How I Invest with David Weisburd
00:42:34 · David Weisburd
[00:42:34] S0: Empirically, seems like no. I had Eric Swerd some from AngelList, and AngelList is very interesting because they have one of the biggest datasets in the world. I think arguably the biggest on... When it comes to startups. I think 25,000 companies or so. And especially today, they use AI. They use the latest machine learning. And they figured out an interesting thing, which is they couldn't run the same mathematical models on all of venture. In other words, it was essentially two completely different and idiosyncratic asset classes, aka the early stage and the late stage. So even mathematically, it doesn't compute to just focus on venture capital as one asset class, meaning to assess pre seed the same way as you would a pre IPO company.
00:43:15 · Jack Selby
[00:43:15] S1: Totally agree. Yeah. I think the mega funds are a different asset class. I'm not saying they're better or worse. They're just in a different bucket. And earlier stage guys, like with what I do, I think we're in a different bucket. There's almost an analogy with what we do as being akin to middle market private equity in the sense that there's a difference... Important difference in the sense that I'm investing in business that are... Businesses that are in these middle market geographies. I'm not taking control stakes, but I only wanna work with entrepreneurs that want my help. So it's like synthetic control. And because it is venture, I do have more of a chance of going to zero than a typical, you know, private equity type business. But hopefully, that is compensated by the fact that my company should have better growth rates. They should have better margins, so therefore, should have a better multiple. Other than that, you could put me in the middle market private equity bucket if you so chose, because I think there is a a high degree of similarity.
00:44:02 · David Weisburd, Jack Selby
[00:44:02] S0: Perhaps not surprisingly to listeners, I'm very optimistic on venture capital. I'll tell you why. So venture capital is known as this access class Mhmm. Where the founders choose the VCs, and the top VCs, at least, choose the top LPs. And my thesis is that the reason that Anthropic, SpaceX, OpenAI, the reason all these startups essentially had to go public was not because they just suddenly decided, well, it's time to bring back liquidity. SpaceX had tender offers. OpenAI had tender offers. Anthropic, I'm sure the the early employees are are are not too worried about about their liquidity. So I actually think the reason it goes back to this kind of consensus and venture capital, 75% of q one twenty twenty six of the entire venture capital funding was put into five companies. [00:44:55] S1: Mhmm. [00:44:56] S0: Said another way, they wouldn't have room to do another round. If they did another round, they'd be approaching a 100% and now over a 100%. So I actually think if there was more capital, let's say it went from 3,500,000,000,000 to 7,000,000,000,000, now you would actually have the Anthropic, OpenAI's, and SpaceX doing one or two more rounds staying private because as we know, there's a preference for top founders to stay private. Mhmm. And that would be much more advantageous to both the startups, to the founders, to even early stage VCs. They have higher multiples. What do you think about that?
00:45:28 · Jack Selby, David Weisburd
[00:45:28] S1: The AI boom that is happening right now and has been going on for many years, it's very different, say, than the Internet period when we were putting together PayPal in the sense that the current market is very CapEx intensive. So you have energy needs. You have chip needs. You have data center needs. The list goes on and on on. You basically had none of that during the PayPal days, the doc... The .com days. And so because of the CapEx intensity, you have a tremendous off the charts amount of storytelling to essentially fuel the fundraising. And so when this kind of cycle corrects, and, like, Cliff Asness, who was on your show not too long ago, you said it perfectly. Like, it's it's never different this time. Like, this will correct. And when it corrects, there's going to be tens, if not hundreds of billions of dollars that are going to get zeroed. It's just a fact. It's an absolute fact. And I would actually... I would challenge in saying that anyone who doesn't believe that there's an AI bubble is an absolute contrarian today. Like, that just seems like a ludicrous proposition. Like, it is such a clear How do [00:46:41] S0: you define that? [00:46:41] S1: Whether it's the circular trading or the valuations, the multiples. I mean, the list goes on
00:46:41 · Jack Selby, David Weisburd
[00:46:41] S1: Whether it's the circular trading or the valuations, the multiples. I mean, the list goes on [00:46:46] S0: and on. Because two things could be true at once. One is 90% of companies could be overvalued, and also the expected value of the vintage could still be high. I think that's what a lot of investors are trying to grapple with what... They get that all these pre revenue companies can't be worth under a million dollars or a billion dollars, But they also are unclear, I think, whether there's gonna be another $1.02, $3,000,000,000,000 company in the batch. And I think probabilistically, it's it's probably very pessimistic to assume that the first three years of AI produced two arguably $3,000,000,000,000 companies, and now we're not... Now it's game over. No no more trillion dollar companies.
00:47:24 · Jack Selby
[00:47:24] S1: I respectfully disagree because I think there is an angle where AI enables companies to be built much more cheaply, achieve revenue much more quickly, get to good outcomes much more quickly, and generate good, if not great venture capital returns without the fixation of, oh, I have to go build an extra trillion dollar company. Because I think people are so caught up in the zeitgeist of SpaceX and Anthropic. These are once in a generation, if not once in a lifetime type companies. And the idea that they come around with any sort of regularity, I think, is ludicrous. And we have to move away from that because if that's what you're pitching, you're again pitching something that's outrageously improbable that you're gonna find at an early stage, and then the duration is gonna be very extended. And that's a poor combination. And so that's why I I fundamentally disagree with that kind of perspective. AI, again, those two things being equal, is an amazing tool, but what about building great companies that don't have to be trillion dollar outcomes? That is a mentality that is totally lost in Silicon Valley. And, again, I I love Silicon Valley with its audaciousness, and it's actually to give give to give fairness. It's the one aspect of my geography where I invest noncoastal that I'm the most envious of Silicon Valley. This is probably my biggest challenge. Like, when I meet that entrepreneur in Milwaukee, is he or she... Are they going to be able to work their tail off and get me to one of those minimum $500,000,000 type outcomes? Because oftentimes, he or she will take my money because they think venture capital is special or sexier, whatever it may be, and they're gonna work their tail off, go through blood, sweat, and tears, all these near death experiences. Like, okay, Jack. We're gonna sell this widget for a $100,000,000, five or seventeen years out. Say, no. No. No.