David Frankel, MP @Founder Collective: Investing Lessons from Seeding Coupang, Pillpack & Suno|E1214

David Frankel 0:00 I would say reserves and how to do the reserve thing is actually one of the most challenging aspects of venture. I still think of, like, pro rata as, like, the original sin against entrepreneurs. You own your own destiny by minding your monthly burn. I think that DPI could be dead. LPs are looking at this asset class right now, I think, and going, "Where is the DPI?" Those guys were just like a casino. One call to John or Tiger, like 20 on 80, no problem.

Harry Stebbings 0:27 Ready to go? David, I am so excited for this, man. We were literally just saying how much more special it is to do it in person. So thank you so much for joining me in person.

David Frankel 0:47 Harry, it's so awesome to be here. I love being here with you in person in

David Frankel 0:50 London.

Harry Stebbings 0:50 Dude, I wanna start on, um, one of my biggest, most pressing concerns actually right now, which is we are seeing these massive seed rounds, like 6 to $10 million. How can traditional seed funds, 50 to 100 million seed funds, play-

David Frankel 1:05 Yeah.

Harry Stebbings 1:05 ... in this new world?

David Frankel 1:06 I mean, I think you still can, right? I, you know, I'm gonna appeal to the inner, you know, uh, McKinsey consultant in you. I know it exists. But, you know, if you think of right/wrong, consensus/non-consensus, look, you don't have to only do kind of right non-consensus, but that's where you do do well. And there's lots of ways of still being non-consensual, I think. So, you know, if you think of non-consensus, y- uh, founders, so, uh, you know, people who come from less traditional backgrounds, people who come from secondary schools, right, that, like, mainstream's not gonna back. That still very much exists. Frankly, founders who've had, who failed, right, who haven't done well and, uh, and, like, you know, the mainstream's kind of like, "Mm, wouldn't touch that." There's still founders who've been orphaned. So founders who come back and go, "You know, I took money from one of those large funds." They went through the distance. They had to feel the pain, right? They say, "I took money from that, one of those large funds, and man, like, I got orphaned," right? Uh, "They, they left me." They come back. So, you know, non-consensus founders. Non-consensus market still, right? And I think this is where b- it's everyone says, "You gotta be right in non-consensus." But I often think, "Well, what do you mean by non-consensus?" So you've got, you know, if you were really early in new markets, 2009, the best bet, like everybody was, like, chasing, I don't know, nanotech, right? Bitcoin had to have been the greatest investment in 2000. 2015, Ethereum. I know everybody is, whatever is chasing DTC, right? Like that's where the whole market's going, you go Ethereum. So new markets non-consensus, you can still do very w- you-

Harry Stebbings 2:38 Mm-hmm.

David Frankel 2:38 And then old markets non-consensus. Harry, do you know one of the best portfolio companies in m- that I'm on the board of right now? Smalls. It's cat food. Dude, it's cat food. Nobody likes cats. Like dogs get all the love. DTC is dead. Nobody will touch DTC. We tried to raise money for this business, Smalls, right? Doing 50 million ARR. Try to raise money in December. Nobody would look at us. Nobody would look at us 'cause people hate cats, full stop, right? Cats get no love. And everybody then looks at like, you know, this didn't work, farmer's market, whatever, it didn't work in dogs, right? So you can be in old markets, right? You can still be non-consensus.

Harry Stebbings 3:14 Totally agree with you. I look at, bluntly, Olo, like, oh, here's something, we just did a deal in a company called Allo, clearly there's a naming thing with restaurants. But like everyone's like, "Oh my God, restaurants, great." Fucking load up on that. I totally agree with you.

David Frankel 3:26 Yeah, yeah. So is it dead? No. I mean the, when, when the whole swarm, when the whole herd moves in a certain direction, great. Like seed is not dead. (laughs)

Harry Stebbings 3:34 (laughs) And so then you see the pricing adjust for those deals, correct?

David Frankel 3:38 You do. I mean, y- you've still got to, like, market's market, right?

Harry Stebbings 3:42 Mm-hmm.

David Frankel 3:42 So, you know, I think if you're gonna be like, "I want a 4 million pre-year," like, totally anachronistic. I think there is a market and there's a market clearing price, and you pay that price, so-

Harry Stebbings 3:51 So then-

David Frankel 3:51 But you get on with it.

Harry Stebbings 3:52 ... when do you-

David Frankel 3:53 But these are not AI prices, right? Like, this is not AI deal where I go 5 on 20. That guy's unbelievable. Next thing, you know, I'm on a Zoom and, and he's in, uh, San Francisco in a hotel room, and I just come off that Zoom and I say to my associate, I say, "We're dead." Right? There's gonna be 100 million pre. This is real, by the way.

Harry Stebbings 4:09 What, what do you do in that scenario?

David Frankel 4:10 I mean, we, we have to bow out. In that situation, I broke every rule under the sun and we put in 100K check, right? I broke my rules, but we don't do that. Right?

Harry Stebbings 4:19 Well, so why-

David Frankel 4:20 We have to-

Harry Stebbings 4:20 ... why would you do 100K check then?

David Frankel 4:22 'Cause I like the individual so much.

Harry Stebbings 4:24 Hmm.

David Frankel 4:25 I have done that once in a career.

Harry Stebbings 4:28 Wow. Could I not push? If I was your partner, I would actually say, "Listen-"

David Frankel 4:31 If you were my partner, I can't tell you what you would throw at me. (laughs)

Harry Stebbings 4:35 (laughs)

David Frankel 4:35 'Cause my partners look at that and they go, "That was utter insanity and stupidity."

Harry Stebbings 4:39 No, I say I would disagree, and I would say actually also there is a huge amount of social validity that comes with being an incredible brand category defining winners. Being the first round investor in-

David Frankel 4:51 Yeah.

Harry Stebbings 4:51 ... Suno is so important for the next generation of Sunos. You should be in that. It's a financially good decision, and you will get great brand ramifications.

David Frankel 4:59 Yeah. There's a time factor here, right? And, you know, people say like, "How, what's the percentage ownership you have to have?" And I, I think in terms of time. So there, there are situations where you can write a smaller check, and I think we've got to be fair to founders here as well. You know, the, if, if I'm writing 100K check, I've got to be very open to that founder and saying, "Look, like this is the other side of the spectrum to me being on your board." But if I'm on your board, I can't write 100K check. I can't write a 500K check anymore, because you need my time and you need my interest, and this goes back to alignment. And so we've got to be, we've got to have some kind of economic alignment. We've got to have some kind of outcome where, you know, you sell the business for 100 million, which is moonshot, as you know, and you know, you make 50 million, but I make, you know, a million even. What does that mean to a, you know, $85 million

David Frankel 5:47 fund?

Harry Stebbings 5:47 Do you think founders understand the venture business enough today?

David Frankel 5:50 I think some founders still see, you know, a name in lights, and they go, "I want that name."... y- y- beyond anything. I, if it's Sequoia, a16z, Accel, you name it, I want that name. And I think there will always be a steady supply of founders who think that way. I don't think they understand that, you know, the w- you're gonna b- the one in 10 if you're lucky, and there's, those stats are probably not even right, one in 10 get funded, get the ne- otherwise, you're orphaned or, you know, you're in, you're in a world of hurt because someone that the world thought was like very, very serious and very smart about you just said no to you. Go try sell against that. I think it's very, very difficult. By the way, to our earlier point, those founders come back to us and they say like, "I was orphaned." Right? "They didn't do b- I was..." They don't understand that 90% don't get follow-on funding.

Harry Stebbings 6:40 When have you not broken the rules and you've stayed disciplined and you regret it?

David Frankel 6:45 (laughs)

Harry Stebbings 6:45 We, we spoke before about one time with me. (laughs) Uh, when have you not and you regret it?

David Frankel 6:50 You know, there, there have been times where we didn't break the rules for the best of reasons. Uh, the first thing that comes to mind is like Pinterest. The founders came to us and we had a conflict. We had a, uh, a, a very strong associate in Zach Klein who was the chairman of Supply. We'd, we'd invested in Supply. We couldn't make the investment. I look back then, I go like, "How..." You know, if you look at that outcome, you go like, "How could we have..." But we didn't break the rules, uh, what we had. And I think there's like financial rules, and then I think there are rules of like loyalty and partnership where you go, "That's my name on the door." Right? "And I cannot break." I, those are just unbreakable rules.

Harry Stebbings 7:27 David, conflicts. Today, not, not many funds observe the rules of not investing in competitive companies.

David Frankel 7:35 We're very old school.

Harry Stebbings 7:36 Really?

David Frankel 7:36 Yeah, we're very old school on that.

Harry Stebbings 7:38 David, how fast do you know when you are in a company that is not good?

David Frankel 7:42 Wow, that is such a great question. (laughs) Gotta think about that for a second.

Harry Stebbings 7:45 No, so I, I actually feel like you know very, very quickly. I'm saying first three months.

David Frankel 7:51 So I, I'll give you the corollary of that-

Harry Stebbings 7:53 Yeah.

David Frankel 7:53 ... is there have been companies that I've been very down on, and often it's in enterprise SaaS where just the sales cycle is so long and you go like, "Are they ever gonna get there?"

Harry Stebbings 8:04 (laughs)

David Frankel 8:04 But I remember saying to my wife on Olo, "This is done. We've lost all our..." This was pre Founder Collective, saying, "We have lost our money. Like Noah is never gonna get there." Like th- he's, each time this guy gets a little bit of funding, I feel like he's just pulled a rabbit out of the hat. I feel like he's duped the investor. How are we gonna... Uh, and so the, the corollary to that is some of these businesses take a long, long time. And often the mor- so consumer, I think you get feedback pretty quickly. By the way, Harry, there have been times where I've seen, uh, where I've said, "How good is that entrepreneur?" And I've started to say, "They're not the smartest, they're not the fastest, the freq-" y- you know, like, the, the velocity of getting th- sorry. The velocity of getting stuff done here is very slow, and then something lucky happens. And particularly in a consumer business, you get this fast feedback, and you then you think they're geniuses. But this, this is a long, long journey. Like the one thing I've learned here is patience beyond anything else. (laughs)

Harry Stebbings 9:03 Patience and like pain tolerance-

David Frankel 9:06 Yeah.

