0:00The incentive model of the large firms has created a huge white spot for new investors. As you go from a $500 million fund to a $5 billion fund, you just don't care only about the multiple, you care about how much capital you get into these companies. Because would you rather put $20 million into a startup and get a 10x or $500 million into a startup and get a 4x?
0:20The reality is your job is to do the latter. You're the first venture capitalist across 450 episodes that I've interviewed that decided to give back money to institutional LPs and vest his money along with their partner. Why do that? It was really a combination of offense and defense. When we started in 2012 for $750,000, a million and a half, we could get that 10 to 15% ownership.
0:41By 2022, you're talking three, four, five, $6 million to get that type of ownership. Do the math on the spreadsheet, all of a sudden we're going from being a 90 95 million dollar third fund to a $250 million, $300 million fourth fund. Now raising it's not a problem. Our LPs would earn the right [music] to do that if we wanted.
1:00But returning it, I think would have Hunter, you co-founded Homebrew, which is one of the most prolific seed investors in the world. You were early to Chime, Cruise, Plaid, Gusto, Shield AI, a lot of these companies before the entire industry was was coined.
1:17That's what I always joke. I'm like the job of a seed investor is to invest in the company before the market map comes out. So we did Chime before neobanks and fintech became popular. Obviously now a double digit billion dollar uh public company. And we did Shield AI, one of the top three most highly valued defense tech companies before American dynamism and defense tech and so on came for it.
1:37If you're doing it after the market maps come out, then you're just a pundit. If you're doing it before, you're a seed investor.
1:42It's almost the difference between beta and alpha.
1:46What do you think about the funding environment today?
1:49Wow. So I used to think that my job as an early stage investor was to truly be non-consensus and then bet that those companies could convince the next round of investors that this matters. I almost think now uh the job is to be pre-consensus, not non-consensus, because there is so much crowding into the trends, mostly driven by AI.
2:13Some of that might be quite logical, bigger outcomes, lots of capital it needs, but I think a lot of it is actually based upon the incentive model of the investors, and I'm not sure that that's actually good for startups.
2:23I want to double click on that because unlike probably 99 plus percentage of VCs, you invest now your own money in Homebrew.
2:31So in 2022 we switched from a traditional model. We had raised funds from endowments, foundations, great outside investors to investing our own capital. So Homebrew 4, which I call Homebrew Forever since it's an evergreen vehicle, see the marketing guy, um is uh 100% of investments begin with our own capital from my partner Satya Patel and I. I joke that uh if I want to seem humble, I call it a bootstrapped VC firm. If I want to pat myself on the back a little bit, I call it a dual family office, you know, some fancier structure. But yes, we're investing our
3:04Just going back to what you said before, which is this consensus is is largely driven by incentives. What are those incentives?
3:12If you are a venture firm, it's crazy to think that you're not influenced by the incentives as an individual GP and as a firm.
3:21And so of course you want to pick the best companies with great outcomes and so on and so forth. But when you think about the near-term incentives, they're not always aligned with that same type of patience to bet on a company when others don't believe and to be able to wait a long time for that to come true.
3:35You might tell folks folks might say that, well, I got to be in the hot names even if maybe there's some outcome risk down the road cuz if I'm not in the hot names, I don't build the brand. If I don't build the brand, I don't get to see the next good company, so on and so forth. So I truly think if you, you know, gave lie detector tests to some of the investors right now and you said you can be choose one. You can pick either a hot name that's going to inflate a lot over the next few years that you get credit for being associated with, but there's greater risk in the
4:05actual outcome, or something that kind of is under the radar for the next two, three, four, five years, but ultimately produces returns. I think a lot of people would pick the first because as a GP, you have an incentive to become a star within your firm.
4:20As a GP, you are trying to build a marketplace brand and being associated with the hot deals, the hot founders makes you relevant. And you're also trying to raise that next fund, which keeps you alive, pays your salary, so on and so forth. And so losing, I guess, some of that, you know, be damned, I don't care, I believe in this company and I'm going to bet on it.
4:40Um I don't know, I'm seeing that disappear a little bit from the market. It's not to say that everybody behaves in the same way, but as, you know, people have once said, your fund size is your strategy. So when you have this coalescing around multi-billion dollar fund sizes, it would be crazy to think that their strategies, incentives aren't also coalescing.
4:57So there's two aspects to that.
4:59I want to first handle the the economic aspects, the dollars and cents. Let's say you have a $500 million fund, you invest in one cohort of companies, maybe you have a chance to get a 3x. So now you have $200 million in carry, or you go the safe route and you get a 2x and now you have $100 million in carry.
5:18Well, obviously there's a $100 million difference, but that $100 million may not come there for 10, 15 years if you're an early stage investor. On the other hand, if you could raise another $500 million fund, that's $100 million in management fees guaranteed. So even if you are contrarian and right, which is no easy feat, Mhm.
5:41you still at best end up in the same exact situation. At worst, if you're contrarian and right over long term and you don't raise another fund, that could be a career ender even though the fund may end up doing you're assuming that everyone's coin operated. And I guess it's the question. When we started out Homebrew, we sort of said we want to sit at the intersection of excellence and joy.
6:03Excellent would be the economic performance, especially for ourselves, the opportunity cost of our time, and also taking money from endowments, foundations. People had great exposure to great managers. We wanted to do justice by their trust in us.
6:15However, we knew that if we were just excellent but not enjoying it, that we wouldn't actually continue it, right? So if we somehow managed to get returns but weren't proud of the work we were doing, like life is too short.
6:27And so our decisions were always trying to focus on how do we sit at that intersection. And frankly, I think if all you're doing is creating a net present value based upon the certainty of how much money you can raise and what fee structure that's going to create, then you are so misaligned with the nature of the founders taking the risks that you should probably just be a structured growth investor and create all your value and de-risk on the term sheet rather than in company picking.
6:53And that's what's sad. I think founders should have a bunch of different tools in their toolboxes to pick from when they're putting together a cap table.
7:00Essentially, what you're increasingly having is a box of hammers trying to content market why their color handle is better than the others. We're all in on AI. We have the government captured in our lobbyists. All these things that have turned us like big tech, big tech in a way that big oil, big tobacco, you know, big steel used to be. And I don't know why I do early stage. It's still because I like when more people disbelieve than believe. I like when the founders aren't quite sure it's going to work.
7:25For a while, that was rewarded with lower valuations. Now, not as clear. It's a tough market, but we actually think that the I don't know, the incentive model of the large firms has created a huge white spot for new investors, home brew 10 15 years ago, and a whole generation of new firms that are much closer to the metal than now the titans of industry on the venture side have become.
7:49This episode is presented by Juniper Square, the operations partner for private markets.
7:56I was smiling because me and my business partner Curtis just went through an exercise of going through the top 20 venture capital firms websites, and essentially all of them said a a of we back great founders going after exceptional opportunities. It was almost the exact same message I love this, because this is what I always say. Venture capitalists don't take the advice to the gift of startups, right? They would if they you told a startup, well, what's your brand? And you said, we're here to change the world. You'd be like, that doesn't mean anything, right? But if you ask venture firms why they exist besides having capital,
8:26one of two things would happen. They'd give you exactly what you said, which is sort of the most bland thing. Even worse, I bet if you separated the three, five, 10, 12 partners from one another and asked them to answer that, I'm not even sure you'd get the same answer from all of that.
8:38In many ways, it's the most optimal thing to say because it's attractive to the most amount of people without being contrarian to anything.
8:46Trying to be everything to everyone is But it doesn't sound like it's contrarian.
8:49Uh, we you know, we always used to say, you know, Steve Jobs is the pirates, right? Like the the the technologists are the pirates. Like venture capital started out believing they were, you know, accessories to the pirates and somehow they became the navy, right? You were talking about a little bit earlier the question about incentives and, you know, returns versus uh near-term uh momentum. What we failed to mention, and I think this makes it even harder, is these fund sizes are growing.
9:15And so as you go from a $500 million fund to a $5 billion fund, you just don't care only about the multiple, you care about how much capital you get into these companies. Because would you rather put $20 million into a startup and get a 10x or $500 million into a startup and get a 4x?
9:31The reality is your job is to do the latter. And so all of a sudden your business model is not just impacting, it's changing the startup's business model because they say, well, I need to raise 25. And you say, how about 45? Well, what are you going to do with the capital?
