Uncapped with Jack Altman
· Jack Altman, Bennett Siegel, Kevin Hartz
[00:00:00] S0: I’m really excited to be here with Kevin and Bennett from A*. Thanks for doing this with me. [00:00:00] S1: Thanks for having us. [00:00:00] S2: Thank you. [00:00:00] S0: I want to start with just the quick history on A*, how the firm came to be, how you guys started working together. Then I want to go into seed investing. Can you give us the quick backstory on A*? [00:00:00] S2: We first met through Ramp, and that was at the seed stage. Eric and the team were raising and I participated as an angel. This is pre-A*. Bennett was at Coatue. That’s where we first interacted. [00:00:00] S1: We started A* five years ago now with our third partner, Gautam. The idea was to build a new kind of venture capital firm that could focus on partnership with founders at the earliest stages and work closely with them as they continue to grow and mature. Five years in now, we just closed our third fund. We’re at a billion of AUM, and the idea is to bring something different to the early stage market.
· Bennett Siegel, Jack Altman
[00:00:00] S1: We started A* five years ago now with our third partner, Gautam. The idea was to build a new kind of venture capital firm that could focus on partnership with founders at the earliest stages and work closely with them as they continue to grow and mature. Five years in now, we just closed our third fund. We’re at a billion of AUM, and the idea is to bring something different to the early stage market. [00:00:00] S0: A year ago, I started this podcast, and one of my first guests was Josh Kopelman, founder of First Round, an amazing seed stage firm. One of the things he was talking about was the venture arrogance score, that really stuck. What he was saying was, bigger funds are super arrogant to think that they can have big returns, directionally speaking, because you own X percent of a company. How big can the companies be? What return are you getting? That argument really resonated. It’s funny now to me, looking back 10, 11 months later. A lot has happened. There are more of these five to $15 billion funds than ever. The rounds are more expensive than ever. There are these three-plus huge looming IPOs, which kind of gives credence to the big fund. Some of these big funds are doing really well actually. So there’s this whole situation. I’d be curious to hear your guys’ take on the landscape and being a smallish seed-focused firm relative to this market moment.
· Jack Altman, Kevin Hartz
[00:00:00] S0: A year ago, I started this podcast, and one of my first guests was Josh Kopelman, founder of First Round, an amazing seed stage firm. One of the things he was talking about was the venture arrogance score, that really stuck. What he was saying was, bigger funds are super arrogant to think that they can have big returns, directionally speaking, because you own X percent of a company. How big can the companies be? What return are you getting? That argument really resonated. It’s funny now to me, looking back 10, 11 months later. A lot has happened. There are more of these five to $15 billion funds than ever. The rounds are more expensive than ever. There are these three-plus huge looming IPOs, which kind of gives credence to the big fund. Some of these big funds are doing really well actually. So there’s this whole situation. I’d be curious to hear your guys’ take on the landscape and being a smallish seed-focused firm relative to this market moment. [00:00:00] S2: Look, you always have to play the hand you’re dealt, and we live in this world of giants. It’s true about Anthropic, SpaceX, and OpenAI and these massive returning large-capital-needing companies. But at the same time, big funds, big fees for those partnerships. We stayed small so we can be agile. It’s like the equivalent of when you’re the CEO of a new startup and you don’t take a salary. [00:00:00] S0: Do you think if the fees were capped—instead of 2 and 20, if after like a billion there were no more fees—VCs would behave way differently?
· Jack Altman, Kevin Hartz, Bennett Siegel
[00:00:00] S0: Do you think if the fees were capped—instead of 2 and 20, if after like a billion there were no more fees—VCs would behave way differently? [00:00:00] S2: Absolutely. Without a doubt. I’ve seen funds go from small to large and the behavior absolutely changes. No names, no name drops here, but it happens that way. There’s so much in this really exciting upswing of the market. LPs want to get in, and they’re not able to negotiate those fees down. [00:00:00] S1: If you think about it, the fees haven’t changed as the asset class has changed. Look at long-only oriented funds in the public markets. They charge 1%, they charge 10% carry over a hurdle. At this point, these growth funds that are raising $5-9 billion, they’re investing in what would’ve been public companies a decade ago, and they’re essentially indexing the asset class. Why should you make 2 and 20 for that? We built A* to be aligned with founders. We want to partner early, we want to take risks, we want to work hand in hand with them. It’s a different craft, but our incentives are aligned. We only win as they win. That’s different than I think the prevailing view in the bigger firms.
· Bennett Siegel, Jack Altman, Kevin Hartz
[00:00:00] S1: If you think about it, the fees haven’t changed as the asset class has changed. Look at long-only oriented funds in the public markets. They charge 1%, they charge 10% carry over a hurdle. At this point, these growth funds that are raising $5-9 billion, they’re investing in what would’ve been public companies a decade ago, and they’re essentially indexing the asset class. Why should you make 2 and 20 for that? We built A* to be aligned with founders. We want to partner early, we want to take risks, we want to work hand in hand with them. It’s a different craft, but our incentives are aligned. We only win as they win. That’s different than I think the prevailing view in the bigger firms. [00:00:00] S0: You do need to do well enough as a big firm. You need to cross some threshold so you can keep raising your funds. But you think about a $5B or $10 billion fund, and you think about them playing at seed. I was joking with you before we started that your guys’ fund is like $450M or whatever. Some of these funds, if they raised $8.3B versus $8.8B, none of us would clock it. But that’s a whole extra A*. They can use that going into seed rounds, and their incentives there are different. So I’m curious. What is their strategy? What is a $10 billion fund doing at seed, and why are they doing it? [00:00:00] S2: I like any unit of measurement that is an A* unit of measurement. Maybe it’d be adopted as a practice. [00:00:00] S0: We’ll all talk about A*s going forward.
· Jack Altman, Bennett Siegel, Kevin Hartz
[00:00:00] S0: We’ll all talk about A*s going forward. [00:00:00] S1: There are two facets. We used to joke at Coatue that there were two ways to make a billion dollars. One way was the Benchmark way. You find an incredible Series A, you lead it, you partner, you have a generational public outcome, and you earn your percentage of the company. That’s hard and takes a long time. [00:00:00] S2: Or the A* way, in addition to Benchmark. [00:00:00] S1: In addition to Benchmark. Or you put a billion dollars into a company and you double your money as it goes public in three years. That also earns you a billion dollars to distribute carry. One is a lot easier than the other and more repeatable? So incentives have shifted in a way that reflects the market reality. Seed specifically—we see this with a lot of our friends at multi-stage firms—it’s option value. Let me build a basket of companies with a certain amount of ownership and see what pops. If it pops, I could double and triple and quadruple down. I don’t think founders want to be thought of as an option, as part of a basket. [00:00:00] S0: I obviously want to believe that too. But can I give you the counter there? I’m curious how you manage it in the market? The counter is basically, look, I also don’t want to be thought of as an option, but $10M at a $100M sounds a lot better than $3M at $30M. I have $7 million extra dollars to go hire a team, run my experiments, see where I’m at. That is the discrepancy that’s been created. So how do you navigate that as a seed specialist?