The Twenty Minute VCDavid Tisch & Terrence Rohan: Biggest Misconceptions & Hardest Truths About Seed Investing | E1112
EVERY SPOKEN WORD
150 min read · 30,049 words- 0:00 – 0:53
Intro
- DTDavid Tisch
The space I have conviction that there will never be efficiency in is the seed market.
- TRTerrence Rohan
I believe, actually, a group decision is the wrong way to make a seed investment. A lot of this, um, the picking is instinctual, intuitive. But articulating that to a group is really hard.
- DTDavid Tisch
I don't believe in the word coaching. I believe in relationship. Leadership, culture, those things can be helped from the outside. But I think the idea that the success of a company is dependent upon outsiders is nonsense.
- HSHarry Stebbings
Where's the seed market in 10 years, guys? What's the discussion then?
- TRTerrence Rohan
Maybe there's less (censored) , but more of it.
- HSHarry Stebbings
I am so excited for this. I've been looking forward to this one for a while. The, the Twitter shitposting, David, has been incredibly entertaining. I feel sorry for Terrance, having to put up with us for this conversation. But first, thank you so much for joining me today.
- DTDavid Tisch
Thanks for having me back, Harry.
- TRTerrence Rohan
Thanks for having me. I'm excited
- 0:53 – 4:19
Guest Introductions
- TRTerrence Rohan
to be here.
- HSHarry Stebbings
Now I wanna just start with some intros. So can you first just explain a little bit about who you are, what firm you founded, and then where you focus in particular? Let's start there. And, and Terrance, why don't we start with you, given the fact David's done this twice before? (laughs)
- TRTerrence Rohan
Sure. So hello, my name's Terrance. I'm a seed investor. Um, I've been fortunate over the past 10 to 15 years to back some incredible founders, um, at their earliest stages. Figma, Notion, Hugging Face, uh, Vanta, Robinhood, um, Patreon, Front, just, just to name a few. Started off my tech career originally at, at Google. I was there '05 to, to '10. I did various product development, product marketing roles. Um, and then started professionally investing in 2010. I, I joined, um, Index Ventures, actually joined over in London, and led and managed the seed practice for them for seven years. Incredible experience. Did that both in, um, both in, uh, in London for a short stint, and then in San Francisco. We did incredible work. Super proud of it. Um, and, you know, part of my role there, I was fortunate to give, you know, they gave me a lot of rope to innovate. And one of the, one of the things I innovated it on was actually giving capital to founders to invest. And so I incubated a fund, um, for them, um, which later was the genesis, um, for Otherwise. So Otherwise is the fund that I invest out of. The model is w- we give capital to, um, a, a network of top founders and they discreetly make multi-stage investments. Uh, actually venture investments, primarily it's seed. Don't publicly talk about the fund or the strategy, so I'm gonna hold to that. But I'm really happy to talk about my own, you know, investing experience and, and, and kinda journeys. Yeah, in terms of investing, I write two 150K checks. I do mostly, mostly seed, but I do some later stage investment. I'm sector agnostic, um, but do mostly applications and, um, yeah, really try to support, um, amazing founders.
- HSHarry Stebbings
That's some good early stage checks, isn't it? You're naming those offers, like, "Woof, bring it, David." (laughs)
- DTDavid Tisch
Uh, I'm not gonna, I'm not gonna compete, so I will just, uh, I'm David. I live in New York, uh, and I collect toys. And that's, uh, that's where we're at.
- TRTerrence Rohan
(laughs)
- DTDavid Tisch
Um, I'm David Tisch. I run Box Group, uh, which I've been doing for about 15 years. Uh, before that, I, uh, started and ran Techstars in New York, um, for a couple years, but left in 2012 to do Box Group, uh, full-time. We are a, as of, uh, recently, uh, we just closed our sixth fund. So it's a $212 million, uh, early stage fund. We do pre-seed seed investing. We're at a 500K to $1 million check. We're happy to, uh, be the second or third biggest check in a round. Um, we don't take board seats, uh, and we believe in, in what we call collaborative seed investing. It's what we've been doing, uh, since the beginning of the fund. And we do so, um, in conjunction with, uh, the whole ecosystem. So we come in peace and we work nicely with others. And, uh, we also have a follow-on fund, uh, to go with that, uh, Box Group 6 and Box Group Pix, 'cause that rhymes. We're into rhyming. Um, and we are a team of nine investors. Uh, seven are based in New York, two in San Francisco. Um, and we've been working together for a long time.