Harry Stebbings 9:06 ... actually. Like, you know, the, uh, one of my best friends is, um, the founder of Calm, the meditation app, and he says, "Listen, being an entrepreneur..." Uh, he told me this when I was fundraising. "Being an entrepreneur is just the ability to get punched in the face every single day and say, 'Oh, I'll come back tomorrow.'" (laughs)

David Frankel 9:20 Yeah, yeah. (laughs) Well, the, the, the more optimistic remark there is like you jump out of a plane with a box of silkworms and, and hope

David Frankel 9:27 they're overachievers, right?

Harry Stebbings 9:29 (laughs) I haven't heard that. But you're right, absolutely, in terms of consumer you see a little bit more, enterprise you see less, which is why, David, I do not do reserves. And I don't because I was in Hopin, I was in Clubhouse, I was in BeReal.

David Frankel 9:45 Hmm.

Harry Stebbings 9:45 All lost money.

David Frankel 9:46 Mm-hmm.

Harry Stebbings 9:47 And then I've got a load of companies which were much slower in enterprise and are phenomenal investments.

David Frankel 9:52 Mm, mm, mm.

Harry Stebbings 9:52 But if I had reserves-

David Frankel 9:54 Yeah.

Harry Stebbings 9:54 ... I would put them all in the three companies with traction.

David Frankel 9:57 Yeah.

Harry Stebbings 9:57 How do you feel about reserves and that approach?

David Frankel 10:00 We, we did no reserves in fund one. Zero. And then what we found was there was this negative correlation bias. There were these companies that just were not getting there fast enough that needed our help, and we had to break the rules. You know, one of the best instances of breaking the rules, Eric, who is the most disciplined investor in our team by far, he's created literally the infrastructure on which we all kind of, you know, rise. Eric looks at me on TradeDesk and goes, "They're out of money if we don't invest here. They're out of money." Eric breaks his own rules, so painfully so for him, ahead of me. I'm m- I'm more opportunistic, I go like, "If we've got to do it, we've got to do it."

Harry Stebbings 10:38 I've got, I've got goosebumps. I'm like imagining-

David Frankel 10:41 Yeah, yeah.

Harry Stebbings 10:41 ... this company not existing.

David Frankel 10:42 No reserves in fund one, and, and Eric invests in TradeDesk as a follow-on because nobody else was gonna give them money.

Harry Stebbings 10:48 How much did you-

David Frankel 10:49 So-

Harry Stebbings 10:49 ... put in in that follow-on?

David Frankel 10:50 Uh, we may have put in... Whatever d- well, uh, uh, it was like somewhere between half a million and a million. Whatever we did, it felt like a lot. In fund two, we, we, we created a reserve strategy because, and it was that negative correlation bias that made us do it. We went, "If we're gonna put in like another 50%, we won't lead ever, but if we're gonna put in another 50%, like how do we do that only in our companies that like crave and need the money?"

Harry Stebbings 11:15 Why would you do that? I mean, it, 'cause it's also very easy to set rules based on exceptions like that. But every other reserve that needed the money where that was the case went to zero.

David Frankel 11:27 I'll tell you what happened is we put in a reserve strategy where we said, "We won't fund if it's more than 20 million post." But then what happened is the market just went away with it. You know, that was, that became anachronistic.

Harry Stebbings 11:37 Mm.

David Frankel 11:38 So, you create these rules and then the market moves, and in a way, like what you have to do is two years later you have to try and change those rules all together again based on what the market's doing.

Harry Stebbings 11:46 So now today, how does your reserves look?

David Frankel 11:49 We still have this kind of one-to-one reserve policy, but we actually struggle on our reserves. Because a lot of the time, our good companies-

Harry Stebbings 11:56 I just don't understand, it sounds-

David Frankel 11:57 ... get bit off fast.

Harry Stebbings 11:58 I'm so sorry to ask, but I s- uh, how, funds at 75 million. So you have a one-to-one, you've got a 30...... five, say, for initial. I mean, there's fees and everything, so it's 35 for initial. God, if you're doing, you've got, like, t- $25 million to your checks. It's not very many.

David Frankel 12:15 Uh, I'll tell you what happened, Harry, is, i- is d- this is how this moves, is during COVID we got very scared. At the beginning of COVID, we went, "Oh my God, like, the market's gonna close down. We're gonna really have to fund our companies." So then we're thinking, uh, you know, "We, we, we've gotta even, we've gotta, like, in the first instance, put even fewer funds into our companies." And then what happens is the market just gets awash with capital. Everyone's day trading, and we, of course, we run, raise fund four prematurely. So, I would say reserves and how to do the reserve thing is actually one of the most challenging aspects of venture. How to get it perfectly right, pretty tough.

Harry Stebbings 12:53 It's also so tough because you are forward-looking in terms of where the portfolio will be, and that is very difficult on net new investments that maybe haven't even been made yet.

David Frankel 13:03 Yeah. The minute I feel like we should reserve more, I almost feel like the market will go crazy. The minute I think we need to reserve much less, my sense is, "Oh my God, like the market is gonna, like, you're really gonna need more money now."

Harry Stebbings 13:16 Okay. The company is going nowhere, and you lose faith in the founder and the CEO. Do you tell them or do you do what my friend Jason Lemkin says, which is like, "That never works. Just don't bother. Just don't tell them. No one wants the hard feedback."

David Frankel 13:31 Pretty forthright. I- I'm the opposite of Jason. And he may be right, but sometimes I think, look, whether I say something or not, you're kind of running out of money in three months time, and I better say something. I feel like, eh, I'm abrogating my duty if I don't say something. Running Tide, we just, we just closed down the business. This was a carbon sequestration business, ag, literally ag in the ocean. Unbelievable business. We've got $10 million, and he's burning $3 million a month. I think Marty kind of stopped taking my calls because he knew what I was gonna say to him, and I said it to him anyway. I said it to him in an email. And the fact is, like at-

Harry Stebbings 14:08 (laughs)

David Frankel 14:08 ... the end he sort of knew-

Harry Stebbings 14:09 He wrote it on his window-

David Frankel 14:10 (laughs)

Harry Stebbings 14:10 ... and the condensation-

David Frankel 14:11 Exactly. (laughs)

Harry Stebbings 14:11 ... cut burn. (laughs)

David Frankel 14:12 Yeah, yeah, yeah. I put on the boat. I knew you had to take the boat out.

Harry Stebbings 14:16 (laughs)

David Frankel 14:16 Like, I, and I knew that he was rolling his eyes, knowing exactly what I would say. We closed the business like a month ago. Now, could he have in... Li- literally, could he have cut the burn to give himself... He absolutely could've. But these founders get onto this treadmill and it's just, it's almost impossible to slow this thing down.

Harry Stebbings 14:36 Why?

David Frankel 14:37 I think what they feel like is they're... And it, their loyalty is to the team that they've put in place, their loyalty is to the last set of capital that still says, "Go for it." And then the same thing that makes these amazing entrepreneurs where they go like, "I'll walk through walls," right? They go, "And I'm gonna be the guy, I'm gonna be the person that is gonna pull the rabbit out of the hat in the last three months." So down to the last, you know, draw, and, and in fairness to them, some of these enterprise clients are still giving them hope. If you do this, this, this, you get a $100 million

David Frankel 15:08 contract.

Harry Stebbings 15:09 In terms of those founders and that psychology, how do you see that differ in terms of, we, we spoke about it a little bit before, but like first time founders versus second time founders with huge exits or failures or small exits?

David Frankel 15:21 I would say generally, founders who've had enormous, enormous success and exits come to the next opportunity with some degree of hubris. I, I could, I speak about this personally. I sold my first business and I thought I could conquer anything. And they look at any vertical, any, and they, you kind of go, "I'm gonna disrupt that. I'm gonna be the one that's gonna show them a lesson." And generally speaking, that hasn't worked out well for us. Versus entrepreneurs who tried their asses off, raised money, and for some deg- reason or another, it didn't work out. They come back hungrier, they come back, they want that, they want that prize, they wanna prove... Chip on the shoulder, and if they can bring back the team somehow. So second time entrepreneurs where it's faile- where they've failed and they come back for more. Tom Leese at Motorway is an unbelievable example. I was on the board with Sonali Diraker of Top 10. They build an unbelievable product in the travel space, but they get crushed in that vertical. Try to outspend Kayak and the other players, spending $100 million a month. Google's single largest advertisers. You can have the best product you want. You know, tail between their legs, go off, they lost all of our money, s- brings back the team and starts Motorway, billion dollar valuation. You know, it's like they're great people to back.

Harry Stebbings 16:36 Can I-

David Frankel 16:36 The, the trick is you gotta get them to come back and speak to you, because sometimes-

Harry Stebbings 16:40 Well, can I be a vic- they didn't with y-

David Frankel 16:41 Yeah.

Harry Stebbings 16:42 You, what did you learn from that?

David Frankel 16:43 You know, the, is, is to say, "Look, you failed for all the best reasons. You failed, it's not because you didn't try your ass off. It's not because this team isn't thoughtful. And, you know, the clock cycle, the frequency at which you got stuff done was enormous. Um, the context was just impossible. Come back to me." And, m- you know, my bad on steroids, right, that I didn't say that. And I've learned that the hard way. Every time there's a failure and I love the team, and generally, like that's the nature of this business. Like I, I, you know, I, I put teams before themes all the time. Uh, you know, it doesn't work out and I love that team, like I have to say to them, "Come back please." Not because I'm an options junkie, but because I wanna be in

David Frankel 17:25 business with those people.

Harry Stebbings 17:26 I, I totally agree with you. I, worst question LPs ask and I get in trouble for this is, "What themes do you like?" I'm like, that is the most lazy LP question.

David Frankel 17:34 Mm-hmm. Mm-hmm. Mm-hmm. Mm-hmm.

