Hey, everybody, welcome to dead cat Eric newcomer here very excited. have Jeremy Levine, an investor partner at Bessemer on the board of what? Pinterest, Shopify. Are you still on the board of Yelp? Also? Not Not anymore. You stepped off
on run but 14 years.
But you still Pinterest in Shopify, right? I'm getting that right Bessemer last year announced 4.6 billion sort of suite of funds, including $780 million buyout funds. So we'll be interested to talk about that later the downturn, but really have Jeremy on because I feel like, you know, someone who's been at Bessemer for over two decades, a real sort of VC who's willing to be honest in skeptic, is sort of nails the the line between skeptical about some of the euphoria, while being sort of a long term optimist in the technology industry. Do you think is that a fair characterization? Jeremy?
Yeah, I like that. A lot. Actually. I may borrow that.
So I just, I just wanted to start off since you, you're sort of you've seen it all, could you and this is like, I don't know, business school type question. But could you just sort of chart out from the view of like, the private markets, like 2000 2008 2008, to this moment, sort of, because, you know, we're going to be searching for metaphors in what this moment is. But can you just sort of chart out sort of the startup hype cycles that we've experienced, starting with the 2000? Boom?
Well, that's like trying to teach a history course without having prepared
it. Not you don't have to hit every, you know, this sort of you live through it.
Yeah. So well, I joined Bessemer in 2001. And really, two bubbles, I guess, had burst within a year of each other, just before I became venture capitalists, or actually what happened just before what happened just after the first was the internet bubble, people refer to that as the.com, crash or the.com game. And that more or less came to an end in April 2000, precipitated by a massive fall in the NASDAQ all of a sudden, and then a little more than a year later, there was the second one that talked about a lot less, it was essentially the end of a telecom boom. And so those two trends, the development of the consumer internet, and this massive telecom boom, which was actually driven largely by a regulatory change in 1996, the telecom Deregulation Act in 1986, created two huge trends of venture capitalists and entrepreneurs capitalized on by funding for the VCs and building for the entrepreneurs, all these great companies. But it got in both instances, euphoric, as you said, and people started to do crazy things, build companies that had no, no prayer of how to gravity's invest in companies at Crazy valuations, despite the fact that there was no prayer of having revenues in both the internet boom, and the telephone game. And eventually, as happens over and over and over in history, people came to their senses and said, Wait a minute. There's some really great stuff here. But there's a lot of stuff that isn't so great.
Was there a key trigger to people coming to their senses?
You know, it's funny, it's, I don't, having lived through it. I'm not sure what the trigger was. It was sort of like, somebody woke up and said, Wait a minute, and then everyone else like, oh, yeah, wait a minute. And it's there wasn't a sudden interest rate pipe or the beginning of some interest rate hikes like there were in 2021 2022. So I'm honestly not sure. I think, eventually, maybe some fatigue, finally entered the picture, but I don't know. It's good question.
Okay. So then.com, this sort of double driven, boom, sort of unwinds. And people really like, there are questions of whether the technology industry is really a thing, or what was the sense of pessimism at the bottom of that bus.
I mean, it was It was wild, it really swung dramatically the other way to the point where they were, it won't take more than two seconds of Google searching. But there were multiple cover stories of like, Amazon being a sham, right? And that the thing was going to go to zero. And by the way, at some point, I can't do the math in my head on like a split adjusted basis, but the stock was trading at like $2 a share. And that's free splits. That'd be relative to like, several $1,000 A share today. I think that people just basically threw in the towel or the proverbial baby with the bathwater, and no one wanted to touch anything. And it was kind of funny, actually. There's this, you know, there's, there's virtue signaling all over the place. And as the.com buildup was increasing, people literally started adding.com To the end of every day. Anything that's somehow doubled the valuation. I think at one point even like Barnes and Noble became Barnes and noble.com. And then as the bubble burst, people did the opposite. They just removed.com from all the names. And it was like the most sort of obvious kind of shameless thing. Like one day, I'm an internet company, or one day, I'm not the next I am. And the next day, I'm not again, well, that's like with crypto today. Absolutely. That's right. It's sort of like, dot x, y, z. It was it was it was really hot. Sure, the minutes. But I will say, after, when the despair got got deep. That's when the real the true the true entrepreneurs began to emerge. They didn't give up on it. And out of the ashes of the.com, implosion came three really valuable and important companies. One was Amazon. One was eBay. And then one was Yahoo, which quickly got eclipsed by Google, but they all all existed. So maybe even for now, obviously, Google remains important today. Yeah, who not so much. But then a whole bunch of entrepreneurs, who were truly passionate about building something new capitalizing on these new talents and trends, like the fact is, millions and millions of consumers in the United States, we're now connected to the internet. That wasn't true in 1996, it was true in 2001, the speed of these connections was increasing dramatically. The power of these web applications was also improving, like in the early days of internet, you could just get kind of checks and basic images on your website, there was no interactivity, this technology called Ajax, which allowed a little bit of interactivity inside the web browser came and not allow all these new applications. So like true entrepreneurs, despite the despair, started building things. And I remember in 2001 2002, in my first year, so venture capital, there was not a lot of activity. And the pace of new investments and getting to meet with compelling shops was quite slow, right? But those who were doing it back then, like, boy, boy, they were really serious and really passionate, because they were not deterred by all the naysayers. And it was very unpopular to be an entrepreneur, particularly the internet. Do you guys in 2003 2004, and then
2008. So then what, I guess what 2003 2004 People start to regain their confidence. And then 2008 2009 is sort of the next dip. Yeah,
I think let's show the true except that the 2000 She doesn't want to crash into the internet and telecom bubble were really tech industry specific issues. And then slowly, things started to build from 2002 to 2007. You know, TechCrunch emerged, I think, in 2005. And we started to meet really compelling entrepreneurs, folks like Jeremy Stoppelman, who was dropped out of business school in 2004. To build Yelp, that was a very unpopular thing to do. That's a serious guts. And obviously, he was he was passionate driven to do it. But by 2007 2008, funding had started to increase. These companies are getting publicity, notoriety and fame through new media outlets, like TechCrunch that emerge, actually to replace predecessors, which are generally offline things like, you know, Fast Company Magazine and Wired Magazine, which were like 300 pages thick, mostly ads at the peak of the.com bubble and then became, you know, 15 pages, eventually, not existent. So funding can increase, but there were no exits, literally no exits. I think the only notable exit during that period in the consumer internet was maybe YouTube, I can't remember exactly. Which period is this? This is from 2001 2007 2008. Yeah. And so the funding and the startups, the creation of startups and the willingness for people to take chances and be entrepreneurs and build something steadily increased during that period. But there wasn't yet a lot of evidence that it was working, right. Companies were starting to work, consumers were engaging, software was emerging. But there were no exits, the venture industry in general had very few compelling exits, when you sold a company to a company public and generated a three or 4x return that was noteworthy. Wow, you know, congratulations. That's impressive. There wasn't a lot of it. And then the financial crisis happened. And everything kind of pause for a brief moment. And those who were building companies kept building companies really smart acquires like, Google got aggressive and said, Wow, like, everything is cheap. Maybe we can buy a bunch of great stuff. And they made overtures and tried to do things, right. They've danced with Yelp for a little bit trying to buy, which didn't ultimately work out. But it just sort of put a pause on things. But it was kind of had nothing to do with the tech industry. Like nothing had changed and he had kept climbing. So it was it was like a reset, because everyone's like wait a minute, is my bank account even can allow me to withdraw cash tomorrow. Money market funds started locking up, the government intervened and came in with these huge rescue packages,
right? I mean, it's sort of there's a very easy simplification but 2000 There are real valuation questions like What is the opportunity for the tech markets? was 2008. It's like, what happens if we have a recession? And just, you know, there's less consumer spending? And what's the effect on the technology industry? And I'm gonna skip ahead. You know, I think that is sort of a big question. Now, where some people are worried about valuations, and some people are worried about the recession, I'll let you respond to that in a bit. But I want to, I want to get there. So we have this 2008 period, not specific to tech, but you know, the markets generally are pessimistic, we dip a little bit, and then we sort of enter, you know, and this is where, you know, Facebook's, you know, emerged as and everything like that sort of bull period up to like 2015 2016, or, yeah, get us there.