- HSHarry Stebbings
Do you have stapled funds? Do LPs do both of them in equal ratios?
- DTDavid Tisch
Yes.
- HSHarry Stebbings
Got you. Okay, good.
- 4:19 – 13:52
Winning the Best Founders
- HSHarry Stebbings
Now we, we, we chatted a little bit, uh, before, uh, about kind of Keith Rabois, David, and, you know, eh, eh, very good at seed investing. Um, Keith said on the show with me recently, "Every investor needs to be able to answer the question, why do the best founders in the world choose you?" When you think about that question, why do the best founders in the world choose Otherwise or Box over other people, what's your answer to that?
- DTDavid Tisch
It's important to, to meet the best founders. So the first step is, do you see them? Do you get to know, uh, who they are and what they're working on as early as you can in that journey? A relationship starts ideally well before, uh, the sort of transactional portion of raising capital. And, uh, I've been doing this a long time. I think repeat founders come to you, uh, i- if you've provided the level of relationship that they're looking for as they raise capital. So first off is, you know, the first time you work with somebody, did you do well enough by them for them to come back? I think that is a foundation of a long career in venture, is building repeat relationships. I think for first-time founders, you have to find them where they are and you have to get to know them in a, in a style that meets them versus a product that, um, I think can differentiate. I think at the end of the day, for the most part, all VCs offer the same product. We are giving money and we are taking equity. What comes after that is obfuscated in a sales pitch. It's this, "Pick me for all of these reasons." When you are a amazingly unique...... lead investor of multi-stage rounds à la Sequoia, uh, you know, Andreessen Founders Fund, uh, Keith now at Khosla. You have a history and a track record of a brand and of an individual that I think is really hard to compete with. And it's not saying that you can't compete sometimes, but the probability that you can win against one of the top three, five, 10 firms on a repeat basis, I think is a really challenging, uh, proposition.
- HSHarry Stebbings
Can you compete sometimes though? If they think that you can be competitive or have the ability to be competitive, they're not gonna be like, "Oh, we're gonna bring Dave in to one of our deals," because they know that you have the ability to be competitive. Do you see what I mean? Is it not like either/or?
- DTDavid Tisch
I, I think a l- i- it is very much either/or. And I think if you have a sharp elbow, um, people are gonna be aware of that and, uh, come at you with sharper elbows. And, um, for us, we're-
- TRTerrence Rohan
Even, even with 500 K checks?
- DTDavid Tisch
Well, I don't think we compete. I don't think we're trying to be.
- TRTerrence Rohan
Well, that's what, that's what I'm saying. D- You, you didn't get it.
- DTDavid Tisch
Yeah. We're not a, we're not an or firm, we're an and firm.
- TRTerrence Rohan
Yeah. Yeah. And an amazing and firm. So I, I don't think people necessarily compete with BoxGroup, but I think you can tell that and story as, like, a counterbalance to, like, a, to, to a multi-stage fund.
- DTDavid Tisch
No. I, I, we don't-
- TRTerrence Rohan
You actually-
- DTDavid Tisch
... try to compete. I think if we tried to compete-
- TRTerrence Rohan
Sure.
- DTDavid Tisch
... we would lose our ability to work well with others, and I don't think our value proposition is to say, "Pick us instead of somebody." So back to your question, Harry, why should people pick us? Because they like us. And I think that at the end of the day, that is why people should work with investors. There is a value component to this, but I think all that value gets played out after you accept an investor, not before. And I think the idea that you're going to be able to sort of prove value, um, ahead of the pitch I think is a, a nice head fake that a lot of investors, uh, try to do, but I don't think is realistic.