9:46Like I can't do anything with that. Well, I need to get I need to get my ownership target. I need to write we only write $25 million checks. And so all of a sudden the business model of the VCs is not just meeting the founders where they are, it's dictating the terms, you know, to the take more, take more, take more.
10:03So that's on the startup side. That obviously has some unintended consequences. If you raise a certain amount of capital, it takes away opportunity to exit outside of IPO.
10:12I think it has unintended consequences for some of the investors too.
10:15Yeah, I want to double click on that. So, what are those unintended consequences of having $5 billion fund? Is it just going later in Is that a A few things. One, um you become less patient because you have all this money put to work and you want to see it start to get marked up faster, faster, faster in order to legitimize having put it to work, who's going to do the next round.
10:37I think that um you become Double click on that. Why does a $5 billion fund have less patience than a $500 million fund?
10:44Well, because uh they the velocity of getting that money into the company matters too. You have a fund cycle and so you want to put it to work within two, three years. So, if there's used to be what? 24 months, 36 months between funding rounds. If you're trying to get enough capital into that company, you can't wait, okay, I'll do the A in 2026 and then we'll do the B in 2029 and we'll do the C in 2032, not out of the same vehicle. You don't have a six year initial investment period. So, you're
11:14trying to figure out who can I load up on. Now, it's different if you have a regular fund, a growth fund, so on so forth, but a lot of these folks are investing out of large single deals.
11:22feel that pressure of deploying so much more.
11:23And if And if the company is not off to the races, then all of a sudden, you know, it's forgotten even if some of the best companies, you know, were overnight successes, but it took a thousand overnights.
11:33And obviously, on a return basis, if you invest $25 million and take 20% of a company versus $45 million take 20% net net, you're going to get a worse return investing $45 million if it's fundamentally the same company.
11:47Yeah. Yeah, I mean you But the you're you know, one of the things that you know, is unintuitive to people who didn't spend a world in finances, as the fund sizes go up, the underwriting target goes down, right? Like if you can consistently deliver 3x on billions of dollars, you know, you'll never go out of business. If 3x is your best return on a $25 million fund, you know, you might be 75th percentile, not 99th percentile. And so actually uh I used to think that
12:15uh venture investors at the seed, A, B, C stage, you know, maybe were different people, maybe had different ways of viewing the world, but essentially we're all playing the same game. And it was really the growth investors, the people who would do the one round before the IPO that maybe had a ratchet or things like that. Those were Well, they were the different guys, right? They were the ones who at the table playing the different game.
12:34Now I think everybody after, you know, it's less about stage and more about fund size, that like everybody who's under a $100 million fund is playing a different game than everybody who's now, you know, 500 billion, 2 billion, 3 billion, 4 billion. And I think as an early stage fund that is not just changed the nature of how you think about entering, but changed the nature of how you think about exiting.
12:55Secondaries, figuring out how to not do the later rounds out of your core fund, but instead using SPV vehicles, so and so forth, because you don't want to be the one at the table with the smallest chip stack and the largest underwriting target against people who are playing a very different game and at the end of the day don't really care about you.
13:14It's interesting that you mentioned that. I had Eric from Mhm.
13:18AngelList, and they have the benefit of having a 25,000 plus company data set. So they could really And they're It's on their platform, so so they're direct to it. There's there's no one intermediary.
13:29This isn't the Cambridge Associates data that has like a bunch of stuff, but unfortunately is missing like the top 1% or they have access to all the information.
13:36And one of the things that they figured out is they were basically like banging their head on the wall, they realized that you can't actually make generalizations about venture as one asset class. They had to turn into early stage and late stage, and then they could actually compute some useful insights. But until you look at venture from these kind of two different lenses and two just mathematically different lenses, you don't really get a good sense for it.
13:57I think you have to turn that that duality into, you know, maybe four quadrants because I think it's early and late and then it's fund size because there's plenty of billion dollar funds doing early stage investing, you know.
14:08Um for them it's a toehold sometimes, for them it's, you know, trying to uh get information. Um but it doesn't mean they're not investing in that stage. And so I really do think it's kind of like early stage small fund, you know, early stage big fund, you know, multi-stage big fund, and then maybe just later stage big funds that matter. But I I sometimes think it you know what's the story it's the you know I think every like I don't remember which culture produced this tale, but everyone has a version of it, which is like there's a bunch of blind men in an elephant and depending on which part of the elephant the man is touching they think it's a
14:38different animal. If you're touching the tail you think if it's a rat, if you're touching you know the the leg you think it might be a hippopotamus. I mean venture has become so big, the financialization of it, you know, whether you're direct on the cap table or you're through a different vehicle, whether you're uh uh an evergreen fund or a fund that's raising every few years, whether as an LP, you're running your own book, you're you know a fund of funds so on so forth. We're all touching different parts of the elephant and I'm sure you have all different people come in and talk about their part of the elephant, you know. I'm most excited
15:07about my parts of the elephant, which tend to be, you know, early stage, bet on the company, bet on the founder, being willing to take the risk of being alongside them as both home brew and then, you know, through Screen Door, the fund of funds we created, um being able to bet on the next generation of emerging managers who I think are filling a very needed white space uh that has been left behind by the growth of these mega vehicles.
15:31So I want to get into your incentives. I want to get into Screen Door, but first just add more complexity. There's not enough complexity in this conversation.
15:37we're going to 5D chess, not just 4D chess.
15:40To add some more complexity, the LP side of the equation. LPs also have some interesting incentives to say the least. The average there's a famous pension fund study, the average CIO stays at a pension fund 6.1 years, which is 60% the deployment of what a venture capital fund is supposed to do. Often times they they go over that.
15:59And often times when you look at the incentives, what are those incentives?
16:02You want to get into the most branded venture capital firms. What are the most branded venture capital firms? Almost by definition, the bigger your brand, the bigger your fund.
16:10Largest funds and funds that have historically performed well, not necessarily moving forward. So you have this incentive. So it could be a situation where pick your multi-stage firm, you're the CIO of a endowment or pension fund, and you actually get positively rewarded for investing into this brand name fund that may end up returning to to So I came in raising Homebrew 2012 2013 with no venture experience. A lot of tech experience, product management, angel experience, but the LP world I knew what they were. I mean I understood the
16:39concept of endowment foundation so on so forth, but you know I hadn't had any direct experience. And through you know raising our funds, through seeing other people raise funds, uh you know what's the expression is the scales fell from my eyes, right? So uh I realized that there are a bunch of reasons why I say Darwin runs at half speed in venture.
16:58And LP incentives, the long time cycles, like so basically the competitive dynamics are not fast enough to flush mediocrity out as fast as it should be.
17:06Why time cycles are very long. Why relationships. If you're an LP and I'm a GP and my firm has made you money, you'll give me the benefit of you know in the past you'll give me the benefit of the doubt as we go through a turnover so on and so forth. But one of the reasons is exactly like you said, it's sort of who's in the seat at the LP and their incentives. I was very surprised we've had wonderful LPs, always a very small group, but the person you know who's sitting at across from us has changed you know more than we are. We haven't changed. There's two of us, but that role changes. And like you said, they inherit a book of business and so
17:35they first have to make a decision about well am I going to rock the boat right away, you know, or am I just going to roll with these names for a while and then put my stamp on it? Uh you have the question about uh you know they're often managing privates in general. And so the fund doesn't just uh rise and set on the venture aspect of that. And so if they have you know a book of managers who you know some of who may be a little bit long in the tooth, but as a basket it's meeting their goals alongside other things, that might not even be their first place to turn to say I got to do work here. You know they may be looking at
18:04their PE you know allocations or other stuff. And so I was like wait it's infuriating. Why don't you want to get into the best new managers as quickly as possible so on so forth. It's like well I get uh punished more for taking a zero on a firm than I do for taking a get rewarded for taking for a spork.
18:21principal Yeah, all these issues, right? And so and and a good people, good smart people, but it's just the question about like what about that system leads us to, you know, let mediocrity in venture persist longer than it should. I often say I have love in my heart, chip on my shoulder, right? So part of and I know we'll get to it, part of the fund of funds for me was love in my heart was I just really love working with new VC firms. I learn a lot from them in addition to be able to pass on knowledge that that we've learned. The chip on my
18:50shoulder is I watched enough National Geographic specials as a kid to know what happens when you want to speed up Darwin. You have release some new natural predators into the ecosystem and you let them chase down and kill the weakest of the herd. So like I'm funding not scouts, not minor leagues, I'm funding competitors to myself, to the, you know, large firms out there and I hope they take down a few of us.
