00:17:31 · Trae Stephens
[00:17:31] S0: I I think I come in... Again, not knowing anything about venture. I come in thinking there are probably, like, hundreds of startups, and we're gonna spend a bunch of time, like, learning about these companies. And we're gonna sit around a table, and we're gonna make really hard decisions about which companies we're gonna deploy capital into. That was totally wrong. It turns out there are thousands of companies. As I said before, you generally know pretty quickly whether or not it's gonna be one that you're going to back. And it wasn't really about the decision making. It was really more about, like, having an understanding and an opinion on what was likely to work and what what wasn't likely to work. And so, you know, in the first couple weeks, Brian Singerman, was one of the GP at that time, he's he's now running his own fund, he sat me down and he said, your only goal for the first year, your goal is not to make investments. Your goal is to take as many pitch meetings as you can. And he was like, I'm going to challenge you to take 500 pitch meetings in your first year, which is A lot? A lot. Without making any investments? That's just Right. Right. And I didn't really understand why he wanted me to do this. But after like 200 pitch meetings, I was like, oh, man. He's trying to show me this critically important lesson about investing, which is that almost all these companies are completely uninvestable. And you only get to get that knowledge if you lower your bar and you have a lot less discrimination, which you can do when it's your first year in venture capital. I can't do this today. This would be an incredibly poor use of my time. But it was really important for me to see everything in the market Mhmm. So that I I was able to tighten it up so that I could make much more efficient use of, you know, what a good intro looks like, what a good founding team looks like, what, you know, types of companies have the potential to return the fund rather than just be, like, good acquisition targets, which for a billion plus dollar venture fund
00:19:27 · Aditya Agarwal
[00:19:27] S1: doesn't move a needle. Yeah. But you said something earlier, which is interesting, which is that you said that it's you expected venture capital to be surveying the landscape and then kind of making decisions, but instead it was about coming to a shared understanding of what good looks like. So is it... Is that what you were trying to... Like, is... Do you think that one of the key aspects of Founders Fund's success is that as a partnership, have a very strong point of view, a shared point of view on what great looks like?
00:19:54 · Trae Stephens, Aditya Agarwal
[00:19:54] S0: Yeah. Yeah. So, like, a great example of this... And my chief of staff, Ellie, is somewhere over here. Eli does a lot of this work for me now, which is great. But like as the GP of the Venture Fund, if someone on our team says, I believe this is an investment that we should make and I need to get Trae to meet with the company, there's like a 90% chance that I will agree. Because our bar is really high, and we generally understand what it means to create fund returning opportunities, what concentration means, like what is the fund strategy for deploying capital, how we're thinking about average entry price. Like, we're we're kind of, like, pretty aligned on this. And so when someone brings something to the GP, it's gonna be pretty baked. Like, it's not just an exploratory meeting at that point. Mhmm. And I I think you just need a lot of reps to get there. Like, a a brilliant person, like, you know, 160 IQ person can't walk in and be good at this just because they, like, understand science. Yeah. Like, you need to have thousands of reps before you truly are able to understand what a good opportunity looks like. [00:21:00] S1: So maybe this is too much inside baseball on venture, but I'm curious. When do the... When does that 10% occur? Like, where does, like, where is the often the source of disagreement? Is it in priors on market shape, product shape? Is there just like a different read on founder characteristics? Are there, like, common sources of misalignment or disagreement?
00:21:19 · Trae Stephens
[00:21:19] S0: Founders Fund is twenty years old. I've been around for 13 of those, so just a little over half. You know, you can make an argument about if it's the best venture fund of all time or if there's two or three other firms that have similar return profiles. But we've done really well. Yeah. And I can't take a ton of credit for that. Thirteen years is actually not that long to, like, see the the upside that's been generated. In those twenty years, for one of the best performing venture funds of all time, I can genuinely say that, like, 12 companies have returned 95 plus percent of all the returns to the fund. It's like Facebook, we did seed in series a. SpaceX, Airbnb, Spotify, Stripe. You're like, there's only 12. And so when you're meeting with with companies, your your question needs to be, is this a $10,000,000,000 success story? Is it a $50,000,000,000 success story? Is it a $100,000,000,000 success story? Is it a trillion dollar success story? Now, you have a company that come in... Comes in, and I... I'm not gonna target anything that I've seen. But let's say it's like a, you know, manufacturing autonomy for welding tubes. I don't know. It could be anything. You can meet that and be like, that's a cool idea. Somebody should do that. That... It's likely to work. There's a lot of customers for that. Is this a $100,000,000,000 company? It is not. And so if you have a billion dollar venture fund, and I own 10% of a $1,000,000,000 success story, that's $100,000,000 I have now, in this success profile, I have returned one tenth of my fund. It just economically doesn't matter. And so you you like start attuning to that. It's like, I need to believe this is gonna be a 60 to $100,000,000,000 company. And there's just not that many companies that have the potential to to grow to that scale.
00:23:00 · Aditya Agarwal
[00:23:00] S1: Okay. So this is a good segue, which is perhaps... I think that there was broad consensus around outcome sizes and kind of market segments for those outcome sizes, I think, across our industry. Broadly, you know, maybe up until three or four years ago. But I think over the last three or four years, it feels as though a lot of kind of like, you know, the... Kind of, you know, like, hey, this could be a $10,000,000,000 company. Now it's like maybe like, you know, a much bigger kind of like, you know, potential size than it... We all thought it would... Was going to be. So I guess maybe the question here is that how have either you, yourself, at Anduril, or maybe at Founders Fund started to adjust some of your own priors on how big some of these outcomes can be in a world where we actually have kind of the tailwinds of, you know, massive acceleration through AI? Well, I could give you the the pro version of this argument.
00:23:53 · Trae Stephens
[00:23:53] S0: Give me both. I'm gonna... I'll start with the negative version of this argument. And I'm not saying that this is always right. There are always exceptions to the rules. But I I... My general assumption is that it's actually not true. Okay. Like, there's company values at liquidity... At the point of liquidity are not going to move meaningfully beyond where they have historically. Like, there will be exceptions. OpenAI, Anthropic, you know, they're gonna go out at over $1,500,000,000,000 market cap, and that's incredibly unusual for a tech company. But like Airbnb is worth a $100,000,000,000. Stripe is worth a $150,000,000,000. These are incredibly awesome venture outcomes. And this belief that every AI company is gonna be a trillion dollar company, there's just not enough money in the universe that there's going to be $101,000,000,000,000 companies. What ends up happening is now we have these companies that are coming in that are saying, we're doing a $300,000,000 round. And we literally have to ask them, that's how much you're raising, or that's the valuation? And we don't we don't know the answer to that question. And it's just math at that point. Yeah. It's like if you're raising up, like, pre revenue, pre incorporation round of 100 plus million dollars, you can just walk the math out with dilution, with capital costs, everything like that. And you basically get to the point where it's like, even if this works, like, at a $100,000,000,000 level, we don't return the fund, which means that you require it to be a trillion dollar outcome to see the same venture dynamic that you see in a normal company ten or fifteen years ago. And I think that there's like two problems here. And it's both on the investor side and the entrepreneur on the entrepreneur side. On the investor side, there's this belief, like venture capital is far too aspirational. It doesn't make any sense. The asset class can't support a 100 successes. You know, being an investor should