- HSHarry Stebbings
Do you not think you can introduce people to customers, to talent, uh, and make those core intros ahead of time and actually prove-
- DTDavid Tisch
It's a commodity.
- TRTerrence Rohan
I agree. I, I, I tend to agree with, with, with David on this, that a lot of this value-add is commoditized and it's als- also often, when you talk to founders, it might be, like, a couple quick motions to try to win the check, and then people kind of fade into the background.
- DTDavid Tisch
You're building a decade-long relationship with a founder, if things go well. And the idea that in a week, a day, a month, however long that transactional sales pitch goes at the beginning of a round, that you're going to prove all of your value in that short, compressed, fake timeframe versus this actual long relationship of ups and downs and needs and wants, um, I just think isn't the way to do this. And so, how we've built our firm at BoxGroup is by being consistent. We've never changed who we are or how we invest. We wanna build a relationship at the earliest stage, and we're there to help founders. What does help look like? It's different, uh, every day for every d- sort, sort of each founder. Every founder's gonna want different things at a different point in the company's life cycle, and the style and the personality of a founder is gonna be different depending upon who they are, what their background is, what industry they're working in, what they need in a given moment. So the idea that in that sales pitch we're gonna prove value I think is just not the way that we approach our business. We, what we wanna do is build a reputation that when a founder asks another founder that we've worked with before, they say, "We love BoxGroup. BoxGroup is our favorite investor." Not necessarily best, favorite.
- TRTerrence Rohan
What's the difference?
- DTDavid Tisch
I think best is this, "What did they do?" What, like, name the things that they did for you. Favorite is, "I would work with them in a heartbeat because I like them and they are a friend." They are somebody that we go to when we want to talk to, to an investor without this sort of parent in the room. We wanna be the friend in the room.
- HSHarry Stebbings
How do you be the friend in the room to so many?
- DTDavid Tisch
We're, we, we're great friends.
- HSHarry Stebbings
But you have many great friends then. Like, hundred.
- DTDavid Tisch
Yes.
- TRTerrence Rohan
I think that can be done. I, I have a similar, I have a similar investment philosophy, and I think it is really, I think it is really around this, like, relationship. And if you, if you're someone with clear values, clear approach, you know, great reputation, like... And I think that's largely why people ultimately choose you. It is, it is for the relationship. I think these, I think David's spot on. Like, these, I think these, like, value-adds and these things, I don't know, it might sound kind of impressive, but it just, yeah, it degrades, it commoditizes, and ultimately... You know, I would say also this. Like, startups are so hard, and the ups and downs, particularly at seed, right? And you want to be that person that can really help them, help that founder through that journey. And you're not gonna get there through, like, just commoditized services. It really is breaking through to that level, you know, that level of trust. It's, it's, it's a relation- ultimately, a fundamentally, like, a really human relationship there.
- HSHarry Stebbings
I hear the tears of every venture value-add platform operator-
- TRTerrence Rohan
(laughs)
- HSHarry Stebbings
... in the background. (laughs) Uh, I, I'm gonna-
- DTDavid Tisch
W- we-
- TRTerrence Rohan
Well, I think it is-
- 13:52 – 18:54
Disrupting the Seed Market
- HSHarry Stebbings
Can I ask, uh, Terrence, you said before the show the seed market is total jump ball right now and the most ripe for disruption. What did you mean by jump ball, and why does it make it ripe for disruption?
