The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
00:03:04 · Harry Stebbings
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00:04:42 · David Tisch, Harry Stebbings
[00:04:42] S0: Thanks for having me back. Nothing's happened in between the past two and a half years and now, so we can just sort of regurgitate all the old conversations. [00:04:50] S1: Has our job completely changed, David? [00:04:52] S0: In some ways, totally. And in other ways, not. I think, you know, I've been doing early stage investing for seventeen years now, which makes me old. And I think a lot of the times people try to relate the current moment to a historical moment. So, you know, is this like 2021? To me, no. It has nothing to do with '21. It's a totally separate moment. And this one's funky and interesting and maybe frothy, maybe insane, whatever it is. But it's a standalone new market condition that you have to figure out in today's world. Because in '21, there were a bunch of other factors, macro micro, that were creating that environment. And if you go back to, you know, '18 and '15 and 2010, each one of these moments are just different. And so I could argue our job has totally changed and equally explain that our job is just to do whatever the current market conditions present. And the actual job is, like, see, meet, get to know great founders, make a decision, should we invest or not, and beg them to take your money. That's the the funnel that we operate in.
00:04:52 · David Tisch, Harry Stebbings
[00:04:52] S0: In some ways, totally. And in other ways, not. I think, you know, I've been doing early stage investing for seventeen years now, which makes me old. And I think a lot of the times people try to relate the current moment to a historical moment. So, you know, is this like 2021? To me, no. It has nothing to do with '21. It's a totally separate moment. And this one's funky and interesting and maybe frothy, maybe insane, whatever it is. But it's a standalone new market condition that you have to figure out in today's world. Because in '21, there were a bunch of other factors, macro micro, that were creating that environment. And if you go back to, you know, '18 and '15 and 2010, each one of these moments are just different. And so I could argue our job has totally changed and equally explain that our job is just to do whatever the current market conditions present. And the actual job is, like, see, meet, get to know great founders, make a decision, should we invest or not, and beg them to take your money. That's the the funnel that we operate in. [00:06:02] S1: I I totally agree with you there. In 2021, I think we can acknowledge it was just incredibly bubble like. It was a good time to sell. It was a bad time to buy. There was no fundamental technology innovation. There was short term behavioral change with COVID in different respects, communications, buying. Everyone says, well, now starting to feel like 2021. Are you in that camp of the craziness is real, or are you in the camp of no? We are so early, and there is so much room to run.
00:06:31 · David Tisch
[00:06:31] S0: I don't think it's as simple as that. I think in each one of these moments, there are good companies and bad companies. And so as a VC generally, and especially as an early stage VC, I think the macro is less impactful than the micro. Is the company that I am fortunate enough to be an investor in the good one? Is it the great one? Is it the most important one? That transcends the macro. And the macro to me is like a portfolio analysis. It's a industry analysis, but it doesn't come down to a specific company analysis. So do I think there are, you know, not perfect companies raising a lot of money at big valuations? Yeah. But I don't know that that's ever not the case. And I think you've seen it historically in our industry. There are incredibly public blowups of some of these companies that happen in catastrophically messy ways. It sometimes create TV shows or movies or documentaries. And then there's companies that die quietly in the night. But I think underlying all of these moments of of brothiness are probably a handful to a lot of great companies that are building high quality businesses, and they're doing it in, you know, a long term oriented way. Are they raising money quicker? Are they raising money less dilutively? Are they doing it at big valuations? But I don't think that that is a, like, industry wide harmful set of conditions. It's just, is this company a great company? Can this founder, can these founders navigate incredibly complex changing environments almost in real time today to create an enormous amount of value that I think you are, to your point, in the early innings of a deployment of a horizontal new technology that will have tremendous impacts. But like all other technologies, what you see is this initial wave of impact, initial set of reactions, some version of plateauing, more innovation, plateau, innovation, plateau. The difference this time is those cycles are like two to three months. It's the new model release. It's the new revenue growth of a vertical AI business. It's a huge M and A deal. All these moments create these mini cycles that feel like they have waves across the industry.
00:08:54 · Harry Stebbings, David Tisch
[00:08:54] S1: We've seen seed rounds be 10,000,000 to $20,000,000 very consistently. [00:08:59] S0: Or also 50 or a 100 or a billion. [00:09:01] S1: Oh, for sure. But I'm saying kind of if if we don't take the real outliers, like 10 to 20, it's really been quite normalized as a round size for good seed companies with, you know, pedigreed founders. I get that our job is just to find them and and beg them to take our money, but does the business not really change in that respect? Suddenly, how do you think about sizing? Bluntly, there's nothing there, and you're having to write a large proportion of your fund as an entry check. How do you think about that with the massive explosion of round size?
00:09:31 · David Tisch
[00:09:31] S0: You can either come on a podcast and complain about it, or you can do the thing, make a decision, yes or no. If you're going to play the game that's in the market of deals, You don't get to change the competitive dynamics of a free market. So if great founders or potentially great founders are going to raise 10 to 20 because someone else is going to do the deal at that price, you get to say yes or no. I think if you think that is an important company and one that you want to be part of, you have to say yes. And there's two conditions that allow for those starting points to not materially change the economics in venture if the outcome sizes are bigger. So if think about ten years ago, the idea of building a $10,000,000,000 company was far fetched. Today, is sort of like you have to sit and look at an early stage company and try to squint and get there as a sort of normal outcome versus a billion. So I think there's a change factor there. And then you see anomalies well past that in terms of valuation or even acquisition or our future IPOs. And then the second one is the lack of dilution. So as an early stage investor to me, in the companies that tend to hockey stick very quickly, the series B, C, D are dramatically less dilutive to the founders and the early cap table than in the past. They are raising these later stage rounds at three to 8% dilution instead of 12 to 20%. And if you take that across multiple rounds, your early stage investment just gets diluted less. And that is an economic factor. Now, we, Box Group, we invest in a wider set of companies, which you've criticized before many times for not an ownership focus. If our entire portfolio is filled with $20,000,000 seeds at 200,000,000 pre, do I think that the business is fundamentally changed? Yes. And so you have to find in this market a varied entry points for early stage investing. I think you have to have a portfolio balance, but not on an individual deal basis.