Yeah, well, so the financial crisis, I view as a pause, and basically the public market price, these drops, precipitously, things started to lock up. And that was, after seven years of slowly, gradually building confidence, building valuations, building entrepreneurial activity, and building VC investment. And so during that pause, basically, because the public market prices adjusted dramatically, entrepreneurs and investors were like, we're not sure what to do entrepreneurs like, hey, it's kind of bounced back up investors were like, Hey, we're not so sure. And so we just kind of waited for a little bit. In the meantime, those who were out there building folks like, you know, Jeremy, soft Miguel, or Reed Hoffman I liked and they were just building and they're like, you know, this is a bummer. Maybe we can't raise capital, the same price as we thought we could. But it's okay. They just kept building and the usage kept increasing and no quality, the business kept increasing. But they weren't affected so much directly by the financial crisis and a very brief recession, except that they realized they couldn't spend quite as freely because money wasn't as available. But within almost 18 months, they kind of reversed. I think government regulators did, politicians even did a really nice job, preventing a total tailspin. And injecting a bunch of money into the economy, not too much money, and it picked back up again. And so if you almost ignore the 2008 and 2009 time period, and just take it out of history, you could probably just draw a straight and steady line. And then 2010 came, people relax a little bit. And even more of a company started to get started, folks like I think Jeff Lawson Twilio was 2009 Toby Lukey started Shopify, like in the middle of all that nonsense. He was unable to raise much money. I think he faculty favorite story is he he went to Silicon Valley from Ottawa, Canada to raise money. He was so scrappy, that and by the way, there's no Uber. And you guys and whenever he when he went there, there's no it's impossible to get a taxi in Palo Alto. He bought a bicycle on Craigslist. And he bikes up and down Sand Hill Road to meet with venture firms. And everyone told him no, no, no way. No jabs, he went back to Ottawa and said, alright, I'll keep doing it. The hard way, folks, I started to notice him in 2010, and started investing. And so there's a lot of building going on. And then I think a breakthrough moment happened. I think it was 2011 when LinkedIn went public, and that was a like, Oh, my, and LinkedIn had a, it was a multi billion dollar market cap, but it was it was definitely south of 10. But that was a huge deal. The most notable internet VC exit before that, I think, like I said, Before, it was YouTube to Google. And that was maybe one and a half billion dollars, lose a multiple of that, and people like, Wow, maybe this internet thing is a thing. And it just took a little while. In the meantime, Amazon, you know, it recovered, it was a, you know, $2 stock and was back to a significant business. eBay continued to generate massive profits. And I kind of skipped the Google story, but they also went public, you know, I appreciate
the Bessemer portfolio or the main
it wasn't my milestone wasn't mine. Totally fair. I'm
just flagging. Twilio. LinkedIn, Shopify. Yeah. I mean, in the sort of Bull Run, I guess I got to live through covering Silicon Valley, it feels like we were incorrectly worried, or what's been amazing about this period, is that it was actually a very long period of optimism, right? Or, you know, do you think like, whatever skepticism in 2015 2016 was just sort of misplace now or I was just looking back at my old stories. And I had, you know, the fuzzy, insane math of valuations, basically warning about, you know, preferred shareholder perks, which is much more relevant today than it was then I think Bill Gurley tweeted out an old blog post of his sort of flagged, you know, some warnings that weren't really app then but now matter about debt and sort of the risks of the debt. I mean, do you think we were just worried in that period? Because it seemed about time, or do you think we saw sort of the behavior that led to today?
I think two different things happen. They're interrelated. The first is that historically, the economic cycle is between five and 10 years over and over and over again. And while there was that blip, it was nine. Like I said, if you took it out, you could just keep drawing a straight line where I wouldn't say there was like, enthusiasm and up Isn't it oh five, or six or seven, but it was starting to build from the despair of 2001 by 2010, or 11, we're kind of back to normal. Now we're seeing really significant exits. Like I said, LinkedIn went public, I think Yelp public next year, Facebook was emerging and growing, it eventually went public. And so we're starting to see like, the fruits of the labor of all these hard working entrepreneurs and lucky busy is, and it just kept going. And by 2015 2016, it's like, oh, my, yes, there was this blip with the financial crisis, which is more or less independent check. But it's now been like 14 or 15 years, and everything has moved up into the right, year after year after year. And so I think some people were just freaking out saying like, of course, it's coming, because it's come every time in history. Once these cycles get beyond five or six years, and then other people were just looking at fundamentals and saying, Wow, in the despair of, Oh, 102, we thought everything was worth nothing, including amazing businesses like Amazon. And we've gained increasing competition every year since then, to the point where by 2015 2016, things were valued really well. And you saw multiples for software companies and internet companies get to a really healthy levels. They were massively higher than what they were in 2002. But I think in hindsight, the benefit of hindsight, they were probably about right. And then from 2015, to 2021, they just kept going up by 20, or 25%, every year. And as things get bigger, and bigger and bigger, it encourages more people to start building, it encourages more people to start investing. And by 2021, it had gone so far beyond rational that, you know, eventually when the first sign of a Oh, my goodness, maybe there's something else you can do with your money, but speculate happens, which was the initial interest rate checkup, everyone freaked out, right. And I think if you look at where we are today, in the sort of post adjusted world, I think it's kind of back to where it was in 2015 16. I haven't actually gone to run the app, but I suspect, multiples that people are willing to pay and the way people are valuing companies today is about where it was then. And so those who were freaked out that it had kind of started to get too hot, we're probably right in 2015, and 2016. Because now that we have a bit more perspective, I think we're more or less right back to where we were
right. 2021 was sort of a uniquely insane year, right? I mean, we had, we sort of skipped over the COVID had fake where people thought, okay, maybe it's all gonna unwind. And COVID You saw Sequoia warning people. But then because of COVID, you know, the banks lowered interest rates, and people were working from home, all of a sudden, it was a boon to tech. So then that helped actually fuel growth. And then we really sort of saw everything online starting maybe, you know, December 2021. And onward. Did you sort of as an investment firm, try to do anything different in 2021? I mean, like a phenomenon I see specifically is just like, you know, firms return so much too good. You know, if you were a good investor, I think you were quoted in the information basically saying, like, anybody who was anybody should have returned in this bull market. The thing is, people would return a ton of money, but then they're like, well, if I'm returning it, I'm also going to deploy a similar amount of money in 2021. So the question is, you know, how did you play it? And do you think it was a mistake for people who sort of basically tried to deploy as much as they were returning to investors.
