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.
00:27:47 · Aditya Agarwal, Trae Stephens
[00:27:47] S1: That's right. [00:27:47] S0: That is my responsibility as a founder. And I think too often founders are just like, whatever. The market price is the market price. And it's like, man, you're you're playing you're playing a dangerous game.
00:27:57 · Aditya Agarwal
[00:27:57] S1: Yeah. Wanna I come back to the pro version in a second, but I think this is also just a hard message often for investors to obviously say without sounding self serving, which is that the price that you are setting for your round, you better be confident that you can get a healthy multiple for the round after that. Right? Because if this is the high watermark that you can anticipate for the next three or four years, that is a very hard spot to be in, particularly if you still need the capital to grow. And then accepting the highest price right now is often kind of like... It's it's actually a very hard thing to do. And I'd say this having lived through this at Dropbox. We took a bunch of, like, super high marks. And then, like, you know, we were the first kind of public market... Sorry, private market Decacorn, I think, back in 2014 or '15. But then that meant from that point onwards, it was very hard to raise capital to grow unless we had insane economics. And any kind of blip in the market or the product in the... In our growth would just make it really hard. And I think we suffered through that. Right? And so... But then, you know... So my story is like take... Know, it's okay to take a 20% haircut right now if it means that it allows you more flexibility for the future. But it's often a lesson that I think it's hard to kind of, like, tell people about and they almost have to live through. But what's your positive version of kind of the AI valuation story?
00:29:16 · Trae Stephens, Aditya Agarwal
[00:29:16] S0: The the positive version is that there are new market opportunities. Yep. And, you know, there are companies that wouldn't have worked ten years ago that will absolutely work today and can be done at... You know, with much smaller teams, with better margins. I think because of that, you can kind of justify seeing average entry prices shift a little bit. And I think every venture fund has seen this. Like, companies like Bob's company, Arda. It's like, we're willing to pay a higher price because we think that this is an enormous market. And we believe in him as an entrepreneur. And so there there will be some of that. But it really has to be... You really have to be dialed on chasing the right big market opportunities rather than just, like, being generally optimistic about AI, which is... I don't think is a... It's a sufficient argument. [00:30:06] S1: Maybe take us through the founding of Anduril. Like, you know, it sounds like... I don't know if the story is accurate, but it sounds like you kind of pitched, you know, Palmer on this and you kind of got him excited. And the two of you and along with a bunch of other folks started the company. But did you just... You know, you're like, okay. I'm an investor, but I also can start companies on this side. I know Founders Fund has done this historically. But did it feel pretty natural to kind of, like, follow that kind of, like, calling or that kind of question in your head?