Invest Like the Best with Patrick O'Shaughnessy
00:26:54 · Ramtin Naimi
[00:26:54] S1: Really interesting people. But anybody who met those founders would have told you they were brilliant. But nine months ago, nobody in the Valley really cared about BCI as a category. But the thing that these guys are doing, which is super interesting, is Neuralink is implanting chips into your brain, and they get perfect readouts as a result. These guys are extracting brain information via a product you wear on top of your head. When I met Conduit, they had a small amount of human training data. And by the way, like, their model showing scaling data is the more data it gets, the more accurate it gets at actually understanding your thoughts. It showed that if somebody typed their thoughts out, prior to them typing their thoughts out, their device, their software, their model, basically, with an 80% accuracy, understood what they were thinking. So if you read what the model thought they were thinking versus what they actually typed out, you got the same end result, but the words were different. And now they have thirty thousand hours of human trading data. And then in the last eight to ten weeks in Silicon Valley, BCI became a very popular category. And as you know, Conduit raised a very large round, highly oversubscribed 13 term sheets because now it's a great team working on a market that everyone cares about. If these guys succeed and now they're gonna go do a million hour trading data run after scaling laws hold, you could see a world where five, ten years from now, you and I have a little device that we wear over our ear that understands your thoughts and communicates with our agent and can discern between actionable thoughts and nonactionable thoughts. And everything you're thinking about, your agent is running for you in the back end. You just became the most efficient human being in the world. And now everyone's like, wait a second. Somebody could actually build a trillion dollar outcome company in DCI and conduit's latest round prices that into it. But perfect example of, you know, backing a founder who's brilliant, but on a market that people might not be that interested in the time, but they were just early to a market because I think smart people generally tend to understand markets well before the market starts to pay attention to them. You have a perfect example with Gavin Uberti from Etched.
00:28:40 · Ramtin Naimi, Patrick O'Shaughnessy
Gavin met every great investor in Silicon Valley, and everybody walked away from the meeting thinking he was brilliant. I don't think there's a single VC who met Gavin that didn't think he was brilliant, but a lot of people just assumed a startup company cannot outcompete incumbents on, like, AI chip fabrication. That's just never gonna happen. And it wasn't until Sequoia blessed them with a $10,000,000,000 valuation that everyone was like, oh, wait a second. Now we actually believe that startups will totally run circles around the incumbents on this market. And you saw every other chip company in the market raise an astronomical valuation because now people are like, this is now an obvious market to place bets in. But the market was obvious to these founders before it was obvious to the general market. [00:29:17] S0: If I was to shrink all of that set of observations down to one metric, would it be there's like an ideal number of term sheets? Say Gavin's because I know that story. It's not that he got no term sheets. He just got whatever number of handful. You know, he met every VC and got a small handful of term sheets from great investors. Is that the right way to think about it? Like, almost what you want is for the companies you're backing to get, like, two or three or four and not 15
00:29:41 · Ramtin Naimi
[00:29:41] S1: or something like I mean, if a company gets 15 term sheets, it's going to get very, very expensive. A company gets two to three term sheets, you're probably gonna get reasonable pricing because you have less competition and, you know, have you a lot more of a competitive advantage if you're a great investor to convince that founder to take your money and getting a core position in that business. I think it's more so if a lot of people take a meeting with a company, they're generally taking it because the founder is very impressive or they've heard great things about that founder from people in their network. Because for a company to get a large number of meetings with great investors, as you know, a lot of people need to vouch for that founder as a high quality founder. But if that company walks away from those meetings with a small number of conversions, it's probably not because everybody thought it was actually a bad founder or not that great of a founder. It's because people walked away thinking it wasn't that interesting of an opportunity. The default adventure. Most of the time, it's not that interesting of an opportunity, but in a few subset of cases, it's actually a very interesting opportunity. And most VCs, as I mentioned, are reactive and not proactive, and nobody wants to be proactive about learning about that opportunity that this clearly very special, very intelligent person has decided it makes sense to dedicate the next decade of their career to, at a minimum, to working on something within that category.
00:30:49 · Patrick O'Shaughnessy
[00:30:49] S0: If you think about the landscape today of seed versus whatever you wanna call it, early stage a and b versus late stage, anything else that's especially unusual to you about this period of time versus your whole history of doing this?
00:31:03 · Ramtin Naimi
[00:31:03] S1: The valuations in this market, you really have to have, like, a really big imagination for what these companies could turn into to justify the prices you're paying for these companies. It's easy to have that imagination when you're looking at companies like the Anthropic and OpenAI's raising trillion dollar valuations and going public. The market has allowed you to actually expand your imagination to that point. When you look at what these deals are getting financed at, thing that I'm saying that is probably in this market that's reminiscent of 2021 is it's getting harder for people that actually know the market to understand what something will clear at pricing wise. In a somewhat normalized market, I can tell a founder, hey, I think if you go out and we get a number of term sheets and we have some leverage, we could probably get this valuation ballpark from a high quality partner. And I think the current place we're out in the market, I think you can get a term sheet as low as here and as high as here, and that's like a four x difference in price. I'm not even on the money when it comes to where these things will price at because it is so erratic that somebody might just come in and do something irrational to not lose the deal, and the irrational thing might be to pay triple what the second highest bidder is willing to pay. And part of the reason that's happening in this market is every single founder you wanna lead a financing round for has an expectation for what they wanna raise a financing round at. And oftentimes, it pegs off they have a friend with similar company with similar traction that raised at this valuation. And the valuation that friend may have raised that may have been because one person paid three x the second highest bidder. You have these situations in this market where you'll give a founder an offer which you think is generous, and they'll generally be offended by that offer because they can point an example from someone they know is at a comparable stage at rates at three x or four x the price.
00:32:42 · Patrick O'Shaughnessy
[00:32:42] S0: Do you think then in this market, the most rational thing to do is go all the way to the other end of the spectrum to the businesses where we can really investigate them? Everything you're describing feels so untethered from any underlying reality of a product or traction of that product, anything that the business is ultimately going to get built on. It's literally just reputation and this weird multiplayer game of pricing. Totally untethered. Whereas Databricks, where I think you're a big shareholder, it's just so so much simpler to understand or think about an investment in Databricks from here. There are fantastic companies growing really fast that are really big. Do you think that perhaps the smarter thing to do is to go to the total other side of the spectrum given this craziness? I think that's probably competition there.