So there's no doubt that I think there are very few investments that will have been made in 2021, that weren't very early stage companies that people want with hindsight, regret, because they paid such a crazy price. There will be exceptions, for sure. But up until from 2015, to 2021, the winner of the game, so to speak from an investor's perspective, was he who invested the most, because when things go up by 25% a year, you just want to get as much of everything as you can, and a bunch of folks literally embrace that try to do as much as they could.
This was like the Andreessen model than the Softbank model and Tiger model, you know, there's sort of a game of who can be sort of the top price ticker.
I mean, like, I don't think anyone was out there trying to pay the highest price possible. But a lot of people were like, wow, these trends are amazing. They're powerful. We want to get as much of these trends as we possibly can. And so people got really aggressive. And there's nobody who didn't get aggressive because it was impossible to invest if you weren't willing to be really aggressive. When that change all of a sudden, like I said, I think people regret a lot of the decisions they made in 2020, or 2021. Because the pricing with the benefit of hindsight was really, really high. And so I think my simple rubric is that valuations for let's just take SAS companies as an example. They're down about 75%. So insane. If you are a $10 million revenue SAS company in 2021. You could raise money at a $500 million valuation if you grow went really quickly. Today, I think you could raise money at about $100 million valuation. So that's actually 80%. So in order to get if you did raise money at a $500 million valuation, in order to get back to that level, you need to grow your business almost five times. And so that will just take time. If you're a SaaS company and you you had $10 million revenue under management in 2021, you could raise money at a $500 million valuation. And then he did today, assuming you're growing really quickly, and you have a high quality business, you're probably raising capital at more like $100 million valuation. So to get back to the $500 million valuation that you had, in 2021, you roughly have to increase the size of your business by fivefold get from about $10 million revenue to just 50. And there are a lot of really high quality companies that will in fact, do that. And that when they go to raise capital Next, when they're 50, or $60 million revenue business that raise nice up rounds, and the folks who invested even at these really aggressive valuations in 2021, will feel good about themselves. On average, however, it's really hard to do that. Not that many companies grow their businesses by 5x, in relatively short periods of time, so I think most will regret the prices that they paid. But look, it's a boon to the entrepreneurs who were smart enough to raise the capital when they can get it. And now if they invest it wisely, even if it takes a while to get to a larger scale. It's okay, they have the cash to get there. And in part because they raised so much money in 2021. I mean,
there's a flip side to this, which is people also needed to seize the bull market, right, or it was a time to harvest winds. I mean, I look back, you know, I did a big profile of Bessemer. While the boom times were going, I think I gave you guys a little bit of a hard time, just how big Shopify and Twilio are. And it was a moment when you know, Sequoia was out there sort of beating its chest about holding public stocks. And then now with the benefit of hindsight, it's like, okay, yeah, makes sense to sort of sell down your position and cash in winners, even if you have these generational companies. I mean, at the same time, what off zero was a big one of yours, right, that you that got sold, when things were way up? So yeah, I don't know, with a little bit of distance from it. How would you score yourself on sort of getting the most out of the market while being sort of well situated for the downturn? We've made
every mistake possible. But we've also gotten some things right. And so with the benefit of hindsight, we distributed our stock and Shopify way too early. And at the same time, we held on to some stocks in 2021, a bit too long. I think if you're, we're not all that focused on getting that exactly right. Of course, we're always trying to do better, but the real win, if you will, and the excitement and what motivates us is to invest in a company like Shopify or AWS zero, when it's really small, and nurture it and help that company become really big. And if you manage the top ticket and exit your position exactly when the market cap is like all the power to you, that's just not that interesting of a game. I mean, sure, it might improve your returns a bit, that the real energy, if you will, the real effort into generating investment returns. And finally, the reward of playing adventure game is getting to work with the entrepreneurs, when they got something really compelling and small and help their design. We're less focused on like, how do we get out at exactly the right time. And in fact, we invested in Shopify in 2010. I'm still on the board and 2020 to 12 years later, we're even though Bessemer doesn't own a significant position. It's incredibly rewarding to partner with these entrepreneurs, when they have a mission and stick with it for a really long time.
So okay, in our search of, you know, this downturn, what's the right metaphor? And you know, what can we learn from the past? What's your gut read on the percent of like, bullshit right now? Or, like, I guess, in judging whether we're similar to.com or not, it's just like, we had all these companies that got out via Spax, you know, on demand went crazy. There's a lot of stuff outside of like, pure SAS, that, to me, it looks questionable. But I guess from your read, just like how much bullshit is there out there? How many companies are there that that have no path? I know, that's hard to calibrate.
Yeah, I don't. So I think it's really different from the.com explosion, in the sense that one, when that was over, as I mentioned before, there were like three or four really strong internet companies left standing. And they've all endured, like even Yahoo is still worth billions of dollars damage, lots of revenue. I believe Apollo owns it today. But only three or four ads, hundreds, I mean, hundreds. As a brief aside, so why, and I'll come back to what I think of today and Ebola, but when I joined the venture industry in 2001, I looked at these entrepreneurs who built businesses and these venture capitalist who funded them from 96 to 2000. And I was jealous Oh my lord, like they generated enormous value and enormous wealth, that in such a short time, and I said to myself, the world is never gonna get this crazy again, right? Like, like the entire world smoked a giant joints. And it was high as a kite, and like, what fun it would have been to be part of that, but I missed the party. But I thought, you know, it's really rewarding and fun and challenging to find compelling entrepreneurs and invest in startups. So even though it's never gonna get as good as it was in 2000, again, I'm going to try to make this my career because I think I'll find it fun. And level. 20 years later, it happened again, like, like someone passed the joint around the party a second time, and no one remembered what it happened the first time, and things got crazy. So in that sense, it's really similar and enormous wealth was created, enormous companies are created. But the difference is, when that party ended, at the end of 2021, it wasn't three or four companies left standing. It was dozens and dozens of strong public companies, and hundreds of really interesting private companies. Now, not every unicorn and not every company that raised a lot of money will be successful. But the industry is, I would say two orders of magnitude larger than it was, yeah. 2000. And,
obviously, I'm not saying that this period could be a total invalidation of like technology, right? And in the way that the.com bust was, so I feel like, you know, you do sort of have to distort the metaphor slightly in that it's not everything, but it's just, I guess, to me, the question is, was there so much optimism that, you know, the next round will be higher than the last, that sort of any sort of cash flow modeling or real rigor was thrown out the door, and therefore, we can't really trust you know, even like DECA corn level valuations that were granted in 2021?
