How I Invest with David Weisburd
00:21:07 · David Weisburd, Jerry Ye
[00:21:07] S0: So it's not Catalyst? [00:21:08] S1: Yeah. General Catalyst is customer value fund. And they not only work for startups, they also work with public companies. Right? So like Lemonade for the longest time, Fiverr, they've invested a $150,000,000 into Lemonade. It was like $2.50 into function, I think, and a billion to Grammarly. So these are actually really large tracks for for this product. [00:21:35] S0: Have you heard of Henry Shi and the startup leaderboard? [00:21:39] S1: I have not actually. [00:21:41] S0: So Henry Shi, previous guest, he started this scoreboard, which is the lean startup, basically, scoreboard where he tracks the top companies that have raised very little capital and has... Have grown. Famously, you had mid journey. I think it... They had something like a dozen employees and a $10,000,000,000 valuation at some point. I'm wondering how AI changes the fundraising game for companies. In other words, what are the downstream consequences of having smaller companies with high revenue? Does user acquisition financing fit into this new way of funding startups?
00:22:21 · Jerry Ye
[00:22:21] S1: I mean, if you think about a company, right, a lot of their... Especially for consumer companies, once they have product market fit, a lot of... If if not their their largest line item is UA spend. So... And as I mentioned, right, right, for those types of companies, it's a highly predictable problem in the short term. So does it make sense to, you know, fund that with, ten year capital at a cost of a ten year capital structure? Or is it better to relegate, you know, the cost of your data center or your token spend, etcetera, for that side? But for UA, you know, this is a lot cheaper capital. So, you know, you can potentially have companies, especially on the consumer side, that leverage and lean into this type of structure and are able to increase valuations quite significantly. Especially in like, let's say the gaming space where fundraising has been depressed over the last couple years. For example, the gaming space where fundraising has been difficult and there are companies that have leveraged UA spending to scale their revenues three, four, five, 10 x, right, over the course of a year or two. And that now has opened significantly... Opened a lot of doors in terms of being able to raise the next round.
00:23:37 · David Weisburd, Jerry Ye
[00:23:37] S0: Yeah. I was gonna ask you about that because the downside of having companies that... Just read that pre seed rounds are typically now at a $100,000,000 valuation. I guess seed rounds, that means are 500,000,000, a billion dollars. Why even do user acquisition financing if you could go and raise equity? I guess your answer would be that not every sector of the economy is this red hot sector today. [00:24:00] S1: Yeah. Not every sector is that red hot. But the other side is, you know, it is still coming out of cost. Right? Even at that at at, you know, those valuations as well. Right? So if you just price it in terms of, well, what if you use UA versus, you know, not losing that 20% chunk of your company, and you do hit your revenue goals, that's actually pretty expensive. [00:24:21] S0: And talk to me about venture debt. So venture debt has been around for many decades. And since really the earliest history of venture capital. Why is venture debt not better than user acquisition financing?
00:24:21 · David Weisburd, Jerry Ye
[00:24:21] S0: And talk to me about venture debt. So venture debt has been around for many decades. And since really the earliest history of venture capital. Why is venture debt not better than user acquisition financing? [00:24:35] S1: A, it's not necessarily available for all companies. Right? Especially as you go earlier stage. For example, if companies that have 10,000,000 ARR, you know, you're not gonna get venture debt offers generally. But b, it's usually on a fixed repayment schedule, and user acquisition financing is actually where the revenue is coming from revenue share. So we're not getting paid unless those users actually generate the revenue as well. So it actually matches when revenue is actually generated and when the company actually have the the funds to repay. Right? There's also, as as we discussed earlier, it's not recourse as well. Right? So it is a bit a lot more founder friendly. So we're not going to end up with a sizable chunk of the company because you underperformed for a quarter or so. [00:25:25] S0: We talked earlier in the podcast how you spent your entire career making these very art like aspects of venture capital quantifiable. What percentage of being a great venture capitalist can you quantify today?
00:25:39 · Jerry Ye
[00:25:39] S1: It's a very interesting question. And I think initially when I started, I would have said that it's difficult to quantify the largest portion of that equation, and that is access and the ability to be able to, you know, get into the room of of a company. But what I've seen over the past few years, especially, you know, talking to other peers at large firms or even small firms, there's a common exercise that all venture funds do, or I hope they do, is you're essentially looking at deals that are done. Right? Deals that are announced in TechCrunch, which shows up on Crunchbase, PitchBook, and you are triaging whether you were actually in the room or not with with the company. Right? And at what point in time. Right? So if you look at it from funding announcements, like, were they actually connected with the founder at some point? Was there emails? How many emails? Was there a meeting? How many meetings? Was there a term sheet? Did it go to IC, partner meeting? What did they decide? Right? And all of that stuff is actually in the CRM. Right? The thing is most most firms kinda see it as like a to do list of, you know, this is who to follow-up on. But it's actually a gold mine in terms of understanding and even quantifying a firm's ability to access deals. Right? Because if you join what deals are done with your CRM, you can start adding a score essentially to how much access does this firm have to a particular sector, particular geo. Right? So let's say you covered 85% of all AI deals done in the Bay Area, but you only cover 15% in New York. Right? That is a reason to add a partner in New York. If you ended up doing only, you know, 2% of the deals from the best papers at NeurIPS, you have like a research and academic conference, you know, hole in your sourcing. Right? So it's a reason to add a partner there. Right? So what's actually interesting is that, like, if you look at this full circle from, an LP perspective, right, is just imagine if someone's... Of another fund is fundraising, and you ask for the a... API key to their affinity or their CRM. You can actually quantify this. Right? Like, if if a new firm says, you know, we have access to all the AI vertical deals in Europe. Well, you can see from the meeting. Right? You can see that, well, if this partner just left a large firm and say that they brought all these relationships. Right?
00:28:27 · Jerry Ye, David Weisburd
Is that true? And that's actually like a very interesting part that you can quantify as well. [00:28:34] S0: It's fascinating because this concept of track record, people talk about it in venture capital as if it's the 10 commandments. It's it's it's these tablets that everybody goes around. Everybody looks at the same 10 commandments and says, the... These are the commandments. In reality, even the most sophisticated LPs in the world, they've gone to podcast, they all say the same thing. It's very difficult to understand attribution of track record. There's this old saying that success has of a thousand fathers and failure is an orphan. This is a real problem in venture capital on every level. VCs trying to hire VCs from outside the firm. How do they know that they're actually did these deals? LPs trying to invest in VCs and across... And even startups trying to pick the GPs that actually did the deal versus somebody, you know, else in the firm that that kind of actually did did the hard work and did the value add for for the startup. [00:29:29] S1: Yeah. Definitely. And all that data is there. Right? It's in the email inbox or the CRM. The big question is, you know, like, is anyone actually gonna be willing to share this? Right? I I think even the top LPs have problem getting into funds as well. Right? And getting them to actually share this data is probably not going to fly for a lot of a lot of large firms. Right?