Uncapped with Jack Altman
· 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?
· Jack Altman, Kevin Hartz
[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? [00:00:00] S2: We are a boutique firm, so we can’t be everywhere and we can’t cover every scenario. We find enough founders that are looking for a great partner to work with and to go through this battle. We’ve been through it before. I’ve been involved in founding a couple companies from inception all the way through IPO and beyond. We can’t win them all. I would also say, the challenge of this era—and maybe I’m biased by this—is that the amount of capital out in the market does mean that you don’t have as much help in oversight. I’ve seen more rookie mistakes being made in this environment that just shouldn’t have happened.
· Kevin Hartz, Jack Altman, Bennett Siegel
[00:00:00] S2: We are a boutique firm, so we can’t be everywhere and we can’t cover every scenario. We find enough founders that are looking for a great partner to work with and to go through this battle. We’ve been through it before. I’ve been involved in founding a couple companies from inception all the way through IPO and beyond. We can’t win them all. I would also say, the challenge of this era—and maybe I’m biased by this—is that the amount of capital out in the market does mean that you don’t have as much help in oversight. I’ve seen more rookie mistakes being made in this environment that just shouldn’t have happened. [00:00:00] S0: It’s funny, there’s a class of things that is very hard to sell in a fundraising process, in the quadrant of true/false, easy to sell/hard to sell. There is this set of things like what you’re talking about—help during the hard times—which I think is very hard. It’s real, but it’s very hard to communicate in a round process in a market moment like this. When markets are hard, maybe that resonates more. But when markets are really frothy, as it is in many ways right now, it’s just tough. It’s an interesting time as a seed specialist. [00:00:00] S1: We’ve seen this before. In 2021, that was the era where Tiger was offering every software company the lowest dilution, highest valuation offer. Solo GPs were promising very little help, but they were hitting the highest price bids at Series A. Most of those companies and most of those outcomes did not work. [00:00:00] S0: The pitch was, “We’ll be uninvolved.” [00:00:00] S1: Yes.