19:16Perfect segue into your incentives.
19:19So again, just to show you how unusual this is, I don't I think you're the first venture capitalist across 450 episodes that I've interviewed that decided to give back money to LPs, to institutional LPs, invest his money along with your partner.
19:36So I would say we definitely inhabit a unique chess base on the board. There are people who have, you know, um left their venture firms to, you know, angel invest or to take a break and you know, either those people are usually wealth effect retired. They were good at what they did and so they're really just kind of throwing some money around, having some good time, enjoying their life or um they were asked to step away. They didn't have a good track record and they are, you know, trying to rebuild a reputation, get a little bit heat to then go raise more money or get hired.
20:02So we are kind of obviously neither of those. And to be honest, it was something we always planned to do. We told our endowments, foundations from the first fund that we're not going anywhere, but we think sometime in the future we're going to switch to our own capital model. And everyone just kind of nodded.
20:18I think that they thought, well, great, thank you for telling us, but like really one of two things is going to happen. Either you're not going to be good enough to do this for very long, in which case it doesn't matter to us what you think about you're going to do in 20 years, or you're going to be good at it and nobody stops once they're good at it because it's fun, it's addictive, the and the amount of capital you can make and you know, just keep raising like you do it longer than you expect.
20:41there's essentially a lifestyle creep.
20:42We were talking about this before we were recording as once you have this home now you're it's keeping up with the Joneses. Now you now other other if you say I'm not a ceiling guy, I'm a floor guy, the floor keeps rising, right? Like you get used to certain things. And I think there's a lot of reasons besides just economic incentive that people do it. They if they hire a team, they want to keep that team employed, right? They want to keep their firm together. If they um enjoy being able to go $500 million deep into nuclear fusion before the technology is proven, it's harder to do that out of your wallet than it is out of a venture
21:12fund. So there's lots of reasons to continue institutional. We did it a little bit earlier than we expected. So I sort of said five funds 20 years. If you do the math, that means we were going to do this change in 2030 sometime in the future from when we're talking right now. Instead, we did it you know, eight years earlier, 2022.
21:27And I think it was really a combination of offense and defense to be honest. Um the offense was what are we waiting for? Man, if this is what we want to do, why don't we do it now?
21:37We uh were successful enough over the course of our first decade to sort of earn the right to sort of call our shot in the sense that you know, we're willing to put more of our money at risk. Maybe we're not as entrepreneurial as the founders we back, but we're certainly more entrepreneurial than the average venture firm.
21:52Um and so we looked at each other and said, great, let's do it. The defense or the sort of reaction I think was the market was changing around us.
22:01And in order to continue our strategy, which at the time for Homebrew was concentrated early stage venture, 10 12 15 investments a year where we're leading co-leading a seed round, owning 10 to 15% the check size it took to do that was growing faster than inflation, right? So maybe when we started in 2012 for $750,000 a million a million and a half, we could get that 10 to 15% ownership.
22:22By 2022, you're talking three four five six million dollars to get that type of ownership. Do the math on the spreadsheet. All of a sudden, we're going from being a 90-95 million dollar third fund to a 250 million dollar, 300 million dollar fourth fund. Now, raising it's not a problem. Our LPs uh we'd earn the right, I think, to to do that if we wanted.
22:44But returning it, I think would have changed how we operated in a way that in order to make sure you're excellent would have reduced the joy. It would have forced us to do a bunch of things in order to run Homebrew successfully that I don't think either one of us were excited to do. They didn't add value.
23:02They were about the business model of venture, not the helping startups, not the working together on whiteboards with founders. So we said why why do that?
23:09Just for money? Not worth it.
23:11Unpack those. What are those things that you did not want to do?
23:14So the first thing is I think you get into this insidious mindset about the types of exits then that you need to return the fund, right? Like all of a sudden, if you're going to own 10 to 10 to 15% of a startup and as an early stage investor, let's just assume by exit you'll be diluted down to half of that, whatever. So all of a sudden, as opposed to a billion dollar outcome being an outlier for you, do the math da da da.
23:35Oh wow, now I need a 5 billion dollar outcome. Now I need four of them.
23:39Just to get the same exact number.
23:40to get the same exact number. Now it doesn't mean that we're not shooting for those same types of returns. Doesn't mean that previously we were looking for singles, doubles, triples and letting others hit home runs. We were fortunate enough to invest in you know, several multi-billion dollar outcomes, not just valuations.
23:59Um but I do think your mindset changes from the first day you pick a company, but also your question about what is that company becoming and how fast.
24:11And I think the the heavier the weight on your shoulder, the heavier the burden is to imagine that the only way this company matters to me professionally is if it's a 5 billion dollar company, you get impatient, you start giving bad advice to founders, you start encouraging them to do things faster and unnaturally, you start to um try to preserve the valuation uh all costs in order to, you know, not not take the right down. And like these companies, the first few years of a company it's about figuring out who they
24:39are and what they are. And the venture business model should not be a factor.
24:43One thing I've learned from talking to hundreds of investors is that great investment firms aren't built on investment returns alone. The firms that endure are great at the things most people don't see, their operations, [music] their relationship with LPs, and the quality of information they use to make decisions. And here's what AI has changed.
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25:42[music] People talk about product-market fit as if it's a singular event, but really you're constantly rediscovering it. Absolutely, absolutely. So I think that that first thing is sort of would it leave us in a mindset to be the best partners to the founders we were backing, and we were worried it would cause us to implicitly and explicitly stray.
25:58The second thing is I think you have to put together a larger team, right? You have to all of a sudden start thinking about, well, if I'm going to write these bigger checks into companies and I'm even more on the hook, I'm going to have to write more, I have to make better decisions about pro ratas, so on and so forth. All of a sudden I need more coverage. If I need You need more finance people.
26:15If I Well, also not just back office. I mean, thankfully that stuff can always be outsourced and so forth, but like if I'm now hunting for more and more five billion hour outcomes, well, then I can't afford to say no to that, you know, emerging area of, let's say, AI bio that Sacha and I might not have any experience in, but is going to if that's going to produce a disproportionate amount of science AI, is going to produce a disproportionate amount of the next $5 billion, $10 billion, $50 billion, we better have coverage because if we don't have coverage, well then I have to hit an even higher percentage of what I know how to do. So you start
26:44bringing people into the firm, you start expanding the partnership, maybe without the type of relationship, the type of diligence, how many people have we seen come into these firms and cycle in and cycle out of the team page, that type of stuff. Or oh, crypto's hot, we're going to be crypto. Oh wait, hold on, no, scrub that, de-publish the blog post.
27:00Now we're AI, you know, like people end up chasing these hype cycles because they're chasing returns, not if they had a modestly or appropriately sized fund that matched their skill set and understanding, you know, and were confident enough to say I'm going to keep winning at that scale.
27:16So we were worried about kind of uh team creep and culture creep as a nature of having to, you know, expand to encompass even even more. Um also, frankly, Sacha and I, here's what we'd always say. Uh here was here was our priority list.
27:32Partnership, portfolio, pipeline.
27:35Everything else is below the line. What does that mean?
27:38We've known each other since 2003. We sat this far from one another at Google for a bunch of years. We've been friends in addition to professional colleagues, but if anything ever feels out of sort from the partnership, if we even just haven't spent that much time together, nothing else matters as much as getting back on the same page. Fortunately, that hasn't been an issue.
27:53Of the investments we've made and the next hot deal, what matters more? The investments we've made. We will always pass on a startup opportunity if it's moving too quickly. If there's something urgent going on in the portfolio where that founder depends on us to help them get through a tough spot, make a decision, so on and so forth. I think that's why we have a, you know, stellar founder NPS, so to speak.
28:14I think once you start getting, and everything else below the line, operations, team, fundraising, media, content marketing, personal brand, right? I think the more and more you start playing everybody else's game, everybody's playbook. Oh, now we're one of 15 $300 million early stage funds, which might be exactly the right size or might be no man's land. All of a sudden, how do I preserve that prioritization?
28:36Don't I have to start getting the hot deals? Don't to start doing the brand marketing?
28:39You know, where's where's my portfolio?
28:41Oh, they haven't heard from me, but they've heard from my analyst or my my Claude agent.
