This Week in Startups - The New Power Law & How I Built a $100B Portfolio | E2007

Episode Date: September 11, 2024

This Week in Startups is brought to you by… .Tech Domains. Don’t miss our “Jam with JCal” contest! To apply and get more details go to jamwithjcal.tech brought to you by .tech domains. Fidelity Private Shares. Manage your cap table and data room, get faster, more accurate 409A valuation and fully automate your next financing round. Visit https://www.fidelityprivateshares.com/ Mention our podcast and receive 20% off your first-year paid subscription. Oracle. Oracle Cloud Infrastructure, or OCI, is a single platform for your infrastructure, database, application development, and AI needs. Save up to 50% on your cloud bill at https://www.oracle.com/twist * Timestamps: (0:00) Jason joins Pejman Nozad and Jason Shuman at the Liquidity Summit 2024. (3:25) Pejman Nozad’s “How I Built a $100B Portfolio” (10:42) .Tech Domains. Don’t miss our “Jam with JCal” contest! To apply and get more details go to https://jamwithjcal.tech/ (21:34) Fidelity Private Shares. Visit https://www.fidelityprivateshares.com/ Mention our podcast and receive 20% off your first-year paid subscription. (23:50) Jason joins Pejman for a fireside chat. (36:33) Oracle. Save up to 50% on your cloud bill at https://www.oracle.com/twist (38:02) Jason Shuman’s “The New Power Law: Good vs Great Funds”: Subscribe to the TWiST newsletter: https://www.ticker.thisweekinstartups.com * Subscribe to This Week in Startups on Apple: https://rb.gy/v19fcp * Check out Pear: https://pear.vc/ Check out Primary: https://www.primary.vc/ * Follow Pejman Nozad: X: https://x.com/pejmannozad LinkedIn: https://www.linkedin.com/in/pejman/ * Follow Jason Shuman: X: https://x.com/JasonrShuman LinkedIn: https://www.linkedin.com/in/jasonshuman/ * Follow Jason: X: https://twitter.com/Jason LinkedIn: https://www.linkedin.com/in/jasoncalacanis * Thank you to our partners: (10:42) .Tech Domains. Don’t miss our “Jam with JCal” contest! To apply and get more details go to https://jamwithjcal.tech/ (21:34) Fidelity Private Shares. Visit ****https://www.fidelityprivateshares.com/ Mention our podcast and receive 20% off your first-year paid subscription. (36:33) Oracle. Save up to 50% on your cloud bill at https://www.oracle.com/twist * Great 2023 interviews: Steve Huffman, Brian Chesky, Aaron Levie, Sophia Amoruso, Reid Hoffman, Frank Slootman, Billy McFarland * Check out Jason’s suite of newsletters: https://substack.com/@calacanis * Follow TWiST: Substack: https://twistartups.substack.com Twitter: https://twitter.com/TWiStartups YouTube: https://www.youtube.com/thisweekin Instagram: https://www.instagram.com/thisweekinstartups TikTok: https://www.tiktok.com/@thisweekinstartups * Subscribe to the Founder University Podcast: https://www.founder.university/podcast

I actually think this is one of the biggest mistake people when start this business as an engine investor or venture capital do. They're not thinking enough about sourcing. Founders have a lot of choices. How do you make sure you see the best founders before anybody else? So we've ramped up our incubation strategy and we're incubating now about a third of our fund. So what that does is it enables the sector specialists to take that network and take markets that they like and themes that they want to back. And they can incubate a company with a founder and an operator that's proven. You know, when you do actually specialize and you do focus, the customer is the one that benefits. This week in startups is brought to you by Fidelity Private Shares. Manage your cap table and data room.

Get faster, more accurate 409A valuation and fully automate your next financing round. Visit FidelityPrivate shares.com. Mention our podcasts and receive 20% off your first year paid subscription. Dot Tech domains. Don't miss our jam with JCal contest. To apply and get more details, go to Jam WithjCal. Tech, brought to you by dot tech domains. And Oracle. Oracle Cloud Infrastructure, or OCI, is a single platform for your infrastructure, database, application development, and AI needs. Save up to 50% on your cloud bill at oracle.com slash twist.

I met our next speaker because we were both sort of in the orbit of Sequoia Capital. I had been a founder and he had sold a rug to one of the partners there. He went on to raise hundreds of millions of dollars for his funds and is one of the most thoughtful, hardworking individuals I've met at the seat stage. And I judge everybody like very, very harshly. Starting with myself, then my team, and then people I meet. And, you know, I just watched Peshman from the moment I met him, when Sequoia was recognizing his non-traditional path into venture.

And then I just watched him do the work. Yeah, just people love Pesma. And I do too. It's just a great force of nature in the industry. So we welcome my friend Pesma. It's going to talk about his incredible success over the last decade. And his lessons. Thank you very much.