- TRTerrence Rohan
Sure. So I think this actually applies to both the seed and the venture, and, um, and I think we've got, like three long trends coming, and then one, one kind of really recent one that's just really creating a, uh, absolutely really unique market right now. So I think the long trends are if you look at, like the funds, you know, the expansion and the fragmentation of, of both the seed and, and the venture market. It's the story we know well, new man- new managers, all that kind of jazz. So that, that... But that's been a trend maybe 10 years in the making. Another trend that's kind of 10 years in the making is generational change, um, so you're having storied funds with storied partners that are kind of riding into the sunset. You know, it's unclear, and I think this is both true sometimes even at the, at, at the, at the Series A and even at the seed, it's, it's unclear, like who's going to t- you know, take the reins. There's some young partners. They've got a, you know, really good, like generational resonance, but maybe not the track record and experience. So that, that's another, uh, that's another trend. And I think another trend that's kind of, you know, very fascinating is if you really look at, like founders and, and the, uh, for lack of a better term, like the power and the optionality that they have now, it's, it's really shifted. Like when they, you know, 10 years ago, when they were starting a company, it was really hard. Capital was scarce, tooling, how to do it, all that. And over time, just more and more tools, more and more options, more and more capital, know-how, everything. And, and what you're really having is like, I think the founders went from, or the VCs kind of went from the customers to now the founders are the customer. So, so those are like really kind of longstanding kind of compounding trends, which I think in- even in its own right could be very destabilizing, um, and, and create, like a really interesting ordering. I mean, I, I find this like, before I get into like the, the, the final point, like I, I, the, the most interesting data point that I get is I often ask founders, like, "Who do you want to raise your Series A or your seed from?" And there's just no, like clear set answer, and 10, 15 years ago, it was tight, right? And so, and there's, and there's a lot of, like interesting... Just super variance in, in, in, in that answer, and that, that answer is coming from, from, from founders, so that's an interesting data point. And then I think we're living now in this, like, you know, AI is coming along and really fascinating market, and it's like the brand pairings on who's great at that, who's not great at that. How these, I think you even mentioned, like how these seed companies are... I mean, how these companies even raise seed rounds or even early stage rounds or even how they're raising venture is kind of all a little bit over the map. So I think in like two years, like you, you mush that all together, it's, you know, yeah, it's ripe for in- incredible disruption. Or I'd say there's a lot of opportunity there for funds and managers to really take leadership positions because it's, it's, it's, there's just so much change and, and corresponding opportunity right now.
- DTDavid Tisch
The biggest fundamental change is, is really right before COVID a- and the shift to online and distributed venture firms is the accessibility of founders to a venture firm. So if you go before sort of 2010 through probably '18 or '19, getting a meeting with a top-tier VC firm was hard. It took logistics. You probably had to fly to San Francisco. You probably had to go sit in a parking lot and a waiting room and do this weird, like march down Sand Hill Lane to, like these very old, stiff firms, and it was a really tight funnel to get in front of them. I think coming out of COVID, the accessibility of the multi-stage firm is fundamentally different. You can spin up a meeting. You can spin up a partner meeting. You can spin up an investment decision, you know, fundamentally, like-... exponentially more agile way. And I think that's a huge change in the market, and that's created more founder optionality to raising rounds, and raising rounds quicker, and, and getting in front of more firms in a tighter timeline. I think that change is real and impactful, and has changed the e- e- and to, Harry, your point, it has changed the way that multi-stage firms have an ability to access the seed market because they move faster. I think speed was an advantage before 2019 for early stage investors that has been sort of equalized by all firms across the entire spectrum, and I think that's a huge permanent change that I haven't seen, uh, go back. And I think more than anything that that allows founders even more accessibility and optionality when they think about their rounds.
- 18:54 – 28:37
Venture Capital's Evolution
- DTDavid Tisch
- HSHarry Stebbings
For, for me, the big trend we left off though was the scale of cash that so many firms have been able to accumulate, and the transition of venture, as Doug Leone says, from like a boutique high margin business to a real transactional industry with low margins. Um, I'm like-
- DTDavid Tisch
I don't think that impacts seed.
- HSHarry Stebbings
Well, it does impact seed because Andreessen will invest more and more at seed. And all of these-
- DTDavid Tisch
Doesn't matter.
- HSHarry Stebbings
Why doesn't it matter?