Harry Stebbings 17:35 Do you know one thing that I think can be quite lazy in our landscape though is pro rata. It, so many funds that I see and operate today, yeah, we'll just do pro rata.

David Frankel 17:44 Mm-hmm. Mm-hmm. Mm-hmm. Mm-hmm.

Harry Stebbings 17:44 It's like an easy option, an easy get out. I think you should be like all in or all out.

David Frankel 17:49 Mm-hmm. Mm-hmm.

Harry Stebbings 17:49 How do you think about-

David Frankel 17:50 You know-

Harry Stebbings 17:51 ... that.

David Frankel 17:51 I still think of, like, pro rata as, like, the original sin against entrepreneurs. You asked me earlier, "Is there stuff that entrepreneurs don't, don't understand about VCs?" Like, if I said to you, "Harry, you know, I've got an option to," I don't know, you know, anything, right? Like, why would you give me a free option? Why would you give me a free option? If I said to you, like, like, you know, "For $10 million," like, give me an option to buy 10% of 20VC, and it's, I can decide if I want to do it or not. Like, would- would you, you wouldn't in a million years, right? But you've had to learn that the amazing thing about entrepreneurs is they give pro ratas, like, and it's- it's, like, the superpower thing for VCs, and I think it is terrible, terrible for entrepreneurs. You- you're selling options against you. So, standard operating procedure is, you know, later stage VCs look at it and they go, you know, "Go to the market. See what the, test the market, see what the market will bear." That's code for, like, "I don't want to price you. You know, go out." The market's going, "I'm a stalking horse. Like, why would I be a stalking horse for XYZ?" And, uh, you know, the, uh, if you're doing great, if your revenues, if your rule of 20 is like, uh-uh, your rule of 40 is off the charts and you're doing great, amazing. Pro rata doesn't matter. If you're struggling, pro rata's terrible.

Harry Stebbings 19:07 Why is it terrible if you're struggling?

David Frankel 19:09 Because you go to the market, you're a stalking horse for XYZ lifetime fund that's in your, on your cap table already. Everybody's going, you know, "I'll price this thing. They'll come in at that price only." And, um, and so it's just very difficult, I think, to get deals done. By the way, then you find, uh, unless you're killing it... So I remember, I think of Coupang and, you know, Coupang came, went to Sequoia and said, "Look, it's a 4 billion pre. Um, BlackRock will put in a billion," right? The nobody gets their, you don't get your pro rata. When you're doing incredibly well and you're hot as anything, you can do it. When you're not, even the later stage investor goes, "Uh, I want to put in my, I want 20% ownership." But this is getting more rare now, but, "I want 20% ownership," and your cap table is saying, "No, no, no, no. We're doing our pro rata." And then you get into that struggle of, well, I've got to dilute more than I thought I would. So in good and bad, I don't think pro rata is great for entrepreneurs.

Harry Stebbings 20:07 You mentioned stalking horse there, and it's, uh, I use that word exactly internally 'cause I oscillate on the power of conviction and being the first to commit, being the first to show an entrepreneur, "I believe in you." We often hear that's what founders love. Actually, quite a lot of the time, they use you as a stalking horse. They kind of take you to market and, understandably, their job is to get the best round. But you can be used to get a better price, to get a better structure. How do you think about that?

David Frankel 20:35 Uh, uh, I think it's a good signal to investors early if that happens. Like, do you want to be in business with that entrepreneur?

Harry Stebbings 20:43 (laughs)

David Frankel 20:43 So, I'd rather it happens early to me. It happens to everyone. But I'd rather it happens early to me than later on, because it was pretty clear that that individual was totally transactional. Josh Kopelman, I remember him saying to me, "I'll give you $2 million uncap note ahead of the next round." A lot of this was in his portfolio already, where he went, like, "What's the quadrant that's really killing it?" What first round used to do is, in the quadrant that they thought was, like, amazing, they would go to those founders and say, "Here are uncapped, literally uncapped checks, and what we're doing is your initial founders are show- showing such enthusiasm for your company that that can only be great as a selling point when you do the next round." So, that's a different take on it.

Harry Stebbings 21:23 Totally.

David Frankel 21:24 But I, but I think you can do that, you can do it in the opposite direction, where you just show unbridled enthusiasm, and in a way that's testimonial marketing for the, for the founder.

Harry Stebbings 21:33 Do you think there's any other terms which you're like, "That's- that's BS"? We had Nick on the show from Notation who we mentioned before, who was like, "You know, we should take common, not prefs." I totally disagree with him on that one. But like you said there, pro rata is kind of a very strange and wrong thing. Any others where you're like, "That's berserk"?

David Frankel 21:48 Well, I would disagree with Nick because I would say prefs are fundamental, saying you should give your investor your, their money back, right, before you kind of, you know, uh, distribute the spoils to everybody. I think that's a fair tenet.

Harry Stebbings 22:03 Sure.

David Frankel 22:03 I think most entrepreneurs would go, "Yeah, giving them their money back is fair." I remember in Uber, by the way, you know, we had preferred shares. Eric was the first investor, was one of the first in the first round on Uber. And I remember one of our LPs saying, "You've got common." And Eric went, "No, no, no, they're- they're preferred." And- and our investor said, "No, no, you've got common." And Eric was like, "What are you talking about? Like, they're- they're preferred." He said, "Well, you're under a stack of so much prefs. You're under like $5 billion of prefs now. It's equivalent to common." And so I think there's another way of looking at that, of going when companies raise so much money, if you're in the very beginning, right, do you really have prefs? You're under that whole pref stack. Unless you got kind of pari passu. And I think that's changing in this environment now.

Harry Stebbings 22:46 How's that changing?

David Frankel 22:47 Well, I think the terms are getting tougher. So, in a more... And, uh, you know, there's so much capital out there, but later stage capital can ch- call the shots a lot. And it depends on how well the company's performing, but when tougher performance companies raise money, the terms are getting tougher-

Harry Stebbings 23:04 Yeah.

David Frankel 23:04 ... as well. And the pref stack, like, pari passu feels like something of the past. There's a real pref stack coming back.

Harry Stebbings 23:10 I do notice also founders not adjusting. I was in this board meeting the other day and they're like, "But we've done this, this and this, and so we should be double our last round price." And I'm like, "I understand your rationale, but the market has moved," and it's like they can't get their head around the fact that external to them, totally, the market has changed.

David Frankel 23:28 Well, the, you know, the listed market's changed completely. So if you look at SaaS multiples in '21, '20, where that was 20X and then you look at those SaaS multiples as 5, 6X, that trickles down. So later stage investors that invested in private at a billion, and expected that rule of 40 to be up, you know, at least profits and huge growth all the time, and that hasn't materialized, they're looking at those same companies who are going out for top-up rounds, and they're going, "Why would I top out at the last valuation?" Or they're saying...... again, go to the market, see what the market will bear. We've seen down rounds in companies that got valued enormously, hugely. Goes back to, at any point, you, you own your own destiny by minding your

David Frankel 24:14 monthly burn.

Harry Stebbings 24:15 (laughs) Love that. Uh, can Venture survive, uh, unless we get the reflation of public market multiples?

David Frankel 24:21 So, this is a great question. I think that DPI could be dead, right? And, and let me, let me-

Harry Stebbings 24:27 (sighs)

David Frankel 24:27 ... clarify that. But I think a lot of LPs look at 2018 plus funds and they go, "Where's the DPI?" And I think that what happened there was a perfect storm. Fund, our Fund 3 is a 2018 vintage. No DPI yet. And what happened is, if you look at Fund 1, Fund 2, five, six years in, we were giving DPI. It wasn't even our biggest hitters, but we were giving through companies like Cruise or Desktop Automation and, and like, you, that you've never... Desktop Metal in Fund 2, right? Through companies like Datalot and InfoScout in Fund 1, we were already giving significant DPI. That's way before we got to Uber, TradeDesk, cr- y- Coupang, and we, we haven't given DPI, by the way, in, at all in companies like SeatGeek, Airtable. You look at 2018 plus funds, and the problem is, it was this perfect sto- storm. So we were preparing, we were getting involved in companies that had lots of potential, and then 2019, 2020, ZIRP comes along, day trading at home over COVID, and like, 10 on 40, 10 on 40, 20 on 80. You know, Tiger looks at A16Z and goes, you know, "They, they have 10 on 40. We'll do the 20 on 80." SoftBank. And that was like the apotheosis. But at every stage, the money (hands clap) was just going out like crazy. Did we do founders' favors? Wow. Like, no, no, no. Right? So, that's the 2018 plus vintage, and then, and then... So LPs at every stage, I think are looking at this, thoughtful LPs, and they still wanna get into good funds, so they're not being as direct with the managers. But they're looking at this and going like, "Where, where..." (laughs) You know, "Show me the DPI." Harry, we've got no DPI in Fund 3 yet. We've got an LOI in a vertical SaaS business right now. LOI. We haven't got, this is, this is not there yet. The company's done tens of millions. It's got a good valuation. It's PE. It's all PE, right? So there are still PE players who now looking at a vertical and going, "I like that vertical. And they seem to be quite disruptive in that vertical, and I can tie them into XYZ Company where I'm amalgamating a whole lot of companies, and they're the tech play." So we've got PE in this company with us, and they're gonna ultimately sell to like a bigger PE, and they've got a 1X liq pref, and they won't take... th- they'll literally shunt it into the bigger company because they think their outcome could be better. That's how M&A and DPI is gonna start to happen now.

Harry Stebbings 26:53 But how do we, how do we solve this? When LPs are asking you, David, "Liquidity, where is the liquidity?" How do we solve this? Because IPO markets are not opening up until H225, I think, at the earliest would be wise to say. And then M&A markets are, uh, uh, not open really ............................

David Frankel 27:09 Yeah. (laughs) You know, there's the saying like, "One swallow doesn't make a summer," and I kinda like think, "No, no, no, no. One swallow can make a summer." So, think about this optimistically. One good IPO and everyone will go, "Hmm-mm, IPO markets are open again." I think pre-election in the US, IPOs are pretty much closed for now. I think postelection, one or two or three great IPOs, every single... You're going to have like this swarm of JP Morgan and Goldman Sachs bankers coming to tell you like, "It is

David Frankel 27:39 open."

