it was interesting in that maybe not surprising there. Like no one's ever said that to us before.

Everyone wants to get bigger. So we had a whole bunch of questions to ask you because we thought you might want to get bigger. We don't have to know what to ask you if you want to get, you know, smaller and not take our money anymore. So, yeah, it was disappointment. And for us, it was disappointing as well, honestly, because we only had 10 LPs. We had been institutional from the very beginning.

And we've really enjoyed working with them. And they've been incredible supporters. So it was a hard conversation to have. We didn't surprise them. We've got to given them, you know, breadcrumbs over the course of time that it might go in this direction. But the good news is we've found ways to work with them since. We, you know, sometimes because we're stage agnostic now in many ways, we can do later stage checks and pull together SPVs and we rely on our LPs for that.

Have you done a couple of those so far? Yeah, we have. We've got a handful of those now. It is magical. Explain to the audience what's magical about the SPV process and what it does for you as a fund manager. Yeah. We never did it when we had LP capital. We didn't like the misalignment of incentives that it can create, especially when, you

You take money from people who aren't your LPs in the core funds or not all your LPs in the funds can invest in SPVs. But the idea behind a special purpose vehicle is a fund specific to a single investment. And the beauty of that is your returns are then tied to just that one investment rather than tied to returning an entire fund. We're generally speaking, you have to return all the capital in a fund before as an investor you earn the economics through carry. And so with a single investment fund, it's just that single company that determines whether you earn a return or not. And then, you know, the, and then the downside of that is every time you want to do an investment with an SPV, you have to raise capital again. So there's no pooled capital in advance that you can allocate. You have to herd a bunch of cats.

We've done 270 SPVs now. I think I've done more than anybody. And I actually literally started an SPV company because, I don't know if you heard a shore fund management went out of business. Yes, I saw that. So I hired, and I'll announce it here for the first time, the top three tax people over there, because it really is a tax issue at the core of this. Sure.

And I hired the top three tax people from ashore, or what I thought were the top three. My team thought were. And we started SPV Solutions.com. Year one is only our SPVs because we have a big group of these to manage. But maybe in year two, we'll let other people do it. But it's the absolute worst business to be in is managing other people's SPVs. But it's such a powerful thing because individuals, get to decide, I want to invest in this or I don't. So for somebody who's an active investor,

and then they get to decide how much they put in. And they can look at our investment from our fund as a proxy for that. And we typically do 250K, 500K, and people will say, oh, wait, you're putting 750K into this? You're putting only 100 into this. You're putting 250. Does that mean you have a certain amount of conviction? It's like, hmm, pretty much. Yeah. So congratulations, you've figured it out. When we put a little bit more money in, that means I might be a little more greedy. But I find SPVs are like almost the purest form of being a capital allocator because I have to write a deal memo. And then we have every founder do a webinar with our 11,000 syndicate members. And man, it's just, I will have people come to me, Sotia, and say, you wrote in your book or

you said on this episode or of your podcast, you know, this is stuff you don't invest in. And in the deal member, you're doing this. And you said, this is the proper valuation method. And you've totally thrown that out the window. And I'm like, yep, I have a curious. I have a book of your and I'm willing to throw some of them out when I get the vibe that I think that this should be the one. We say that all the time. It's important to have frameworks, but it's important to know when to break the frameworks as a venture investor, right? Yeah. You're always playing by the framework.

You're likely going to miss some incredible opportunities. Explain one of your frameworks. Do dueling mental model frameworks here? You give one and I'll give one. You give one and I'll give one. For a long time, one of ours has always been we don't invest in solo founders. and there's a reason that people don't invest in solo founders, but you break it sometimes. So explain why you have this heuristic, why you have this rule, and then when you break it.

The simple reason we have the heuristic is, one, it's incredibly hard to build a startup. We find it's much harder to do it when you're on your own and you don't have somebody sharing in the battle with you. generally speaking, companies at the early stages need to be able to build a product, distribute a product, and build a team that distributes and builds a product. It's very hard to find one person who has all those skills. And then founders also have to be incredible storytellers. And part of their job is to eventually recruit people to their company, sell to customers, sell to investors.

and if they can't get at least one other person bought in, then it feels like a harbinger of things to come. And so those are some of the reasons that we haven't invested or try not to invest in single founders. We break that rule. Yeah, you have to break the rule when you have somebody who is iconoclassic, somebody who is transcendent. And I have many times broken the rule.

And when I do, the reason I tell our team is, this person better be exceptional at hiring and inspiring legendary people. Because if they're a solo founder, they don't get the benefit of like, I'm the business head on the three-headed, you know, Munster. And they're the tech and they're the design. And we all come together as this, you know, incredible thing. The other one is just backing builders. So even when you have multiple founders, we have a rule. We back builders.

