Invest Like the Best with Patrick O'Shaughnessy
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.
00:33:25 · Ramtin Naimi
[00:33:25] S1: It's less competition. You could deploy large sums of capital into those companies and be a passive investor. I think it's probably a safe way to know that you have exposure to great companies. The main question is if you're pricing those companies in today's environment, you need to kind of answer for yourself whether you believe it's 2019 or 2021. Because in 2021, you could have invested in Stripe at a $100,000,000,000. And Stripe was a great company. It still is a great company, arguably one of the best. But today, Stripe is a $179,000,000,000, which is great. But that's what, like an 11, 12% IRR over five years, which, by the way, is still better than, like, the bottom 75% of ventures. So you can probably secure yourself a top quartile position in the venture market by backing the best companies at the highest prices Because they are great companies and great companies tend to continue to be great companies. They do tend to compound over time. But I do think the thing that gives me a little concern around that strategy is how consensus the approach you described has just become recently. Because I've seen a record number of VC firms in the last eighteen months honing on the same idea of there is a handful of obviously great companies that can absorb a huge amount of capital. And as a VC, if you can demonstrate access to these names, you can raise large funds and become a passive investor with large sums of money in these companies, almost to the point where it's become a consensus strategy of an easy way to deploy large sums of money and do well. And you might have more data on this than I do, but I can't really think of many times in history where, like, an easy strategy turned out to also be a good strategy long term. So I think that's kind of the interesting thing about this market is if everybody believes that's an easy way to make money, it's probably not a great way to make money. But I can't think of any strategies that were considered easy money at the scale that people believe it's easy money right now.
00:35:05 · Patrick O'Shaughnessy, Ramtin Naimi
[00:35:05] S0: What about the data companies where the narrative for years was, is it more like a trade than a company? We need to arm all these models with tons of data, but once we have the data, we're gonna be good. Seems like maybe that narrative has shifted and these things seem to be more persistent than one might have thought or bigger than one might have thought. [00:35:22] S1: What do you [00:35:22] S0: think about data companies?