Good morning, everyone. I actually was thinking to bring a gift for Jason for what he did. does and you can see it. And I couldn't find out what to bring that is appropriate. And my wife just came back from a trip to Iran. And she brought this pretty incredible cookies made in Iran that it's going for tens of hundreds of years in Iran. And I thought what is more appropriate that Iranian Muslim immigrant me coming to America, being a venture capitalist, give this gift to an American boy raised in New York with parents from background in Greek and Irish, that he truly dedicates his life, his family, everything to this ecosystem, helping

founders, LPs, GPs, angel investor to really make a dent in the world. But at the end of the day, I think if you cannot come to this, that technology giving us the opportunity to make an impact, I think we have not done our job. But Jason has already done it. So Jason is for you. Thank you so much. My name is Peshman Nozad. I'm the co-founder of Managing Partner-Opeer.

We see we are in Pre-Seed and Seed and Seascialists. That's the only thing we do every day. We are a team of 26 people. My partner and I, we started the pair in 2013. We raised $432 million two years ago in the worst time of the history. This is perhaps the biggest dedicated pre-seed and seed and seed fund in the world by non and multi-stage firm. Mara and now we know we started for 23 years.

I actually funded her husband's company the year two her company in 2003 and I chased her for four years. Finally, I convinced her to start this fund with me in our first office with Coupa Cafe on University Avenue. You're kind of Ying and Yang. I'm a college dropout. She's a Stanford PhD. She started three companies, sold all three of them successfully. I actually, funny enough, I never worked for a tech company. She has 14 patents. I have zero patents, but I have a lot of scars on my body as an angel investor. I'll tell you the story. And this is a topic of the talk. I historically was very fortunate, lucky to be the earliest investor in the companies that are worth over $100 billion. And depends on the public market,

this goes up and down. This is the one that we at pair are very proud of it. If you look at every sector, we have been seeded investor in really truly category defining companies. And in each one of them, we were either the first check or among the first few investors in the company. and many of them didn't have a product when we invested. But my journey didn't start there. This is me when I was homeless in 1992 when I came from Iran. And this is I was sleeping in an attic above a yogurt shop. And I'll tell you the story.

So I grew up in Iran. I was 10 years old when the revolution happened. And then 12 years old when the war happened. So my teenager life was just going to school, come home, do homework, go play soccer, and then wait for Iraqi jets or missiles to bomb our city. So it was a tough teenager life. It was a very good students, but I was a better soccer player. I played professional soccer.

Then I hosted Iran's most popular radio sports talk show. I went to university, a top university in Iran, and I dropped, and I decided to go to Germany where my parents lived before me. I got a great scholarship to play soccer in Germany, but four or five weeks into it, my brother pushed me to go to the U.S. Embassy, and for no reason, I went there. and luckily I got a visa.

So I came in 1992 with no plan. Typically, you come to this country. You go to school or you come do something. But for me was kind of crazy to leave the life in Germany, come here. I only had $700 and I didn't speak one word English. But I actually, the biggest challenge was I was in love with the girl back home in Iran and I thought I'm going to lose her. So I called her every day from payphone.

And 1992, there was no WhatsApp. I have. There was no internet phones. It was like $3,4 for a minute. So I remember I got this bag of quarter every day going to pay a phone. So the money was gone. I bought a 1973 Chevy for five payments of $150. And I drove every day for an hour and a half and washed cars in San Jose came back. So my first job in America was washing cars. But at rest assured you, I was the best car washer the world has ever seen. My English improved, I ran out of money and I got this job and I begged the owner of the yogurt shop to let me sleep in attic. This is truly an attic. Imagine you live above this, no windows, waking up every morning 5 a.m. to 5 p.m. and then go to college, come back.

It was emotionally hard because I could have taken a flight, go back to Germany, but something was telling me you can keep going. Something magic happened. One of the nights over there, I saw an advertising for the rug gallery in downtown Palo Alto. I called. They rejected me. I insisted that they should meet me. The next day I got the the job and I started to sell Persian rugs right on University Avenue. And this is me. And again, I sold rugs like no one else. I remember one year, a couple of years in a row, I sell two million dollars worth up rug. Most of our companies will die before they get the $2 million there are. So, and most Persian rugs, you come, Jason comes and say, Paisemone, I bought a home

in Hillsborough and I'm looking for a rug from my dining room. So, So Jason and I will look at rocks together, and ultimately I bring 10, 20 rocks to Jason's home. When you go to Jason's home, obviously you start to talk for an hour, hour and a half. Six, seven years into selling a lot of rugs, I realize all of my customers are top-inchie capitalist founders, people who cannot meet them, even if you're a VC world or even in a tech world, but I had barbecue with them with Doug Leone, John Doer, Jason. I actually sold rugs to Niels. Nils is here, so you can be many, years ago in Portola Valley 20 some years ago. And I was in awe. Obviously, there were wealthy

people, but when I, I always thought businesses is, you make this and you sell it. I never knew you can build massive companies, create jobs, create wealth based on knowledge. And I decided I want to be one of them. So I started to ask a lot of questions from people like Jason and Doug Leone and John Doer of the World. And then I thought this is an opportunity for me to be part of this amazing community. I knew it's like playing an NBA and I won't be LeBron James, but I can be the best agent in the league. So I convinced the owner of the Rock Gallery to partner with me and we started to invest in late 90s as a kind of engine investing. And we made terrible investments. We didn't know what the heck we are doing. And when I kept going, I paid a lot of