28:46That's Like I want to be there with people. I want to bet on people. I want to earn trust and context so that they turn to me and say, I'm trying to figure this out. Would you help me? As they start taking the $50 million checks from the larger funds, you know what they don't like doing? Calling the GP who gave them the $50 million dollar check and asking them what might be a dumb question about hiring. They can always turn to us for that, whether we're writing a check out of our pocket, which is what we do now, or before when we were writing, you know, seven figure checks out of a fund.
29:12So if fast forward to today, you and Satya are now investing your own money.
29:18What's the strategy there?
29:19Well, I have the Homebrew tattoo on my shoulder. I got it when we started, not when we succeeded, because I said I wanted to capture the moment. Now there won't be any rebrand, and I've only had to use it a few times to win a deal sitting across from a founder and work?
29:32Oh, yeah. Well, of course, because when they say, well, I'm trying to decide between you and this other firm, and I'm able to say, the partner you're talking to at the other firm won't even be there in a year, and then I roll down my sleeve and I show them that tattoo, I said, I live my firm just like you live yours. I might as well slide the term sheet right then. I mean, it's YC handshake.
29:48It's actually why we put our name behind our brand because it's ways for Pierce. We can never say it's not us. We can never say some GP promised you that. It's always our name. I got that from from Ryan Serhant. Also reminds me of Neil Shaw. So he doesn't have a personal email. He only has his Green Oaks email because he says that Right.
30:08kind of real signal that not an outfit I take on or off. Yeah, yeah. I'm not trying to go anywhere else. That type of stuff. So yeah, so we switched over and it's been great. I think the So still called Homebrew.
30:18Still called Homebrew. Homebrew four, just like my capital is Homebrew four. Because of the tattoo, it's going to Homebrew forever, like I said. What hasn't changed? Our appetite for risk. We're investing the same type of stuff.
30:26Uh, what hasn't changed? The hours per week we work. Like this isn't, you know, retirement. Uh, what hasn't changed? Trying to be the most useful investor on that cap table no matter whether we're first, which sometimes we still are, but more likely we're second, fifth, 20th.
30:43We want to be useful. The two things that did change, and I said we invest in the same type of companies. It's still 90% pre-seed and seed. When we were only leading rounds, there's certain type of companies where you just felt like, why am I the best investor to lead uh you know AI chip company, right? So there's certain types of things we've done in deep tech, cybersecurity that before we know how to be a great supporting investor, but to be honest, I don't think we would have been a great lead investor. So I'd say 75% is the type of stuff we always do, dev tools, applied AI, fintech, so on and so forth. 25% is some of those
31:12areas where we're an excellent supporting investor. The other thing that's changed is I ripped up the spreadsheet. At the end of a call, let's say you were a founder and we were just jamming for 28 of 30 minutes. You tell me about your company. Sounds awesome. I want to work with you.
31:28I don't have to end that call by saying fantastic, let's work together. I need 12.75% of your company because that's exactly what the spreadsheet says. I don't care if that means you can't bring in another great co-lead. I don't care if that means you have to kick out you know some operators who would add a lot of value. If you want to work with me, that's what I need. Now of course we're always in a partnership. You have to understand my needs of ultimately you know I'm a shareholder and things like that. But what we're able to say is hey fantastic, where are you in this round?
31:57Did you just finish it up? Oh great. Can we figure out how to get a small check in? Are you just starting? We'll commit to you before there's a lead and we'll help you find one.
32:03Oh here's between we'd like to do between 100k and 500k. You tell us. So we're basically pretty flexible because all we want to do is work with the greatest companies and greatest founders. We've done about 70 investments over the four years, so we're still doing about 15 a year. And I like to think well certainly uh we haven't seen every company in the world. I don't think we have 100% coverage. No one does. It's not our goal. Um also nobody is perfect in their selection. I'm sure we have false positives. I'm also aware we have you know false negatives.
32:32Um I do like to think that because our puzzle piece is so flexible and so valuable, you know we do have 100% win rate, right? So, uh the portfolio is probably like the best expression of our tastes and interests over the last four years because we didn't have to meet that company at just the right moment where they had just the right slot available and just the right round. And it's been great. Uh there's nothing else I would have wanted to do for the first 10 years. I think the market needed us to be leading co-leading rounds at that point and we needed that experience. We needed that success,
33:01but I would never want to go back to that for our second 10 years both given where we are um as well as where the market is.
33:08One of the things that Silicon Valley and venture capitalist trying to figure out is whether there's such a thing as a pre-seed and seed round anymore. Obviously, the nomenclature is there.
33:17People still use it for marketing standpoint, but is there the small round to to to prove something out?
33:23I joke only in hindsight. I don't blog as much as I used to, but I, you know, I'm a 20 plus year blogger, you know, from back in the days. I've always enjoyed writing. And so I friends who sometimes joke like whenever somebody asks a question like that, I always respond with a URL. Like, hey, I once wrote a post, you know, blah blah blah. But in this case, it's true.
33:39I wrote a post a while back called Seed is no longer a round. It's a phase. And I still think it's true. It's something that gets, you know, um aggregated into a, you know, a series of funding events in hindsight. In hindsight, once you say I'm sure of the small team I have, the product I'm working on and I have product market fit for it and now I'm ready to raise an A round.
34:00For some people, might be a small $1 million and that's actually all they need. They're off to the races. They raise $25 million next and you can call that a seed, whatever. For others, it might be $2 million, $2 million, $2 million, $2 million.
34:14There's any combination. Now, in that, is there a point at which in total dollars raised that it crosses from, you know, pre-seed, seed to something else?
34:23When somebody announces $100 million seed round, do I kind of roll my eyes? Of course. I think for purposes of, you know, my strategy, but even more so for a lot of the fund managers we back via Screen Door who are mostly early stage managers investing out of initial maybe sub $100 million dollar they're really looking at the first round where enough ownership can be bought for a check that's meaningful to them.
34:48So, for some of those people, it's similar to homebrew, 10 to 15% ownership targets. For sometimes it's 5%, 7 1/2%. And it usually means those rounds are capital wise, you know, a few million dollars raised to maybe 10 at the most. Things above that, you just sort of get into the imputed math, right? Like the valuations are high I think those start to move into um big game hunting, large fund territory.
35:15And or if you're a more modest fund, you're looking at that as sort of the 20% of your 80/20. These are momentum checks. Everyone calls them differently. Supporting checks, momentum checks, thesis checks, explorer checks. You expect them to be accretive to your portfolio.
35:32If you hit a true outlier, if you would put that into an early round of pick any of the recently filed S-1s, right? It would probably still be the best returning not just uh multiple but aggregate dollar investment in your in your fund.
35:45Um but you know, you didn't have them in your initial portfolio model. You're not modeling them out yet, you know, as individual companies. You're holding them as a basket. And I think that's totally legitimate for an early stage fund to do. Uh it's not just logo collecting. It's, hey, I earned the right to put a smaller check into a larger round.
36:07I believe in this company for reasons that are greater than its competitors and I want exposure to it.
36:14Do you still make these thesis checks?
36:17Across our three institutional funds, um they all were sort of 25 to 35 company vehicles. We would take maybe the amount of capital that we, you know, would use for like one core check and break that into pieces and do those sometimes quite successfully.
36:31And these are just companies at a higher valuation?
36:33Higher valuation or that we um didn't have enough conviction to try to go lead or co-lead the round. Maybe we let them met them too late, things like that. We had done that previously. And I mean um our investment in Plaid was an example of that. Uh in our first fund, we met them just as we were getting started and they had already almost closed the round. There was a small amount of money left, but it turns out that when you put a small amount of money into a multi-billion dollar company, it can still be quite meaningful to a what at the time was a $35 million net asset sort of size fund. Now as Homebrew Forever, it's like they're all the same because we're just committing
37:03checks. I think our median check size is, you know, somewhere between 100k 250k starting per company and that type of stuff. Um and so it's not the same for us. I think we look at every company the same way. Maybe the version of that for us now would be when it's post post seed. I said 90% of what we do is still pre-seed and seed.
37:20If we missed it or we were wrong and we come back to it later, maybe that would be our equivalent now because we're not trying to play catch up just to get the logo on our website.