Harry Stebbings 27:39 It needs to be a mega hit.

David Frankel 27:40 Yeah. Well, and a-

Harry Stebbings 27:41 And Instacart won't do it.

David Frankel 27:42 No. There, there are tons of four, five, six billion ones in the... SeatGeek's been IPO ready for two years. Two years.

Harry Stebbings 27:50 But that doesn't do it.

David Frankel 27:51 No, that doesn't move the needle.

Harry Stebbings 27:52 It needs a Stripe, it needs a Starlink, it needs a SpaceX.

David Frankel 27:55 Yeah, yeah. The minute that happens, IPO will be open. But I think-

Harry Stebbings 27:58 The, the minute that happens, also LPs are open.

David Frankel 27:59 Yeah.

Harry Stebbings 27:59 Because there are so many LPs-

David Frankel 28:01 Yeah.

Harry Stebbings 28:01 ... who have positions in those companies.

David Frankel 28:03 Yeah. LPs are pissed off at the moment. LPs are looking at this asset class right now, I think, and going, "Where is the DPI?" And they did unbelievably well, and some of them are scared to sit it out, and it depends what kind of LP you are. If you're an endowment or you're like a parrot-, you know, parastatal or something, you've gotta be in this asset class, and your allocation can still be tiny. But I think LPs are looking at this right now and going, "Where is the DPI?"

Harry Stebbings 28:28 I, I'm looking at the '19, '20, '21 though, and I'm in a couple of funds, you're in a cou- many funds, and we hear other players, uh, "I don't think that it is a DPI delay in a lot of cases. I think it's a permanent loss of capital that we're actually trying to avoid."

David Frankel 28:42 I think vintage matters so much. I look at our 2020 fund and I go, "That's actually gonna be okay." 2018 fund, I go, "I'm much more worried about that." We need DPI there. So, I agree with you. I, by the way, I think what we've seen is like the m- more polarization than I've ever seen in my career before. We've seen this completely binary outcome thing, where companies are losing it and companies are doing very well. And to return these seed funds, you can't just have these huge... It's great for PR, it's great for your story to say like, "I was in XYZ great company," but actually fund returners, you need four or five good fun, good companies. If we sell four companies at $250 million each, right, we can return a fund. If we sell 10 companies at $100 million each, like nobody cares about that, we can return a fund. And if you don't have that, right, you're in trouble again.

Harry Stebbings 29:37 So, the, everyone always says in venture, you need your fund returners. This is what the business is about. Are you saying that actually, that's not true? You can have these demi-fund returners, these ones that return 25, 30, 40%.

David Frankel 29:48 Yeah. Look, Harry, I, I mean, I will be infinitely, uh, grateful to have been in Uber. My gratitude to Eric knows no boundaries. In Fund 2, certainly PillPack-

Harry Stebbings 30:02 Can I ask, how many times did Uber return the fund?

David Frankel 30:04 Ugh.... it's, I mean, Uber's just in itself, it's just, that's incredible. Uh, Trade Desk was a bigger outcome for us. Coupang returned the fund, right? Like if a... And multiple times. If I look at... And then we've got, in SeatGeek and Airtable, potential fund r- you know, fund returners again in fund one. But, but Harry, here's the thing is, PillPack returned fund two. I am so grateful to Elliot and TJ.

Harry Stebbings 30:28 PillPack returned fund two?

David Frankel 30:30 Yeah.

Harry Stebbings 30:30 Wow.

David Frankel 30:31 Yeah. I mean, we were, we were in at the beginning of PillPack, right? So we were, we were the-

Harry Stebbings 30:35 I guess it's-

David Frankel 30:35 ... largest institutional pre-seed, and we co-led the seed with Fred.

Harry Stebbings 30:38 But this is the other thing that people aren't talking about, which is like, it did for you, because you've got a 75 million fund.

David Frankel 30:45 Yeah.

Harry Stebbings 30:45 But I know a lot of people... Uh, again, I love Index.

David Frankel 30:48 Yeah.

Harry Stebbings 30:48 They're great. But Index's seed fund is like 500 million?

David Frankel 30:52 Yeah.

Harry Stebbings 30:52 400 million?

David Frankel 30:53 Yeah. Just...

Harry Stebbings 30:54 M- uh, that-

David Frankel 30:54 Yeah.

Harry Stebbings 30:55 That same one returns less than 25%.

David Frankel 30:57 Right. Yeah. Entrepreneurs need to do the math on that as well. Entrepreneurs need to be doing the math on that. Goes back to our point is, if you take 20 million from a billion-dollar fund, right? Do you move the needle for that? What, what does it take for you to move the needle there? And if entrepreneurs get a $10 million, you know, check from XYZ, you know, large-scale fund, and a partner doesn't join the board, that is not a good signal. I think if a partner says, "I'm putting in $5 million, and I'm joining your board," right? Like, everybody goes, like, you know, you know, multi-stage firm versus seed. I think there are other ways. If a partner at a multi-stage firm, billion-dollar f- firm says to Harry, you know, "Five on 20, and I'm gonna join your board," I would say that's a strong signal. That's very tough for me to compete against, because they're saying to you, "I'm gonna spend time here." Uh, uh, like admittedly-

Harry Stebbings 31:45 But are they-

David Frankel 31:45 ... as long as they're not on 20 boards, right?

Harry Stebbings 31:46 But are they? I mean, yeah, respectfully, I know many of these mega funds. They never show up to the board.

David Frankel 31:51 But some of them show up.

Harry Stebbings 31:53 Some of them.

David Frankel 31:53 Some of them show up, and I, I, I just wanna give credit where credit's due. There are people who, who show up. Then there are people who are very disciplined, say like, "I'm not investing." You know, again, percentage of the fund and what it takes to return that fund is very indicative of wh- whether you'll get time or not. Like, size of fund-

Harry Stebbings 32:09 We just won, we just won a series A, and I said, "You should take our check, because this is 7.5% of our fund."

David Frankel 32:15 Right.

Harry Stebbings 32:15 Like, you really-

David Frankel 32:16 Right.

Harry Stebbings 32:16 ... matter to me.

David Frankel 32:17 Yeah. I think for entrepreneurs and for LPs, right? Size of fund, check in company versus size of fund tells you everything. Everything.

Harry Stebbings 32:25 What happens then to LPs? 'Cause they continue to invest in the asset class. They're not actually pulling back. How... Does capital deployment from LPs change as a result of the illiquidity?

David Frankel 32:36 It depends on who those LPs are. So I think, again, endowments, pension funds.

Harry Stebbings 32:42 Your, the endowments are turned off, though. They are dialed back.

David Frankel 32:45 They've dialed back a little.

Harry Stebbings 32:46 Mm-hmm.

David Frankel 32:47 But I think they'll always go, "Look, we have to have 1 or 2 or 3% in VC." And I think-

Harry Stebbings 32:53 Oh, way, way more.

David Frankel 32:54 Oh, or more, right?

Harry Stebbings 32:55 10, 15, yeah.

David Frankel 32:55 So I'm, I'm going minimum, absolutely, right? Like if you... To- totally, if you look at like the Swensen model was like up, uh, VCP was more like 30%.

Harry Stebbings 33:03 But I'm getting on a high horse here. This is the big-

David Frankel 33:04 But-

Harry Stebbings 33:05 ... problem though, which is they all looked at Swensen and thought, "Hang on, we can replicate this incredibly heavy 35, 40% allocation."

David Frankel 33:12 Yeah.

Harry Stebbings 33:12 But that was in a time when liquidity was much better, and actually your hit rate on selection was much better. Now, your hit rate's way lower and you've got-

David Frankel 33:20 Yeah.

Harry Stebbings 33:20 ... real illiquidity.

David Frankel 33:21 Yeah. Well, so, so you've seen, you know, high-net-worth family offices pull back even more, right? And, and I think the vintage just matters a lot. And some of the large LPs will be scared of sitting out vintages. It's kind of like the, you know, um, Accel, you know, Fund 7 era, you know? So I sat out-

Harry Stebbings 33:40 Hm.

David Frankel 33:40 ... and I missed Facebook. So I, I think sometimes if you think you're in, as an LP, in a great fund, you may lower it, but you'll try to stick around.

Harry Stebbings 33:48 Mm-hmm.

David Frankel 33:49 But you've got to keep up your track record.

Harry Stebbings 33:50 Do you-

David Frankel 33:50 You've got to be a great fund.

Harry Stebbings 33:51 Do you mind LPs bowing out in those cases?

David Frankel 33:54 We're so small that in some cases we welcome LPs bowing out. So in our last fund, in fund five, we had one fantastic family office. We love and adore them. Say, "If it's less than 10 million, we're out." And we went, "It's less. Your allocation's less than 10 million. They're out." And, you know, we, we... Our fund's small. We don't mind. Harry, we spend an in- a very, very small amount of time on fundraising. We spend... If you ask me, I spend truly 95% of my time on finding good companies and supporting good companies. I think I spend 3% of my time on fundraising. But doesn't mean I don't care about our LPs. I'll, I'll talk to our LPs any day of the week, and I love spending time with them, but I'm not out

David Frankel 34:36 there fundraising.

Harry Stebbings 34:36 But the secondary markets then are like more alive than ever, almost to the point where it's-

David Frankel 34:41 Hm.

Harry Stebbings 34:41 ... the most obvious market to go into, and all LPs are like, "We're super interested in secondaries now."

David Frankel 34:46 Mm-hmm.

Harry Stebbings 34:46 How do you think about navigating secondary markets? Is it the duty of us seed funds to be very active in managing positions, portfolio exits?

David Frankel 34:56 I'd say the first thing is secondary is so elusive. Like if I think of the secondary we've had over our entire kind of, you know, uh, uh, over our career, I can count it maybe on two hands. So secondary tends to be in your... And by the way, do you mean companies or do you mean funds?

Harry Stebbings 35:12 I mean company, actually.