Yes. And I think clearly, the valuations are often you can see it in the public markets, the public valuations are down by three quarters, not every single company, but more or less across the board. And so you can basically apply that to the private company, it's just the same. And so if you had a private company valuation of 10 billion, a rule of thumb is assume it's two and a half billion today. Yeah, I mean, yeah, but that and that doesn't mean you won't get back to 10 billion, that just means you got to grow the business, it's essentially two doubles. If you can double your size this year, and double your size again next year. I'm not that good at math. But two times two is four, I believe, four times two and a half million, you're right back to 10. Right. So the best case scenario, or I shouldn't say that there's probably better cases. But a really good case scenario is you still have a great company, it's still growing quickly, you can double two more times, and in two years, you're back to a $10 billion valuation, no one is crying for those entrepreneurs or investors. That's a pretty common outcome. And by the way, if you fall short of that, and because you're trying to be a little bit more conservative with your capital, you don't have access to quite so much. And therefore you can't be as aggressive in your growth. Maybe you'll grow your business 40% This year, and 40% next year. Well, 40% growth followed by 40% growth will make you about twice as big as you are today. And so if you translate that to value in the mock exercise you're doing here, that turns a two and a half billion dollar company to 5 billion. Is it a jacket corner? No, there's a $5 billion equity. That's pretty amazing.
I was dunking on Lyft for being exactly like four to $5 billion. And somebody I think it was Jason Lemkin tweeted at me like there was a time where it was cool to be a four or $5 billion company. And to some degree, we've just totally lost perspective, like lots of people get rich at a four to $5 billion company, it's not, it's not the end of the world, it can still be a good return for VCs if they got in at the right price. So some of it is just resetting how much wealth is supposed to be created in in a wind scenario.
That's right. And I'd argue it's not just a good, it's a phenomenal outcome. It's a phenomenal outcome to be part of something early, or even in the middle stages, that becomes worth two or three or four or $5 million. It doesn't happen that often. I mean, what's amazing is that there are actually hundreds of examples now that we can point to, but it's still it's hundreds out of 10s of 1000s or more attempts. And so it's still still on knots.
Do you have a view on what 2023 will look like here.
So in the end of 2021, I was optimistic about 2023. And I felt like the imbalance in the system would start to work itself out. Now that we're in 2023. I'm a little bit less optimistic as to how quickly that imbalance will work itself out. But we're still seeing a lot of really interesting entrepreneurs, much like we did in 2002. And 2003. Say, forget, I don't care about the capital markets, like I have an idea. I have a vision for what I want to build, and I want to build it now. I don't want to wait five years before it's trendy again, right. And in many ways, I think they're playing to an advantage because I think today Google announced It was laying off 12,000 people, you know, Amazon has done significant cuts stripe has done significant Shopify has done significant because these are all really great companies with phenomenal people and teams. And I'm certain that not everybody they've let go is an amazing, you know, wildly talented person, but many of them are. And if you're trying to build a company over the last five years, you couldn't get access to those people, because they have these amazing jobs at fantastic companies. Now all of a sudden, you can recruit and build teams at a quality level for a really young company. That was unheard of five years ago. And so while yes, it's much harder to raise capital, and there's just less of it out there. It's also much easier to find great people. And I'd argue and know that, but you might even be able to recruit them and load them into your company and pay them less, right, which means you don't actually need as much capital. And so the negative spiral can be really helpful for company formation, and idea generation. And it's also the case that, you know, maybe the mood at a company like Google or Facebook isn't so cheery. So a bunch of talented people who were just having a blast for a few years now we're like, hey, this isn't so much fun anymore, it'd be much more fun to go start something where to go build something,
part of being a successful investor, is you have to have a sort of divergent thesis, or it just feels to me, like right now, like, every VC is evoking this sort of metaphor that great companies were built out of the aftermath of a bust. And that it's like a good time to start. And some of what we're seeing then is that seed and series A prices just haven't fallen any certainly anywhere near the the super late stage yet. And so I guess my question is like, are those rounds priced appropriately given the risk? And like, isn't it if if you know, even a CO two or whatever with all this money is rushing to series abs, they need to do something? Are there really going to be great deals in series A this year? If it's so competitive, because a lot of people have a similar intuition?
Yeah, I think it's fair. I mean, I think when you're making a seed, or series A or even a series B investment, what's most important is that you're finding a great company, great entrepreneur, and a great idea that can grow for a while, if you overpay, and by the way, I'll go back to our LinkedIn invested, which was a Series C investment in 2006. At the time, we while the overpaid LinkedIn was maybe a $10 million revenue company, we invested at a 225 ish million dollar tune a $30 million valuation. That was unheard of like nobody paid 25 times revenues to invest in a company doesn't six, so much so that LinkedIn is existing investors both invested zero in the financing, they thought we overpaid, but it's such a dramatic amount. But it was a phenomenal company. And maybe we did overpay relative to what the market was or what we should have paid by 20, or 30, or 50%. But the company still grew to the point where I think our position was right at 100x by the company and exit. And so when you're investing at a relatively early stage, there's so many ways to get bailed out. If you've caught a tiger by the tail and back, somebody truly phenomenal. As you get to a later later stage, your opportunities to get bailed out shrink dramatically. And so I think that's why we're seeing the price adjustments at the later stage in today's market had been much more dramatic at the earlier stage. That said, I think there's another shoe to drop, I don't think it will be as dramatic. I think it'll happen in some slow motion. But there's another challenge that the whole industry is facing, as everybody gets a little bit more conservative and a little bit more concerned. And the challenge is as an investor, when I see someone else's series, a investment become a series B Company or someone else's Series B investment become a Series C Company, and I may have an opportunity to invest in it. I want to feel like I'm investing in a phenomenal company, I'll stretch really aggressively. But I also like understand there's a market and I don't want to be wildly out of line with the market, I want to be sort of at the at the full end of the market, if you want to make sure everyone feels like they got a good deal, right. And what ends up happening is that if there are no opportunities to do that, and I'm a little bit more skeptical, or a little bit more cynical, the existing Ambassadors will feel like we need to support our company, because it's hard to find lots of right outside interest. And then when they do that, they realize like wait a minute, we can't be aggressive in investing in someone else's portfolio company, right? Because we need to save more money for our own portfolio.
This is super real phenomenon. It feels like Yeah, everybody's doubling down on their own.
But it becomes self fulfilling, because if you feel like you need to reserve more capital for your own companies even more tight, right when it comes to evaluating some new company, which means those investors have to be even tighter with their capital because they and so it just expires. And so I think we're in a little bit of that spiral. And so I think what will end up happening is, if you've invested in a series a price of X today, in a year you might say God hash, given how hard it is to raise a series B, I should be investing at a price point 7x naught x. So I anticipate it will continue to slip
back inside down rounds, basically,
I don't even know that they'll be down rounds because it den was a really hard and really disruptive for private companies.