attention to great founders. And I learned a business one by one and I was very lucky to be investor in some of the most iconic tech companies, including this one. This is me, Sir Michael Moritz. He's maybe one of the best venture cafes of all time. And that's R. Ashford-Dossey, the co-founder of Dropbox. Dropbox was two people. This is an apartment. I took Mike Morris one morning, Saturday, and we made an investment, me and Sequoia and Dropbox and Monday night. So I have seen a lot of gifted people build massive companies, but I've seen a lot of gifted people fail. So I've seen companies in their apartment all the way to IPU. I can see I'm more excited than the two co-founders here.

So this is the Robux IPO. But I share this photo because of the possibility. I think we all talk about the power of what you can build, but this is the testament. Look at that kit. Arash was a college dropout at MIT, and they built this is a $10 billion IPO. So they built a $10 billion companies, pretty remarkable. And obviously, this is what Jason mentioned, that even Forbes wrote on me. But listen, I learned one thing that I want to share with you, that in venture capital business or engine investor, you just need to make one or two good decisions.

This is not a restaurant business that you have to serve every day. You have to be patient. You have to stick to that. If you can continuously doing it, you're a genius investor. Okay, founders, are you overwhelmed by cap table management? And are you up to your neck in all of this due diligence you have to do? Well, shouldn't managing your investors be easy? That's where Fidelity private shares can help. Because dealing with equity is confusing and fundraising shouldn't have to be your full-time job. And you've got to have a solution provider that you can rely on. With Fidelity private shares, you're going to easily be able to manage your cap table in your data room. You're going to get faster and more. accurate 409A valuations. You're going to be able to do sophisticated scenario modeling, which I'm telling you, a lot of founders don't focus on it, and they should. You want to know what that pro forma cap table looks like and, you know, do some scenarios. Hey, if we get bought for a hundred

million, a billion, what happens? And you're going to want to automate your next funding round. You want it to go smoothly and you want to come across as professional, all on one collaborative platform with awesome support. Fidelity even has an amazing startup community for access to exclusive events for founders and VCs. So, experience the difference that Fidelity can make by visiting FidelityPrivatechairs.com. Mention our podcast and you will receive 20% off your first year paid subscription. This is Bill Gurley. When he tweets or he talks, the whole venture capital community pauses and listen to him,

name one of his companies. What else? Here you go. No, no, no, I think everybody comes short, even the venture capital community. So one of the best investors of all time, he made a lot of great investments, but he made one really good decision, and he made history. And so whatever you do, be patient, consistent, stick to a strategy. I look around, and one of the best fund ever is Kleiner Perkins Fund in Genentech invested.

even that fund has only one company. I don't know the exact return, but it was a massive return. It's one of the best performing fund of all time is the fund that Kleiner Perkins had. I want to give you another example. Look at Netflix. So this is kind of the portfolio construction

of what we do, but Netflix does the same thing. It's a comedy movie, blockbuster, suspension, drama. In your fund, you might have biotech company, SaaS company. Same thing. They have 18,000 titles in the platform, and they won 23 Oscars, but only three movies.

Just think about it, 18,000 titles, three movies. So the venture capital business is no difference. The hit comes not often, but it will come. There are few companies that the power law, these are all the startups, these were my winners, not all of them, there are few. Power law is important, but you need to have a role class a strategy in sourcing, picking, winning, helping in portfolio construction. Before I talk about

how we do some of the examples of sourcing, I want to talk about Jason. Look at what he does. Day in, day out, everything he does, it's at the end coming to the sourcing. So he believes in breed sourcing with everything he does. And I actually think this is one of the biggest mistake people when start this business as an engine investor or venture capital do. They're not thinking enough about sourcing. Founders have a lot of choices. How do you make sure you see the best founders before anybody else? That's what Jason does.

He sees things on pre-idea before everything does here. So if you want to be a long-lasting angel investor venture capitalists, you really have to think about your sourcing strategy. If you're at Sequoia, maybe not because everybody knocks your door. But if you are not there, you need to think about that how do you find founders before anybody else and have a strategy that you love to do it and you can scale it. I'll give you some examples of what we do up here. One of the programs we built three years ago called Female Founder Circle,

every year we select top 100 female engineers in the country. These are people who are just to start to thinking about starting a company. They are either at the big tech companies in academia. It's a free program twice a year for 15 weeks. We put our heart and soul into helping this woman. We have workshops, speaker series, that have, you know, social gatherings. and you look at the results. Sequoia, Kleiner, and Jason Horowitz,

and there are over 127 companies came out of it. But it takes a lot of effort to build these things. It doesn't happen on his own. The other one is we have a program at universities, at top five universities. We have a garage program, which is a social club for hackers. We have a pair of fellowship.

We train students to become venture capitalists, and we have a pair competition. We invest in around 30 to 40 companies every year for the business stand competition. But anyway, these are all sourcing that, what we do. And the result is staggering. We have invested in over 150 companies. 50% of our companies actually started by students.

