The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
00:13:39 · Nick Shalek
[00:13:39] S1: Harry, I'm always concerned about pricing. Always have been since the start of the firm. So you're asking the wrong person. But what upside multiple is attractive is a subjective question for everybody to answer for themselves. Like it's something you negotiate with yourself and your LPs based on what success looks like for you. Our simple answer has always been like, we don't think of ourselves in the venture or the growth business, but in the business of making asymmetric bets on the exceptional people are going to change finance. So whether we're investing at seed or in a public company, whether, you know, we tell ourselves that a price, you know, round is cheap or not, the conversation has to come back to the question you're asking, which is how big can this be? You know, for us, it's like, can this become one of the most important companies in the future of financial services? I think finance is big enough that if you get that question right, you can earn venture type returns, sometimes even at a later stage and sometimes even when it's incredibly hard to write down on paper what you need to believe for something to be that big. You know, the only way to to earn exceptional returns, this is sort of the framing that I would bring it back to, which is a little different than what you're asking, but I think it kind of cuts to the core is if you want to generate several multiples of whatever LPs trust you with, which is, you know, our goal, the only way to do that is to be contrarian, since otherwise returns get competed away. It's just sort of like the law of investing. So we always ask ourselves, like, do we have a non obvious or non consensus point of view? And it's not always clear, like, it's very obvious when you're truly non consensus in retrospect, like how it felt when we first invested in Bitcoin and Coinbase. And most people just had no idea what we're talking about. But then you look at something like crypto today with Coinbase as a public company, and is it non consensus? Like, I think in the broader scheme of things, it still is exceptionally early. You know, even when everyone seems to agree with your general points, like say, neo banks can be big, they might not agree on degree.
00:15:13 · Nick Shalek
And this, know, gets to the heart of what you're talking about, you know, like, one of the hardest things I found in tech investing is updating your priors, know, one point you can only see Stripe as a billion dollar company, and then you got comfortable with as a $10,000,000,000 company. But how do you get over that view and see it as a $100,000,000,000 company or a trillion dollar company? And this imagination and constant reframing is like, seems to be one of the key intellectual traits of the best investors. It certainly might be the case that people are tricking themselves and over applying this kind of thinking. I think that definitely happens because you see too many companies priced too richly. But you know, for us, it might be true that the best fintech companies are still in the phase of selling DVDs and books. And if you believe that, like what might happen next? Warren Buffett has this saying that time is the friend of the wonderful company more than valuation, which is very important. We all need to focus above all things on like what are really the wonderful companies. And I imagine that's true for you too.
00:16:01 · Harry Stebbings
[00:16:01] S0: It absolutely is. I think what I find challenging also is bluntly, in a world of COVID and less in person interactions, the compression of fundraising timelines and Zoom fundraising. Bluntly, it's just made it much harder to build a relationship with the founder, build a relationship with wider team members, feel the culture of the office, and understand that fabric of wonderful, if that makes sense and isn't too cheesy. Do you struggle with that too?
00:16:24 · Nick Shalek
[00:16:24] S1: A 100%. I think that's the biggest challenge for us. The fundraising environment, the valuation environment, I should say, is one thing. I think that's just a reality that you have to adapt to. How to build meaningful relationships and partnerships, which we see as kind of a cornerstone of how to be a great investor, that's harder to do. We always think when we're underwriting a deal, and this I learned as an LP too, the first decision is important, but it's you should do the work to make the second decision because you often will have to and especially in this environment, you have to make that decision before you have a chance to collect all that much more data. But even more importantly, if something goes wrong, which is you know, almost is inevitably the case in FinTech companies, there's some, you know, regulatory issue or a balance sheet issue, you want to have to get back to that word, you want to have the conviction to be great partners at that time. And I think a lot of the worst behavior we see from investors is where they came into something quickly, and they didn't really understand it. And we really work hard not to be those investors, but it's hard to do on a three day timeline on Zoom. So we're working on it, adjusting and trying to do a lot of things to figure out how to be on the front foot rather than the back foot.
00:17:24 · Harry Stebbings
[00:17:24] S0: I mean, I'm so glad that I'm not alone in that one. I do want to ask that, you know, in terms of like, you mentioned the reinvestment decision making process there. When you think about ownership, often a lot of funds, you know, certainly of your size have very specific ownership requirements. How do you think about ownership requirements on entry? And then how possible do you think it is to build ownership over time? Often I find with the best companies, they get taken away by the best and you never see them again. How do you think about those two?
00:17:49 · Nick Shalek
[00:17:49] S1: Ownership definitely matters. To me, that's like almost a immutable law. But I think this is one of the tricky dichotomies of the business, and there are a bunch that you can never quite reconcile. There's this F Scott Fitzgerald quote that I remember maybe from college that like, the test of a true first rate intelligence is the ability to hold two ideas in your head at the same time and still retain the ability to function. And that's what I think about on this topic all the time. So here's my two opposing ideas that, you know, seem hard to reconcile. Like first, ownership really matters, mostly because we're all limited by the time we can allocate. And at Ribbit, we really believe in making concentrated focus investments and putting our money where our mouth is. But second, at the same time, I think investing in the best companies should be the tail that wags the dog. You know, you certainly shouldn't back a weaker company because you think you can own a few more percent of it. So the thought experiment for me goes like this. Like, if the best founders only want to sell you x percent of their company and x is lower than your ideal, you kind of have choices. One, don't back the founders. Two, you just shut down your business. Or three, you try to find ways to align your desire to own more with their objective to make the business successful. So we start with who we want to back, and then we get to working on number three. And our arguments are usually based around trying to show them in lots of ways the value of being partners with us. And if we can give them more money over time, and we still think the return is asymmetric and meets our absolute bar, it's the highest return on time thing we can do. This is how we think about it. I don't envy stage focused generalists, because I think it's an even harder challenge these days.