The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
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?
00:34:24 · Harry Stebbings, Venky Ganesan
[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? [00:34:46] S0: Yeah. It it's a it's a function of time. So so the way to think about it is that... And I don't think we spend enough time in venture capital about that. We should say, what is the time horizon you're gonna hold the company? Because the time horizon will determine your dilution. So part of of the reason when you are in a situation where your dilution slaps is they have quick exits. They grew their value fastly. They have quick exits. And that's a double win. When your time horizon is long, there are two hits. Your your IRR gets hit, and you're gonna have meaningful dilution. [00:35:13] S1: Did you think of that when investing, which is just like, what really is the ramp? There's like businesses like in the ERP space where they're like, oh, but the revenue is such high quality, Harry. I get you. It's not as fast as your Higgs Field or your Legora, but it's so high quality. And I'm like, Yeah, fuck, it's slow. Am I
00:35:33 · Venky Ganesan
[00:35:33] S0: wrong to think that? No. I think the velocity of the business is very important for venture capitalists, right? And the velocity will determine a bunch of things, right? Because the other reason why your dilution goes down is like if you have a fast uptick in valuation, the amount of ownership you gotta give for your next set of human capital is a lot lower, right? So you are a $200,000,000 company and you're giving 2% of the company to hire a senior exec, right? That's pretty meaningful. You quickly go to $2,000,000,000 company, you don't need to get... You're gonna give RSUs and you give the same person $20,000,000 right? Which is point 1%. DPI or IRR? Both. I mean, you can. I do think actually that you can't have IRR without DPI. I think the question you're trying to ask is, hey, will you settle for a larger DPI over longer horizon, or do you want quicker DPI with a faster IRR? I think the reality of venture when I joined, this now dating myself twenty eight years ago, people didn't focus on IRR. People were like focused on like cash on cash return because IRR took care of itself. I think in today's venture, the game has changed. You have to focus on IRR. You know why? Because there's no way for venture to be successful in today's era without the max seven participating in everything you're doing. Every venture company is writing a tax to Nvidia in some way, shape or form. Writing their tax to a hyperscaler in some way, shape or form. And possibly writing a tax to the foundational model in some way, tax reform. So if you're gonna be successful, right, you're gonna be writing a tax to all of them. All of them are available in the public markets or they will be soon in the public markets for someone to invest in a no fee, no carry index fund. And so you have to think about your IRR as I've got to beat that with thousand basis points to justify anyone giving you capital in the private markets.
00:37:21 · Harry Stebbings, Venky Ganesan
[00:37:21] S1: You mentioned Town. I had JD on the show. Really like him. Yeah. I've known him since the plant days. I'm pissed off about that one because he started the company when he left. And I remember talking to him about it when he started, and he was doing something in some terrible space. No offense. He'll agree with me. And then he obviously pivoted. Tax. [00:37:37] S0: Think they were doing something in tax and pivot. [00:37:39] S1: Thank you. I'm too old for this shit. [00:37:42] S0: You're old, what am I? I'm eight years old. [00:37:44] S1: You're you're a spring chicken. And for anyone watching, they'll see that you look much younger than me. But my question to you is, we obviously know what happened with the Town Round in terms of competitive nature and dynamics there. I don't wanna go into that. What I wanna go into is actually, does competition matter for VCs to invest against now? It seems like Andreessen has, you know, three companies all doing the same thing and many big platforms do. Does it matter being in many players in the same space anymore?
00:37:44 · Harry Stebbings, Venky Ganesan
[00:37:44] S1: You're you're a spring chicken. And for anyone watching, they'll see that you look much younger than me. But my question to you is, we obviously know what happened with the Town Round in terms of competitive nature and dynamics there. I don't wanna go into that. What I wanna go into is actually, does competition matter for VCs to invest against now? It seems like Andreessen has, you know, three companies all doing the same thing and many big platforms do. Does it matter being in many players in the same space anymore? [00:38:09] S0: I mean, this is a personal preference. Right? I think I think culturally for Matt, Sean and I, we like to be committed to the entrepreneur. The situation is going to be specific. Look, if we take a board seat and we write a big check, then we want to be. If you invest in the seed round and you have a small check, you're a passive investor, that's a different issue, right? But when we make a commitment to the entrepreneur, we want that to feel like a two way commitment, right? We expect them to put the interest of their shareholders and commit to it. And we, as shareholders, need to commit to them. And that's why we didn't invest in OpenAI. We only stayed with Anthropic. There's no shade. Again, venture is changing in a way that multiple people are doing different things. I think you just have to figure out what is authentic to us and our values and live by those. And I think for us, when we make a big commitment to the founder, we think of it as a two way street. They commit to us, we commit to them.