And some of them you can see there are multibillion-dollar companies now. This is the hard part. And I think if you realize Jason that how do you pick, it's hard to explain it. It comes with experience, obviously, but you can learn it. You can ask the right question. You can pay a lot of attention to outliers. really read between lines. When you are in the meeting,

just don't ask about the product, like ask about personality and you really get to know them and develop a taste for the founders you want to work with. And obviously, winning comes with your superpower, why founders should raise money from you. And, you know, it takes time.

But sometimes being the first believer in a company as an engine investor or a founder, you win real against Sequoia and me. You just need to believe this is it. And founders really love, of the first believer in their company. But spend a lot of time thinking about why founders should raise money from you and what are the kind of entrepreneurs you want to work with.

But I tell you, hustle goes a long way. Founders really love investors who go extra mile for them. I give you an example. I learned a company was founded by the first founding engineer of DoorDash and first GM, and I was late into it. I tried to get to the round, and the founder said it's late. This was the middle of the COVID.

Remember when you were buying groceries that you have to wipe the grocery bags? This was at that time. And this is the company that actually does kind of a Cloud Kitchen, extremely successful. They raised tens of million dollars today. They are just growing really fast.

And they were just opened one location in Lafayette. And I told me, myself, I need to go to work in that kitchen to tell the founders and how much I want to be in this. My wife says if you leave home, don't come back because you might get COVID. But I did it. This is the video of a day I drove for an hour and a half. I worked the entire day in the kitchen and at night I convinced the founders to take my money. Local kitchen storage. You can see these are the indigenous provided by different brands. So this is the store, for example,

and should the chicken provide in one of the friends? They basically bring three, four brands under one roof and you can go buy, you know, food from different sources, different restaurants. This is the co-founder was in awe that I was there. So anyway, just go extra might for your founders if you want to win. That helping part, you can do variety of different things, but do something is a thing. authentic. That's something you can scale and something you can win. You can be great at sales. You can

grade at networking or you can grade at marketing. A few things I want to talk about pay. We actually three years ago, we hired the head of global talent of Instacart, who took Instacart from 300 to 3,000 people. He hired three other recruiters. We have four senior recruiters in-house on our payroll, and we hire people for free. So we just put this blog that last 16 months, We hire 100, most engineers for our companies. When I say companies, these are not DoorDash, this is team of two or three. And actually, we open the biggest venture capital office in the country, is the 30,000 a square foot office in San Francisco.

It's free. A lot of workshops, speaker series. Founders can work out of their portfolio. Or if you have any suggestions, if Jason said, page one, I like this founder a lot. We give them a home with no string attached. We just did a hackathon with OpenAI. 792 people applied. So it's an incredible value added to the,

the whole ecosystem. Jason asked me to talk about the portfolio construction. What I want to leave you here, that our portfolio construction is very different than Jason, very different than YC, very different than Sequoia. So this does not mean you should follow it. Just pick something that works for you. This is working for us. We invest around 20 to 30 pre-seat companies that we write 20,000 to 2 million per 7 to 15% of the company. We actually created an accelerator on every pre-seat company that we invest has to go to that program, because if you invest 30 times a year

is very hard to scale our help. But if you batch them together, you can do two times a year sales workshop rather than 30 times. We invest in 10 to 15 companies at $1.5 to $5 million for 10 to 20%. Our investment period is 3 to 3.5 years. This fund will invest in around 100 companies,

and we close to 60% of our fund is reserved, and I'll talk about that. But here are some of the lessons I learned. Prerata matters for us. I think if you're a winner, you should go double down and be able to do it. Everybody says, just go, LP will tell you, go own 20%. But that era is gone. I think that era was in 70s and 80s, that you had to start with 40% ownership,

and the public companies was just $200 million. But if the public company is like $10, $20, $50, $500 billion, you just don't need to own 20% at the beginning. And actually, if you look at even Sequoia seed has changed strategy, they are okay to own 10% and double down on it. But this is working for us. I think if you see outliers, you know, even if you have a mandate to own 10 to 20%, you can own less. I just pick these numbers. It could be 2% or 1% or 1% or half a percent for you. And obviously your strategy has to relate to your fund size. I think our strategy has changed. Our fund one was 50 million, Fund 2 was 75, 160, and 432.

Although the focus is always precedence, but the portfolio construction has changed since Fund 1. Wow, this jam with J-Cal contest has been a blast. So far, I've had the opportunity to meet with four great founders from companies like Corpod, Ullama, Ullam, Ullam, Ullam, Ullam, Ullam, uptreads AI, and the Roamap, all because they all use dot-tech domains. And we have room for one more. Do you want to come on the pod and tell me what you're building?

Well, you only need two things to enter. You got to be a founder with under 2 million of funding, and you've got to have one of those awesome dot-tech domains. So head to Jam with jacalc.com and tell me what you're building. And if you win, I will invite you onto this week in startups, and you'll get to share your vision with me and the world. I'm working with dot-tech domains because killer startups use them. You know, 1x.com, rabbit.com, so many others. And guess what? We use it too.