David Frankel 35:14 Yeah, so, you know, it's elusive. Like in your high-flyers, so in your really well-known companies, there's a, there's a real secondary market. Try to get secondary in your smaller private company, it's almost impossible. So I, I've found secondary to be very, very difficult. Where we've done secondary, they've been pre-IPO, really high-flyers, and you know, uh, uh, you know, the secondary market's all over them, and then you fall off a cliff.

Harry Stebbings 35:39 You mentioned like, you know, the companies that raise from, you know, your Tigers and your Andreessens and your SoftBanks and then have these down rounds. What happens to all of these companies with seven years of runway which kind of aren't hitting? Are we about to see this decimation of them? Do they just kind of plateau into the unknown? What happens?

David Frankel 35:58 It's funny, you think about product market fit as in the early stage only.But if you don't maintain product market fit, and you don't maintain growth, right, it just becomes-

Harry Stebbings 36:09 Well, most of them never had it.

David Frankel 36:10 Yeah. Well, the ones who didn't have pro- product market fit, they're being abandoned, uh, you know. At some point, like, their boards start to abandon them or they just get incredibly frustrated. Some of them, frankly, you know, it's at every single stage, late stage. Some of these companies have IPO'd even, right? And then, you know, you really kind of, you, you rarely know what that looks like because the market walks away from you. In some respects, being private then is a luxury, particularly if you've got a lot of money. But if you're burning it fast, it's just a matter of time, Harry.

Harry Stebbings 36:40 Do you think we're seeing a VC, uh, a, a generation of VCs quiet quit in companies? Just kind of, uh, in these companies, they just go, "Puh, I'm out."

David Frankel 36:48 I do. I do.

Harry Stebbings 36:49 Is that a problem?

David Frankel 36:50 Um, you know, I think it's, uh, the, for the entrepreneur, it's like, there, there comes a point where it's like you can have... It goes back to your earlier question, you can have words, you can have as many discussions. If the business is just not working out, like, do you expect your f- your, your investors to be around? I, it, that comes back to relationship, I think. That comes back to some degree of sentimentality. And if you're purely commercial about this, the investors are moving on, uh, down the whole ecosystem. The LPs, just like the LPs are moving on, they invest in those companies. If I invest in you, and, uh, you know, we're personally still involved and I'm going like, "Harry's gonna get this right at some point," like, maybe it's this abundance of faith, maybe it's crazy and sentimental, but, you know, if I believe in the call option of Harry may just still get this right, maybe I'll stick

David Frankel 37:42 around.

Harry Stebbings 37:42 We've mentioned Coupang, we mentioned Uber, we mentioned The Trade Desk. I love our mutual friend, Avi, for his framework around actually selling. And he broke it down on the show, uh, in three distinct paths. I'm intrigued, when you look at the IPOs there and the great outcomes they've gone on to be, do you sell all when they IPO, and what's your process for liquidating and how to distribute effectively?

David Frankel 38:07 Yeah, I kind of, I have to channel one of our LPs, Tim Bliamtas, who's the CIO of WeatherGauge, and I remember around Uber, Coupang, some of the situations where we had shares to distribute, uh, try speaking to Tim and saying, Eric and I speaking to Tim and saying what we should, what we should do. And Tim said, "Whatever you do, you're gonna be wrong." And of course, like, the answer to that is you sell prematurely and you didn't capture the upside. You don't sell and the thing tanks and you didn't preserve value. And frankly, it gets more complicated than that. Some investors wanna give the shares to their, you know, foundations, and they, like, they're pissed off with you for cashing out and giving them cash instead of shares. Some investors say to you, LPs say like, "I don't know what to do with that share. Like, I've never heard of The Trade Desk. Like, why didn't you make the decision for me?" The answer there typically has been with big distributions, with large positions, so fund movers or it's half the fund, we distribute, and we say, "It's up to you." With smaller positions, when it IPOs, so Desktop Metal for instance, it got to the point where it was like, I don't know, worth $10 million, we sold, and we take the cash and we distribute the cash. So, I would say quantum or size versus the fund size is pretty much how we decide aro- around that. Now, what our LPs did with their stakes, so Trade Desk 25X, Uber 150 billion. I don't even remember what the IPO price was. But Harry, that is... If I look back, I go like, "Never sell a single thing." If you, if you could, and, you know, people have to live and people have various desires, but if you could, never sell a share. And I know we've gone through the up and the down cycle, but great companies, companies with real moats, right, like, you wanna be in those companies forever. That's when we get into Buffett land. Like, we're not good at that.

Harry Stebbings 39:56 So do you agree-

David Frankel 39:56 (laughs)

Harry Stebbings 39:56 Do you agree with Sequoia's evergreen fund structure?

David Frankel 39:59 Well, I think the timing was, uh, problematic, right? Uh, clearly.

Harry Stebbings 40:03 (laughs)

David Frankel 40:03 But I think the theory that they had, I'm impressed with them that they thought about that and they executed on it. I think the timing was unfortunate.

Harry Stebbings 40:10 I think only they could execute on it, to be honest.

David Frankel 40:13 Yeah, yeah. And then the companies still have to be extraordinary, right? So the company is in there, and you could argue that, you know, they, they had those. So, I think the strategy there was actually

David Frankel 40:24 sound.

Harry Stebbings 40:25 Uh, d- I... LEACH.

David Frankel 40:27 (laughs)

Harry Stebbings 40:28 When we spoke, you mentioned LEACH, and I thought (laughs) it was a great, uh, you know, acronym. Uh, what is LEACH, David?

David Frankel 40:35 Mm-hmm.

Harry Stebbings 40:35 Let's start there.

David Frankel 40:37 Oh, Harry, this is a subject I can keep you here all day on, but L- LEACH is lethargic economic extractor causing harm. And these are these legacy companies. A great example of them is the PBMs, the pharmacy benefit managers. Companies that were very innovative 40 years ago, so a PBM connects the pharmacy to the insurer. You know, 40 years ago or 30 years ago, they were great companies, right? And you know, the c- the insurance codes and how much you should pay out for your meds, great. And then you have the whole internet and you've still got hundreds of billions of market cap, hundreds of billions, adding no value, right? And the problem is that these incumbents use every trick in the book. Capitalism's so beautifully set up for them, so they use lobbying, they use lawyers, they use PR to say that the challengers are illegal. That's, that's like job number one. So, I have had this, like, time and time again, and in one way I go, like, it's a badge of glory, right? Like, to, to actually, like, rouse a LEACH, like, unbelievable. You're doing y- you know, because the incumbent is now pissed off or worried about you, it's a badge of glory. But I think, like, going through that, what it takes to take on these LEACHs is tremendously underestimated.

Harry Stebbings 41:51 I remember, actually, TJ at PillPack talking to me about rousing the LEACHs, and that being a very difficult moment.

David Frankel 41:58 Yeah.Well, I- I- I'll tell you, SeatGeek, right? You know, I actually gave, um, I gave testimony to a panel of lawyers for the Department of Justice. Russ D'Souza is the co-founder of SeatGeek. He says to me, come on a sales visit with him. So I go to TD Garden in Boston, which is like Madison Square Garden. We meet with the manager. She's awesome. She says, "We'd turf Ticketmaster in a heartbeat and go with SeatGeek. Like, we love your ticketing policy. We love the open thing. We can't give up Ticketmaster." You go like, I look at her, I go, "But hold on, you're like, you're like, there's no other venue like you in Boston." Like, this is this, you know, covered arena. It's beautiful. It's where all the basketball and ice hockey takes place. It's like, well, you know, when U2 comes to town, who, where else are they going, right? She goes, "No, no, no, no, it's not that." She says like, "Live Nation straight out said to us, 'U2 will come to Boston. You'll have one night in Boston instead of three nights.'" I make like a million or $2 million net profit a night. I- I literally gave testimony to the Department of Justice telling them exactly what I've just told you. And what you've got is, you've got, you take vertical after vertical. So Live Nation, Ticketmaster, that merger should never have been allowed. But once it's allowed, we will occupy, monopolize that position all day long. Harry, we've got it right now, I had it in my business in terms of taking on the legacy telcos in my startup, like impossible. But you know, you- you, a- and we can talk about some of the strategy around that.

Harry Stebbings 43:17 Is that ever a business you want to be involved in, though? When you are fighting against these monopolistic players with regulatory power, with lobbying power, with capital moats to the extreme, fuck.

David Frankel 43:29 (laughs)

Harry Stebbings 43:29 I mean, I've met so many ticketing companies. I remember Dice most recently, I don't know if you know them, in London. Um, I'm just like, "Hell no. Live Nation, I'm not going against you."

David Frankel 43:39 Yeah.

Harry Stebbings 43:39 Ticketmaster, not a chance.

David Frankel 43:40 Yeah. Yeah.

Harry Stebbings 43:41 You see it in travel the whole time. Am I really gonna go against Booking, Expedia, TripAdvisor, Trivago? Fuck no.

David Frankel 43:47 Yeah. Yeah. Uh, we- we- we've seen this again in Suno. So Suno is a Fund IV company. You know, the, uh, the- the record, the recording industry has just gone wild against Suno. And often, it's exact same playbook, but I think this is a place where VCs can add a ton of value, is, it's the same playbook. So they're lobbing their ass. The recording industry, like first says, "You're illegal. Like, what you're doing is illegal." And- and, you know, OpenAI and lots of people have that same legal challenge, although it's slightly different. So the OpenAI challenge is on the output, right? The LLM. Suno, the challenge is on the input. And Suno's going back and saying, "We're training on the open internet." That's like Harry learning to play the piano and listening to the Rolling Stones. Is that okay? But the first thing is legal, and you go, "What's this actually about?" Right? And sometimes the answer is, "I don't want you in business. I do not want you in this sector, and I'm gonna use all my heft." And then sometimes it's about, like, "I want my pound of flesh." But I do think this is an area where VCs, by any stage VC, can add a lot of value. So if you go, "Look, this is gonna happen to you. Here are, this is the way the game is played. Here are the lobbyists, here are the lawyers, here are the PR consultants, right? And here's how you're gonna have to use your money." And often it's like this multifaceted, it's like, I don't know, it's like war, right? And you need like, you know, air, land, sea, uh, and that's how you win. So you take TJ speaking to Mikey Schulman at Pil- at Suno going, "This is the playbook. This is how, this is the only way you, you, you, you know, you resolve this."

