Uncapped with Jack Altman
· Kevin Hartz, Bennett Siegel, Jack Altman
[00:00:00] S2: Do it all. [00:00:00] S1: We’re a little different from a traditional seed fund. We do have a reserve-heavy model. We do have more capital available for follow-on than seed. If all you’re writing is the first check in seed, it’s exceptionally hard to drive returns. For our best companies, we’ve piled in every single round, and out of a portfolio of 40 seed investments, we might have 3, 4, 5 companies that have the lion’s share of our capital. It’s concentration, but different than the way that a traditional growth fund would talk about it. [00:00:00] S0: You’re saying seeds hit so infrequently that if you don’t double down on the few that work, it’s very hard to get good returns as a basket. [00:00:00] S1: I think that’s absolutely true, and I don’t think your fund is going to return the multiple. We look at others of our peers who look at pro rata and say, “What’s peanut butter pro rata everywhere?” You always want to support your founders, but as you look at the Series A, the B, the C, the D, those follow-on decisions are actually in many cases more important than your initial investments. [00:00:00] S0: What’s interesting is I would argue that from a basket of seeds, it’s actually very difficult to tell by the Series A where you should be concentrating. But a lot of funds just do their pro rata in the next round, and that’s that. That really is just peanut butter across all of it. I would think it’s much easier to know where to put huge amounts of money a stage or two even later than that.
· Jack Altman, Kevin Hartz
[00:00:00] S0: What’s interesting is I would argue that from a basket of seeds, it’s actually very difficult to tell by the Series A where you should be concentrating. But a lot of funds just do their pro rata in the next round, and that’s that. That really is just peanut butter across all of it. I would think it’s much easier to know where to put huge amounts of money a stage or two even later than that. [00:00:00] S2: Agree. In our case, we do agree to support our companies in the A. We’ll always do the pro rata in that round and then watch. But you’re right, like that inflection… [00:00:00] S0: There’s a different pool of concentration. Let’s say you had a fund that was a $100, and $40 of it’s going into initial seeds, and then there’s $20 for those pro ratas. I would think for the last chunk, done right, you’re probably doing 10% of the fund into a few companies each, that kind of thing. Is it that concentrated? [00:00:00] S2: This is interesting because Brian Singerman is creating this LP fund to find new managers to be able to concentrate and help them go all in. Since 2005, that’s what Founders Fund kind of pioneered, breaking the old venture rules and putting this inordinate amount of money in. Like when they sold all their Spotify off at a $9 billion valuation and rolled it into Airbnb, that was pretty monumental. [00:00:00] S0: Which is interesting because that’s more of a trader mindset, which you don’t normally see in venture. Spotify did well, but I guess that was a good trade because Airbnb was at what, $2B or something like that? [00:00:00] S2: Yes. $2.5B.
· Kevin Hartz, Jack Altman, Bennett Siegel
[00:00:00] S2: Yes. $2.5B. [00:00:00] S0: So instead of getting a 5x, you got a 50x. Great. [00:00:00] S1: You need to know what great looks like to be successful. For us, we have a $450 million fund. More than 50% of the dollars come after seed. Most growth investors look at seed companies and they’re completely uninteresting: it’s a founder, it’s a product, it’s raw. Most seed investors look at growth companies and they say, “These are all amazing. Oh my God, they have product-market fit and revenue and scale, and the founder can actually string together two sentences.” That’s historically why people create separate early and growth stage teams. To be really great as an early investor and to follow your founders as they mature, you need to know what great looks like at every level. To your point, the Series A may be a hard stage to do that. Obviously you as a practice now are picking that stage, so it should get easier over time. But as things become more consensus, they get more expensive. It’s harder to buy ownership. So it’s always that pendulum on where you want to be on the risk curve.
· Kevin Hartz, Jack Altman
[00:00:00] S2: The other side is, when you do back the truck up and really go for it, ensuring that it is the money round. In ’06 or ’07, we used to sit on the floor and project SpaceX launches. They’d launch them in the South Pacific somewhere and they would blow up every time. That was the sucker’s bet, to actually invest in those rounds as these things were blowing up. But as soon as they got one into orbit and that landed the contracts, that put forth the sequence of events. Then that’s the next phase of putting money in. And certainly Starlink was the big unlock more recently. [00:00:00] S0: Founders Fund’s SpaceX concentration is extremely impressive, to do it over and over into that company. I guess the key is, you’ve got to have a SpaceX in the portfolio that’s worth concentrating into for 15 years, but it’s still pretty impressive to do it. A lot of people just wouldn’t have the stomach for it. I’m curious about some of your guys’ opinions on AI. Obviously I know you spend most of your time trafficking in founders and talent, but I also know you guys have strong opinions about the market and where it’s going. I’d be curious to hear some of those. Bennett, maybe starting with you. We had talked a little bit about rollups, buying businesses that are older, established companies and applying AI to them. I know you’ve got a background doing growth as well, so you have some more familiarity with this. What’s your view here?
· Bennett Siegel, Jack Altman
[00:00:00] S1: There are a few things that are going to be worse for incumbent businesses and the venture capitalists that are participating in these, than the work of buying and transforming and dealing with the culture and the process changes. Everyone thinks it’s as easy as buying a business, deploying AI, improving free cash flow margins, and earning a return. Private equity firms have been doing rollups forever. It’s incredibly challenging to turn around an existing business. I think this is actually a great business for founders. It used to be that you had to raise capital, you had to buy an asset, you had to improve the asset, and you would keep 20% of the profits. Now a founder can go and raise venture capital dollars, dilute 20%, so keep 80% of the profits and go buy a business. It is phenomenal for them. I think it’s an exceptionally tough asset class that allows venture capitalists to raise lots of money, but I think it’ll be very hard to achieve real profits doing it. [00:00:00] S0: By the way, on that point, as the venture capitalist, don’t you need the thing to appreciate a lot just to get back to even? [00:00:00] S1: Yes. [00:00:00] S0: If you gave somebody $1 billion and then they went and bought an asset for $1 billion and you only own 20% of that thing, don’t you now have $200 million?
· Jack Altman, Bennett Siegel, Kevin Hartz
[00:00:00] S0: If you gave somebody $1 billion and then they went and bought an asset for $1 billion and you only own 20% of that thing, don’t you now have $200 million? [00:00:00] S1: The ironic element of this is that the founder can’t lose. The founder has literally bought into a business with embedded asset value that they now own a large percentage of. But unless these companies appreciate dramatically in value, the venture capitalist owns a relatively small percentage. Now people are doing convoluted structures where there’s a holdco and an opco and there’s carry and there’s waterfalls. But no one has actually proven a way that you can monetize this in any way that resembles venture-like returns. [00:00:00] S2: The other dimension of it, in this venture capital/private equity play, is simply that venture capitalists are very good at watching the top line. They want things to blast off, and they’re not so precise. This is all about the top line, but the bottom line more importantly. Venture capitalists don’t pay as much attention to that with their companies. So it just doesn’t feel like the right culture fit for this sort of stuff. [00:00:00] S0: Are there any forms of rollups or structures that you are bullish on? When you look around the different types that are happening, is there any form where you’re like, all right, if I had to buy one, that’s the one I’d buy?