And I actually literally bought the domain name we backbuilders.com. And we really try to find people who know how to build product because at the early stage, what do you have to kind of figure it out? But then once in a while, we will find a team that's two people or even three, and there's no developer on it. But boy, they work together at Google, Envision, somewhere else. And yeah, they all worked in business development or marketing. And we just say, okay, screw it.

We're going to break that role. Yeah, we've done that too. I would think part of the skill set of building, as I said, kind of three legs of this tool of a company, one is building the product. Yeah. And so you want people who are technical or product people, but we've invested in non-technical teams. And especially in today's world, it's possible to get really far with a bunch of third-party

products that you assemble to build an initial version of a product and get it tested in market. So if the founding team is really deep in an area and knows it cold and has a vision of the world that really resonates, but they're not technical or they're not product people, you can still get excited about something. And so similarly, we've broken that rule before as well. Okay, what's another one that you broke? What's another heuristic? I love these ones related to the founders.

Yeah, I mean, probably one of our primary heuristics is we want to only invest in founders who've experienced the pain firsthand. So it's hard for us to invest in founders who are coming to a problem or a market area based on academic research or like having looked for a really good idea. idea. Yes. Which, by the way, it was Bezos, right? Like, so, you know, Bezos didn't suffer through not being able to buy books online.

He literally was like, this seems like something you could actually send in the mail because it's not that big. And it has a high profit margin. Like, he literally did an analysis to find that opportunity. Yeah, I think he was trying to decide between ties and books, right? Because ties were lighter and high value. And anyway, yeah, so that we have always said that we want people who have experienced the pain firsthand and really know the domain because they've lived in it. But we break that rule every once in a while because you come across a team that has done so much work to learn about an area

and have some functional expertise that is relevant, but maybe not the domain expertise, and have this incredible insight based on the work that they've done. And you have to write the check. They figured something out. They have some secret about the space that they figured out. and you know when you look at it Airbnb had no right a couple of designers from RISD to come in and reboot hospitality and if you got five amazing people

who were incredibly successful in the hotel business and put them together and gave them unlimited funding they could never have conceived of Airbnb it would have been that's right just they would have never accepted it

you know the other one I have is entry price matters and you know I'm like you know it's really important we have to have a reasonable entry price here and then it's like you know what this founder wants 15 million. They want 20 million. The product doesn't exist. It's just in their head.

But they've done it before. And they got the ban back together. Oh, fuck it. Here's a million bucks. There's a half million bucks. Yeah, we've got to be on this ride. And, you know, I will throw out the entry price matters rule if it doesn't. But you want to have that discipline about entry price, which is why I took off 2020 and 21.

I was spending a lot of time on the accelerator and our accelerator. and selling secondary shares in 2020 and 2021, to be honest. We have always believed that entry price and hence ownership matter, especially when you have a fund, it's all about the cheapest price you're ever going to get is the first time you buy. So price and ownership matter a lot. Airbnb leads us to a different example of a heuristic, which is we never think about market size. Right. Because if you had looked at Airbnb, you would have said, how many people want to stay on other people's couches? Yeah, that's a zero.

That's like a 1% market size. Right. And same with, I remember how many times I had the argument about Uber with different people who are like, well, the taxi industry is only so big. Right. Right. So our view is we don't think about is this market worth billions of dollars today. We think about is this market large, meaning is the pain felt by a lot of people?

Is the pain acute? Is it a hair on fire problem or kind of a top three problem for the people who are experiencing it and is it valuable? Can you extract some economic rent for addressing that pain over the course of time? And we've always found- To that one is frequency. How often do they have it, right? The pain. Yeah, that's a good proxy for it, right? And what we found is in our best companies, we've always underestimated the market size because the great founders are able to find a way to expand the market over the course of time. So as long as you start with something meaningful enough, people will find a way. And so that's a heuristic that we are thoughtful about and you need to need to do the right assessment around whether the pain is large, acute, and valuable.

Right. But on occasional, we'll break even that one. But, like, how do we define huge markets? Because the great founders induce a market to exist. What was the market for podcasts before podcasts exist? It's like, people trading, like, basement tapes of, you know, audio interviews. I'm sure they were. I'm sure there were underground interviews that, you know,

people traded tapes of. But, you know, and there was pirate radio, I guess, but how do you even size podcasting? Well, podcasting is so long tail that now there's a podcast on every topic, and it's kind of like NPR has a hundred shows or whatever. Okay,

that was just on the long tail, I mean, there's a hundred thousand after that. How do you even conceive of the fact that, and you had a great investment anchor actually, where you benefited from somebody, a little bit about that one. And I think that one had to be

a little bittersweet. Yeah, absolutely. For me. Yeah, absolutely. Explain. No, that's an example of a company that believed in the value of audio content, particularly relatively short form audio content to start.

