The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
00:13:52 · Harry Stebbings, David Tisch
[00:13:52] S1: In a way that they weren't before, [00:13:54] S0: They're more concentrated, focused on it, and they're more accessible, and they're more efficient, and the market's more efficient. I think founders know how to reach them and know how to run a process very differently than in the past. So I think post COVID, there's a tremendous efficiency in the fundraising market. Competitive deals, it used to be three to five term sheets in an early stage round can these days be 10 to 15. Or it's purposely only three to five, but those three to five are really competing against each other. And that is something you can complain about or just accept the market conditions. And so for us, the belief has always been, we have to be able to invest in the people that we meet that we think are the best. And we can't let our business get in the way of it. So to me, the thing that you got wrong is two pieces. One is the math. Our business math on our side as a venture manager that has LPs that needs to return our capital to LPs at a outlier way, I think you didn't do the math right. And I think a lot of people don't appreciate that our business makes sense. And that's okay. We like what we do. Think it's We And I really think if you [00:15:04] S1: didn't do the math right, because I didn't see the outcome size expanding. Is that it? You've got the numbers.
00:15:04 · Harry Stebbings, David Tisch
[00:15:04] S1: didn't do the math right, because I didn't see the outcome size expanding. Is that it? You've got the numbers. [00:15:09] S0: Well, second part is, yeah, maybe that's it, or maybe the lack of dilution part that I made before is what you get at the beginning actually stays pretty consistent, whereas I think in the past, you would probably put a, like, a negative 80% on that number. [00:15:23] S1: Well, Jason Lemkin, who I do a [00:15:25] S0: lot of shows with every week, we do [00:15:26] S1: the weekly show, and he's like, a 100%, 60%, you'll be diluted. Is that not true in your
00:15:33 · David Tisch
[00:15:33] S0: I don't think of the best companies. Now, like, not every company goes up into the right and never sort of runs into bumps. I think the macro, when you get big, can cause some bumps in valuation. You're seeing it right now in some of the biggest labs going out and trying to raise rounds and sort of reevaluating the price that they're raising at. If you go back in history, Uber, Facebook, Airbnb, Ramp, which I think is one of the best modern companies ever, they've all had a bump, a down round. And so I don't think it's always just up into the right, but I think in this specific sort of three year window, there is a lot of continued momentum in terms of valuations. But the second piece, which I think is related to the first piece that I think concentrated funds dismiss is there is an adverse selection in the concentrated model of what gets in versus what you want to get in. Meaning every concentrated manager will say that we win 90% of the deals we want to win. And I think that's total BS. I think it's like 20%. And so in a given fund cycle, if you're funding 30 companies that you have this immense conviction in, concentration of 30 names with 10%, you need, obviously you need because it's vital, need 10% of the company in order to make the deal work. I think you actually offer that deal to upwards of 120, maybe 150 companies to get your 30. And I don't think people admit that. So I do believe that the best companies, the ones you're most excited about, don't always make it into the portfolio. And so just because you have 30 that you own 10% of, it doesn't mean those are the 30 that you would have liked to be in that portfolio. I think in our motto, what we're able to do is get into more of the companies that we're excited about than other people.
00:17:24 · Harry Stebbings, David Tisch
[00:17:24] S1: I get that. And you know what worries me though so much, and I'm asking here, but it worries me is I completely agree with you in terms of that supposed win rate. What happens now though is they just say, David, okay. Fuck it. I lost to Sequoia and Box Group. Let's do another round. I'll I'll do it at eight 100. I know David just did the first tranche at 400, but I'll do it at 800 today. And for the founder, it's like, well, good deal. Nothing's changed in the company. I get more money at double the price. I think it distorts companies and really [00:17:53] S0: Who are you worried about? [00:17:54] S1: I'm worried about founders losing focus and becoming distracted with way too much money way too quickly.
00:17:54 · Harry Stebbings, David Tisch
[00:17:54] S1: I'm worried about founders losing focus and becoming distracted with way too much money way too quickly. [00:18:00] S0: That is like a babysitting problem. It is. Sometimes that's going to happen for sure. But to attribute that fear to every founder, some founders are going to tremendously benefit from having more runway, higher valuation, more momentum, more buzz in order to recruit people, order to show that there are believers that think this can be huge so that they can justify to customers to get early partners. If you are a great founder, and it doesn't mean all of them are going to do it properly, you have to take all the conditions that you've chosen to take on. So if you took on two tranches, if you took on high valuations, if you took on a lot of money, you're gonna have to use those variables and execute your company building in a different way than if you're super capital constrained. I think the lean startup was a total fake. It was a stupid brainwash that happened for ten years with professors and books and tweets and blog posts that was just totally awful. And I think it sent people, like, the wrong message. [00:19:02] S1: Like Why why was it totally awful? [00:19:04] S0: Just Because name a company that actually ran the Lean Startup Playbook that worked. One, every company, if you're going to be actually successful, needs a lot of money, especially today. [00:19:14] S1: But like 37 signals is is one that's not.
00:19:14 · Harry Stebbings, David Tisch
[00:19:14] S1: But like 37 signals is is one that's not. [00:19:17] S0: There's some bootstrap companies, but if you if you wanna get on the venture flywheel, lean is not the answer. Inevitably, you're gonna be fat. You're not gonna be lean. You have to be. It doesn't mean undisciplined. The difference between the word, like, lean and the word well funded is not lack of discipline. It's just not automatically attributable. Does that mean that every company that raises a ton of money is gonna be well disciplined? No. There's gonna be, again, back to where we started, bad companies. [00:19:45] S1: Will you do tranche drowns if the founder said [00:19:49] S0: I don't like them. But, like, again, there's the, like, emotional reaction and the business decision, and those are very decoupled. [00:19:57] S1: But you will do the second or [00:19:58] S0: third tranche? On it. I don't want founders to know that we'll just rip checks into tranche rounds. But, yeah. Whenever I I I I don't want to. I would like to invest at this... At the lower price. [00:20:08] S1: I'm too... I'm... Fuck off. This is a partnership. I get it. [00:20:12] S0: But that's your problem. Get a shrink. [00:20:14] S1: This is a partnership, and you're saying you're inherently less valuable than them. Well, fine. Just don't take me then. [00:20:19] S0: Okay. That's their choice. And and guess what? They're not gonna take you. And you can go back and you can choose. That company is not gonna be... That's a yes, no decision. That's it. [00:20:29] S1: But you're happy then to just to take