That's right. Dottech powers our founder Friday program. So tell me about your awesome. Dottech domain and startup. apply for the Jam with J-Cal contest today at jam with jacal.com. We're picking the final winner soon. I've talked about that, you know, your strategy should be related to your fund size. So we started with 2.5% at DoorDash, but you can't assume every company you invest is $50 billion

and therefore 2% is okay when you have a $432 million fund. So we really need to have ownership today. Does that mean that we don't invest in the company? We own 4% or 5%. Yes, we do, but we cannot consistently invest and own two, three percent, because not every company is going to be about $50 million. If we had the same return today, let's say at DoorDash, it will not return the fund today for us, but return fund one multiple times.

This is the last thing I want to talk about it, that if you look at Sequoia Benchmark Y Combinator, there are three different firms with three different strategy, exceptional performance, but they're very different. Sequo does seat, IPO, and beyond. Benchmark is only $400 million fund and only does Series A and Y Combinator has this massive factory of the company. So do something that you want to become the best in the world. And that strategy is something,

it's relate to your expertise and your background, and you can scale it and it continues to doing it. Thank you so much. Amazing. Even with the prorata, you were taking a fraction of the 2.5, percent there. It was just a second bet, right? You own 2.5 percent, 2.5 percent of the 600 million, or maybe you were diluted to 1 percent would have been, you know, six million. So just even getting

a fraction of your prorata in there, just placing that second and third bet, the second and third bet in DoorDash, I'm guessing, were the two of the best bets of your life. Yes. When you do see, and in Sequoia does series A, everybody does prorado. Yeah. But if you go to, if you go to $600 million valuation at the time that people questioning food delivery and you invest $1.4 million from your first time fund. It takes a lot of courage. But we had a very good relationship with the founding team and with Alfred Lynn, who was in that part of Sequoia. So we always had this relationship with the board and with the founders throughout the life of the company. That's why we didn't sell any shares. I think most of the seed investors sold. Most of the institution kept,

but everybody sold except us, and I think it takes effort and it takes war to get the node of the team. And I think gut feeling and making a decision. But yes, I think that was a tough decision. You know, $600 million at that time was very difficult valuation, but when the exited, it's kind of no-brainer. And there are other circumstances where the company is wildly overvalued. The performance doesn't match the valuation, and you have an opportunity to sell in secondary, and you do have to consider it, yes? Yes, of course we consider it. This is a tough decision you make. But, you know, Mara and I, we decided you all go in and this will be the opportunity of our lifetime to make something. In the DoorDash example, but I'm assuming in other

situations you have sold in secondary. Yes, we have sold. I actually think we have sold companies at $120 million valuation, not many, but we felt the company is not making a good progress. The investors are not top-notch and it's a good time to get out. So I think one of our companies, I don't name it, Fund 1, we get like 5 and a half X and we sold it, but rarely happens. Right, yeah. It's something I think about a lot, especially when, you know, we have these ZERP-like environments. Now you and I have lived through a couple of these and we started our careers roughly the same time. What do you think about this moment in time if you were to compare it to, you know, of the, let's go back to the Dropbox days or the early Uber days, early Robin Hood days.

You know, that 2009, 2008 period, 2010, so many great companies. There were so few companies overall. And it took a while to close around. Then we had this insane moment of time and then contrast it to the game on the field right now. When you get back into the office tomorrow and you start meeting with companies, what's it like qualitatively? I think it's the greatest time in the history to invest. You know, the AI revolution is for real, so it's hype. So, but I think the power of building companies is extraordering more than before.

We believe at Pair that product building cycle is going to be shorter and is going to be shorter with the power of AI. So you don't need like three, four engineers to build a prototype. Therefore, companies get faster feedback from customer, and as a result, companies will die faster. But if you make it and you have through product market fit, really healthy growth, I actually believe the next wave of public company is going to be five to seven years, not 10 to 15. And you want to be in one or 12. Okay, so let me unpack that. That's a really provocative statement.

and one I'm really enjoying considering right now. We too are seeing on the field two or three people, product velocity, accomplishing what took five or six people, but three years ago. And that just is so exciting because, as you said, they can run through the product maze and find the dead ends and then stop and then either the company goes out of business, the experiment ends, or they find their way out of the product market fit maze. And now we're ready to put more money into the company. So this efficiency means more swings at bat, correct?

Couldn't be more agree. It's that things, but at the same time, you see thousands of companies using AI for law or for tax. So you need to hunt for the founders who deeply understand the market and they're the best in the world who can build that product. We just funded a woman that we've been looking at it for a few years. She's a CFO, her grandfather, build a kind of accounting company in America.