- DTDavid Tisch
Seed is random, because seed is random. There, e- and seed has shifted. The word seed has shifted from a million to three million dollar round to a five to eight million dollar round if there is a pre-seed or a, a starter round. If a founder's gonna take initial capital, so call that sub $2 million, that part of the industry is so random, and the idea that that deal is, is exposed and widely available and competitive is unknown. Those things happen quickly. They happen a lot of the times with built-in networks. They happen a lot of the times with friends, with angels, with angels who actually aren't angels but are backed by funds that raise, uh, capital and distribute it to founders that look like angels. Whatever that capital is, that just continues to be random, and if seed is... I don't think you can index seed, and I don't think you can aggregate seed into a low margin product. If somebody could buy the seed market, that's a very different story. We haven't seen that yet.
- HSHarry Stebbings
But it does matter because if you continue to see these multi-stage funds deploying $5 million checks at seed, that is a fundamentally different product for founders to choose, and some will. You know-
- DTDavid Tisch
That's been around for over-
- TRTerrence Rohan
That's been around.
- HSHarry Stebbings
That, that has.
- DTDavid Tisch
... six, seven years now at a, like, infrastructure level (laughs) across the entire seed market. That isn't new.
- HSHarry Stebbings
That ha- That has.
- DTDavid Tisch
Yes.
- HSHarry Stebbings
But it hasn't by so many firms, one.
- DTDavid Tisch
Yes, it has.
- HSHarry Stebbings
Uh, w- No, it hasn't.
- DTDavid Tisch
Yeah, it has. Disagree.
- TRTerrence Rohan
Yeah, when I... I, I, I-
- HSHarry Stebbings
You think there's been 20 plus, you think there's been 20 plus firms at multi-stage writing seed checks for the last five years?
- DTDavid Tisch
Yes.
- TRTerrence Rohan
Yes.
- DTDavid Tisch
Really? Yes, with certainty. I've been doing this long enough to tell you for a fact that-
- HSHarry Stebbings
I, I-
- DTDavid Tisch
... that check has existed well before this podcast, and that those multi-stage firms, uh, have been not only doing those checks, but very good at those checks for a long time.
- TRTerrence Rohan
Sure.
- HSHarry Stebbings
And this is from the firms or from the partners?
- DTDavid Tisch
All of the above.
- TRTerrence Rohan
No, from the firms. From the... Yeah, I mean, I, I started off, that was my job at In- that was my first gig in 2010 at Index.
- HSHarry Stebbings
'Cause I could name you four in Europe? (laughs)
- 28:37 – 35:11
Seed Investing Myths
- TRTerrence Rohan
So yeah. What are the other "it's such bullshits" of seed investing, guys?
- DTDavid Tisch
Everything everybody tweets. Like, nobody no- nobody's that great at this. Like, there isn't this, like... I don't think anybody's batting average. I don't like sports analogies, um, so I'm gonna skip that. I don't think every, I don't think there's a seed investor that you can find who has figured out how to be right 10 times more often than another seed investor.
- TRTerrence Rohan
I don't know. I, I think there's real skill. Um, I, I, like, when you look at, like, a Roger Aronberg at IA, the guy is fucking brilliant.
- DTDavid Tisch
He did mostly, he did, he did some seed investing and a lot of series A investing. And if you look at the combination, series A investing is quite different than seed investing. I think Roger is a outlier. Roger invested in an era when he had a thesis, and he was able to find companies that fit his thesis with immense conviction and build incredibly deep positions in those companies. And the returns prove themselves out, and, you know, he went off into the sunset to do act two, um, because he was so good at it. So I think there's aberrations, but I, I don't think, if you look at pure seed investing, that there are people who are just mostly right.