Yes. Can you explain that? That was my next question. So as part of why is it that a series a company just can't just raise at a lower Series B,
if everybody's doing it. So the reason why the math is so tricky, is because of the structure of a typical venture capital deal. And so the way a typical venture deal works, let's say somebody invests in let's say, a venture capitalist lead to series, a investment invests $5 million, and a $20 million pre money valuation, which is a $25 million post money valuation, and the investor essentially owns 520 15 or 20% of the company that's like the down the middle of the fairway series a deal. Let's say 18 months go by, and there's still promise for the company. But maybe the the market feedback is like, hey, that's interesting, at a $15 million pre money valuation today, not a 25, let alone $50 million pre money valuation, why is it so hard to like, just accept that they should raise money at a $50 million valuation? The reason is, because number one, there's 5 million of preferences in the company from the previous investors investment. And two, almost every venture deal comes with what's called weighted average anti dilution protection. And so if the company raised viability as initial financing, and now needs access to say, 10, first of all, if you were to raise 10 million at a $15 billion pre money valuation, you're selling 40% of the company, because it becomes 10/25 of the of the company's value, you take the 10 of new capital, you add it to the $15 million valuation, you get to a 25, post 1020 Business orders, that's a huge chunk of the company to be selling. And the previous investor is gonna get anti dilution protection, which means they're automatically issued more shares to compensate for the fact that there was a down round. And so in addition to the 40%, you'd be selling to a new investor, you also have to give up more equity ownership to the previous investor, because of the termination of security. And so you could suddenly find out that you've sold 50, or 60%, of the company, and financing. And that just doesn't work. Like he's no longer interesting for an entrepreneur who just got booted so dramatically. And so it's really hard. And then on top of that, you have a massive communication challenge for all of your employees. What are you telling all your employees like if they worked at the business for two years, and their stock is now worth less than when they joined two years ago? That's really depressing. And it's, it's hard to maintain momentum and enthusiasm for our mission, if a ship is slowly sinking,
but this logic pushes founders to pursue debt and structured equity are basically structures that allow them to maintain the illusion of their valuation while putting the company at great risk. If they cannot continue to sort of justify it. Would you agree with that articulation? And what what's your view on sort of the some of these structure equity proposals being floated,
I would agree with that it's kicking the can of taking painful medicine down the road. And if there's a chance that it all works out just fine. But there's a bigger chance that the company does well. And the financing starts to become a serious problem. Or the financing eats into all the equity value subtly of all the founders and the employees because it has all sorts of crazy terms. And suddenly, you realize that you own very little of the company, because you sold all these aggressive terms to some investor in order to maintain a headline price, that seems good. And so it's sort of like a way of hiding the problems under the rug. Eventually, someone's got to lift up the rug, and see all the problems there. And so it's treacherous. What should happen is that you should have an honest investor who says, I invested a year ago at a $25 million valuation, I got it wrong, the company isn't worth 25 million anymore. And so let's own up to where we are. Let's work something out where, you know, I made a bad investment. You shouldn't be the entrepreneur that has to suffer all the pain, let's figure out together like we're business partners. And so maybe I give up some of my ownership, maybe you give up to me or ownership, let's start this company off on a clean slate at a $15 million valuation, if that's what we believe, is sensible and we still believe in the vision and the opportunity, so forth. But it turns out that that's like having a really tough conversation. You have to be really honest, because
like, No, you're great, you're great. And then one comes to you and says, You're not as great as you think you are like nobody wants to have to be the one to do that. Even if the other board members secretly agree.
And also nobody wants to like concede some of their rights. Rights like I bought something like I don't want to give something up for nothing but guess what, in the spirit of what's best for the company, you need to or there is no company People are remarkably short sighted about it. So the other way to do is like to kick the can down the road to pretend integrate all these other structural issues that can come back to haunt you later.
Have you done this? Like, are you have you done this with a startup? Like reset the cap structure? Yeah. Bessemer? Yeah, absolutely. Up in the, in this period.
Yeah. In fact, just in fact, just yesterday I was on the phone with with an appraiser who had seated and the company had raised maybe a total of $4 million. And it just wasn't working. And so hats off to an intrapreneur. I'm not going to name a company because I don't want to embarrass him. But he cut costs dramatically. It had been up to 30, or 35, people was trying to grow really aggressively, it didn't work, telcos dramatically, the business is still doing $300,000 or so a month in revenue. And with a much thinner staff, then that makes a little bit of profit. And so it's never unless the team had bent something wildly new, I don't know where which is always possible, it's never going to be a multibillion dollar company, it probably won't be a multi million dollar company. And so we could insist that we just keep going to broke, but instead by admitting what you've got, and right sizing it and accepting your current fate, you go from being on defense, and worrying about running out of money or leading your team to being on offense. And I was like, Hey, we have this like six person company, it generates just enough revenue every month to wash its own face. It's not washing his cash balance, go down and down and down. And now the founders can sit back and say, what do we want to do? Do we want to sell this little company and try to move on to something else? Or do we want to try to invent something new, what we have as a current company has a base? And what I'm saying and it says, Look, in order to keep it interesting, while you cogitate and brainstorm ideas, every penny of extra cash you generate? Why don't you keep 80% of it, just pay yourself really nicely, and set it and send 20% of it back to the investors. That's not the deal we have in fact, the deal we have is you have preferred stock. And so in theory, the first $4 million has to all come back to the investors. But that's not like, I mean, we can insist on that. Let us say that, like it's really short sighted, and it's not very partner like, and so
I would rather them, they just say we don't care about the company more, we're gonna do something else. Yeah, exactly.
And by the way, there's bitterness. And it's like they spent years of their life on it, like, yes, we lost some money. That's a bummer. But but they lost time. Maybe that's an even bigger environment. So you have to acknowledge everyone's position. You're all business partners. So yeah, they have to acknowledge, like, what's going to be perfectly
our employees, the ones getting screwed in these deals, or I mean, there's just like an inherent, they're the one not at the table when these things are being reset, right? Or how do you think employees should? Like, I don't know, what's good news, when they hear their founder sort of announced some changes? And what's bad news? Or what do you think about the employee position here?
Look, it's really across the board. Some founders and leaders are great about taking care of their teams, and some are less great. In the example I was just describing. There were 32 people who had been recruited to the company who were working really hard. There are only six now. And so 26 of them no longer have a job, or they're working somewhere else. Where they screwed. I don't know what what does that mean? Like, they worked hard. They were paid market rates, and then the job ended. That's a bummer. Like, nobody likes to be in that position. But that's the nature as entrepreneurial startups like right always worked, we hoped. But no one stole from them, no one took anything away. It just didn't work out. Like that's always a potential outcome. And I'd argue luck plays quite a big factor. And maybe those employees got unlucky, just like the employee, you happen to joined Shopify and you guys in 10, as opposed to joining, you know, some other random company got really lucky him, and I'm sure they contributed important things to that company. But like, you know, all of a sudden, they're making millions and millions dollars. Do they deserve that? I don't know. That. So look worked with wins. But yeah,
but I'm not I'm not in any way anti layoff or anything like that. I'm just asking when there are these negotiations, where it's like, okay, employees got their shares under an old regime. And now there's like a new regime, it's clear the negotiation sort of happening without them, for sure.
And then, but it's much like a founder will negotiate an investment with a venture capitalist. Once that is done, then the founder has to decide, okay, how do I want to apply this to all my team. And some founders are really generous and issue lots of equity, and bonuses, and so forth to team, particularly when there's great performance, and others are a little bit tighter about it. But they're really good culture. And every company is different culture. Some company cultures are, you get nothing until you earn it, other company cultures or you get a lot until you prove that you don't deserve it, and everything in between. And so in this instance, if this company is fortunate enough to start to grow its revenues and start to generate your profits. The founder could say, I'm going to keep it all for myself. Or he could say I'm going to share it with my team. My guests know at this point, he's going to share with the CEO right and so I'm not going to I can do Usually with all six people, just company by company, but we'll set up a structure together, and then he'll figure out how to roll it out more broadly.