37:29Nobody cares. Um what we are believing is saying we were wrong or we didn't see this and we think that there is still the same upside from a net new earlier investment. So for example, you know, in hindsight, let's use Anthropic like you were just saying like turns out that the multiple upside from Anthropic at the Series B was still higher than the average multiple at a successful seed investment, right? So when we invest post seed, it's not because we think the company has
37:59been de-risked. It's not because we want to be associated with the brand. We think it we think it's because it still offers us the same uh upside on a new dollar in as if we had picked a new new company, a new venture. And so we do that selectively.
38:14Invested in Anthropic Series C and one of the reasons was I've always thought ownership percentage was a vanity metric and really it was about multiple on capital.
38:25Now that you're investing your own money and you don't have to spin any narratives for LPs, where do you stand between ownership versus I guess the way I think about it is that every fund manager needs to understand the math of their portfolio and what assumptions you want to base your portfolio management on.
38:44If you're somebody who believes look, we're in a different era. The outcomes are orders of magnitude bigger, not just in aggregate, but, you know, before they go public, right? So like these outcomes are bigger and they're being captured by the private markets, not the public markets. So I am going to be comfortable owning less of these names, no matter the price, no matter the stage of entry. My answer would be we'll see, right? Like certainly if you believe and if, you know, they've displayed a skill of picking and
39:13accessing those names, then they might be right.
39:17I still think if you gave me today you said, Hunter, I know you just talked about not wanting or needing an institutional fund, but I'm going to force you to take $500 million from your previous LPs, go invest it, I think I would still mostly run a concentrated book because that's just still the way I understand how to create value. Does it mean that I might have broader targets of ownership? Maybe I don't need to own
39:4610 to 15 %. Maybe I'd be happy, you know, 8 to 10 %, you know, so and so I'd be flexible, but I wouldn't go multi-stage across the board, inception stage to growth stage. And I don't think I would be evenly distributed across all ownership ranges, largely because I don't know how to concentrate my time and effort and expertise when I do that.
40:08I do think that if you're looking at seed and Series A all day, that almost every Series B company you look at is going to be by definition look better.
40:18They're further along. You know, the selection bias has meant that they survived. So they have a more mature team. They're more like And so I think if you're the type of person as an individual who is looking across all stages, playing all different roles in companies, so and so forth, and is consider yourself a generalist, you better have some other rubric to make decisions other than vibes. Now, a firm can be a collection of those individuals where the firm as a total might have somebody who I do initial checks, that person decides on
40:47follow-ons. I do early stage, that person does late stage. The mechanics of uh you know and velocity of a dev rel tool startup is very different than you know a consumer app. So they're the consumer person, I'm this and together whole is greater than the sum of parts.
41:02I think you can get great market coverage, you know put together different strategies that way. I'm just skeptical that people can be repeatedly talented um looking at companies across you know all markets, all technologies, all stages, all participation mode.
41:20If you think about every human has their own LLM, just like a model, and you've been trained on a pre-seed and seed LLM, some of the benefits of that model are going to be different than a growth model. What does that mean? For a pre-seed and seed investor, for example, you're not focused on loss ratio primarily, you're focused on the upside.
41:37If you could have a portfolio with a 50% loss rate ratio that's in the best companies versus a 30% that's even in the second best companies, the first portfolio is going to do much better. So the intuition to be more optimistic or more focused on the winners versus not being in the losers versus if you're in a later stage fund and you have a 50% growth rate and what communities are you Where's some of your time? We always talk about with Screen Door, one of the things we look for is um are the managers we're backing native to the founder communities that you wanted to invest in.
42:06So are they somebody who grew up around the founders that they're thinking of backing, grew up in the technology spaces, grew up um whether it be literally growing up or you know sort of academically, vocationally, uh demographically, have they spent time in the markets that they um believe that they um have figured out and want to invest in? Because it turns out that uh we think that when you're sort of looking at the nature of the venture market today and you have these very very large asset managers, most of those
42:34folks have removed themselves from the scrum. They have teams, they have data tools, so on so forth. They can be very valuable in certain ways, certainly as companies grow, being able to be capital providers, being able to open doors, so on so forth. But you know those first three to five years, that's why you don't often hear my largest investor was also my most helpful one. You were a lot of things of like my largest investor was you know, the angel who or the founder who had
43:03done this right before or was this fund who the check that they wrote was meaningful because it wasn't an option value check. It wasn't it was a belief check. And so yeah, I think if you're a little bit more qualitative supported by quantitative rather than the other way around, which I think is sort of the early stage model that you know, we practice.
43:22Uh I I just I I'm always wary of trying to be all things to all people. Back to you what you're saying about venture brands, it's like if you can't if you can't say uh if if why you exist doesn't give a founder at least some sense of whether you're right for them or they're right for you or not, then you haven't told them anything.
43:38So another way, conviction, if it's not polarizing anyone, it's not actually conviction. It's just good marketing.
43:44we think about polarizing as like if you're not being controvert you know, there's differences about strategies to attract attention.
43:50offend them. It just has to not be something polarizing.
43:52the time there are categories that we do not invest in as home brew um because I am not interested in them. We are not interested in them. They have fantastic entrepreneurs that have created very interesting companies.
44:04Um but I think founders deserve especially early on deserve investors who aren't waiting for them to pivot, aren't waiting for them to uh be validated, but who believe in them. And so we haven't done things for example in gaming or fitness or wellness by and large because I don't think those are the categories we get up every morning and think about.
44:25Certainly there's some wonderful companies in those spaces, but it's fine. You know, we've been able to find wonderful companies in spaces that we do get up every morning and think about.
44:33You mentioned Screen Door.
44:35You founded Screen Door, which is quickly becoming one of the top LPs to back emerging managers and the managers backing the next pre-seed and seed, your competitors as you mentioned.
44:45that's you know, people about the story about that.
44:47So um Screen Door is uh like you said sort of a vehicle that's meant to back the next generation of funds sometimes called you emerging managers, but you can just think of them as founders who start venture firms as opposed to founders starting uh startups.
45:02Um Sacha myself uh sort of started spinning on the idea in 2021 and founded it brought in some of our friends and colleagues uh Kirsten Green from Forerunner, Charles Hunter from Precursor, a bunch of people who had also started their own firms maybe around the same time and our goal, again love in your heart, chip on your shoulder, our goal was one to be able to make meaningful bets, meaningful put in business great emerging managers who we thought
45:31um could benefit not just from advice, but benefit from an anchor check. So how can we Yeah, how can we help write bigger checks than we were currently doing at the time. We were writing personal checks often into these into these funds.
45:46But how could we go and be 10% of their fund instead of half a percent of their fund?
45:51Um and thus as you said sort of be a signal that helped them get to a first close or if they're past a first close, help them get to a second close, get them off the fundraising trail and start to just building their firm.
46:02We also found that it was really interesting to work with these managers that um the way I always think about it is um I'm a I'm NBA pilled, so I'll use a basketball analogy. On the court, Victor Wembanyama is going to dunk on LeBron James without hesitation.
46:17But off the court, he might saddle up to LeBron and say, tell me what you learned about likeness rights so I can make good choices about how I manage my image and get the most money for my sponsorship deal so on so forth. Fierce competitors on the court, you know, can learn a little bit off the court.
46:34So not to call myself LeBron, but we Yeah, which one are you?
46:38Well, you know, the beard the beard suggests I'm LeBron if not the physique.
46:42Um the you know, so what we've been able to do I think is put together an amazing portfolio so far about 20 to 25 managers who are the Victor Wembanyamas, are the rookies of the year. They're folks who are um getting into these interesting deals, interesting areas, you know, ahead of or alongside some of the best firms in the world. They're pre-consensus, you know, not post-consensus.
47:05And we learned from them and, you know, hopefully they learned from us. Not about investment picking, that's what they know how to do, but in firm building or in general questions or that type of what happens when type of stuff. Now, we did that originally with a group of us raised a vehicle from institutional LPs, started writing these anchor checks.
47:24Um, and I sort of called that a fund zero, not a fund one, because we knew that if we were going to build something of real credibility, it couldn't just be in our hands. We had day jobs. And frankly, we enjoyed our day jobs too much to, you know, sort of quit them to become professional LPs.
47:39So we were fortunate in 2023, just two years after we founded, to sort of um, have kind of I call it like a re-founding. Um, we were able to hire as a managing director a woman named Lisa Kylie. She also hired a team, all of whom had been first check sort of into EMs from various points on the LP spectrum. So they were practicing a muscle memory that they had been at the forefront already. We didn't have to They didn't have to unlearn how to some of the incentives to the LP model.