- TRTerrence Rohan
I'm gonna largely agree with that and, and build on David's point. I, I think the longer you're in the game, if you're really honest with yourself, you have to acknowledge, like, you have to have so much humility on how luck and how random and how...... just, like, any of these companies that you back, like if, if they really, like... You can't imagine the success. So I, I, I, I, I do think it is... I, I won't be as provocative, David, but I think a lot of the things that put, is put out on VC Twitter, it is content marketing to make the person seem smart. But if you really get 'em, whatever, two beers deep, they're gonna be like, "Shit, I, I, I don't know." Or at least, like, the, the longer that I've been doing the game, like, the more humility I've, I've, I've, I've gained.
- DTDavid Tisch
It's also, we're not building the companies, right? Like-
- TRTerrence Rohan
(laughs)
- DTDavid Tisch
... the, the hard work is being done outside of this podcast and outside of Twitter. The hard work is being done by founders, by their first 10 employees, by the first 100 employees, by their ability to find customers and traction and users. Like, it is so easy to sit here and put out, as, as Terrance properly said, content marketing to attract people to think that you are this magic maker of their success. I just don't buy that. Our job is to allow people that are outside of this room to go fulfill their dream. Some founder has a dream. They have an idea. They have conviction. They actually have to have conviction. And they go out, and they go have an N of one opportunity to go build the thing that they are building to a level that, again, is unrealistic if you are playing out the outcomes that are required for venture's scale. And they go do that with blood, sweat, and tears. And we sit here, and we talk about how we knew it when we met it. And I just don't buy that.
- HSHarry Stebbings
Well, I mean, we basically co-founded the company by being on this podcast.
- TRTerrence Rohan
(laughs)
- HSHarry Stebbings
I mean, we, we, we came up with the idea. We, we were central to product market fit. But, okay, I, I totally get you, and I agree with you on the centrality of luck.
- DTDavid Tisch
Say that again. Say you agree with me, please.
- HSHarry Stebbings
I, I, uh, oh, David, I, I agree with you on a lot of things, don't worry. But, uh, I agree with you on the centrality of, centrality of luck, but, uh, some people are just a lot luckier than, than others. And so, you've got-
- DTDavid Tisch
I don't think it's luck, though. I don't think-
- HSHarry Stebbings
Okay.
- DTDavid Tisch
... luck. I think that's a misplaced word.
- TRTerrence Rohan
See, see, David, maybe, maybe there better team-
- DTDavid Tisch
If you don't, if you don't-
- HSHarry Stebbings
Yeah.
- DTDavid Tisch
... see it, you can't invest in it. And so I think the hard work at a s- as a seed investor is meeting with that opportunity set that has a chance to be those outlier companies 10, 15 years from the day you met them. And that is actually the skill, the second skill to what Terrance said is picking.
- HSHarry Stebbings
But if that was the case, the content marketing that you kind of denigrated just now-
- DTDavid Tisch
Yes.
- HSHarry Stebbings
... kind of-
- DTDavid Tisch
Very valuable.
- HSHarry Stebbings
... uh, is, is a very valuable-
- DTDavid Tisch
That's why I'm here doing my own content marketing.
- HSHarry Stebbings
(laughs)
- DTDavid Tisch
You're gonna take this. You're gonna summarize this into a 30-second TikTok. We're gonna go viral. And I'm gonna get the next generational companies to come to me because we made a great TikTok.
- HSHarry Stebbings
Yeah. Uh, yeah, I mean, you're, you're right, but-
- DTDavid Tisch
Thank you for that. I'm using your distribution rails to my benefit.
- 35:11 – 1:04:01
Closing Long Commitment Deals
- TRTerrence Rohan
yeah.
- HSHarry Stebbings
David, how do you think about that? Given your, your statement earlier about liking long-term relationships, I'm very much, again, with you on that. And I find it very difficult when I'm forced to make a ten-year commitment predicated on one meeting and then a se- maybe a second meeting a day or two later. I find that very, very challenging in a way that series A allows you a little bit more luxury. How do you do that then given the preference for long-term relationships?
