00:19:54 · Trae Stephens, Aditya Agarwal
[00:19:54] S0: Yeah. Yeah. So, like, a great example of this... And my chief of staff, Ellie, is somewhere over here. Eli does a lot of this work for me now, which is great. But like as the GP of the Venture Fund, if someone on our team says, I believe this is an investment that we should make and I need to get Trae to meet with the company, there's like a 90% chance that I will agree. Because our bar is really high, and we generally understand what it means to create fund returning opportunities, what concentration means, like what is the fund strategy for deploying capital, how we're thinking about average entry price. Like, we're we're kind of, like, pretty aligned on this. And so when someone brings something to the GP, it's gonna be pretty baked. Like, it's not just an exploratory meeting at that point. Mhmm. And I I think you just need a lot of reps to get there. Like, a a brilliant person, like, you know, 160 IQ person can't walk in and be good at this just because they, like, understand science. Yeah. Like, you need to have thousands of reps before you truly are able to understand what a good opportunity looks like. [00:21:00] S1: So maybe this is too much inside baseball on venture, but I'm curious. When do the... When does that 10% occur? Like, where does, like, where is the often the source of disagreement? Is it in priors on market shape, product shape? Is there just like a different read on founder characteristics? Are there, like, common sources of misalignment or disagreement?
00:21:19 · Trae Stephens
[00:21:19] S0: Founders Fund is twenty years old. I've been around for 13 of those, so just a little over half. You know, you can make an argument about if it's the best venture fund of all time or if there's two or three other firms that have similar return profiles. But we've done really well. Yeah. And I can't take a ton of credit for that. Thirteen years is actually not that long to, like, see the the upside that's been generated. In those twenty years, for one of the best performing venture funds of all time, I can genuinely say that, like, 12 companies have returned 95 plus percent of all the returns to the fund. It's like Facebook, we did seed in series a. SpaceX, Airbnb, Spotify, Stripe. You're like, there's only 12. And so when you're meeting with with companies, your your question needs to be, is this a $10,000,000,000 success story? Is it a $50,000,000,000 success story? Is it a $100,000,000,000 success story? Is it a trillion dollar success story? Now, you have a company that come in... Comes in, and I... I'm not gonna target anything that I've seen. But let's say it's like a, you know, manufacturing autonomy for welding tubes. I don't know. It could be anything. You can meet that and be like, that's a cool idea. Somebody should do that. That... It's likely to work. There's a lot of customers for that. Is this a $100,000,000,000 company? It is not. And so if you have a billion dollar venture fund, and I own 10% of a $1,000,000,000 success story, that's $100,000,000 I have now, in this success profile, I have returned one tenth of my fund. It just economically doesn't matter. And so you you like start attuning to that. It's like, I need to believe this is gonna be a 60 to $100,000,000,000 company. And there's just not that many companies that have the potential to to grow to that scale.
00:23:00 · Aditya Agarwal
[00:23:00] S1: Okay. So this is a good segue, which is perhaps... I think that there was broad consensus around outcome sizes and kind of market segments for those outcome sizes, I think, across our industry. Broadly, you know, maybe up until three or four years ago. But I think over the last three or four years, it feels as though a lot of kind of like, you know, the... Kind of, you know, like, hey, this could be a $10,000,000,000 company. Now it's like maybe like, you know, a much bigger kind of like, you know, potential size than it... We all thought it would... Was going to be. So I guess maybe the question here is that how have either you, yourself, at Anduril, or maybe at Founders Fund started to adjust some of your own priors on how big some of these outcomes can be in a world where we actually have kind of the tailwinds of, you know, massive acceleration through AI? Well, I could give you the the pro version of this argument.
00:23:53 · Trae Stephens
[00:23:53] S0: Give me both. I'm gonna... I'll start with the negative version of this argument. And I'm not saying that this is always right. There are always exceptions to the rules. But I I... My general assumption is that it's actually not true. Okay. Like, there's company values at liquidity... At the point of liquidity are not going to move meaningfully beyond where they have historically. Like, there will be exceptions. OpenAI, Anthropic, you know, they're gonna go out at over $1,500,000,000,000 market cap, and that's incredibly unusual for a tech company. But like Airbnb is worth a $100,000,000,000. Stripe is worth a $150,000,000,000. These are incredibly awesome venture outcomes. And this belief that every AI company is gonna be a trillion dollar company, there's just not enough money in the universe that there's going to be $101,000,000,000,000 companies. What ends up happening is now we have these companies that are coming in that are saying, we're doing a $300,000,000 round. And we literally have to ask them, that's how much you're raising, or that's the valuation? And we don't we don't know the answer to that question. And it's just math at that point. Yeah. It's like if you're raising up, like, pre revenue, pre incorporation round of 100 plus million dollars, you can just walk the math out with dilution, with capital costs, everything like that. And you basically get to the point where it's like, even if this works, like, at a $100,000,000,000 level, we don't return the fund, which means that you require it to be a trillion dollar outcome to see the same venture dynamic that you see in a normal company ten or fifteen years ago. And I think that there's like two problems here. And it's both on the investor side and the entrepreneur on the entrepreneur side. On the investor side, there's this belief, like venture capital is far too aspirational. It doesn't make any sense. The asset class can't support a 100 successes. You know, being an investor should
00:25:44 · Aditya Agarwal, Trae Stephens
[00:25:44] S1: Not at the entry prices that we have. No. Not at [00:25:46] S0: the entry prices that we have right now. There are too many VCs. I think this is like just a... It's a truism. And because of that, you have all of these people that are chasing deals, knowing that they have to get in the winners to make it work. And they're willing to pay any price to do that without recognizing that, like, the the baseline for a successful venture fund is you have to beat the S and P 500. And at these prices, you're not. You're just not. [00:26:09] S1: I mean, the f s... S and P 500 is, like, 25% IRR, even 20... I mean, that's not easy to beat.
00:26:15 · Trae Stephens
[00:26:15] S0: That's the... And that's the floor for venture capital. Yeah. If you don't beat the S and P 500 as an asset class, why are you putting money on venture capital? It doesn't make any sense. Correct. And so that's like on the investor side. We have a responsibility to to be Percent. You know, disciplined Yeah. And understand the bar that we're being held to by our limited partners. On the entrepreneur side, and this isn't a critique. It's like I don't expect that they would think about this. But I genuinely don't think most entrepreneurs have thought even one second about how economics works. They just think someone is willing to give me this much money, and they're willing to give it to me at this price. Therefore, that's the market price. But there's like long long running, long range implications and consequences from those decisions, and there's just no economic awareness of what those consequences are because no one has lived through a down round. They haven't lived through a recap. They haven't lived through getting stuck and not being able to raise. They haven't lived through an economic downturn. And so it's just like you're just yeeting cash at some point because you think everything is up and to the right forever. And this has just never been true. There will be downturns. You have to be responsible in the way that you raise because otherwise, you're literally playing a game of chicken with your company, which is not just an organization. It's people. You're playing chicken with people. And I I think people deserve better than that. Yeah. Like, I I have a responsibility to the 10,000 employees of Anduril to not raise at a price that I'm not not going to be able to beat the next round.