And they wanted to build the platform for the creation, distribution, and monetization of that content. And they succeeded. And they, yeah, they succeeded. They sold to Spotify, as you know. And our view is, you know, that could have been an enormous business. But the founders need to decide what they want the next phase of the company to be.

And they decided they could have a bigger impact within the confines of Spotify. It's a great alpha come for everyone. So no complaints at all. But one complaint. There's still one complaint. Because if you have a business, you did a 15X on that probably. Yeah, more, I think. Yeah.

Yeah, because you were the first investors. Yeah, you were in the $12 million round. It sold. I heard for upwards of $200. I don't know if that number ever exactly came out, but at least $200, I think. And so the pain of that is that, well, what if it 10x from there? And instead of a 20x or a 30x, whatever, you could have a 2 or 300 X. But the thing about it, I'll say about that, Jason, is like it was never going to 10x, 20x, 30X if the founders weren't going to will it to that.

Just an independent company. That's true. if they had decided that they were better off in the confines of another company, that was the right outcome for that company. I think that is a very namaste way to be at peace with it. This is, I think, for me, one of the toughest things that I have to learn to deal with, which is, you know, sometimes founders take the quick win, and I understand it. I did it myself with Weblogs Inc when I sold it to AOL, and I needed to get that first win.

But back then you didn't have secondary. And I got to think Anchor could have just sold half their position and gone long, especially at that time and built a competitor. Oh, man, it just would have made me crazy. You know, in our business, it works both ways, right? Like, I'm sure you've heard that there are investors in Snapchat who wanted Snapchat to sell at a billion dollars. And, you know, Evan didn't. And you saw what it became. And the investors benefited from that, right?

So you never know. You never know. I guess that's true. You invested in Mercury. Congratulations on that. Thank you. But you invested later. That was a late stage investment for you.

Yeah, that was after we'd move to our personal capital. Let's go back to our little dueling banjos here. I have one. Yeah. We will never invest in an accounting nightmare or messy cap tables. Unless we will. So if this company is growing really well, and they gave 30% of their company to a dev shop that did $100,000 worth of work, like we normally will not engage that company unless I really love it.

And then I'll say, let me talk to the dev shop and explain to them why they should take $100,000 and 5% of the company so they don't screw up the cap table. There's a small slice of this and getting the 100Ks better than it being unfundable. So that's one for me. you fix the cap table before you get invested. Correct. I use our bank roll and I say to the founder, listen, we can't in good conscience. You know, this cap table is so screwed up.

You guys have 40% of the company. You gave a seat investor 30%. You gave the dev shop 30%. You don't have control of your own company and you just got to 25K a month in revenue. There's no VC who's ever going to invest in this. We have to clean it up now. So I'll put in 500K. 250 can go to buy out these existing investors.

they can still have skin in the game. They get an amazing return. And then you guys get back up to 70% ownership. The investor's own 25% in this Fakaka maniac dev shop that you gave the company to gets 5%. Yeah. But I'm assuming if you aren't able to clean up the cap table and that way, you're not going to invest. I totally agree.

Messy cap tables, messy accounting. Just life's too short. I mean, I have these accounting situations where people are doing cash-based accounting for a subscription product where they sell two-year subscriptions. And I'm like, not only is this a problem because we don't know if the plane's at 30,000 feet or 3,000, and we don't know if our speed is 600 miles an hour or 100, and this is dangerous to fly a play like that. We can have tax issues.

You can get hit with the tax bill that we don't expect. And this could be a year of cleaning stuff up. There are other heuristics that you look at. We did Tam. We did the founders, multi-co founders. We did cap tables. What else when you go to invest? You say, you know, we can't do that anymore.

We can never do that. But then maybe we'll break the rule. Yeah. Are there categories you'll never touch? Like I've gotten my ass kicked in direct to consumer and hardware. Those are hard. No, we've always said that too, but we've made exceptions in those areas. And, you know, sometimes that works out, all right, you know, cruise, which we were early in at camera.

Hardware. Hardware. Hardware. Started as a hardware. aftermarket kit, right? It turned out just fine. That was a quick flip for you, was it not? Yeah, it was two years, I think, something like that.

