The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
00:13:06 · Harry Stebbings, Venky Ganesan
[00:13:06] S1: Do you believe in king making? I know that sounds like a strange question. King making the theory that multiple successive and quick rounds led by strong investors can really help increase the chances of a company being successful. To me, [00:13:20] S0: that is a great example of Soros' reflexivity. What I mean by that is, you have a company that does well, and because it does well and the revenue is growing really fast, has a quick markup. And because of that quick markup, it gets more capital, it gets to come on Harry's show, and then it gets more notoriety that allows you to get more human capital along with the financial capital. It grows faster, and it's out of the markup. Now these are good things as long as the revenue is happening and the core business is building. But someone, a copycat can look at it and say, Oh, the secret is to have a markup. A copycat investor might look and say, If it's marked up, it's going be marked up again. And then reflexivity kicks in. And then everybody starts acting that way. And this explains how market cycles work until it stops. And one thing we know from Solos is that all reflectivity will eventually stop. We just don't know how and when. But until it stops, a lot of people can look very smart. [00:14:19] S1: We don't know how and when, but we can play the game of predicting how and when. If you were to predict how, what is the first signs of this cracking?
00:14:19 · Harry Stebbings, Venky Ganesan
[00:14:19] S1: We don't know how and when, but we can play the game of predicting how and when. If you were to predict how, what is the first signs of this cracking? [00:14:28] S0: I think usually the first sign comes with some major debt default. Generally, equity is never the reason why these things crack because equity, you write it down, you just take the loss. Debt, on the other hand, people have this expectation they're going to pay, get paid back. And so most of the cycles I know, it breaks because people lever themselves. And so if you see what happened with Leopold, a current investor, right. But when you're 4x leverage, it doesn't matter if you're right. You have to also get the timing correct. [00:15:01] S1: Missed his risk management class at high school, didn't he? Poor old Leopold when the music's going. So, yes, I completely get you there. How do you feel about, like, the multiple tranche rounds so quickly? I'm meeting founders very often where they're like, oh, we're doing around this week at a 100, but then we'll be opening up the second turn of it at later... Next week at two hundred because we've got so much demand. This just gives me shivers, and I feel like like, yeah, I am kinda... We buy any gold or we buy any car.
00:15:28 · Venky Ganesan, Harry Stebbings
[00:15:28] S0: I feel like in every cycle, you get the innovators, then you get the imitators, and then you eventually get the idiots. And I think the innovation of the tranche financing was the notion that I can get build with me money and then use that build with me money at a lower valuation to get just money at higher valuation. And then eventually transition to just pure dumb money. And I think that's the logic of this. And so I don't need like money, all money is not the same. I will bring in some investors who are going to actually build the company with me. And then I will bring in some capital along and then eventually I'll bring in some very low cost of capital. That was the intention. But again, like everything else, now people everyone's doing it. And it's not tied to the quality of the company anymore. It's become another technique for people to do. So I find like these things start initially with some... The core of the idea is actually a good one. Okay, I want to actually raise capital, but I want to distinguish between capital that adds value and capital that doesn't add value. [00:16:27] S1: Will you do it as a firm if you're coming in in the latter tranche? [00:16:30] S0: Absolutely. Depends on the situation. We have been on both sides of this situation, and I think if the company is interesting, the founders are special, absolutely. Really? Yeah. At the end of the day, I never care about what other people invest, what they do. I'm looking at this round and say
00:16:30 · Venky Ganesan, Harry Stebbings
[00:16:30] S0: Absolutely. Depends on the situation. We have been on both sides of this situation, and I think if the company is interesting, the founders are special, absolutely. Really? Yeah. At the end of the day, I never care about what other people invest, what they do. I'm looking at this round and say [00:16:44] S1: Are you not hurt by the fact that they are saying you're legitimately less valuable than Peter Fountain who were letting in at half the price? [00:16:51] S0: Peter is amazing. I think the biggest thing I've learned over time is you never want to let your ego come in the way. My only ego is to make money for my investors. If I can make money for my investors, who the hell cares? [00:17:03] S1: Have you let your ego ever get in the way? I have done. 100%. What happened?
00:17:03 · Harry Stebbings, Venky Ganesan
[00:17:03] S1: Have you let your ego ever get in the way? I have done. 100%. What happened? [00:17:07] S0: I think you get caught in ways of around negotiating for valuation or being in a syndicate, or sometimes you're offered the opportunity where you think you're offered a small piece and you're like, Well, I'm too big for that piece. I think in this business, you have to have a high degree of humility because every week I get hit, I get punched in my face by things I don't know. The biggest mistakes are when we get too caught in our ego. Look, the reality is simple. We raise money from institutional investors with one and one new goal, which is to return more of them back. If there's an opportunity to make money on investment, we should do it. The rest of this is all noise. And I think too often, because venture capital tends to be dominated by personalities, people get caught in this. Probably don't know a lot of people like Goldman. Everybody can say David Salmon, who's a CEO. But the idea is Goldman makes a ton of money, and those people just go and do their job. Too often, venture capital, end up... Because there's so many personalities and people, it becomes more about who and our ego as opposed to just do the job.
00:18:07 · Harry Stebbings, Venky Ganesan
[00:18:07] S1: I think that's forced by the fact that we are fighting for constrained supply though. You're If looking at, say, Goldman's public team, you can buy NVIDIA. I can buy NVIDIA. They can buy NVIDIA. It is a free market. Here, we are both competing for Mattis at Legora, and our check, if he takes yours, he won't take mine because there's one lead check. And so we have to have personality. We have to sell ourselves because there is a constrained supply. No? [00:18:34] S0: Yes. What you say is absolutely true, which is that you have to have these two dualities and manage them. One is you have to have a personality. You have to be able to project a sense of differentiation, right? Because why does someone choose Harry and not me? It's because they like Harry. [00:18:50] S1: My good looks and charm. [00:18:51] S0: I see that in person even more so. But I think if you get caught in that and you get so immersed in it, then you lose a sense of what the core purpose is. Right? The core purpose of having that personality and charm is to make money for your investors. That's why it is. Right? And if there's a time for you to make money for your investors where you have to let your ego take a backseat, you should do it. And that's the right thing to do. Now I'm not saying it's easy to do, I'm not saying I've done it, but it's the right thing to do. It's kind of like, I know I gotta eat right and exercise. I know that. I don't do it often, but I know it's the right thing to do.