The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
00:27:30 · Venky Ganesan, Harry Stebbings
[00:27:30] S0: But I I do feel that you have to think about the question of ownership and concentration as when. What I mean is that where was the company? What information do you have? How much conviction can you have as an outlier company? Because the the thing about position sizing is you want to position sizes when the data is there. And if you position size it ahead of the data, then you're taking a lot more risk. So the question is not, did you put 20% of the fund of the company in one check at the beginning of the fund, or did you ladder up to 20% on the basis of new data? Obviously it's much better to ladder up on the basis of new data. And I think in an era where venture capitalists are going to have ownership come down, right? I mean, I wish we could get 10. Even 10% is hard, right? Now the way you're going to win is you're going to establish a position and then size up as a company does well so that you have sized it commensurate to the outlier opportunity. [00:28:21] S1: Totally get you and get that. And everyone says, but ownership doesn't matter so much because outcome sizes are so much larger than they've ever been. And they are. That is a valid answer. My question is, are they on the whole? Like, do we just have a breadth of companies that will be much larger? Or is it really just a handful of Anthropix and SpaceX? And cursor on the small hand at 60,000,000,000, which is still enormous and amazing. But is that a good enough justification for ownerships going down?
00:28:49 · Venky Ganesan, Harry Stebbings
[00:28:49] S0: I think the problem comes down to your portfolio composition. Right? If if you are in one of those outliers, I think you can survive with low ownership. But what happens if you are not in these big outliers? Because what... Essentially, you're playing a game to use baseball analogy as you're playing a game where there's only grand slam home runs or strikeouts. There's no singles, doubles, or triples. Right? And in cricket terms, like, it's only scoring sixes and not having ones and twos. And the problem with that is that if you don't score the six and you don't have the ones and twos, that's gonna be a tough fund. And so part of getting ownership is giving some insurance for you that if you missed out on the outlier, the sort of midsize outcomes can still move the needle for you. But will you do singles and doubles? No. The goal is always to score home runs. Right? Yeah. But sometimes you strike out. And and so if you strike out all the time, that's gonna be a tough fun. So the idea is that you wanna at least say, okay, I went for the home run and I got a triple. [00:29:44] S1: But I just don't think founders are aware, and I say this... And people always get at me, I I think they kinda miss the point. Because I say it, like, lovingly for awareness of founders, that the game has changed and that, you know, going from one to 4,000,000 and then four to 8,000,000 and then eight to 16 and then banking in five years time, we're gonna hit 30. That's an amazing achievement, but it is just not enough to get Venture excited today. Do you agree with that?
00:29:44 · Harry Stebbings, Venky Ganesan
[00:29:44] S1: But I just don't think founders are aware, and I say this... And people always get at me, I I think they kinda miss the point. Because I say it, like, lovingly for awareness of founders, that the game has changed and that, you know, going from one to 4,000,000 and then four to 8,000,000 and then eight to 16 and then banking in five years time, we're gonna hit 30. That's an amazing achievement, but it is just not enough to get Venture excited today. Do you agree with that? [00:30:10] S0: Yes. I agree with that. Again, snapshot in time because you're seeing companies But do think Venture will ever go back to being excited about that? Well, they're not excited about it today because they're seeing companies go from one to 10 to 50 to 100. So you're getting to 100 in three years. In some cases, they're going from zero to 1,000,000,000 in eighteen months, right? So when you see those kind of companies, of course you want to do those. But that's because we are moment in time where the sudden trends are allowing you to do it. I don't think this continues forever. So I think this is where I think you have to take the long, long horizon look at this, right? There were companies who grow, they grow fast, but there's a combination of things that make these companies grow fast today that may or may not continue. [00:30:50] S1: When they grow as fast as they are, the rounds come thick and fast and the prices are high.