And she built a prototype without any engineer, and she's not an engineer, got feedback from customers, then raised money from us, and then hired a founding engineer. That would not happen two years ago. Yeah. And talk a little bit about your signaling when it comes to founder qualities. So this is, you know, I guess in the decision-making process at Per, and your personal decision-making process. What signals do you look for in those founders and, you know, maybe compare it to the orthodoxy in Silicon Valley? Well, I look for founders who are paranoid

in a healthy way. So they wake up every morning. They really believe where they are going, but they questions themselves. We at pair, we want to partner with somebody who really understand the market and the customer and the problem more than anybody else. in the world. We like teams who have history together. Either you went to same school or you play basketball every weekend. That doesn't mean if you have met your team in the conference three months ago, we say no, but it's actually a checkmark for us. I think we look for founders who able to attract talent. And I think two things I realize from some of the best founders. One, they're insanely focused. You don't see them anywhere. They're just either with their customers or with

team and the ability to learn and adopt, you know, our industry changes and the best founders adopt to these changes and make a good decision. Let's talk about how seed is being perceived differently. Everybody seems to have looked at the business you and I are in and said, oh, that's interesting, getting in early. You don't have to fight for the deals. In fact, most of the companies we invest in, you and I and our teams are sharing the deals saying, hey, can we pass a hat here and try to get enough money into this company to keep them going. So maybe you could talk about

what is changing right now in terms of people, everybody wanted to go late stage, everybody rushed over there. Maybe I could flip a company really quick, and then now everybody's rushing over here. Are you seeing that as well? Yeah, the worst investors

are the seasonal investors. It means you do things for a period of time and you change because market has changed. The best investors, are consistent. They pick particular market, particular strategy, and stick to it.

Look at Jason. For the last two decades, he's been doing pre-seed and seed, nothing else. Same thing as me. And same thing as, you know,

Y Combinator or benchmark. They have been very consistent. People come to seed. I actually realize a lot of LPs, now big endowments, also, even sovereign fund. They are now looking at

seed funds because they were thinking, if you're an investor in Andristen Horowitz in Sequoia, you already cover it, but they realize that you need a dedicated, dedicated and managing seat. I always get these questions from, and you can use it next time,

but give me some credit for it. When you go fundraise from LPs, for Seed Fund, I said, oh, what about multi-stage firms? Everything you do, they do also. I tell them, like, listen, if you think, like, our business is like Italian cuisine, multi-stage firms are like Italian restaurants.

You go over there, you get a really good salad, you get a branzino, you get a tiramisu, and you get a pasta. We are the corner pizza shop. We only make pizza day in, day out, and we are the best in the world to make dough. So at Pear, we live and breathe, pre-seed and seed. And I think that's a difference now. That's how even LPs realized you need a dedicated seed manager for their own portfolio. Have you ever been to Japan, like Tokyo? No, my mar has been like 24 times. I'll take you. We'll go. Because we need to do a row. trip. Yes. I feel like it would have a good time. The first time I went, you know, they said,

do you want to get like tempura, sushi, ramen? And I said, sure. And they said, no, no, no, or which one? And I said, well, whatever you want to get. You know, and they said, well, no, no, you have to tell us specifically which one you get because there's a tempura restaurant. And I said, hold on. To first, like a side dish, right? They said, no, no, we want to take you to the best temporal restaurant. It's like old house. It's been around since like the 40s or 50s. And you go there and they only make you tempora. And they make it piece by piece. And you get this chiso leaf with uni in it that's been your sea urchin in it.

It's been perfectly temporar it. And there's something about that that I find so inspiring, which is just relentless focus on making one part of the craft, absolutely perfect. And, you know, when you think about Silicon Valley and the mess and the confusion, I think one of the great things is when you have a firm like yours or a white combinator, and thank you for including me in the group. You know, when you do actually specialize and you do focus, the customer is the one that benefits. And you and I have two customers, a partner and a customer, LPs are our partners,

and we have this incredible customer, which is year zero founders. Year zero, I always talk about with my team. And I think that they need something different than when they get to Series A, right? They have a different set of needs. What are the needs that you think they need in year zero? What did the founders of DoorDash and Dropbox need in that year zero that you gave them? When you really fundamentally break it down to first principles, what did they need from you? First of all, I'm going to use a temporary slide in my first fundraising deck, so I like that.

That's a lot. You know, our investment team have started in Seoul 10 companies to likes of Cisco, Insacar, Zingah, Yahoo, Dropbox, Black. So our team is capable to go in a room with two, three founders. on the whiteboard and figure out the next 24 months. And the next 24 months means who's your customer, what kind of product you need to build to fulfill the need of these customers, and then what type of a team you need to build?

So that's basically the core work of our team over there. And companies are different. Sometimes you work with a second or third-time founder. They need help less, but in overall our work and our promise to the founders, is like we're the best firm that partner with you at kind of an idea stage and get you to product market feed. And getting your product market feed is like customer product and the engineering team. And it's so funny when you come to the same conclusion as a peer, we fundamentally say at our firm,

teams, great teams, making great products, and then delighting customers. And if you could stay focused on those three things in the first year, just who's on the team? because it's usually only two or three, so it's really a decision to just hire one person, maybe sometimes two, but usually just adding like that third person and then obsessing over that product and what the customer is getting out of it.