48:07But now they were doing it out of their own vehicle. And so Sacha, myself, some of the folks I named earlier, along with some new additions, have stayed on as what I'd call kind of GP advisors, um, helping Lisa and team on, you know, aspects of sourcing, diligence, underwriting, so on and so forth when they ask it of us. But most importantly, making ourselves available, building relationships, working with the underlying portfolio managers as they move from their fund ones and twos to threes and fours and so on and so forth
48:35and grow as their own firms. Um, Sacha and I are also LPs in it, so we have real skin in the game. We don't draw salaries from it, so it was This wasn't a case of oh, deinstitutionalize homebrew, institutionalize screen door, one pocket pays the other, so and so forth. Um, like everything, you know, we sort of like I said, we've put in our own money and we're believe in the outcomes, you know, not just the inputs.
48:55Um, but for me, it 's been incredibly valuable. I'm in the I 'm in group chats that I wouldn't otherwise be in, right?
49:01So these early managers, many of whom are in their 20s or early 30s, just have a different way of looking at the world.
49:07They have different ways of doing things, many of which, you know, make me a better investor these days. We don't As Homebrew, we don't get their documents, right? So this isn't a data play. You'll see lots of venture firms um either as firms or as GPs writing checks into emerging managers. Most of it is um I don't want to say predatory, but it's with the belief that they are going to The firm will benefit. Yeah, they don't see It's They're investing in the scouts, the minor leagues. They're not investing in competitors. We invest
49:35in competitors. I hope that Screen Door never underwrites a manager who um doesn't a little bit give me a shiver um because I want them out on the field beating the established VCs. But you also build these relationships and you get to collaborate with them. So we've co-invested with, you know, a number of them in companies and it's really fun to see them do their work there, too.
49:54It's a play on Ashton Kutcher's angel investing rule, which is if he even for a second feels like he should quit whatever he's working in work for the startup he invests. So as soon as you find somebody that good that you're like, wow, what they're doing might be better than what I'm doing, then you kind of invest.
50:08Yeah, and obviously, you know, people have different playbooks and so forth, so it's not always an apples-to-apples comparison. But I would never want to feel like I'm investing in somebody and then coaching them up. This is quite the opposite. I We're investing in somebody who doesn't need our help, but our help and our mindset are attractive to them.
50:21We are a differentiated LP uh not just in our um ability and velocity to commit, underwrite a fund one, to be in a first close, that type of thing, but bringing a community and a mindset to their own building that I'd like to say just like such and I at Homebrew, our participation rarely is the difference between success or failure, you know, rarely the difference in success uh to a startup. But what we hope to do is slightly increase the velocity and probability of their success. I would
50:51say the same thing about Screen Door. Um we're backing great managers and just trying to increase the probability that they're great firm builders.
51:02You You that these managers, some of them are in their 20s. Often times they have a different mindset. You mentioned earlier you're NBA pillled.
51:10If you had to explain the pills that these managers are, what are they pilled in?
51:14It depends on the world and the specific slice of the world they grew up in. Um the ones who are, you know, early in robotics and have been around that maker space are just um I think see the future a little more crisply. So uh whether you call if I was going to try to bring it back to to basketball, it's yeah they're making no look passes while I have to Within their domain.
51:39within their domain where I have to actually see where I'm passing the ball. They have an intuitive sense for how this technology is developing because they don't know the world they don't know the world before.
51:49and often times some of these investors are even down on the research level on on the science level.
51:54Absolutely. They come out of companies, campuses, or you know, Discord groups that are dealing with the raw material not with the investment memo.
52:05So what they sometimes need to think about is the you know um how many of these do I want in the portfolio? What is the type of risk I'm taking in investing in this company? But they don't need any help on predicting the future or understanding the talents and competencies and spikiness of the founders because they're hanging out with them. Um but it's not just a social aspect.
52:25It's um they also know how to help those companies build bridges to the partners, investors talent that they need. They understand the mindset.
52:37they're translators.
52:38They understand them because the first 20 people to join a startup are more similar to the founders than not, right? Why would you join an early stage startup if you didn't passionately and unnaturally believe in its ability to succeed? The idea of taking a first 20 person role and not having founder equity is almost crazy, right? You have taking almost all the risk besides maybe some capital raised for a fraction of the equity. You're only going to do that if you love startups, love early stage, and believe in this one. And so they also tend to be
53:06really great on helping founders assemble their early stage teams. It's different than the talent group at a multi-billion dollar fund who's going to call their executives for the Series B, Series C, Series D. These are folks who are who's on the ground.
53:20are more through networks versus through processes.
53:22exactly. And often passive candidates and some job seekers all that type of stuff. So that's why I see them being so incredibly valuable. They're also peers, so they have the trust built in.
53:31They know that they're all they're going through it. They're building their firm just like somebody's building their company. It's more similar than different. When we were raising Homebrew in the earliest years, even though a venture firm is very different than a startup, the questions we were asking ourselves felt much more similar to the questions that um a Plaid or a Chime or whatever are asking themselves than what I think Sequoia was asking themselves in 2013.
53:53Um and so What do you mean by that?
53:56Well, all the questions about um what sort of things do we focus on now that pay off right away versus do we plant seeds that won't pay off for a while? What sort of team and structure do we build? How do we We We have too much to do, not enough time. How do we actually sequence it?
54:16Like It's funny. We're both old enough and been been We've both We're both old enough and been around a lot enough to realize that up until about 5 years ago, venture capital was not seen as this ongoing cost. It It was It was basically two people, like you and Satya, that came together and decided you wanted to deploy money and then maybe do another fund, another fund. And now it's gone from basically no intrinsic value, no GP staking of venture capital firms to now venture capital firms going public reportedly within 5 years of like what institutional value are
54:45creating? It's like I don't know. I go home each night. But that why I thought it was so important when we um when Lisa at all, you know, sort of started Screen Door Proper, we gave them the their management company.
54:56So like the things you can do when you sort of take a mindset of um what's the right structure for something to succeed and you say let's just all succeed together are so different. How many venture firms break up because of economics or break up because of poor generational transition so forth. I'm not saying that like we did a generational transition or anything like that, but I'm saying if you don't look and you don't examine the core questions about incentives, what needs to who's fully committed versus who's helping that type of stuff. It's
55:26like we didn't look at it and say, hey, we started this thing, come work for us. I hope you succeed. We said great, we work for you now. Not org chart wise, but you know, we're not we're not tied to the organization, but it's like this is yours.
55:38The best answer to your question of how many firms are good at generational transfer is essentially none except the ones that you know. So the ones that are still around are the ones that are good at generational transfer. It's Sequoia, it's Benchmark.
55:53Maybe. There's a bunch around that Maybe a couple.
55:55Still TBD. I call it like we're you know, you But everybody else, everybody that you can't name, everyone that people have forgot about in the last 20 years, some of these some of the top funds. I don't want to speak of the dead, but Or the dying.
56:06the or the dying, but but essentially no one has been good at it except these small firms that have been able to TBD, some of them have taken one or two swings and then just now found the right potential right combination. I often so I'll show my age again. You know, you used to have used to say, oh, I got a bootleg, right? It's a tape.
56:24And then is there a first generation bootleg, a second generation so is it a tape of a tape of a tape? Like did you get this off the soundboard at the Grateful Dead show or did somebody else record it you recorded it? So I think unless they really think about this intentionally, who are the people we have? Does our strategy still match these talents? Are we too big for our strategy? Are we too small?
56:42Basically multi-generational venture firms are more likely to be dub tapes of dub tapes of dub tapes of where the music sucks.
56:52It's kind of the name is still there.
56:53generation. It's still it says on the label soundboard recording Grateful Dead, Fillmore 1963, but it's the fourth generation of that recording and you can barely make out the music and it's not a good jam.
57:06The only firm that I've ever seen do a full reboot has been Kleiner Perkins.
57:12Do you know any others?
57:12Only when and that was that was only when it became so painful and existential, right? They tried to do the change the jet engine in air.
57:20In many ways that was a brand new firm.
57:21Yeah, they had to uh Do you know any other firms?
57:24if they I mean uh maybe this was a step forward and you know we're never privy to what goes on inside. I always wondered if you know Mamoon at all ever had any discussions about in order to finish this we need to rename it.
57:37I'm sure those discussions happened.