Harry Stebbings 45:16 Do these companies inherently need to have more cash, then?

David Frankel 45:18 They do. By the way, you can't do, you can have all the cash you want, you can have all the strategies you want. The first thing you need is customers that absolutely love and adore you. If you don't have customers that love you, right? Like, what are you doing this whole thing for? So if you don't have actual, and I would say this is Seekic, PillPack, Suno.

Harry Stebbings 45:36 PillPack, love.

David Frankel 45:36 Like, every one of those companies had customers, their revenues were increasing, because, and that's why they're a pain in the ass to the incumbents, is the incumbents go, "Oh my God, like, customers are actually going there. Like, what's this thing about?" And usually they don't have their shit together, right? So the incumbent is, like, playing for time or just, like, going, like, "I want this to happen when I want this to happen. I don't want this to happen to me."

Harry Stebbings 45:58 Can I ask?

David Frankel 45:58 (laughs)

Harry Stebbings 45:59 Do these companies not always lose? And I know PillPack returned the fund, and I love TJ and so I hope I don't upset him with this, but I mean, the PBMs are still the PBMs. And, you know, Epic is still Epic (laughs) . And they still were. Booking is still Booking. Live Nation is still Live Nation.

David Frankel 46:19 Oh man, Harry, there's- there's no fun in entrepreneurship if you believe that.

Harry Stebbings 46:23 (laughs) But is it not true?

David Frankel 46:24 You know, the- the incumbents-

Harry Stebbings 46:25 The only one that I can say disproves it is Spotify.

David Frankel 46:29 Yeah, and- and actually you could say, really, what is Spotify? It's just another distribution mechanism, right? Like really what happened to the, uh, like, the recording industry didn't like, you know, LPs to CDs. They didn't like CDs to... Sorry, I'm gonna say that again.

Harry Stebbings 46:44 Yeah.

David Frankel 46:44 You know, if you look at Spotify, i- in some ways, that's just another way of distributing music. So the recording industry, the publishers, the owners didn't, you know, they didn't love when CDs disrupted LPs or when tapes happened to CDs. And in a way, like all Spotify, it's a Herculean outcome, but if you look at, like, how much of their revenue the record labels actually take, Suno's something very, very different. Like, this is where AI is fascinating and really interesting. It's, it like allows Harry... It's, basically it's the breadth of your creativity. If you're creative, I will give you, like, the- the- the most professional tools that- that- that, like, the best DJ in the world has. You've got that r- on your phone now. This is really, really prob- problematic. Now, is the recording industry going away? Is Spotify going... None of them are going away. In fact, in some ways, the biggest threat is if Spotify does this with their incredible distribution, right? Like you've- you've really got an interesting, you know, competition on your hand. But the incumbents don't go away, but their share of the market can change dramatically.

Harry Stebbings 47:48 Totally can. You mentioned Suno, they're obviously an incredible business at the forefront of AI as well. AI is a new capital profile. Do you ch-... You're a big, big ardent believer in capital efficiency and kind of smaller rounds and being pragmatic around that, as am I. Do you change your stance around that in a world of AI...... today.

David Frankel 48:09 So, you know our view is kind of teams versus themes. And even in AI, like the teams have to get some kind of product market fit. Some before. I think that can still be done reasonably capital efficiently. I think after that, if you look at the capital required to scale and to distribute and to get to ... I mean, you look at like Josh Kushner's 1 billion and 100 billion OpenAI, and I go, you know, would I take that bet or not all things being equal? I probably would take that bet. If you said to me, "You have to," like, "Are you for or against?" I would say, "Is Josh in the winner there gonna make 2X and maybe much more than that?" But bet against the 2X, I wouldn't bet against the 2X. I think his LPs will make 2X on that. But at some point to play in that, that's a whole different world. If you want to play in the hyper-scaler game, wow, you're gonna need ridiculous amounts of capital. And by the way, we are seeing like what's a TLM, like tiny language models, which run on the, which run on the mobile phone, and basically make things like scanning or, you know, translation very realistic and on your phone, even when you're not connected to the internet. You need capital for that as well because the programming overhead of that, the nu- the number of engineers you need to create something tiny is, is huge.

Harry Stebbings 49:28 Uh, with that in mind, how do you think about navigating AI seed round stakes? 'Cause all the AI seed rounds I see today are, I mean, just crazy competitive and crazy priced.

David Frankel 49:37 You know, we're off-piste. (laughs) We're non-consensus. We're contrarian. So, when I see those rounds, if I see a round at five on 20, that's in our hitting range. When I see those rounds at like 25 on 100, pretty much we're out.

Harry Stebbings 49:50 We just won't engage.

David Frankel 49:51 We're pretty much out. Again, team versus theme. So, you know, it, there are rare instances where we see someone who's just like, "You cannot ignore." You, you wake up in the morning, you go, "Oh my God, like, how can I not be involved?" But, uh, for the most part, 99% of the time, we're, we're not involved. By the way, you, you, you just can't make money in a seed fund at those numbers. I, I don't s- I don't see how you can make money.

Harry Stebbings 50:13 It becomes OpenAI.

David Frankel 50:14 (laughs)

Harry Stebbings 50:16 You know, so I, uh, I'll, I'll tell you, I was one of the first investors to meet Mistral.

David Frankel 50:20 If it becomes ...

Harry Stebbings 50:20 Remember Mistral?

David Frankel 50:20 Yeah, of course.

Harry Stebbings 50:21 Yeah. Uh, and it was, the first round was at like 250, I think. And I said, "There's no way."

David Frankel 50:27 Did you write the check?

Harry Stebbings 50:28 No. I said, "There's no way that I as the seed manager can invest in 250." What, it goes to 5 billion, and with dilution, which there will be a lot, because I'm gonna get, what, 10X, 12X?

David Frankel 50:40 Yeah.

Narrator 50:41 I, I-

Harry Stebbings 50:42 Wh- wha- but what if it's a 50 billion company?

David Frankel 50:44 Yeah. Overall, I admire discipline. I think rear-view mirror on this, you can't build a fund on this. Rear-view mirror, you can think about that one that you missed, that two, there, and there, there are one or two in a generation. There are these generational companies or maybe there is one a year. And if you're in that company, awesome. But can you build a fund strategy? I don't think you can. Not at seed.

Harry Stebbings 51:06 But you can break the rules. (laughs)

David Frankel 51:09 Well, if you, if you break the rules and you're right, you've done unbelievably well. By the way, again, if you were, if you broke the rules and it was a 10 post and you broke the rules and it was like, you know, 250 million post, like, the return to you and your fund is infinitely different.

Harry Stebbings 51:24 Yeah.

David Frankel 51:24 So, I think you break the rules and you get it right on a 250 million post, and you get a 10X, right? That's why I go Josh on a billion. If, if he makes 2X there, and you go like that is the company, that is the company, would you bet against OpenAI right now? No way. So, it depends on the customer base for OpenAI. If, if the customer base, if, if they distribute well and more and more people say, "Look, ChatGBT is on my phone. Download that. Start using that." Like, you know, when my wife and my kids start to use it and like go, "Oh my God, like, I'm going here before Google," I'm not sure that Microsoft can think of it only as their play thing. If people are leaving OpenAI and OpenAI is not scaling and not creating more and more revenue, you may be right. But if OpenAI continues to grow the way it is, I don't know that Microsoft can ignore them. I think in some ways Microsoft are gonna have to say, "This is terrible, like, because we wished we owned 100% of it, but this is our play." And you know, who knows, like, the next thing could be a merger between OpenAI and mi- Microsoft. I don't know that they want that. I think there's a lot of regulatory heat around this that you may kind of do well to avoid f- at, at the very beginning.

Harry Stebbings 52:31 I've been insanely impressed by Perplexity, I have to say. I don't know if you've used Perplexity or not.

David Frankel 52:34 I haven't, yeah.

Harry Stebbings 52:35 Oh my God, it's a phenomenal product.

David Frankel 52:37 Yeah.

Harry Stebbings 52:37 Way, way better. Um-

David Frankel 52:38 I, I would say I start now, so I have a range of tools. But if you say to me, "Where do you start?" I start in ChatGBT. I don't go to browser.

Harry Stebbings 52:46 Wow.

David Frankel 52:47 That's where I start.

Harry Stebbings 52:48 Huh.

David Frankel 52:49 Anything. Right? Like I, I don't know. After lunch, we're gonna get a restaurant. You know, I'm, I'm an optimi- like I'm, I'm, I'm an optimizer. I can't help myself. If I wanna know the three best restaurants within like five blocks from here, I will literally go to ChatGBT because the answer is cleaner. It's like, it's, it's more summarized. It gets me to what I need faster. That is a huge

David Frankel 53:10 shift.

Harry Stebbings 53:10 Do you think AI will create a generation of new unbelievable companies with huge market caps? Or do you think it will consolidate power into existing huge market caps?

David Frankel 53:21 I think there's short term and long term. So, I think in short term, we're gonna be, you know, underwhelmed right now. I think if you look at like the amount of CapEx that's being spent, and you look at the actual earnings that will be generated in the short term, there's just no way it makes sense.

Harry Stebbings 53:34 David Cohn at Sequoia says the $600 billion AI question, which is exactly that.

David Frankel 53:38 Yeah, yeah. And I think, by the way, all the way through the ecosystem, so it's not just the hyper-scalers, right? It's like down to, and David said it well, like down to the data centers, down to the steel, down to the chips. I think in the short term, it's gonna disappoint. I think in the long term, Harry, like every one of these waves... By the way, it reminds me of like self-driving cars. I remember taking a bet with Eric and he said, "Self-driving cars in five years." And I said to him, "The last 5% is very difficult." And like we're, we're getting to self-driving cars now. So, it takes forever, but every single-

Harry Stebbings 54:09 But it's one of those ones where suddenly, suddenly, and then boom.

