How I Invest with David Weisburd
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.
00:11:37 · Brijesh Jeevarathnam, David Weisburd
They really want to do something, achieve something, show the world, you can use whatever set of words you want, but those folks are the ones who keep on going. And they will find a way to outwork, out hustle and win against folks who don't have that X factor. [00:11:54] S1: When I think about chip on shoulders, dozens of entrepreneurs come to mind, people like Palmer Luckey, people like Adam Neumann. When it comes to venture capitalists, what are some examples of great VCs that have this chip on their shoulder?
00:12:07 · Brijesh Jeevarathnam
[00:12:07] S0: I'll stay away from the names here, if you don't mind. I'll give you some archetypes perhaps. We back both franchise managers, well known names, but also we back a number of fund ones and twos. And these fun ones and twos, they're folks we've known for typically five, ten years. So it's kind of very much a relationship that is long term. So we know the folks. The archetypes of these kind of folks that we back, besides sticking all the basics, would be they had a, let's call it a not the best departure from a power venture firm for whatever reasons, of their own choosing, of the other firm's choosing, and or that firm has gone a direction in terms of scale or geography where they feel they cannot practice their craft the same way. And now the chip on the shoulder is, I guess to put it in human terms, I guess, I'll prove you wrong. I can do this without the shingle of great brand X or without the calling card of franchise Y. And that is one archetype. Another archetype would be folks who have been, let's say, operators before in a startup or maybe they had a startup that failed, etcetera. And they've had a tough time in the LP market fundraising. They have an interesting thesis. They, from our vantage point, have the right to win with entrepreneurs. They're raising usually a modest fund, but they've taken enough bruises in the LP fundraising journey, they are really motivated to kind of prove that they can belong with kind of a, let's call it a franchise set of venture managers. Now, we don't back many of these. We back some of these folks. What's great is if we can find them early and get into their fund one or two, that quality of relationship we can build with them is exceptional because they never forget, right? They might have allegiance to all LPs, but that first one or two Keystone LPs that kind of put them in business, quote unquote, that is another great archetype as well of venture firms we like to back early.
00:14:21 · David Weisburd
[00:14:21] S1: What is the second order effect of an LP having great relationship with a GP?