Part of what happened in 2021, we saw the entrance of like hedge funds, private equity funds VC funds. Do you think like the incentives of hedge fund compensation and just some of how these managers made money outside of just like maximizing returns for the LPS was a major contributor of the environment we saw in 2021?
I think are you asking like, is there really bad behavior by investors to help themselves at the expense of
others, just like if I'm a hedge fund, and I get paid on some of my investments based on the performance in a year, I have a strong incentive just to mark things up and go wild in a year and make some returns? That's that's not the venture model. But there's also I don't, I'm just trying to, maybe it's too big of a question. But the disconnect between how like investors are compensated versus how funds flow to their LPs? And like, do you think there have been any, like poorly set up compensation structures that incentivize sort of irrational behavior,
humans are remarkably creative and inventive. When it comes to their own compensation. I've learned that and I think the holds back phenomenon had some really interesting compensation dynamics to it, where the spec sponsor would get a significant chunk of the combined company, they'd make even more money if the company traded above the dispatching price. But even if it trades below, they still walk away with a good chunk of the company. And so there's no profit generated. And yet this back scratcher makes so much money. That's that's not well aligned incentives. I think it's no surprise that as more and more, these tech companies are falling below their stock prices, we're seeing the stock market dries up entirely and be like, Oh, wow, there's not great alignment here. Let's not let's not do it, in terms of people investing in tech companies that are in the broader venture tech ecosystem. I haven't seen much of that. I think most of the firms that were investing any meaningful amounts of private capital and private companies had separate private funds that worked exactly the way venture fund works. And look, I I joke with my wife from time to time, she also works in business, but not in the investing world. And she has a family of academics. And so like it working to make money is somewhat unappealing or distasteful. But as I joke with her, like, venture capital isn't the noblest of the finance professionals, because you can't really make any money as a venture capitalist unless you're part of creating something that creates value in the world, right? Because we generally get paid when the investments in which the companies in which we've invested, become worth more. And then we return the profits of those companies back to our LPs. And we keep a piece of it. And so there's, there's really good alignment between us and the entrepreneur, we do better as they do better. And there's really good align. But you know, it's an LPS. And whereas in most other investing businesses, you can trade, you can buy something when it's cheap, and sell it when it's high, or sell it when it's signed by or when it's cheap. And you aren't necessarily creating any value. You're making smart trades. And there's not a lot of that that happens in venture capital. Yeah. So it's the noble it sort of depends.
I mean, I think a lot of the companies you mentioned are, are safe, but there are lots of cyclical plays in venture where people do make a ton of money career making exits on companies that don't sustain I don't want to
Yeah, it happens it look, it happened even more over the past several years, right, with all these cryptocurrencies, like the number of people who made lots of money, buying a new cryptocurrency at for a penny and right spiked up to something huge. It was never used in any material way in any application. And then it fell wildly back down to earth like that's, and frankly, that was a little bit what happened in the internet bubble. All these companies went public with big values until they weren't worth anything. And so yes, it's not it's not perfect, but it's generally hard to do really well financially, unless you create something of value that's durable. It's not impossible, but it's hard.
I wanted to shift gears a little to some of the themes that you've been a big investor. And I mean, like consumer and marketplaces, particularly and just take stock of where they've been and your like level of optimism about finding new bets in those areas. And they're very poorly defined categories. And maybe, yeah, but I don't know, let's actually start with marketplaces. Like, what's your scorecard on the success of marketplaces? Are you still bullish on like chasing marketplace businesses? And I think the underlying question is just like, Are there that many great marketplace outcomes to justify how much of a category of pursuit it has been for the venture capital industry?
Yes, and yes, and so I remain very excited and I think there have been tons of successful companies. I think there's tons of opportunities still for growth. I think it's not as easy. There's more competition and the remaining categories are smaller. But many of our best investments historically have been marketplaces. And I think that will continue for some time. And we have some great and sizable marketplaces in our portfolio today, you can step up as an example. And that's existed for the better part of 20 years now. But we still think there's fantastic opportunities to continue to grow and expand into adjacent and other areas. The challenge, though, is how do you one get something going from scratch, there's the classic chicken and egg problem. And you need a really creative and innovative ways of circumventing that challenge. And then to, particularly outside of China, which is where I focus my investing, there are a small number of companies that really control the consumer internet, both on your desktop and on your phone. And you start almost everything you do at Google, Facebook, Apple, or Amazon. And they're massive companies with enormous resources, and huge levers of control. And it's very hard to get something in front of a consumer without going through one of those companies, right? In the earlier days of the internet, they would let you get access to your their consumers for free. And as they've gotten more sophisticated, and what I'll call less evil, or more evil, they have they've, they've stuck their hand out or picked up more toll booths, which make it harder for you to get to get YouTube without paying. And so a classic example is in the early days, you could generate lots of free traffic from Google. And now in order to find a free link on Google, you got to scroll way down past the fold to find the free links, right, all the ones at the top someone's paying for that wasn't the case. And the rest of them
to just like Google gives you the answer. And you don't even have to leave Google. Yeah,
even worse, they push all the results back and they favor their own services. Or in the case of Apple, you know, in the beginning, you'd find lots of stuff in the app store. Now a lot of the App Store placement is paid. And I was like, hey, there's a way for us to make more money. So and they've all done this more and more and more CI their, their market caps and their own revenue growth. And so it's just harder. It's called taboo,
they're spending a ton on advertising, right, they're sort of running the Tick Tock playbook, or tick tock spend billions and advertising to just force their way into the consumer.
If you think of the great internet companies that emerged up until 2015, none of them spent money on marketing. None of them, they built massive user base without doing it. Yeah. Companies like LinkedIn and TripAdvisor and Yelp and Facebook and YouTube and so forth. Snapchat, Pinterest. But since around 2015, as the what I call the oligopolists, started to get more aggressive about monetizing everything and limit three distribution, the only way that you could reliably get in front of massive consumers is to buy your way. And the problem with buying your way is that oftentimes, you have to pay the toll collectors, say $2 to get a consumer that you could only monetize to the tune of $2.05 worth $1.50. And if you're only getting back a little bit more than you paid, or even worse, less than you paid, you just can't sustain it.
And of course, the complicating factor is, startups are telling a story about their lifetime value that they haven't validated yet. So there's also just the mystery of what the actual lifetime value is, and how much investors are going to trust them in that bull market environment that we just experienced.
Exactly. And during the crazy market, people said, Yeah, sure. Now as everyone's gotten a bit more conservative with their cash, people saying, wait a minute, but even if you believe it, if the way you get to if you spend $2, to get a consumer that generates $6, in lifetime value, the way you get there is you spend the $2 today, and over the course of the next year, you get the $2 back, and then the next year, you get another $2 next year and others you dollars, you do in fact have a positive unity comic equation. But to get 100 million consumers, you got to spend $200 billion. And you won't actually even get that money back for a whole year. And in the meantime, you have all your employees and your interest rates and all those other costs that you're spending. So to get to scale requires enormous amounts of money. None of the companies I mentioned Pinterest, LinkedIn, Yelp, they all built real user bases with less than $10 million. And so the costs to go after large consumers has gone up by one to two orders of magnitude. And so far, there are two examples of really cash rich Chinese companies, not startups, there are large Chinese companies that have said, Oh, we see the game. This is amazing. It's great for us because startups can't do it. And they each came in and spent a BOW and BOW when I saw tick tock spending, like $60 to acquire a user. I thought they're off their rocker on Friday. But in hindsight, he was brilliant. And they built a massive user base and you
got a $4.6 billion fund advertising cheaper than ever this will be true contrarian ism Are you? Should consumer investors come to you and say, Hey, I have a plan to blow $500 million. And at that point I will be a legit consumer startup or is this a playbook you're willing to run with your own money?