- DTDavid Tisch
So see, pick, win. You have to see it in order to pick it in order to win it. Seeing it, the earlier you see a founder, the better your relationship is when that transactional moment comes into play. And so if you can meet people before they're starting a company, before they're thinking about starting a company, if they're at a university, if they're working at a different company and thinking about starting one, that is the best time to meet them and to build a relationship that you can have conviction when they do show up for that transactional moment to say yes. I think that that is the, the essence of seed investing. The hardest part is getting exposure to founders at a scale that allows you to see in a given year, in a given fund cycle enough of those potential great opportunities and great founders. And the pick, I don't know...I, we, we debate this internally at our firm. I don't know how to get better at picking when you don't find out the results of your picks for, like, five to 10 years. And so, how do you wake up tomorrow and do work to be better pickers? You can be prepared in markets, you can be prepared in the businesses and the types of businesses that you're trying to fund. You can sort of try to find better people, but I don't really know what that is. So I come back to it of, like, can you build relationships that you get excited enough about to say yes because somebody comes to you with their dream, presents it to you, you say, "That is magical." You get this, this feeling of a human that shares with you what they're thinking about. And you're like, "You are so sophisticated and deep and passionate about what you wanna go build that I have to say yes. This is, I like... You've gotten me as excited as you are to go build this company. I'm in."
- TRTerrence Rohan
I think, I believe actually, a group decision is the wrong way to ma- to make a seed investment. I real- I really, I really do believe that. If you look at even, like, the history of... as a quick aside, like, the history of venture funds modeled after law firms, partnership model, group decisions. And if you really just passionately look at, like, the decision signs of what that optimizes for, it is for consensus, it is for safe. And often, these companies at seed stage... And I think the consensus in the, in the group huddle is like, "Maybe that's series B." That's super smart and super valuable, but, like, day zero stuff, I think you, you really round the edges and you can miss a lot of great things because David can have... And I think a lot of this, on the picking, in my view, is instinctual, intuitive, hard to explain. David meets a founder. He's like, there's something in his eyes. And you know what? (laughs) In seed investing, sometimes that's actually the best reason by articulating that to a group, you know? Um, you know, it's just seeing that X factor in someone is really hard, right?
- DTDavid Tisch
I don't, I don't know who you're provoking-
- TRTerrence Rohan
Um-
- DTDavid Tisch
... 'cause I, I fully agree with you.
- TRTerrence Rohan
(laughs) Okay. Well-
- DTDavid Tisch
Uh, like, so we're, we're a team, we're a team of nine. Everyone on our team can say yes in an individual meeting. We don't need, we don't vote. We don't try to find groupthink. It has to operate in your gut. And if we meet this magical founder and she just left her job at a different company, she's coming out of, uh, university and my partner, Nimi, Adam, or Greg, uh, meet them and they get excited. Or if a Dean or Claire on our team meet them or... W- we have two Claires, which is low probability on a nine-person team. If Claire or, or... We have two junior people on the team. If they meet somebody and they get to this level of conviction, I wanna listen to that more than I need to sort of find a way to get groupthink internally. I think it-
- TRTerrence Rohan
How o-
- DTDavid Tisch
... happens at the edges.
- TRTerrence Rohan
How often is it eight one? Eight no, one yes?
- DTDavid Tisch
We don't vote.
- TRTerrence Rohan
But is it j- I'm just, I'm just really intrigued. Like, generally, is it positive sentiment or are there sometimes cases-
- DTDavid Tisch
I don't, I-
- TRTerrence Rohan
... where you're like, "How low-"
- DTDavid Tisch
... we, we don't operate, we don't operate our firm in a way that we actually try to extract that sentiment. We operate with the, the people who are spending time on that deal should make that decision. And if by people I mean one or two people, that's great. It does not need to operate at a firm level. I think seed investing, to Terrence's point, cannot be about consensus or groupthink or safety. It has to be on the edges. It ha-... Like, everyone on our team thinks about people differently, we think about spaces differently, we get excited about different things. And my job at BoxGroup and, and our job at BoxGroup is to have people here who we believe can make great decisions. And so Terr- Terrence takes that model and, in essence, runs the same thing. He just does it... We're not gonna talk about it because it's a secret, so I don't wanna touch on it. But Terrence takes that decision-making and distributes it to other people outside of the room, founders. We do that in the same room in some way, but we're still distributing the gut to the individuals at the firm who we think are, all of us, capable of making a decision.
