How I Invest with David Weisburd
00:03:26 · David Weisburd
[00:03:26] S1: I want to get into in a bit about what makes a VC a great founder whisper. But first you said the Michael Moritz kind of being lonely away from from the pack and being this independent thinker. One of the most underrated memes today from Marc Andreessen is this idea that there are no more diamonds in the rough, only diamonds. Does that still apply today?
00:03:49 · Brijesh Jeevarathnam
[00:03:49] S0: Mark is a much more profound thinker than I on these topics. I might have a slightly different view on what Mark said. And I did hear that whole segment. I think what he was trying to say is the diamonds in the rough are off by one. And there's a reason why they're off by one. The founder is unusual or a different geo, or the thesis has evolved, the founder is hard to work with it. We think about the world a bit differently. When we look at our portfolio, when we look at the few companies that drive returns, and we'll come back to this topic, the power law and venture, which everyone knows about. I'll share some statistics on it in a minute. What we look for is who backed these companies first, who backed them early before it became a bit more of a feeding frenzy. So, it's not enough to be in company X, this great potential winner. Who can have back the first run of company X when it was far from the breakout winner, right? So I guess in that sense, those companies are diamonds in the rough. And there are great GPs, great venture firms that have a consistent way of getting there to be the first or among the first to invest in a company that is not yet obvious to the world why it's going to be the potential winner in a category and then help build it to become the winner. So that's our view on this, like a nuance from Mark's view. And I do think there are many examples where even today in this world of potential FOMO and potential consensus thinking, if you go to the earlier stages, there is kind of non consensus thinking in the seed series A, etcetera, around backing these great founders and hoping they'll become something in the next few quarters or years.
00:05:40 · David Weisburd
[00:05:40] S1: Episode is presented by Juniper Square, the operations partner for private private markets. So another way, sure, there might be consensus at some stage, but if you keep on walking it back back further back, it's absurd to think that there's consensus when it's just two founders thinking on an idea. That... That's kind of an absurd idea. So the question is when does this consensus form?
00:06:04 · Brijesh Jeevarathnam
[00:06:04] S0: Yeah, it's hard to draw a bright line and say, this is where the consensus is. If I had to take a step back, I think we should talk about what venture is today versus what it used to be. And you started by saying, I've been in this industry now of selecting managers, both venture and buyout, for twenty years. And boy, the time has flown by. And what's also happened is the industry has really changed in that time. When you look at the venture industry today, depending on which source you look at, there are about 4,000 ish firms, 3,000 to 4,000, let's call it. I go back to when I started in the industry 2006, twenty years ago, 2006, there were about 500 firms, active firms per PitchBook and NVCA data ballpark. So that's a 8x ish increase in the number of firms between now and then, right? Not only has that gone up, the number of firms, the amount of capital going into venture backed companies has gone up. We're looking at, I think NVCA says as of third quarter, we're at 500,000,000,000 plus, which is a mind numbing number. If you think about the number of startups has gone up and it's now, I believe, at like 40,000 companies or whatever, venture backed startups, which is an eight to 10x increase from fifteen, twenty years ago. My point in saying all this is venture is no longer kind of a craft industry. It is very small compared to the public markets obviously still, but it's expanded in scope, in size, and broadly funding aperture to a point where we may have to use different terms to talk about the different parts of venture. To answer your question, to tie it back to that, it's not clear to us exactly when a company becomes consensus. In today's AI world, the letters don't mean much. Series A, B, C, D, as you know. Companies raise kind of five rounds in one year kind of thing. But there is a point when maybe the companies found product market fit, they have some marquee customers and they're seeing a high kind of net dollar retention and so on when these companies in a particular sub sector break out from the crowd, right? At that point, clearly it's consensus. Before that, you pick any category. It could be, let's say AI. It could be at the hardware part of the stack or the infrastructure part of the stack or the app part of the stack. At the very earliest stages, it's unclear who's going to break out.
00:08:42 · Brijesh Jeevarathnam, David Weisburd
And that I think is the magic and the alchemy of venture. And our focus, we are a full spectrum investor from seed all the way through kind of growth stage. But our focus remains on the early part of the spectrum. [00:08:57] S1: Today, does what you look for in VC managers, is that dramatically different than even five years ago?
00:09:05 · Brijesh Jeevarathnam
[00:09:05] S0: Yeah, some things have changed, but I would say most things are perennial, high level. We have always looked for three attributes to be strong. Those three attributes are number one, the investment team itself in fund. The Number two, it is the investment strategy they're pursuing. Number three is the track record in venture. Of the three, as you can imagine, third, the track record is the most quantitative. It is also backward looking. So while it's good to have, it is in many ways the least important indicator of future success. So we spend a lot of time on the softer aspects, which is the team and the investment strategy. The team, people ask us, what do you look for? Many things such as intelligence, academic accomplishments, prior experience in the industry, they're all table stakes because there's so many folks who check those boxes, right? What we're looking for beyond that is we're looking for a few things. One is the chemistry and the level of complementarity between the team. There are many teams where it's like a basketball team, right? There's a version of a center and a point guard and so on and so forth. People have different skills. But combined, they make up for a force that is really hard to beat in a competitive market. They're able to once again see around corners because maybe one of the partners has a particular skill with people, the other one is more numbers oriented, one is perhaps good at thinking about markets and products, etcetera, etcetera. So we're looking for that kind of magic to happen in the combined team composition. We're looking for harmony between them. One of the bigger risks we take is that there is team, I'll call it disharmony or fallout, etcetera, etcetera, which happens in partnerships, right? We're also looking for an X factor and it's really hard to quantify what that is. It is kind of a chip on the shoulder. It can be from many things. It can be from the way somebody grew up or where they grew up or being fired from a prior job, including a venture fund or many, many things. Josh Wolfe of Lux Capital has a great quote on this. I think he says, Chips on shoulders put chips in pockets, right? And this X factor is important because the best VCs, I guess the best founders as well, of course they're driven by economics and by their net worth, but they're driven by much more than that.