I'm not sure I'm comfortable with that just yet. That would take enormous guts, in part, because even spending a lot of money that chances aren't that great, right. And so I hats off to to both was Pinto and bytedance, who are doing it in the US, is courageous, and like, they're one for two, maybe heading to two for two. And so maybe that playbook become more mature. But what I'm obsessed with are founders who are way more creative than that, like, it doesn't take that much creativity to spend a billion dollars. It takes good execution, and a big piggy bank, but not that much inventiveness. And when I'm much more interested in is the inventive founder who says, despite the fact that there's a small number of really large internet companies that incredible control over distribution, I'm gonna find a way to get my product to consumers, and they obsess about it. They don't just obsess about the product itself, but also how they're going to get it to consumers. And my favorite, kind of modern era example, is discord. And we're really proud to be very small investors in discord, I wish we were more significant investors in discord. But Jason and team built such a compelling service or utility, that they got influencers, makers, streamers, I call them super humans, to embrace the service and use it to communicate with their fans and followers, to the point where discord has never spent any material money on marketing and has hundreds of millions of users. And so, while it's much harder to do that, and you have to be more creative and inventive today than you did in 2005 to build massive distribution, it is still possible. And those are the kinds of companies I'm obsessed with anyone who's doing anything like that, please call me.
Do you have any takes on the gas acquisition, you know, feel free? If not, but discord, you know, just bought, you know, a very rocket ship, you know, Zeitgeist The Lightning in a Bottle teen app that I don't know, questionable how long a sustain Nikita the founder, you know, sold a similar company to Facebook, I don't know just just an interesting model, I guess of a founder who is like, okay, I can achieve virality. And then I'll just like dive into the big consumer company the day or any observations?
Yeah, well, look, the story is not yet written. But I think it's really smart of discord. Because as you put it, capturing lightning in a bottle is very hard to do. And it happens very infrequently. And when you see that happening, it's much smarter to buy it and CO opt the wildly inventive and creative founder than strike rate yourself. And I think that's what Discord is saying, like, by their discord did it itself, it created lighting about for its own app, and everyone is totally trying to recreate that or create more of it. And now they're saying, let's, let's try to see if we can leverage some of the power of what has been created a guess at Discord. I'm not sure what the plans are or how it's going to work. But it's exciting.
The average and I'm saying the average median VC did better. Since 2008. If they were in sort of SAS Enterprise world versus consumer world. Do you agree with that?
I think the hit rate is much higher. And so the adage is the most giant outcomes come from consumer companies. And that's no surprise, you know, but three of the $4 trillion dollar companies, so that's Apple, Google, Microsoft, and who am I forgetting Amazon, Amazon, thank you, through the four are consumer companies. And one of them is a little bit more enterprise, but also consumer that, of course, being Microsoft. So if you want to go for trillion dollars, you gotta go for a consumer company. But the number of really high quality cloud software businesses outstrips the number of impressive consumer companies, but at least a healthy multiple. And so if you're going for in baseball terms, if you're going for slugging percentage you go for consumer companies, if you're going for batting average, you go for software companies,
yeah, safer way to make a bunch of money betting bet on SAS companies, generative AI like the buzzy things of the moment, like what are you looking at at the moment? Are you optimistic personally about generative AI? And what are the things that in 2023 You think you'll be looking at? I know you like to keep? You'd like to keep some you got mad at me because I think I skipped one of your investments. You added
me. Yeah. That was Kambli Oh, they're doing great. So now you can talk about that as much as you want. But yeah, I like to I like to see young companies get to a certain scale where they can handle the attention the competitive pressures and at a really small stage, there's no reason to embrace those things until you have to. So the short answer to your question is like so we, as you might imagine, in the in the venture business, we get to see lots and lots of product demos. And in fact, we get some somehow almost numb to product demos because we are privileged to get to see them all the time. And it's really rare that we see a product demo or that I've seen your product demo and 20 plus years doing this, where my jaw literally hits the table. And when we had the Jasper team, come present to us, my jaw literally at the table, in part because I was so impressed by what they built. But also, it was like an old shit moment, like the machines are coming for me to write. And so for a while, I thought, Look, I'm pretty safe. I have a sophisticated, complicated job that requires high level thinking. It's the folks who are driving a car for a living then need to be worried because like, we're gonna have driverless cars and like the machines are coming check it out. relatively safe. And then I saw Jasper and I said, all my none of us and say,
This is a text generator. Right? Chad GBT competitor. Yeah, so
the founders came in. And they basically said, What do you want Jasper to write about? And I can't remember who said it. But I think someone said, Write an essay about why Hilton Head is a good place to go on vacation if you like golf, like, okay, that's kind of and they literally type that in to Jasper. And within a moment, Jasper spit back, back back to the past. So Jasper produced a eight paragraph essay. And we all proceeded to read it. And I My reaction was like, holy cow. I can write that. And I could probably even write something that's better than that. But not by much. And it would take me a few hours, right. And that's when I realized this thing is real. And so of course, we became invested in Jasper and are super excited about it. But yeah, so I think the power of these large language models in generating artificial intelligence that is indistinguishable, and perhaps even better than human intelligence is around the corner. I thought it would not happen in my lifetime. I thought when I heard about open AI several years ago, as a nonprofit, I thought, hey, that's a cute experiment. And it'll be relevant to my children, perhaps, but not be. And now I'm realizing no, no, it's here.
I'm super excited about them. But you're someone you ate, like bullshit. And I feel like the text generators are very good at it. Right? I mean, they, they say with confidence, a lot of stuff, you know? And if they get maybe 90% of it, right? Or do you worry that sort of justice, self driving cars have struggled with sort of perfection, the lack of perfection on accuracy for text generators, will be sort of a barrier to widespread adoption,
in the short term, for sure, but it's a problem being worked on. So gradually, I believe it will get solved. Until it solves, there are a bunch of uses that you can't really take advantage of with these technologies. And or it creates purpose for humans. And so at a minimum, like the human has to be a proofreader. And just because the machine, put it in the story doesn't mean you have to leave it there, you got to go fix it. And that may be the role of humans that will make us wildly more productive, right? Eventually, when they figure out how to create ground truth. For these large language models. You won't need humans anymore. And that is kind of scary. But I'll give you an anecdote with a young professional in our office who was relatively new to excel, who is working on a financial model. And this person wasn't that familiar with how to transform some data in Excel. And so they ask chat, GPT and they describe the situation and said, Can you write a macro for me? And Chuck GBT produced the back row in text the copy that from champion GPT, paste it into Excel. And it worked. Yeah, it's like, wow, this is amazing, like, productivity benefits from these tools are just incredible.