David Frankel 54:12 Yeah.

Harry Stebbings 54:12 Suddenly Waymo's there.

David Frankel 54:13 And now it's like Waymo, if you get into a Waymo in California, like your mind is blown, right?So I think to discount AI in the next 10 years, man, you gotta be crazy. Like I think it's gonna have profound, profound changes. The difficulty is, it's always Hollywood. Like there, there'll be one in a thousand companies that'll be off the charts, and there'll be, like, one in a hundred that's amazing, and that will launch so much capital. And I think, like, being involved in that, like we can't, we're too disciplined to be involved in, like, figuring out which is the one in a hundred. You know, I remembered this with Eric, and this is, you know, the, just like the height of humility. An LP at one of our annual dinners, li- like leans conspiratorially over the table and says to Eric, "How did you know?" Talking about Uber, going like, "How did you know?" Right? I can, I literally see this in my mind's eye. And Eric looks at him straight in the eye and goes, "I didn't know." The company before, it was so easy in that moment to retrofit like how smart or... And he look- he was like, "I had no clue." He said, "The company before was just as interesting, and the company after," he said, "like I had the same high hopes." And I think, like we're not smart enough to figure out the one.

Harry Stebbings 55:23 Right.

David Frankel 55:24 So, so yeah, like, you gotta be around and you gotta hoist a flag and say like, "I'm, I'm interested in these great teams, but I don't kn- we, we don't know how to do this."

Harry Stebbings 55:32 What I'm impressed by though always with you is your humility. I mean, like, "I don't know." Yeah, dude, but like not many have the number of hits that you do. You can say, "I don't know," when it's the one out of 50 that's a hit. But when you have The Trade Desk, Coupang, Airtable, Uber, I mean, the list goes on and on.

David Frankel 55:51 Huge credit to Eric.

Harry Stebbings 55:52 You could say, well, the data shows that-

David Frankel 55:54 Huge credit to Eric.

Harry Stebbings 55:54 ... you do have a higher probability of knowing than anyone else.

David Frankel 55:57 Yeah.

Harry Stebbings 55:57 And so-

David Frankel 55:57 You, you're reminding me again of Eric, right? Where Eric has this lens. It's so simple, but, uh, we look at a company and go, "Can we 10X that? Can we 10X?" And if we can't 10X, then we shouldn't invest. And I think that is, again, alignment with the entrepreneur. That, that is so much flows from that. Like the, the economics, the size of the deal, the size of the valuation. If we can't, like with high conviction 10X, we shouldn't invest. That's how we create the alignment. That is Eric's rule entirely.

Harry Stebbings 56:30 A lot of venture investors would say, "Pfft, for a seed investor to think that, that's a low bar. You need to think bigger." How would you respond to them?

David Frankel 56:37 Small fund, you can do that. Small fund, four companies at 10X, we return the fund.

Harry Stebbings 56:42 Do you know what I would-

David Frankel 56:42 Easily.

Harry Stebbings 56:43 You know what I would respond as well? Go and read Bessemer's Memos, because every memo for big companies, whether it's Snap or whether it's Procore or whether it's Shopify, every great company, you underestimate the size of your winners. And so by thinking that-

David Frankel 56:58 Yeah.

Harry Stebbings 56:58 ... actually you do not lose the amazing Olo, which will g- do great returns, the amazing PillPack, because you needed the $20 billion company.

David Frankel 57:09 I, I think it's insanity. I just think it's insanity. Like I think when, I think you market those winners, and again, it's great PR fodder, it's great to like attract the, the investors in the next fund. But I think it's insanity to go, it's like that huge, you know, you, people don't even use the word unicorn anymore. It's that huge company or, or bust. I think it's insane. By the way, I also think it's like boring. It doesn't take you in a whole range of like fascinating directions where at the beginning you go, "Look, these guys are crazy. Like I, they... But could this be a 10X?" Yeah, it could be a 10X. I think that just provides this much easier on-ramp into these very interesting situations.

Harry Stebbings 57:47 Do you think about downside protection when you come into companies? Just in terms of, "Listen, they're really smart operators in payments. Bad day, Stripe will buy them."

David Frankel 57:56 That's the one thing I don't think about much.

Harry Stebbings 57:58 Hm.

David Frankel 57:59 By the way, I think it's the most unfair feature of capitalism, Harry, is the most you can lose is all your money. The most you can make is three, you know, 3000X, right? Or unlimited. If you just look at that, it is such an unfair feature of capitalism. And my LPs maybe go, "I don't wanna lose money for anyone." But I, I sometimes think exactly the opposite. If we're not losing, are we taking

David Frankel 58:25 enough risk?

Harry Stebbings 58:26 Listen, I had Shardul on from Index the other day, and I asked him, uh, "What's your biggest loss and what did you learn?" And he, he actually went like, "I, I, I haven't really lost a deal." Now, (laughs) I, I pushed back and I said, "Have you taken enough risk then?"

David Frankel 58:40 Yeah.

Harry Stebbings 58:41 I mean, to be fair on him, he, he's got Datadog and Wiz. Like-

David Frankel 58:44 Yeah.

Harry Stebbings 58:44 ... yes, he's got a-

David Frankel 58:45 Yeah, yeah. Yeah, unbelievable.

Harry Stebbings 58:46 But, but my question to you is like, what's your loss ratio?

David Frankel 58:50 I don't even know what it is, no. We have definitely lost companies.

Harry Stebbings 58:53 Yeah.

David Frankel 58:54 And we've lost, you know, there's, there's good losses and there's bad losses. The bad losses are wh- where you look back and you go, "My judgment wasn't good."

Harry Stebbings 59:02 When it's off, why is it off?

David Frankel 59:03 So if I look back and I go, "I love the what, I never really loved the who," I've really learned this the hard way. It's, Kopelman call them, are they like red button or green button entrepreneurs? They call at like 7:00 PM just before you're having dinner with your family. Do you take the call? Well, if it's you and I go like, "I love this guy, I'm taking the call," then I'll say like, "I'll call you back after dinner." But if it's red button, "Oh, he made a mistake," I look at that and I go, "Don't wanna have lunch or dinner with that entrepreneur." That's a big mistake for me. When I look at it and I go, "I fell in love with the what, like I fell in love with the what, but I really didn't love the entrepreneur at the beginning, and I wasn't, you know, the chemistry wasn't there," that's a mistake. When I look and I go, "Look, that was just such an extraordinary entrepreneur. That person was so compelling. I was so energized by that person. And you know, the context was wrong, we were too early, like we gave it our best shot, but the incumbents just killed us," I never look back at that and go, "That was wrong." I look back and I go like, "That comes..." You chop a lot of wood, you're gonna get splinters.

Harry Stebbings 1:00:02 (laughs) I love that. You absolutely are.

David Frankel 1:00:05 (laughs) .

Harry Stebbings 1:00:05 You know, there was one great piece of advice that I was once given by a guest, but he said, "Harry, if you're ever willing to take less in a deal, don't do it." So if ever you have 1.25 allocation and you're like, "Oh, I'm fine to take one," w-... don't do it. Do you agree with that?

David Frankel 1:00:22 I think it's a great test. I'm very impressed. Um, I think that sometimes if you love the deal and there's heat for the right reasons, to take a smaller amount is doable. But I think, so I think the problem with that comment is it doesn't, it ignores the context, and the context matters. So in an, in a vacuum, that's a fine comment, and I agree with it. But in the context of, there are lots of other people interested, including some collaborators who may go, "I actually want them in this deal with me." And by the way, that is under pressure, when people have got funds that are too big in the deals, and, you know, there's less collaboration. But I think there really are people who you want alongside you because they're smarter and more experienced than you. If you're, if you're having to throttle down a little bit for that, I have no problem with that.

Harry Stebbings 1:01:10 Do you think heat correlates to deal quality?

David Frankel 1:01:12 No, not at all.

Harry Stebbings 1:01:13 Yeah. This is my- I look back at the fund one portfolio-

David Frankel 1:01:15 Not at all.

Harry Stebbings 1:01:15 ... in particular. Hottest deals, the worst. The five on 25s-

David Frankel 1:01:18 No.

Harry Stebbings 1:01:18 ... that were the hottest, the worst.

David Frankel 1:01:20 No. In fact, in an ideal situation when there's insane heat in something that we've gotten earlier, like, that's a great moment to take secondary, if you can. Sometimes you can't. But if there ... I, I speak to teams about this all day long. So, like, you've got a billion-dollar valuation and you're doing 50 million or 40 million revenue, forget, like, you're losing money, this is an awesome time for you to take some, some, some money off the table. And in certain situations, we've had the founders say to us, "Look, there's a little leftover, because there's such heat here. Uh, you know, there's 20 million to go between. Do you want to take some, some money off?" And we have been able to take a third of, but do we get that right all the time? Well, the answer was, you only know that in the rearview mirror. If that went, if that, there's a, there's a, I won't mention the name of the company. We did take a third off the table. We were right over there, but we've got it wrong as well. We took secondary in some of our biggest names. We shouldn't have sold a share.

Harry Stebbings 1:02:11 Which one do you most regret selling a share in?

David Frankel 1:02:13 Well, Trade Desk, I regret every single share I sold.

Harry Stebbings 1:02:15 (laughs)

David Frankel 1:02:16 Uber, I re- regret every single share I sold. Like, e- e- every time we, you know ... Hindsight is just the most precise science. Right? These are great moat companies. Why, why, why, why would you bet against those?

Harry Stebbings 1:02:29 You mentioned secondaries. We've had founders demonized over the last few years for taking secondaries, especially as the tide has turned. How do you advise founders on taking secondaries, right amount to take, when to take them, how to think about that?

David Frankel 1:02:41 My rule of thumb is, you know, there's a, there's a hot, big deal going down. Again, this feels anachronistic, 'cause this was happening on steroids three, four years ago. I'm seeing less of it. But if you take l- you know, less, 10% or less off the table, nobody's gonna really mind too much.

Harry Stebbings 1:02:57 Yeah.