Isn't that weird when that happens? You invest in something two years later? You just get this, you know, 5, 10, 20X? Yeah, it's crazy. Crazy. And you're sending money to your LPs early and they're like, what happened? And you're like, you know how we told you it's 10 years? It's like, we got lucky.

Sometimes weird stuff. I had this happen was a great podcasting app called Swell. Just love the interface of it. I put a quarter million or a half million dollars into it. And I just was like, oh, this is the one. Like I love podcast. This is 10 years ago. I don't know, nine, 10 years ago.

And then Apple's like, you know what? Podcasting's important. We'll buy that company. And I was like, oh, no, no, no, no, don't sell. And they're like, yeah, we're doubling your money. Good news. Doubling your money. Like your situation.

Right. And I was like, that's the worst thing I could ever hear is double. It's interesting. I don't know if you've experienced this, but our very best companies, almost to a T, have all almost gone out of business several times in each of their paths. 100%. If you're not almost going out of business, you're not audacious enough in all likelihood to be an outlier.

So Uber existential moments, Tesla existential moments, Airbnb, they had the crucible moment when the person trashed the apartment and they had it later in their life with COVID. I mean, these companies have so many existential moments. that you have to deal with. In terms of psychology, what have you learned about founder psychology? Have we started to have, we're talking about our mental models, things will never do, the heuristics. We like to think about thinking as investors, but let's just go to archetypes of founders. A lot of people want to believe there's one type of founder. And I do have this archetype and this heuristic. We're not going to invest in abrasive people who are just cantankerous and just brutal to

deal with unless they're incredibly high performing. You know, and it's like high performer, if you do the four quadrants, like high performer, low performer, easy to get along with, difficult to get along with. Don Valentine did this quadrant famously. And he was like, where do you think we make our money? And it's like, high performer, hard to get along with. It's almost always the case. Where are the archetypes that you found and the ones you love working with and the ones that

maybe founders can learn from that this type of founder fails often or more often. So another heuristic we have is that we'll never invest in a round that doesn't have a lead investor. When we were a fund, we were often that leader co lead investor and now we are less often. And the reason for that is we believe that if there's a responsible party as lead investor, then we know that somebody is paying attention and just as importantly, also know that there's somebody that the founder feels responsible to outside of the company. And if they're willing at the earliest stage when we typically invest to have that kind of obligation, responsibility, relationship, we think it says something about their perspective on company

building and on the time and energy it's going to take to build this company over the long term that is indicative of the kind of founder that we want it back and is likely to have the most success. So that's a heuristic that we've always had. I love that, by the way. And then to your four by four, or Don Valentine's four by four, our largest companies, chime, plaid, gustav. Shield, Bowery farming, I would say that all of those founders fall in the high intellect, high EQ box. None of them are in the cantankerous bucket. Now, it's hard to know if that's selection bias or if it's something that has been a

predictor of success for them or what it is. but we haven't had the experience that you've had in terms of the cantankerous folks who've knocked it out of the park. I've had vote. There are some people who are just incredible, high EQ, want to make everybody feel great, soft power individuals. But man, I kind of think when we look back on this founder-friendly, and I'm using air quotes right now, moment in time, there has never been a more duplicitous, deceptive, dishonest double-dealing term in the history of our industry. Absolutely.

What people say is founder-friendly is just actually giving the worst support to a founder-to-a-founder. It's a lack of support. It's a lack of support is what's defined as founder-friendly. No lead investor. Do a party round so nobody's in charge. So nobody cares that you're running out of money. Don't do board meetings. Don't give information rights.

Don't share information with people who have more experience than you, who have backed you, and have the bankroll to give you more money and create an adversarial relationship. And this did start a little bit inside of YC where there was a sort of like, I know Paul Graham had bad experiences. And those bad experiences are real. He had bad experiences with VCs. But for every bad experiences, I think there's a hundred other great experiences. And then to, I think it just, it kind of got away with itself, which was, if I can get 50 investors for 50K each, I'll do that. Why have somebody put in a million and then say we have to have four board meetings a year or have to write a monthly update?

Jason, when we started Homebrew, we wrote early on a blog post around the value of boards at the seed stage. We said from the very beginning that if you take a check from Homebrew and we're the leader, co-lead investor, there will be a board created. It will likely be the board member. You can choose for somebody else from the investor syndicate, but there will be a board created. And so many people, founders less so, but investors told us you'll never win an investment. Like, nobody's ever going to want to work with you. And, you know, 10 years later, not only do the results prove them wrong, but I think we feel vindicated by some of the things that have happened at these companies that have had no oversight over the last few years, right?

where you're seeing fraud or misrepresentation or excessive spending without limit or bad hiring or whatever it is, right? Again, it comes back to that heuristic that we talked about, which is if a founder is unwilling to have a lead investor, let alone a board seat, but a lead investor at the seed stage, then we think that, yeah, that's an investment we're not likely to make. What is the, and you advocate four, six a year at that early seed stage? What, I advocate? One hour of board meeting. Yeah. How many? Oh, yeah.