And it's so often that they get distracted by things that don't matter. And there's so much, so many chores to do, right? And you've got to get everybody focused on just that team, a product, and the customer. You know, I completely agree.

If I, Tony is the CEO of DoorDash, If I text him right now that Tony, let's catch up over lunch or so on, he gets back to me maybe this weekend. But if I tell him that I was in Napa, this door doesn't deliver DoorDash, two minutes, priorities, customers and your team, like really. Ruthless prioritization. Yes. It is so critical.

Ruthless. Like, this is not important. I have a friend who does rocket ships and he has that gene too, where like if people bring up something that is not important, He will just say, this is not important. Okay. I think you would know. All right.

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Limit to new OCI customers in the U.S. Minimum financial commitment and exclusions apply. Next up is Jason Schumann. He's going to give us a talk on the power law, or what he calls the new power law, the difference between good and great funds. Thank you, Jason. Thank you, Jason.

I'm going to be talking to you all about the power law, the differences it plays in good versus great funds, and then the strategies that you can go out and execute on, depending on what you want to do. But first, I'm going to tell you all a story about how I ended up here on this stage. As someone mentioned, my name is Jason, but I'm not the one who invested in Uber. True story, I did actually drive for it, though. Since then, though, I've actually led a couple of investments in unicorns, which has now led me to become a general partner at primary, New York City's largest seed fund, high conviction, low volume shop that tries to bring an unreasonable amount of resources. I'm talking about spending over four and a half million. a year on our portfolio impact team to try to create unfair advantages for our portfolio companies. And ideally, industry leading returns for many of you are LPs. So why I'm here on this stage is because of a tweet, tweet that went viral last summer. I was personally very interested in the power law when we started to activate our new fund.

I sent out this tweet and all of a sudden it went viral. I got DMs from people like this. And then all of a sudden, Midas Listers were retweeting me like this. And then I somehow got invited onto a podcast with Jason and David, with incredible comments in the section, by the way, if you want to read that. And now I'm here on the stage. The inspiration for that tweet, though, started long before. In 2002, Credit Suisse First Boston wrote a memo,

studying cross-discipline frameworks and investing, and talked about the Babe Ruth effect and frequency and magnitude. I was 11 years old when that post was written, so I probably didn't read it. But what I will tell you is in 2015, when I got into venture capital, I did read a blog post by Chris Dixon that he read or that he wrote alongside Horsley Bridge. When he wrote that post, he talked about the power law, and there was a quote in that post that stuck with me throughout the last nine years in my venture career. What it described was slugging percentage and how much more important slugging percentage is

really than batting average in the venture capital business. And for me, when we were kind of going through the activation of this new fund, I wanted to bring this data back to the forefront for us, our firm. Why? Not only because we needed to activate and we needed to scale more, but I had a lot of other friends that were scaling their funds. And I started to receive dozens of phone calls from friends. They were scaling their funds. They were saying, hey, how are you guys handling reserves, portfolio construction? How are you doubling down your companies?

And at the same time, I had a ton of friends leave and start their own funds, which should probably come as no surprise because 1,381 first-time funds were raised over the last seven years. And when you're out raising your own fund, and I'm sure, you know, some of you that have done this, you don't have a lot of time to be thinking about the data underlying our industry. So last summer, I reached out the Stepstone, one of our LPs. They've been committed to the venture capital ecosystem since really before that credit suites post was written. Green Spring, who got acquired by Stepstones, one of our LPs, they started in 2000. They have an incredible data platform called SPI, and I was lucky enough where they opened

it up to me to take a look at some of the information behind some of these funds. So then we wrote a blog post called The New Power Law. We looked at 155 funds that were started between 2007 and 2015, and out of those funds, 150 of them I called Good. Those are funds that had 3.53x moik, and then great funds, there were five of them, had 17.95x moit. What do we find in the data? Well, we found that great funds are hitting home runs more than twice as often as good funds. Specifically, they're getting 10x plus returns on 14.1% of their investments. Why is this important? Well, when we actually model out internally, the unicorn hit rate that we need to get as primary to return 5x net to RLPs, we find that you oftentimes need to be above 10% of the

investments. We also found that great fund winners are nearly 2.5x larger outcomes than the good fund winners. It means the great funds are getting 68.42x on their 10x plus investments versus the good funds that are getting 27.44x. That is a massive difference in the size of winners, but it also highlights one other thing I want to mention. Yes, we do model out that 10%, but what we don't model out is the decacorns and the companies that could be worth multiple billions of dollars because those could end up being worth two, three, ten, twenty, 30 unicorns or Uber, which I don't even know what that multiple was for you. There you go, 5,000 X.

And it's probably no surprise to everybody here, but we saw the Babe Ruth effect really playing out in the data. For great funds, we saw that 91% of their returns came from the 14% of investments, whereas the good funds, not so much, about 40% came from the 10x plus investments. 25% of their returns came from 5 to 10x type investments, and then an additional 15 came from the 3 to 5x. What about losing money? Turns out great funds, they lose money just a little bit more than good funds, and that's okay, about half the time.