Yeah, it's amazing. I wanted to because you have this buyout fund, and I was curious, we haven't talked about that, what the strategy will be.
Yeah, so what you're referencing is we launched something new called DVP. Forge, which is a bio fund. Yeah. And at a high level, like we believe the way we succeeded by being in great service to entrepreneurs, and the entrepreneurs that everyone likes to talk about the entrepreneurs, you end up building massive businesses, they become household names, and they quote unquote, go all the way with them. And so these are like the Jeremy Stoppelman who's still running Yelp, you know, almost 20 years after he started here, Toby looky who's still running Shopify, almost 20 years after he started, or Jeff Lawson, and on and on. And, by the way, we love partnering with those entrepreneurs. It's a lot of fun, it's really rewarding. And we think we do it pretty well. But they're not the only types of entrepreneurs out there. And so as we thought about our mission to serve as entrepreneurs, we realize there are other types and there's some types that we're not yet ready or willing to partner with. And so another type of entrepreneur is the one who opens up the Taco Bell franchise, the McDonald's franchise, and they're also entrepreneurs. They're not going to be the next Toby Gouki. But they could go from one franchise to three stores to five stores, and it's a really great business. And there are other sources of capital or partners that they can work with to do that. But there's this other entrepreneur that we started to come across more and more often in the course of our day. jobs. And those are entrepreneurs who might start, say, a cloud software company. And we might have had a chance to meet them when they were a $2 million cloud software company. For one reason or another, it just wasn't a great fit. And they were growing really quickly. And maybe they will bootstrapped. Or maybe there is a little bit of money, and we'll check back in with them, or they reached out to us two or three or four years later, it's a $15 million revenue business, which is like amazing like to grow your business from 2 million to 15 million like That is no small achievement. But by the time it gets to 15 million in revenue, it's now growing 20% per year, right. And so if you do the math, and even if the growth takes up a little bit, it takes forever to compound a business at 20% per year from 15 million revenue to get to what I'll call a venture scale outcome. And so we tend to rule those out as potential fits for our venture capital business, because they can't have the kind of outsize outcomes that we're generally looking for. But that doesn't mean you're not great businesses. And in some instances, those founders want a different set of services from the ones that we offer as venture capitalists. So as venture capitalists, we're almost always a minority investor. We provide all sorts of help access to other executives and offers we know, but as a minority shareholder, where we think of it as like invited guests phenomenon, it's your house entrepreneur, we have all these things that we can bring over, if I might help you take your pick from them, we'll give you ideas and so forth. But we're a guest in your house. Other entrepreneurs, when they get to a certain size, they may not want to be the host anymore. And they may say, Gosh, I built a business from nothing to 15 million in revenue. If I could put 10 or 20, or 30, or $40 million in my pocket, that's a fortune, right? I don't need to go for the billion dollar outcome. Or I might like to go for it with you or help. So you best where you take over. And I want to stay involved or maybe I don't want to stay involved. And, and maybe I'll sell most of my stock or some of my stock. And that if it if you can help turn this into a billion dollar venture, I'll benefit even more. But I don't want to make it my only your my main thing necessarily anymore. Or maybe you can help me recruit a new team or whatever. And so there's a whole bunch of entrepreneurs who are in that category. It's not the venture model at all. That is essentially a software
via and you'll bring in operators or your Yeah,
we will we will we have internal folks who have expertise in different domains. Now we'll get deeply involved, even more so than we will in a venture business, because we will own the company where we're the controlling shareholder, if you will. And by the way, I think it's really interesting to be a controlling shareholder. In one business, when in your other business. You're a minority shareholder, because you know how a minority shareholder wants to be treated, right? Because that's how you are all the time. And so I think by that it's new. So I can't say we're necessarily choosing to be great at it. But I'm really optimistic. I think we understand how would you treat a minority shareholder who's your partner, because we're usually wearing that pair of shoes at the biochar station. So it's a new initiative, we're really excited about it. Because we, frankly, the number of companies and entrepreneurs who fit that set of characteristics, actually out numbers, the number of companies that fit the classic venture characteristics, like I want to build something really, really big and take it all the way to the finish line. And we didn't want to just turn them away and say, sorry, nothing for you here. We wanted to be able to work with them, too.
I wanted to end with the I don't know introspective personality question. I'm a reporter who's a disposition really skeptical and overtime, trying to shed a little bit of that I watched the bull market in 2021. And I laugh to people that, you know, next Bull Run, I need to just be like, sort of shameless. Like, there's so many people who made a bunch of money just like forgetting their scruples, like, even if crypto implodes, you could have made a ton of money there, you could have made a ton of money on Spax just like being like the booster in the good times. Like, how did I sit that out? I was right there. You know, I've seen Bitcoin so long, but dispositional II, it's like, everything I'm against. And obviously, I care about things, you know, beyond money. But you know, I did sort of set up in the beginning, this idea that you're someone who's optimistic about technology, but sort of skeptical of some of the hype, and I'm curious. Yeah, how do you keep your head when other people are losing theirs? Or what's sort of the practice of how does one actually maintain sort of both sensibilities at the same time? It's
not easy. And honestly, it's, I think the benefit of working with partners is significant here. Because there are so many things one could get excited about. And my personal style or my personal tastes, is to try to find the stuff. I have high conviction or competence in that most people don't care about. I don't like to go where all the cool kids are, where all the popular kids are like to kind of go off in the corner of the playground and find someone who's doing something over there that's really compelling that most people are prepared to dismiss or aren't that excited about, and partners who are much more interested in like, like what everyone saw Thinking about and want to compete and chase after the most exciting things that are conventionally exciting. And for me like the challenge is how do you find something that today, nobody thinks is all that interesting. But in three or four years, they will. And you manage to find an entrepreneur or get excited about an idea before, and it's really rewarding when you're vindicated or validated in that way. And actually think most impressive results are returned. Your companies are founded when there's someone out of favor and funded when there's something that you favor and go back to your analogy about like, wow, why I wish I just didn't have the scruples and I sort of loaded up on Bitcoin in 2021. The truth is, that would have worked
well, not in 20. Oh, you know, I was writing about it in 2014 Super skeptically. Yeah, that would
work that would have worked. And so but it's, it's, it's, in some sense, it's easier to jump on the bandwagon for something in 2021, like everyone's doing is hard. So it's not. So it's also honestly, a really useful exercise is to write down what you really think, at that point in time. So if you wrote down what you really thought about excellent, you guys in 14, it could look back on it, I assure you, it will be different from what you think about what you thought about Bitcoin in 2020. And today, and that we tend to alter our memories, right? Because it's like, it's like a self preservation technique, to have liked the thing early that we know is great today. And to have not liked the thing early that we know isn't so great today. And it's really hard to be truthful about what you really thought. And so one of the ways that we do it as at best was when we invest in companies, we each test by how much money we personally want to invest in a company. So five years later, when it becomes really big. We can look back and like, oh my gosh, like I only wrote a $500 check. I wish I wrote a $500,000 check right? And you can't miss remember that because that shows up on like a financial state, right? But having some way of keeping yourself honest, allows you to in theory, get better at these over time, because you're not warping your memory the way most people do.
Thank you, Jeremy Levine. Thanks for coming on the podcast. I really appreciate it.