Usually an hour, probably an hour and a half board meeting four times a year. So like literally the ask and the recommendation is 90 minutes times four. Not a math genius, but it's about six hours. And if you say it's going to take 10 hours to prepare for each board meeting, which I think would be a lot at this stage. I mean, we're talking. about 46 hours, one week of the year, is spent being thoughtful and considering what we've accomplished in the past three months, what we want to accomplish in the next three months, and talking it out as adults in a room who have a vested interest in seeing this succeed,

and making sure that risk of ruined things like insurance and cap tables, accounting, HR, are not forgotten because a lot of founders have never done that stuff before. So think about all the unnecessary mortality in our space. It's literally like infant mortality. Like we could just have an incubator here and just some basic rules of the road. And I'm amazed. I get into these seed stage board meets. We copied you.

We did the same exact thing. Hey, if we own five or 10 percent, let's just four board meetings a year. We tell them one hour to 90 minutes each, same exact as you. And it could just be product. We could do product at one. We can do HR at one. We could just have a theme or you can do quickly product, HR. you know, challenges, whatever you want to do.

And my God, the amount of times that we have saved a company from flipping the car, it's countless. It's countless. I mean, I think all the companies that we worked with would tell you, even if they're hesitant going in, like it proved to be valuable. Because all it is is a 90-minute step back from the day-to-day of the business once every three months to focus on one or two strategic topics that you probably won't make time for otherwise because you're dealing with all the crap that you deal with in the day to day of the business

and having a couple of other people to help provide perspective on those topics. Like who wouldn't want that? It literally like if I said, hey, you could buy this service for $10,000 a year. The same, if you had 100 people and you said, hey, $10,000 a year, you could buy this quarterly, you know, coaching session. or you could have it for free. Like people would pay the $10,000 for that. So, I mean, it's hilarious.

To your point, I think, like, all this rumor and anger and whatever it was got wrapped up around this notion of what a board and a board member is. And it's, and the work to dispel it is really hard. It is. But I think it's becoming. and clear to a lot of people. And to your point, like, for every one bad example, there are so many good examples, which is why I was kind of never a question for years around the creation of a board

and the idea of having active investors. And then we got into party rounds. And then in the last 10 years, kind of boards with no board, companies with no boards. Or yeah, I mean, look at FTX. Who was on the board of FTX? I mean, who was on the conference? Compensation Committee. Who was on the Audit Committee? Like, compensation committee and audit committee, they come, I don't know what, Series B, Series C, $10, $20 million in revenue. There was a company with billions of dollars sloshing around and by all means and all observations, we'll find out or we'll come out in the lawsuit and the criminal trials. No comp committee? No audit committee? I mean, this is just a dereliction of duty at the highest level. Well, it just goes to show that no matter how long you've been in this business, like, you can fall into making mistakes because you're

trying to get involved with a particular founder or a particular company, right? Like, there, there were obviously high quality investors in FTX, who, uh, FTX is an anomaly relative to how they probably do oversight and management of other companies that are involved with. Um, but that's the world we were living in the last 10 years, right? In many ways, the, the price of winning was to commit a number of unnatural acts. And unfortunately, some of those unnatural acts are going to lead to pain. And suffering. It literally is going to, it is the root of all this evil.

And we found, and you could tell me of the tractures, that when we told people, hey, we're on the board of the company. And we've done six board meetings. And when they did their diligence for the series A or B, whatever it was, the next round, and they were able to see the board decks or see the projections, the company. the companies in the seed stage were at a massive advantage, had a massive advantage over the non-board meeting ones because they felt more venture-ready and they felt like they would

be better stewards of capital. So what did you see? 100%. It was one of the arguments we made in that very first blog post is like, we think it'll be a signal to the next set of investors that this company is venture ready. It's great practice for the founders to be able to do kind of low pressure board meetings before the big check comes from a series A investor who's going to be on the board forever probably. So like just having that practice and that muscle memory around what a board meeting feels

like is really beneficial to founders. So there are lots of reasons why in reality there's value in having a board at the seed stage and lots of reasons that are made up around why it's not a good idea. Yeah, we basically made it super simple because we are high. volume investors. We have the accelerator. We do seven companies in each one. We've done 28 of those. And then we started something founding university where we do 25K into companies that aren't even incorporated yet. So we'll give them the 25K to like incorporate and get going. We have a large number of names. And what we tell them is, if we own over 5 or 10 percent, we've changed it over the

