The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
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.
00:11:43 · Harry Stebbings, David Tisch
[00:11:43] S1: Totally get that in terms of portfolio balance, of on a blending entry price and making it a little bit more palatable. You said there about my criticizing your portfolio. [00:11:52] S0: I mean, speaking about it. I didn't use the word criticize on purpose. [00:11:55] S1: No. I do. I... Trust me. I I I think one of the most important things to look for in anyone, actually, or professional, is like someone who's willing to, like, admit that they were wrong. I have no problem admitting that I was wrong. And what I was wrong on very specifically, I think, is, like, not seeing outcome size expansion in the way that we have done. And that's very rigid minded of me, which is my fault. But it's enabled incredible returns from companies with smaller checks and not having ownership, so to speak. How would you characterize what I got wrong? Did I do a good job of it there? You can own me for it. [00:12:29] S0: I want, like, a soundtrack as you're doing that. So if we could add postproduction music in Oh, yeah. We will. It's like a it's like wider on the on the, you know [00:12:39] S1: It's kind of like lose... You know, lose yourself the first kind of thirty seconds beat. Yeah. It's like
00:12:39 · Harry Stebbings, David Tisch
[00:12:39] S1: It's kind of like lose... You know, lose yourself the first kind of thirty seconds beat. Yeah. It's like [00:12:44] S0: a little background music. Harry getting deep. I think that I've always believed that adventure is a pure power law dynamic industry. You have to be in the outliers. The idea that me or you, to pick on both of us, are going to be able to find and buy 10% to 20% of a true outlier in the seed round and beat the rest of the market, which I truly think a lot of, not all, are great at their jobs, you're going to fight them head to head and convince the founder to pick you. And that's the company that matters. I think it's a lot of steps that you have to believe to get that business right. And so I've never understood trying to compete head to head against who I would deem to be the best VCs in the world. And I think these are brands and these are people that have spent decades building what their organization stands for and attracting the best set of founders to want them in their deal. And I think those multistage firms that have been around for a long time are really, really good at seed investing. [00:13:52] S1: In a way that they weren't before,
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.