00:30:50 · Harry Stebbings, Venky Ganesan
[00:30:50] S1: When they grow as fast as they are, the rounds come thick and fast and the prices are high. [00:30:54] S0: Yeah. I mean, you look at instinct. God bless. I wish we were in... They've gone from, I don't know, $250,000,000 to 10,000,000,000 in ten weeks. Would you have done that round at $10,000,000,000 Smart people have done it. We are in town, which we love and we think very highly of and we're excited about that. I think that there's something going on there. There's a true phenomenon. What I don't know is to understand their data and what it costs for them to keep growing their user base. And how does the Muse launch affect their growth? [00:31:24] S1: Can I ask you, everyone kind of goes into a lot of investing now with the idea that there's downside protection? Noah's incredible. It's in a very strategic space with the incumbents. Worst case, one and 500,000,000 McPref. It's a no brainer for Microsoft to do it as an addendum to Copilot or Apple to do it. Jesus, Apple, please do it. Do us all a favor and save us from Siri. Do you think that downside protection, ah, Demirai, the incumbents will buy it, is okay to have or quite a dangerous mindset to have? I think you can easily rationalize a lot of things if you [00:31:57] S0: take that mindset. And the problem is that, again, you threw out this 0.5 number casually because we are in this environment where, you know, AMD is buying a company for $8,500,000,000 Nvidia bought Hugging Face for 14,000,000,000 Stripe bought Open Router, allegedly, around $8,000,000,000 [00:32:13] S1: Allegedly.
00:32:13 · Harry Stebbings, Venky Ganesan
[00:32:13] S1: Allegedly. [00:32:15] S0: Allegedly. Allegedly. And I think we have to go and say these are... As point in time where companies are doing it, it may not be that way. And so today it feels like a billion and 0.5 is, oh, no big deal. If I'm right, it's gonna be worth $102,100,000,000,000. If I'm wrong, someone will gonna pick it up for $34,000,000,000. By the way, that's what you're referring to my tweets. I wrote this thing about it. If you go back and look at during the .com era, Nortel bought Kairos for 3,500,000,000, Lucent bought Chromatus for 4,500,000,000. These are companies with no product, no revenue, just teams. And they bought it with their stock, and so it felt very similar. In fact, I believe Jeff Yang from Redpoint, legendary investor, had this quote in the Internet Standard, which is a magazine that's an acquisition of MoA. He said, know, there's no risk in venture capital. The company said, this will be sold for billions. If not, it will be bought for the growth stack. And it didn't quite work out that way on the other end of the cycle after March 2000. So I go with trepidation, but I just wouldn't take the mindset, oh, some large strategy is gonna buy my company for the professional stack. Because they don't care about the investors. They care about the founder. Why would they do that? Why won't they just hire the founders for the same package? [00:33:27] S1: In a lot of cases, they kind of are in these structured deals, let's be honest, and screwing the investors.
00:33:27 · Harry Stebbings, Venky Ganesan
[00:33:27] S1: In a lot of cases, they kind of are in these structured deals, let's be honest, and screwing the investors. [00:33:32] S0: So you've seen that, and and you you can't take that... There's no reason for them to take care of the captive. [00:33:37] S1: Do you think about the dilutive nature of businesses today? And what I mean by that is just like we are suffering more and more dilution as an investor class than ever before, and it's a better time than ever to be an employee given the levels of stock based compensation, SBC for people. Do you worry about that? Think about that. Should I worry about that and think about that? [00:33:55] S0: For sure. I mean, we look at whatever we invest in at the seed round, and we assume by the time we sell or exit the company, if we own 10%, we would have 3.5% to 4%. We expect 60% dilution from the point of our first check, right? And that's a combination of dilution from financing, as a dilution from option pool expansions. And so you have to like to really think of yourself as whatever ownership you bought in your first check, it'll only be 50% by then at the end. [00:34:24] S1: The interesting thing is that it's very common in a lot of companies we're seeing today. And then the other interesting thing is companies are sometimes scaling so fast, a la OpenRooter, Alex, a friend of both of us, where they actually don't take that much dilution because they scale so fast, so quickly, and so efficiently where actually you suffer almost much less dilution. So it's almost a tale of two dilution worlds. Do you know what I mean?