years, we'll have a board observer seat or a board seat option. We'll have the option at that. And then when we've been trying to automate people giving us their revenue. So we asked them to do a monthly update, very short, you know, like literally one pager. But if we don't get that, we'll just say, hey, can you just give us cash on hand at the end of the month, number of full-time employees, how much revenue and how much spend? And then we'll do some math there. And when we did that, we just said, anybody who hits $500,000 in yearly revenue. So you hit that $40K a month mark, we just say, you know what, we would like to elect to start these board meetings. And can we set four dates for next year. And people like, did I do something wrong? Am I in trouble?

It's quite the opposite. You've been watching you, young Jedi. And the force is strong. And at 500K in revenue, pretty good idea to have a board. Like, I think three million in funds raised or 500K in yearly revenue, you should want to have a board. You're a real concern now. You're a real business. Hey, let's talk about diversity. Yeah, sure. No, no, I was just going to say we approached it also a little bit in terms of helping lead the horse to water. Because in addition to the board seat and the board meeting, what we said aside from the board meeting, we should have some regular cadence by which we talk about the actual stuff going on day to day in the business. And so, you know, we think that should be weekly or biweekly. But you tell us like what's useful for you.

And because we were having that very tactical conversation with people in advance of the first time we do a board meeting. By the time the board meeting comes around the first one, it feels like a very natural conversation to go from like the day-to-day tactical and say, hey, like, we're thinking about the long term of the business. Why don't we have a conversation about that? And it turns out that's a board meeting, right? It just happens to be a working session that's a little bit longer than the regular touch base and focus on a different type of issue than the hair on fire problem that you're dealing with, you know, in any particular day or a week. and so by the time that the board meeting came around,

everyone was like, oh, this feels like what I might do with people on my team inside the company. And now we're just happen to have an investor here. And it kind of sold itself over the course of time. So we never had to convince anybody like now is the time for a board meeting or we should do a board meeting. It was just kind of the natural progression of things. And again, I'm definitely not going to argue where the world's best board members or anything like that. But I think it's an important sign that, you know, I'm on a bunch of boards now. What we said, the other commitment we made to the companies when we made the investment

to C is like, we'll stay, we want a board seat, but we'll step off your board at the series B. Because when you have a series A and series B investor on the board, you really don't want three VCs on your board. And we've been working with you long enough where we'll have a longstanding relationship with you. Turns out, there's a surprise to us, you know, more than a. half the boards I'm on now, either in a formal board seat or as a board observer, our post-series B.

Of course, that you did a good job, but they want to keep you around. Why wouldn't you want to keep somebody who supported you early around? It's good for the spirit of the company. It's good to have, you know, somebody who knows the entire history. I'm on two boards that became unicorns, and both of them, we were the lead seed investor, and, well, one of them were the lead seed investor, density. We put the first 400K in. and the second one grin, we incubated.

And in both those cases, I've been on the board, and I could have stepped off, I guess, and let the other Series B investors, Series C investors, you know, and I get a free ride. But I'm like, I just want to be there with the founders when they ring the bell at the NASDAQ. You know, I just, I want to have that journey. Yeah, it just speaks to like the vast majority of board interactions are good. And I think most founders with those board interactions find real value. Hey, the industry wasn't, I'll wrap on this, because you've been very generous with your time. Screen door, you started, I guess, this program to help maybe change the face of VC a little when you and I came into it.

Let's face it, it was a lot of Stanford MBAs, Harvard MBAs, Wharton. It was a pretty clubby. Yeah, even just when we started. Yeah. I think they look mostly like me and sometimes like you. I think you would, you're Indian, I take it. Yes. Yeah, I wasn't sure.

So if you're Indian, like, I think that was kind of the first, uh, underrepresented group to maybe be allowed into the, the club, typically white male space. Congratulations. But black women, Hispanic women, people of color generally. And it's been, it was pretty, pretty sad. Yeah. Um, you've tried to turn that around. Tell everybody about screendoor partners.com is the domain name, and screen door is the name of this effort.

Tell everybody what you're trying to do here. Yeah. So to your point, kind of where VC dollars go, who makes VC dollar decisions is still unfortunately largely unchanged from when the industry started and certainly doesn't reflect the population more generally. when we started home brew, we decided very early on that it was never going to be larger than the two of us. And so we didn't have the option of building a firm and kind of changing the nature of the industry by hiring a bunch of people. And at the same time, as we were building homebrew, kind of as we matured, we were being approached by new GPs every single month, every single week. and a lot of them came from underrepresented background, maybe surprisingly, people trying to break into the industry.

