The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
00:44:25 · David Tisch, Harry Stebbings
[00:44:25] S0: Five to 30. [00:44:26] S1: And that's across the a and the b, the next couple of rounds? Yeah. What's the most you've ever invested in a company across the two? [00:44:33] S0: Like, in aggregate? Yeah. Probably $40,000,000. [00:44:37] S1: Which company was that? [00:44:39] S0: I mean, we've we've written substantial checks into RAMP, into Clay, into Baseten, into Rogo, into Tandem. [00:44:47] S1: Which did you not? And on reflection, what did you not see? [00:44:51] S0: Sometimes you can't get more than your pro rata in companies, and that's a fight for allocation in future rounds. And that might be the founder choosing not to take a bigger check from you. So that's one condition. And then the other condition is like we misread the company and didn't lean in hard enough when we could have. And I think we don't make perfect decisions. I wish we did. So I look back and there are so many opportunities of great companies that we were fortunate enough to be early in that we were too slow to react to. [00:45:23] S1: Is there one that you think of first there? What do [00:45:25] S0: I think think of a lot, but I think we're incredibly fortunate to be in business with that founder at the earliest stage. And I think our job is to continue to help them in the ways that they ask us to help them and make our customers who are the founders happy. [00:45:41] S1: David, is pro rata a right?
00:45:43 · David Tisch
[00:45:43] S0: No, do I think a bunch of the early stage VCs that are out there saying, We don't need pro rata. We're gonna give it up. It's all marketing garbage. It's just nonsense. I can write a blog post too. I just don't believe that that it's that black and white. I believe the right to invest in subsequent rounds is earned. Whether you have it in the documents or not, it's earned. There are multiple factors that go into it. So having it in the documents, to me, is more helpful for the founder than for you as a firm. If you as a firm are asked by the founder to step back for whatever reason, that is up to you to say yes or no, knowing that if you say no, you are getting into a fight that you are likely going to lose in some form. You are either going to lose it financially and that you're not going get your pro rata because of whatever mechanism can be used to remove your pro rata, or more importantly, you're gonna lose it because of reputation. You are gonna piss off the founder, and they are not going to like you anymore. So if you say no to a founder and you wanna take reputational risk, that's on you. So why is it important to have it in the documents? Because I think that funds that follow you into rounds in the a and the b, they are happy to squash you in any way they can. And the more that you have it in the documents, the more leverage a founder has to negotiate the terms of their next round. So if a firm comes in and says, We want 22, and you look at your cap table and you're like, I have 6% of my cap table that needs pro rata, you're able to actually create more leverage with your follow on investor to say, that math doesn't work for me. I would like to redo this. And then you can use that in help of your negotiation. Do you
00:47:32 · Harry Stebbings, David Tisch
[00:47:32] S1: see large firms being more ownership hungry or more willing to accept less ownership? [00:47:38] S0: Haves and have nots. There are firms sometimes that need 20% in a deal, then you're like, But last week, you did a deal at 5%. And I see it because I'm in that deal too. And so I always think that's funny when the word need comes up in Venture and you're like, I know what need means. And it does not mean need. It means I'd like, I hope for, but it doesn't mean actually a binary need. I think within the big firms, there are very different style actors. I think there are people who are on the way up or competitive inside of their firm that behave one way. And there are people that are very confident in their position at a firm and their standing and their success that behave a different way. And you can say junior or senior, whatever terminology you wanna use for that. But I think that relationships matter. There are times when we send a deal to a multistage firm and they write the term sheet and then try to squash us. And I'm like, that's weird. And those tend to be, again, this orientation towards short term decision making versus long term and not appreciating the consistency of a relationship. Again, I've been doing this a long time. There are people that you build great relationships with that tend not to have overly sharp elbows with you. And then sometimes you catch your elbow out of nowhere. You're like, Oh, I didn't see that one coming. [00:48:58] S1: Who, when they send you a deal, do you pay most attention to?
00:48:58 · Harry Stebbings, David Tisch
[00:48:58] S1: Who, when they send you a deal, do you pay most attention to? [00:49:01] S0: Great founders. That's who I pay the most attention to. When founders inside of our portfolio, and I don't think it's the best ones only. I think it's the founders who we believe have high quality taste bars and high quality networks. When those people send you someone they know, someone they like, that's when you pay the most attention. [00:49:19] S1: When you look at one part of our business, it's investing. Another part is also, but only making money for our LPs and and selling. And we have very liquid secondary markets today. How do you think about that and taking cash off the table when there is so much demand for some of these names?
00:49:35 · David Tisch
[00:49:35] S0: I work for our LPs, and my customers are founders. And that, I think, is a totally, again, dislocated two sets of relationships. My job is, as you said, to give the people who believe in us and invest money in us as much money as I possibly can. And one way to do that is to try to get out of positions at different times. And there's a risk to it. And there's a financial risk to it and a relationship, a sort of reputational risk to it. And I think that's a really important thing to balance. So in general, we don't sell early. We believe we are investing at the seed stage to join the founder for their journey. And that could be fifteen years, it could be twenty years, it could be four years. But selling early to me risks two things. One is like, if a founder doesn't want you to sell early, you're risking reputational risk in relationship with that founder. In this market, a lot of founders are taking secondary. So you could argue, if you're doing it, I can do it. I don't think that's necessarily the right framework. I really don't. And I can talk about why, but I don't use that framework to think about it. And then the second one, I think the best companies compound the most at the end, Right? Going from like a $2,000,000,000 to $4,000,000,000 to an $8,000,000,000 company is easier than going from zero to a billion. And if you believe that you are in a company that's great, I don't see why you would get out early. I think you're leaving the most money on the table by getting out of something early. And I don't want to do that. I want to see it through. And if I still believe in a company or one of my partners believes in a company, I don't think de risking it is the right answer. We're in the business of risk and we should stay investors in the companies that are gonna keep compounding because every turn you have at the end is a big win for your LPs and for your firm and for the founders.
00:51:33 · Harry Stebbings, David Tisch
[00:51:33] S1: Why do you not think that if a founder's taking money off the table, investors should maybe do the same? [00:51:39] S0: Because I think founders have a different set of economic conditions that are not related to what investors have. Let's say a founder has debt. Let's say a founder is living in a place that creates stress and overhead cognitively for their life. In reality, having some money to improve some things outside of work allows them to be better at their company, or knowing that I have $10.20, dollars 30,000,000 in my pocket, I am now willing to see this through. I'm willing to have bigger risk appetite to like go for it because I feel some safety net. I don't think that that is the same risk analysis that a VC uses to be like, I need to take, you know, 20% of my position off here to like make my fund mouth look good or tell my partners I took some money out of this thing. I just think they're totally different. Or giving early employees like a tender offer and allowing them to have some early liquidity. I think it could help with retention. I think it could keep a lot of those employees happy and engaged and excited to work at a company knowing that they offer tenders every couple of years. We have a bunch of companies in our portfolio that are regularly doing tenders to the employee base, and I think that that's an incredibly valuable culture to set and a retention tactic. And so I just don't believe that they're always related. [00:53:07] S1: What did you believe about Vanisher that you now no longer believe, David?