The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
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.
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.