And the number one thing we heard from them was, well, there's no shortage of advice for us, but there's absolutely no money. Thanks for the meeting. Yeah. Would have preferred a check. Exactly. Thanks for all the praise, but still need a check.

That's right. And then Hunter and I are big believers that, you know, we're all standing on the shoulders. of giants in technology, right? Everything in technology was built on the backs of somebody else who came before us and a back of technology that came before us. And we've benefited from this virtuous cycle that's existed in technology and VC with LPs providing capital to VCs, VCs providing that capital founders, founders,

hiring employees, those companies going on to be successful in that wealth and that knowledge feeding back into the ecosystem. But that virtuous cycle has only been accessible. to small segments of the population, folks who primarily look like me and you. And so we took all these data points and we said, well, there seems like a real opportunity here to build a product. We come from product background, so we try to identify white space to build a product that maybe doesn't try to bring people into the existing virtuous cycle because that seems

slow and difficult to scale, right? Like the big platforms hiring their one underrepresented partner and giving them a check. improving themselves over the course of time, etc. That's a decade long, weight in line. Yeah. It's a multi-decade wait in line. And we saw what happened, you know, at Kleiner Perkins with that, without pointing fault at anybody.

They tried their best to try to, you know, diversify the firm. It didn't work out. And listen, there are lots of good efforts underway because that is important change still, but we just want to try something different. We say, well, what if we tried to recreate the virtuous cycle? what if we try to make it possible that the people who are in this virtuous cycle from day one are people who come from underrepresented backgrounds? And so we looked at that cycle and said, well, the right entry point or the right way to kickstart it might be to put underrepresented venture managers into business because they're empirically more likely to back underrepresented founders or more likely to hire underrepresented employees. And if those companies become successful, then that success is going to yield more dollars and more advice for people who look like the other people in that virtuous cycle.

So we started- Disruptive. Much more money. So that's our theory of change with Screen Door is a lot more people can be impacted a lot more quickly if we, as Screen Door, which is effectively a fund of funds, helps put underrepresented venture managers into business. So we try to find underrepresented managers who are raising their first funds, provide them with anchor institutional capital, combined with advice from GPs who are still practitioners, but who have been in their seat before, but are now on their third, fourth, fifth funds. So people like Charles Hudson at precursor, Kanye McAbella, Kindred Ventures, Kirsten Greene, Four Runner. These are people who are spending real time advising our managers and helping with the diligence of them. And we started that fund of funds a couple of years ago.

We've backed 11 managers so far. We just hired a full-time managing director. We have big plans for what screen door can be over the course of time. But the high-level objective is to be the leading LP for underrepresented managers in the venture business with the idea of changing not just the face of venture capital, but the face of technology by virtue of empowering underrepresented DCs.

It's amazing. So every time you meet a new fund manager or a GP, somebody wants to break into this, you will do an SPV or something and pass the hat or just pass the hat amongst you and everybody just makes a commitment.

No, no, we have raised funds from traditional institutions. So our LPs are, our LPs are Princeton's, Harvard, Northwestern, Duke, Virginia, major endowments, a certain number of family foundations, who for them, we're solving a real problem too because their institutions are so large that they can't write small

checks. Most of these funds are smaller than $100 million, right, as first-time funds. Yeah, $10, $20, $30 million funds. Yeah. It's hard for them to these institutes to evaluate managers who don't come from traditional backgrounds, right? The traditional path has been to apprentice at a big platform and spin out and start a fund, right? And these people don't come from those backgrounds for the most part and don't have traditional investment track records. And so they have given us capital to help them identify and train these managers so that they can support them directly as their funds mature and become larger. And so we're solving a problem we think for both sides of the market.

It's really commendable. I think it's exactly the right strategy. Waiting in line is bull-h-it. It takes too long. you get marginalized inside of these firms from what I've seen. Often they're not given check writing ability. And then you're spending all this time. And I hate to use the term, but I feel like a lot of firms,

it's like token handouts where they'll put people into positions and call them a partner, but they're not even meeting with founders or writing checks. So I feel like this is the clear path. And actually we are also LPs, I should say, I am an LP in most. unique cake ventures. It's great to see that.

We support her. Exactly. Yeah. I mean, our view is that we are an economic vehicle with a societal mandate and we intend to deliver outsized returns via these managers and demonstrate to people like there's a untapped, unrealized economic opportunity here and we want others to follow suit hopefully. Yeah.