57:39I mean and credit to them, you know they've kept the heritage while creating something new.
57:44When these venture capital firms die, my sense of it is that it happens very slowly Mhm.
57:51because these are 10-year funds, because talent slowly creeps out. Is is that how it happens?
57:57I think unless it's really ugly, right?
57:58Unless the ones that happen fast are usually uh partnership dynamics or behavior issues, right? When you think about sort of the last decade of those that sort of had to break up and give money back or there's ones that actually couldn't raise and sort of make announcements that are everything but we couldn't raise, right?
58:16The ones that are slow Air Coming Out of Balloon, I call I think it's the Sixth Sense actually. I think they're Bruce Willis in The Sixth Sense. They've been dead for years and they haven't realized it. And eventually the movie ends and it's the twist.
58:31Yeah, I don't think you have to say spoiler alert for a 20-year-old movie, but I appreciate your you know consideration for your audience.
58:38So going back to because you didn't answer my question. So these managers I guess you and you answered it partially, which is one archetype of these emerging managers that you like to back are these technologists.
58:51These are roboticists.
58:53That's one that one archetype. What else?
58:55So another one I'd say So the way I always say it is they have to be um similar but better or different and excellent.
59:04So the one of the archetypes we just talked about I think the roboticists that type of stuff I think is sort of different but excellent. They're people who don't necessarily have track records. They might have portfolio model constructions or ideas on how they run want to run their enter firms that aren't informed by the top five firms in the way they run themselves.
59:21And that's positive.
59:23It's I mean it's positive when it succeeds. There's good versions and bad versions of all these things. Just saying you're that is not sufficient, right?
59:30The um similar but better, I think those more often look like spinouts very often. To be concrete, uh this incredible woman Lu Zhang left Sequoia to start a firm called Sunflower and we were she's now investing out of a larger second vehicle which we were a part of but we were also fortunate enough to be in her first vehicle.
59:47And the types of stuff that she was doing at Sequoia and the types of stuff she's doing now I mean she might be able to compare it more specifically based upon her mandate at Sequoia or what you know she was able to get through the partnership or how much agency she had for what she could write versus what she had to get consensus on.
1:00:03But I get the sense that like we weren't underwriting um oh I invested in X and now I want to invest in Y. Sequoia doesn't do Y and that's why I'm leaving. We invest in somebody who had all the grit and determination of an entrepreneur to want to be able to go in even earlier with even higher conviction and um run her own shop.
1:00:22And so if you look and you say well you're a she does a lot she's a very technical investor does a lot of interesting stuff in the sciences and dev tools and so forth. If you do some areas that um other people have their eyes on my question is well well great why are you going to be better in them? Like how do you beat those folks?
1:00:39How do you out Sequoia Sequoia?
1:00:40Yeah, how do you out Sequoia Sequoia?
1:00:41And that ends up being I think a combination of some of the questions of playbook.
1:00:48Like what are you specifically good at as a founder and why are you going to be even better at that outside of the platform?
1:00:54As a founding GP. And some of it I think is the counter balance to well these are the types of things I believe in and I think I can do out of uh initially first fund you know sub 100 million, second fund 150 um do out of a vehicle that's not a multi-billion dollar shop where I don't have to take some of the considerations, some of the thought process, some the deliberateness, some of the restrictions that come with that and that brand to run my own. And that
1:01:22combination, I think in general spinouts are overrated. But um so I feel like the you know 80th percentile, 90th percentile spinout is going to underperform and the 99th percentile spinout is going to overperform. And I think she's a 99th percentile spinout.
1:01:39Right. Back up there. So spinouts are one of the most popular strategies for LPs. In fact, a lot of LPs think about we're going to put a lot of money into the multi-stage firms and we're going to do a couple spinouts.
1:01:52Why is the 90th percentile spinout just not a good bet?
1:01:57Well, for the average LP.
1:01:59Because a few things. One, I think um most LPs uh a a lot of LPs can't get to ground truth on the story of why that person is leaving.
1:02:09Everybody does a very good job of telling the story of why they're leaving, giving that person the track record they need to go raise their next fund. My old fund is supporting me, so on and so forth. But if you really got to ground truth, if you knew who did the deals, if you knew how much of their attribution was theirs versus the principal, the associate, so on and so forth, if you knew who provided the value add to the founders afterwards, you would find that maybe that person's bio doesn't match all those sub-bullets.
1:02:38Do you think there's more adverse selection for partners leaving the top funds today or less given that they're bigger?
1:02:46adverse selection.
1:02:47In other words, is there more top talent looking to leave the top multi-stage firms today or was was there more 5 years ago?
1:02:55Uh well, I think there's a bunch of people leaving out of frustration with what becoming a multi-billion dollar fund has turned into.
1:03:04Because the counter the counteracting measure on that is just more management fees, more salary, more carry dollars even if smaller percentage.
1:03:11I think some of those people um even some of the people who are good investors have stayed too long to really understand how to be new fund builders.
1:03:24It's harder than they expected once they get even outside of investing percentile the 90th percentile isn't just a saying that the 90th percentile I don't think is going to be that impressive isn't necessarily even a statement about the individual although as we were just relating sometimes it is and that's one of the things I think about so great about Screendoor because we have those 10 to 15 myself included GP advisors to help with the underwriting like we get to ground truth very very quickly on spinouts and sometimes we were co-investors with them
1:03:52in company I mean we know and people come to us ahead of spinouts to say hey what do you think I see you guys start your own because we are the truth tellers and what it's like to build your own firms.
1:04:00S- Set another way that's almost the minimum viable team size to ascertain whether there's a great spinout is 15 super connected super active people and and if you have one person different even than LPs thinking they have a great diligence network because you know what happens like it's misalignment. We're all going to be in business together right why why I want to kind of go on record saying anything nasty about you why with the the risk of that getting back to you is too high we're all going to be in business together we're all going to make money together so why nobody nobody calls anybody out
1:04:30unless you know it's a Twitter beef or whatever and I got off that site years ago so I think there's a bunch of things that you can say the people spinning out by and large often aren't as good as they say they are.
1:04:41They might be perfectly wonderful smart people but we're talking about a power law business right?
1:04:45They may have stayed too long and they actually don't know how to be competitive in a new firm mentality or they're spinning out past their peak they're taking the shot that they wish they would have taken seven years ago but they're no longer networked in the same way they maybe they don't work as hard they're zooming in from the second or third house on the weekends as opposed to hanging out at the hacker house that type of stuff and there's nothing wrong with that like I work a different style now than I worked when I was 22 also
1:05:14but I'm not starting a venture firm at 53 and so I I that the spinouts seem like a safe place put money and it's very possible that they're not going to be again, they're not going to be zeros. So maybe you're very many of them probably won't be zeros. So you're settling for oh, this seemed like a reasonable bet.
1:05:32If it comes in slightly below the benchmark threshold, it'll all get even out and nobody's going to blame me for having picked the X benchmark partner again.
1:05:43could say I did a fund one and that's giving beta.
1:05:45I got access. So it's like faux risk, you know. Um where I think the real fund one returns are going to accrue to LPs like Screen Door who are pickers of both diamonds and diamonds in the rough, right? So the diamonds in the rough are the too small, no track record. We'll wait for fund two, three, four, five that cause major LPs to not be well positioned to invest in those. And then
1:06:14the diamonds are which is the cubic zirconium versus which is the flawless cut. Rex Woodbury, Daybreak, you know, coming out of Index, Lu Zhang, Sunflower coming out of Sequoia. Those are the diamonds. There's plenty of other cubic zirconium that we didn't back.
1:06:28Yeah, and this idea of consensus Mark Andreessen says there's no more diamonds in the rough, only diamonds. I tend to believe that that's generally true, but it's not meant to be literal, meaning if you keep on going back to the to the history of the startup, at some point they incorporate. At some point it was just two founders.
1:06:45it also has to do with your nimbleness, right? So um if uh Screen Door was a $10 billion vehicle that in order to allocate needed to be able to write minimum 50 $50 million checks into every firm and we couldn't be more than 20% of their you know, AUM, well then maybe we would have by our strategy screened out all the diamonds in the rough because the diamonds in the rough are a $35 million fund one that's going to
1:07:17So I think by staying a fight-worthy but comfortable nine-digit size, by being able to cross the Rubicon in terms of understanding what it means to take underwriting risk in a manager like that versus underwriting risk in a $100 million spin-out. Everything we pass upstream will be diamonds, but when we got them, maybe they weren't yet as polished.