But I think the most interesting piece of the data that we ended up pulling out was about concentration. So what we saw was that 38.7% of the capital in great funds were invested into the companies that returned over 5x. Even more crazy is the fact that 24% of their capital, 24% went into the companies that returned over 10x. Now, that's in comparison to the good funds who had 18.4% of their capital go into the investments that returned over 5x. Now, if I'm sitting there in the audience and I'm an LP and I'm thinking about what does this all mean? I think that it means that not only do you need to be picking managers that can pick well, but they need to figure out which companies of theirs are working in the early days,

and they need to earn the right to be able to invest more capital. Why? Because that over 2x concentration, over 2x concentration can have a massive impact on the returns. What kind of an impact? Well, I took the model. I held every other variable constant, so please, please don't test me on this. And I ended up finding that if the good funds did the exact same concentration as the great funds, they would have returned 8.13x to their LPs versus the 3.53. It's a big difference. So when we ended up looking at all of this, we took a step back and we wanted to talk through our strategy and how did we ultimately think about the key takeaways. One, we wanted to make sure that we had great pickers on the team. Two, I already mentioned it.

We wanted to identify what are the best winners, and then three, we wanted to earn the right to get into them. So our approach is to really go out there and to make sure that we're recruiting great pickers and that we're giving them resources, giving them resources to go out and to win the best deals in the market. Last summer, around the time of this tweet, actually, we sat down with an LP, and they told us how when they evaluated their portfolio, the one correlation that they found is that the best funds had partners that were doing the least amount of deals.

on an annual basis time and time again. It could have been two deals. It could have been three deals, but it's very low volume. So what we've done over at primary is essentially built a team of seven specialized investors. And those investors,

we've now built an expert network and we've built a customer network for each one of those partners in their sector. So that way, when they find deals, they can do diligence really quickly. They can bring a prepared mind into the meetings.

They can end up moving faster and running a tighter process than most other firms, which has led to almost a 95% win rate over the last few years. And then ideally, which we'll see play out, potentially, they'll be better pickers. At the same time, we've tried to play with the math in the venture industry. And so we've ramped up our incubation strategy, and we're incubating now about a third of our fund. So what that does is it enables the sector specialists to take that network and take markets that they like and themes that they want to back.

And they can incubate a company with a founder and an operator that's proven. We also get 30% ownership in those companies. So what does that mean? If a company, you know, that exited for a billion dollars and you had 10% ownership, you get $100 million in returns. But if you own 30%, that's 3x that. So you can have smaller outcomes, but still get the same types of returns you were going after before. Another thing in New York, Insight Partners, is a big fun.

I was inspired by them. And we built up an analyst team. We built up technology to do a lot of outbound, helping us get to about, 90% coverage in the major markets that we cover. And then finally, we built out a content engine. I think we're trying to catch up to you, Jason. We have about 250 events a year, and we're posting content regularly across every single sector specialist. What about building conviction early? Building conviction early takes a lot of work. And I remember having a dinner with Josh Goppelman. I think I mentioned it on that podcast with you, where he mentioned to me that time and time again,

first-round capital is able to identify the top third of their portfolio. regularly. Then when you ended up taking a step back, though, what he did say is that about one company per fund came out of the bottom two-thirds to end up becoming a fund returner. So when you think about it, like, how do you find companies and build conviction early? So what we ended up doing was we built up this large impact team to try to provide us with asymmetric amount of information and to be embedded on the inside. So we have three partners who ran companies that were doing multiple hundreds of millions of revenue. They have teams underneath them that do things like recruiting and go to market work. So they're finding out,

how are the founders operating? How are the teams operating? Are they doing well? And then more specifically, like, what are the customers saying? And what can we end up adjusting? That way, we as an investment team can build our conviction a lot earlier on to double down in our investments. And finally, we need to earn the right to concentrate that capital. Turns out if you have a hot company, it's not always the easiest to get more dollars into that company. So we believe that, you know, we're in a services business. We need to be the first call for these founders. and we need to earn the right to put more dollars to work. Now, what I'll tell you is, is that to date, we've deployed almost $30 million

across a couple of positions like Dandy and Best Well and earn that right time and time again through a number of others. And this concentration strategy really aligns with a quote, one of my favorite quotes actually from Warren Buffett, which is that diversification may preserve wealth, but concentration builds it. Is this the best strategy for venture capital? Is this the best strategy for seed funds? I don't know, we'll see.

But I'll tell you that everybody at primary has conviction in the strategy, and it's also the only way that we would want to invest. But I will admit one other thing to everybody here. It's the fact that there's so many ways to make money in this business. There really are. And so as I mentioned with the unicorn hit rate component, you can catch a decacorn or a stripe or an Airbnb if you have a very large portfolio, like a Y combinator or like a box group.

But it is incredibly hard. incredibly hard to launch a fund that is like that in today's day and age, because you need to have high volume and high quality. And if not, then I would recommend that you go after the people who are really good at picking and are going to be low volume investors. So with that, I just want to say thank you guys for having me. And I want to say thank you to the Stepstone team who, if you're in the audience, feel free to reach out to them to get access to their data as well.