I also think like these managers, because this opportunity is so hard fought, like I feel in a certain way it was very hard for me to break into this. that I just feel, and might be my own imposter syndrome, even at this era, I feel like I got to work twice as hard because I didn't go to Stanford or whatever. I mean, now, and I do have a lot of those folks want to come work for me, so that's kind of rewarding. What did you think of the whole Silicon Valley Bank thing and sort of what's happened since? It was probably the biggest self-inflicted wound that any institution has ever delivered to itself. Unbelievable, right? I mean, the stuff that's come out since, we're sitting here, and now they're saying, like, they knew,

the risk they were taking. There were alarm bells going off. I don't know if we saw the Washington Post story yesterday, but apparently this was kind of a known problem inside the firm, and they were aggressively trying to just make returns to make the stock pop. And I think we'll find out in the post-mortem that. I also, but I think it was a communication misstep as much as a risk misstep, right? The risk is real, like that happened in the past, but like, and they got to a certain

point, but if they had done the private placement or the public fund in private, announced it when it was already done. Yes. And communicated strength to the market, you know, in theory could have prevented a run. Because a run is just a lack of confidence, right? Right. But you can't blame anybody who has, you know, payroll to hit on Monday from saying, you know what, I've got a million dollars or two million dollars here and my payroll is 300 or

whatever. I got no choice. And it's a shame because there's a reason people worked with SVB that are not about it being like the clubby Silicon Valley Bank, right? Like we had to move, we were Silicon Valley Bank customers as a fund. We've had to move our banking temporarily to another institution. We've subsequently moved a bank back to Silicon Valley Bank. and the other bank, Silicon Valley Bridge Bank? Yeah, right. What is it going to be?

What is it going to be now? Is the Silicon Valley brand going to still exist? No, it's been acquired by the other bank and so it's their brand now. But are the thing I'm trying to figure out is are they going to keep that high touch culture? Or are they just acquiring it and they're just like, hey, well, here's our standard offering. Remains to be seen. I don't know. But like simple things like our temporarily new bank.

they can't do batch wire processing, which as a fund, if you're trying to make a distribution to your LPs, as an example, makes it impossible, right? Yeah, there's a huge list of wires

we need to get done, get to work. And then on a more personal note, like my first mortgage was through Silicon Valley Bank because nobody understood the value of equity or understood a K-1 and I didn't have a W-2. Right.

They were the only one, You could underwrite that risk. Right. So, both from a personal standpoint and professional standpoint, there are lots of reasons to work with SVB, and it's going to be a major gap in the market if nobody can fill those shoes or they can't continue to operate the way they operate. Yeah. My first two mortgages came from Silicon Valley Bank for my office space and then for my first house.

I still have one of those. I sell the office space one, although I'm selling the office space because San Francisco. We still live in the house that we bought with Silicon Valley Bank mortgage. I'm getting barbecued online on Twitter. People took a clip of me saying how delightful it was to work with them. And I'm like, yeah, they came over. They popped bottles of wine. That's a liability I have with them, not the other way around.

I'm not short the stock, long the stock. I have like the tiniest of mortgages, but that's their liability, not mine. And they did such a wonderful job of, like you're saying, assessing a VC's net worth and future revenue streams and saying, okay, yeah, it's reasonable that this VC, their revenue is spiky, K-1s come in. Ooh, Uber distribution. Oh, Robin Hood distribution.

Oh, no distribution for two years. Oh, huge distribution this year. Like, it's a different lifestyle. And they, uh, they were. And this was early in my VC career when all my value was in Google stock, right? Yeah. Like they understood how to look at Google stock and no other bank would even consider it. No, they would just be like, what?

How do we do that? Yeah. It's sad to see it happen and completely unnecessary. Or listen, Sotcha. Great to have you on the program. I will see you next year. booking it for next year. If you make it, you make it. If it takes me another two or three years, that's okay too. But we'll do a portfolio review next time. Thanks for giving me the opportunity.

Always fun to chat with you, Jason. It's great to chat. And thank you for sharing all this information. And just if you want to have one of the great legendary investors now in their second decade, with their own money, their own skin in the game, I give no higher recommendation than the team at homebrew. They are in it for the right reasons. They don't need to work. They're already done well for themselves. They do it because you love it. You have a passion for startups and That's how we want to spend our days. And that's as great as it gets. You know, when you have an investor who is that passionate, it means they're focused on your success.

So you want to pick your investors wisely. And one of the wisest decisions you can make, I mean this sincerely, is homebrew. Great job. I really appreciate it. All right. We'll see everybody next time on this week in service. Bye-bye.