1:07:36And you mentioned you're able to access through Screen Door. You're often times able to go below certain thresholds where where there's still diamonds. They're also coming to you for advice.
1:07:48What are otherwise very talented managers, where are their blind spots, and where do they really need help?
1:07:54What I was always surprised by We had a charmed fundraise, I think, in 2013 for Homebrew I. Part of that was we were coming to it, you know, later in our careers. We were both in our mid-to-late 30s, so we had networks. We had both professional and in Sacha's case, we'd done venture twice before. We had track records. We were also investing at a very raising at a very good time.
1:08:112013, 2012 was sort of the beginning of the post-first round, post-floodgate, post software was the beginning of the mobile mobile era.
1:08:20A little bit later, but it was sort of the it was the second wave. Every LP who had invested in a seed fund, early-stage manager Pure Play before was doing pretty well and wanted more.
1:08:30It was Steve Steve Anderson Steve Anderson, Baseline, Ron Conway, Chris Sacca. And those who had been like, I don't think that's a segment or they can't possibly move the needle, were like, I was wrong. And so we were institutional from day one and we ran a good process. We were institutional from day one, very concentrated small piece of blah blah blah.
1:08:46Once I started helping others do the same, I was very surprised how long their fundraising was taking. People who I thought were excellent managers.
1:08:54And what I realized was that even if they had been at great large firms, they were never involved in the LP side of the business. The IR person did the fundraising and the managing partners. Some of them had never met LPs, whereas we had to live, you know, amongst them. So even just helping them think about two things.
1:09:13Are you pitching the right product?
1:09:16And are you running the right process?
1:09:18Like immeasurably speeds up, I think, the fundraising, let alone when Screen Door does commit so and so forth. One of the things I'm most proud of that Lisa and others have shared with me is that managers that they've passed on still come back and thank them for the advice that help like you you know go and close their funds and so forth do great um that they became better fundraisers because of the advice that they got from Screendoor, not just the yes or no. Not ask people how many LP conversations give them feedback,
1:09:47advice, support and introductions.
1:09:50How many how many even respond. That's what I always said, you know, oh this is great we should build a relationship. My answer was always like the best way to build a relationship is to invest in our fund one.
1:09:59Um if that's not right for you that's fine. We'll try to I'm you know we will keep each other up to date. Um we don't intend to grow our fund size that dramatically and we have LPs who I believe will have an appetite to grow with us and so you know I'm not sure that there'll be an opportunity to work together again and please factor that into deciding whether you want to prioritize or not. Not because I was trying to give them FOMO or play a game, but it's true we were four LPs in our fund one.
1:10:22We expanded that slightly mostly based on recommendations from our current LPs of other endowments and foundations they appreciated to eight major LPs in fund two and then we added one in fund three that we all took a little bit of cut back of our percentage on because they were such an interesting LP that we wanted to have them involved. If you were an LP who said no to homebrew fund one because you wanted to wait, you know, you missed a double digit fund.
1:10:42You referenced at today's a much more difficult fundraising market for emerging managers.
1:10:48There's never been more people investing in venture. There's so many folks putting money in globally than when I started, but there's also so many more vehicles to put them into including direct into private so on and so forth, mixtures these shared vehicles and the underlying funds that existed over the last year. Everyone every fund is double, triple, quadrupled.
1:11:09So maybe it was a good time 15 years ago to run a strategy of oh we're we are similar to X or we co-invest with S co-invest with X a lot and if you're an LP who can't get access to X, well then great invest in Y.
1:11:23When X is gone from 500 million to 5 billion you can usually get some direct exposure, right? So, being a first round knockoff, a benchmark knockoff, so and so forth, like well now you can get to first round, now you get benchmark, right? And so I really think that the people who are running there's always going to be some market for lookalikes, right? But I I mean I think it's more fun to talk about what do the smartest people decide rather than what do the second and third tier of LPs and the second and third
1:11:52tier of VCs decide to do.
1:11:54And so I I get most excited when I see people running their own playbooks that are undeniable and regardless of whether they're coming with a track record or not, you just believe that like this fund is going to be created and we are probably underwriting a great fund and what we're hoping to find out is whether it's going to be a great firm, right? So when Screen Door makes a fund one decision or whatever the fund is that sort of is the now it's an institutional fund, I think we are pretty confident we're underwriting a high quality initial investment with somebody who wants to grow and learn and become not
1:12:23just an investor but a managing partner.
1:12:25And that's what we will find out over the success of years, whether they even want to invest multiple raise multiple funds. We've had some great managers who are having amazing fund ones and I'd say they don't necessarily know if they want to raise a fund too. Um we have had others that want to stay the same size, we have others that you know like Lewis Sunflower and something who've you know been able to grow successively as you know their own abilities and team has grown.
1:12:49Had one of the most successful careers in venture going back to 2013 when you started your home brew, you mentioned it, double digit returns. I used to read your blog. I didn't realize you were off of X which which explains why I've disappeared. I'm in I'm I'm in my you know old man in the river phase but you can still find my blog, it's on WordPress, you know.
1:13:07[laughter] We'll link in the show notes but if you could give yourself younger Hunter in 2013, 13 years ago, one time this piece of advice that would you take the next 13 years of your career, what would that be?
1:13:21I'll I'll do bonus, I'll give two. The one that I always say and I pay you know I pay forward when people ask me well what would you have done differently for one? I said look we were very smart about a lot of things.
1:13:30I think what we did was we we though we underinvested in systems and teams because we weren't trying to be the next multi-billion dollar firm and because 2013 frankly investing in IT and stuff meant something very different than vibe coding or spinning up that and there's so many more platinums that are platforms that are also built for the private markets let alone building your own.
1:13:52I think that we may do with you know Google Docs and Notion sheets for too long and as the velocity of the markets the founders or talent networks it wasn't that we fell behind it's that we didn't take advantage of one of our strengths. So for example now it's so much easier to manage find and track in a you know non-stalky way like the first engineer hires at the companies you've backed.
1:14:19When those folks go inside their companies they should be coming to me or I should be finding them that's dark deal flow before it becomes public deal flow right? And that's not just you know doing listening stuff on LinkedIn for who changes thing I think it's having the data to then help you to know where to invest the actual personal time.
1:14:36And I feel like we ended up doing that in non-scalable ways and I think frankly that probably hurt some of our returns towards the end of the institutional funds where there were some folks that I would have thought would be like captured deal flow for us that I ended up not getting to in time to get my 15 percent right so the double sort of penalty of you didn't know it early enough and when you get to them they don't have your ownership slot available very frustrating. So I tell them I was like even though you're not you know you're spinning out a big firm I don't expect you don't and don't expect to
1:15:05recreate every database or hey you're just spinning up you know don't spend all your time and all your management fees on software you need to figure out you know how to pay you know for this for this for this but like think about the expansiveness of the information that you really want to have at your fingertips pick like one or two things whether it be you know networks or introductions talent for hiring you know LPs for follow-on for direct for whatever like
1:15:34start building out the infrastructure. That's what I would have told 2013 Hunter, that like build it out a little bit ahead of what you need it. The second thing I would have said is um don't invest uh through COVID. I feel like COVID, that period, the closed down period of 2020 like broke some of our model.
1:15:52I was so used to meeting people in person and being able to get a real sense of who they were. All of a sudden with Zerp and so on so forth, you're doing a Zoom and then pressured 3 days later to make a decision. Things that felt like PMF, product market fit, virtual offices, we're all going to need 3D renderings of our virtual offices. We're dead by 2021. We're pivoting to something else.
1:16:12And uh so maybe I'll file it away. If there's another pandemic, it's a good time to buy an apartment in New York and a bad time to invest in of the moment startups.
1:16:23All right, this has been an absolute master class. I barely got through any of my questions, but appreciate you jumping on.
1:16:28This has been great. I'm you know, please uh I'm always interested in what people have to say too, so I'm always happy to hear from folks directly. Uh my information is on my blog and um like I said, you know, I get the best job in the world. I back, you know, founders who start companies via Homebrew and that's our own capital, skin in the game. And have the good fortune to be able to back entrepreneurs who happen to build venture firms who then are hopefully backing great startups via Screen Door and so couldn't be happier uh to you know be in be in that stage of my career. Awesome.
1:16:56Thank you, Hunter. k