David Frankel 1:02:57 And I think if things go south later on, then LPs look at it and investors look at it and go, like, "I wish Harry didn't take $5 or $10 million off the table. I wish, I wish Harry..." But, you know, I don't mind if Harry took a million or two million. By the way, I always say, the first million dollars, like, when, the first million dollars makes, like-

Harry Stebbings 1:03:16 All the difference.

David Frankel 1:03:16 ... it's, it's binary. It makes all the difference. And it's partially selfish. You know, it sounds like I'm so generous in saying, "Take as much money as you want," but it's, it's actually very self-serving as well. If that founder's going home and worrying about the mortgage and under pressure from their wife or husband or whatever it is, or partner, we alleviate that pressure in giving them secondary, in, in encouraging them to take secondary. So I, I'd say it's self-serving for the investors as well. Next thing, you've taken some secondary, the mortgage or whatever the issue is. And of course, if you're like in your early 20s and you don't have these problems, the, the context matters.

Harry Stebbings 1:03:51 But I am pissed off (laughs) and I'm pissed off with growth investors who were shoveling cash down founders' throats in the good times and are now going, "I can't believe all these founders that took all that money off the table." You fucking shoveled $30 million down their throats.

David Frankel 1:04:06 Yeah, yeah, yeah.

Harry Stebbings 1:04:07 And quite rightly. They said fine.

David Frankel 1:04:09 The biggest sin of the last era has been just the sh- the huge amounts of capital. These, these, like, boatloads of capital. I'm gonna meet later with Sam, um, you know, Sam Franklin from Otter. Great founder, did a, a lovely business. And, uh, I remember, you know, the other investors were talking about 10 on 40, right? Like, one call to John at Taiga, like, 20 on 80, no problem. And Sam at the moment thought I was like the superstar investor of all time. He was like a seed investor across the, you know, y- biggest name investors involved there, and like, like in a second, did that. In retrospect, what a sin. What a sin.

Harry Stebbings 1:04:47 What, for him to do that deal?

David Frankel 1:04:48 What a sin even for me to, like ... And I was caught up in the moment, but to-

Harry Stebbings 1:04:52 So I, he called me on that deal.

David Frankel 1:04:53 Yeah.

Harry Stebbings 1:04:54 And I told him, even though I lost the seed in that company-

David Frankel 1:04:57 Yeah.

Harry Stebbings 1:04:57 ... to LocalGlobe.

David Frankel 1:04:58 Yeah, we co-led the seed with LocalGlobe.

Harry Stebbings 1:05:00 Fuckers. (laughs) Uh ... (laughs) Um, but-

David Frankel 1:05:04 Saul showed it to me and said, "We need a, we need someone across the ocean."

Harry Stebbings 1:05:07 Ah, f- And it m- moving swiftly on.

David Frankel 1:05:10 Yeah.

Harry Stebbings 1:05:10 But I remember, I remember I said, "Don't do it."

David Frankel 1:05:12 Yeah.

Harry Stebbings 1:05:12 They're fair-weather investors.

David Frankel 1:05:14 Yeah, yeah, yeah. Oh, man, those guys were just like a casino, right? Like, it was, it was insane. John was doing ... I kid you not, we did two, we did a 20 on 80, two weeks, and we, like, did one the one week and we did one another week, and Otter was one of them. But, like, in retrospect, you go, like, "How do those founders know what to do with that money?" And they have that money and they're going, you know, no one would've, like, expanded in the US if you didn't have that money. But you go and you open an office in the US and you go, before your model's working beautifully in the UK, you're trying it over there. So the sin, like, the, the last era, like, the, the boatloads of capital, right, like, like, that's the sin of the era.

Harry Stebbings 1:05:52 But I don't actually think it's changing that (laughs) much.

David Frankel 1:05:55 I think it's the haves and have-nots. So I think if you have AI, right, like, it's changing. I think, again, if you're a vertical SaaS company doing $50 million, right, the multiples, uh, the listed multiples are constraining you. You're not getting a 20X multiple, dude, because that, if I, that listed company that I own shares in is at 6X, 7X, that's the multiple. So I actually think, basically, Harry, we, we can't-

Harry Stebbings 1:06:19 I see this as my opportunity, though, 'cause you're absolutely right. But this means everyone's kind of moving out of vertical SaaS, thinking that it's not attractive.

David Frankel 1:06:25 And, and the fascinating thing there is, like, it's like, goes back to the Andreessen, you know, like, soft- Andreessen said, "Software is eating the world." Like, I have this, like, the haves and the have-nots around data.... right? And you look at some of these vertical SaaS companies or horizontal SaaS companies, the truckloads of data they have, it's theirs to lose. So Marc Benioff Salesforce, you write that, you write that off at your peril. Because the amount of data they have, right? They throw in these AI tools, they doing their- their own stuff, right? That is, that, like, their opportunity is enormous. And I've seen this in some of our vertical SaaS plays. Like, if we give the customers enriched data, if we don't enrich the data, like, we're out of business. But we enrich the data we have, and you look back, you're like, "Whose opportunity actually is this in terms of AI?" If you've got data and you drop the ball, like, y- you know, you only blame yourself.

Harry Stebbings 1:07:16 Uh, listen, I- I totally agree with you. I think the subsequent question, though, for me is, does AI mean you can increase the price you charge per seat or just maintain your position and- and have denigrated margins?

David Frankel 1:07:29 It's a great question.

Harry Stebbings 1:07:30 'Cause I had the CPO of Canva on the show, and he said, "Oh, we're doing all these amazing things with AI."

David Frankel 1:07:36 I- I remember, yeah.

Harry Stebbings 1:07:36 And I'm like, "Fantastic."

David Frankel 1:07:38 Yeah.

Harry Stebbings 1:07:38 But he mentioned the margin denigration that happens with every query.

David Frankel 1:07:42 Yeah.

Harry Stebbings 1:07:42 And then they announced a 300% price increase, which is an amazing tool. I'm sure people will pay for it, great. But will we see prices increase or will we see margins decrease?

David Frankel 1:07:52 I- I- I think, I think, uh, short term, defensive. Short term, defensive.

Harry Stebbings 1:07:58 Yeah.

David Frankel 1:07:58 If you enrich that and you're the one to do it and you retain your customers and you... And because of the enrichment, you increase your revenues and you increase your customer base, I think it's like, almost like... Look at the great companies, Tesla, I don't know, look at Netscape, right? At some point, freemium, right? It's like freemium on steroids. I think the right play is defensive to start, and then once you retain those customers and you've enriched the data, I think there's a lot you can do with it.

Harry Stebbings 1:08:23 So you don't agree with, say, the David Friedbergs or the Dalians who say that AI means that companies will be able to build their own vertical solutions tailored to their specific needs, and actually, we'll see the end of vertical SaaS in that way?

David Frankel 1:08:36 I don't, I don't agree with that. I think the tools, I actually think some of the LLM and the op- you know, I think some of the tools are actually very commoditized. So I think that the vertical SaaS or horizontal SaaS or data owners will be able to access the underlying tools reasonably cheaply at some point. And you may disagree with that, but I think if you look at some of the open-source software around this, it's like, it's gonna become more and more commoditize the underlying tools. And if you... I- I think you... So- so you could go and say, "Well, why can't every single company do that?" I don't think you can, but I think there are going to be software providers that enrich tho- their toolset that are gonna do unbelievably well.

Harry Stebbings 1:09:13 I think we drastically overestimate the technology sophistication of these companies to be able to build with AI their own vertical solutions. Are you kidding me? They struggle to onboard Slack. (laughs)

David Frankel 1:09:26 Yeah. Yeah. You know, you remind me a little bit of when I started our ISP with my co-founders, and we went to, like, the biggest banks and we offered them internet service and hosting and, uh, all sorts of, like, e-commerce options. And then we went to, like, the national kind of railway owner, and they said, "Look, I've- I've got a network. I own a network. I've got fiber on every single railway," right? Like, "I own a network that, like, just dwarfs you," right? "I can do all of this." Like, "What do I need you for?" And I remember, like, it was like, "Okay," like, we walk out, right? Six months later, they'd done nothing. You know, a year later, they'd done... Two years later. You know, and then the university network, like, in- in... This was in South Africa and Southern Africa. The universities had the biggest networks imaginable, and each time, they became our biggest client. So the answer is there'll be the short term thing where again everybody goes like, "I don't need you." Right? And, like, is there a business in terms of smart software solutions? And yeah, that's-

David Frankel 1:10:18 that's all over the place still.

Harry Stebbings 1:10:19 There's one final thing I want to discuss, which is boards. I spoke to so many friends of ours, founders that you work with. You're a phenomenal board member. I've actually s- sat with you on a board, and you were, again, fantastic. What's your biggest advice to me on how to be a great board member?

David Frankel 1:10:35 Well, I think you have to have that economic alignment to start off with. So I don't think you should ever take a board seat where you own, you know, too small a percentage or the size of that potential outcome vis-à-vis your fund is too small. So I really think you have to have that economic alignment, because it means every time you sit down, it's like us. It's ours.

Harry Stebbings 1:10:54 For a founder to know what is economic alignment, what would that be, just broad range?

David Frankel 1:10:59 Look, if you kick off and you own, on a board, like, less than 15% of that company, I- I think it's problematic. Certainly in terms of our fund structure, the- the capital and the cash is infinite in a way, or has been in this era. Your time is not infinite, and at some point you're going to think very seriously about your time. And to be patient, you need that economic alignment with the founder. So if the founder owns 95% and you own 5%, problematic. Every time you sit down, you go like, "I'm working for this guy de facto." If there is more alignment in terms of ownership, then I think it works better. Harry, if things are going like ballistically, then it doesn't matter. So that always breaks the rules. I'm talking about 99% of the time. You've got to sit down and go, "It's our company. We're

David Frankel 1:11:51 in this together."

Harry Stebbings 1:11:52 Biggest lesson on dilution. I think people forget the impacts of dilution today too often.

David Frankel 1:11:58 We don't think about dilution much. We really don't. O- Our MO has been we dilute alongside the founder. As a