- TRTerrence Rohan
But just so I understand, you sit in a room, discuss the deals that you have-
- DTDavid Tisch
We don't have a room.
- TRTerrence Rohan
Okay. You sit in a Zoom, whatever you wanna call, a mutual shared, whatever, virtual or physical location 'cause there are transferrable learnings that one partner can pass onto another f- about a space. You will do that though, correct? Find the-
- DTDavid Tisch
We talk about things. We just don't... We don't vote and we don't look for consensus. We don't... Not everybody is equally ramped up onto each individual company such that their voice is valid. I don't think... It's... The easiest thing to do at seed is find a reason to say no. You name a company, you give me an idea, you give me a market, I could tell you the, like, 32 reasons why it's not gonna work. But that's not the job. The job is to squint and see the one reason it's going to work and say yes when it matters. And the yes is so much more important than the no. And the cost of omission at seed is so much more expensive than the cost of commission. And if you say no to the wrong company, you blow your returns. If you say yes to the wrong company, it's a rounding error in your model.
- TRTerrence Rohan
To jump in on this, I, I, I think this idea of, like, conviction in seed, and I, and I understand David's point on that, it's actually...It's very intuitive, and it's probably empirically weak. And it, and it can crumble. The, it's like, that it can cr- you can just crush it. You, you can crush it and, and, and conceptually, it's super easy. To David's point, there, here, here are 20 reasons why, why, why this won't work, and they're super rational reasons. You know, whatever, you know, the market's low margin, blah, blah, blah, all, all this stuff. You, you, you can crush any of those ideas so easily. That's, that's not our job. (laughs) It's not, it's not, it's not to crush. So these voting mechanisms or even these group meetings, either explicitly through voting or implicitly through cultural norms, often just crush those flames. I think there's some, like, cheesy j- Johnny-Ive quote about ideas that are so fragile when they're early. But I, I do believe that about startups. They're super fragile, right? And so, I think to do the job well is you actually wanna celebrate, empower people to make those instinctual decisions, even if they are a little bit unreasonable.
- HSHarry Stebbings
Are the discussions then not just doubt generators in the people making decisions? If we get together and discuss a deal...
- DTDavid Tisch
We structurally push our group to not allow that. We have vocabulary internally. We say, like, "Throwing a grenade." You're not allowed to throw a grenade on some deal. It doesn't help. And so again, if you come in and you just have this loud, "No," everybody who, who is excited about it ha- h- th- the level of pushback that you need to have to push to, to say, like, "I hear that grenade, and I reject it, and I'm still a yes," I don't think that's where the best decisions get made. I think that's where group decisions get made. And I think, again, especially if you have a firm where people have been around longer or if people are newer or if people are thinking about harder, newer interesting spaces, this gets challenging, right? Like AI, nobody knows the answer to AI, like, how the market plays out, where the value gets created, what the best tenure out companies look like, other than probably, like, Vinod Khosla. He probably knows the answer, or, um, someone like that. But we don't have perfect answers. We don't know the future. If you knew the future, you would be, again, higher percentage correct than any seed investor is going to be. And so, the more that you allow for negativity to creep into conversations amongst the firm, I think less variance you will have in outcomes and the safer you will play, and I don't think that that model works at seed.
- HSHarry Stebbings
Do you really have to police that? Because natural human condition can sometimes be they wake up on the bad side of the bed and whatever, whatever. For some reason, they're negative, whatever that is. Do you have to police that? Because that's hard to continuously instill.
- DTDavid Tisch
I think, I think it's way beyond that. And I think you bring up a good point, right? Like, someone's individual mood on a specific day, the weather, the political climate, the, like, seasonality-
- HSHarry Stebbings
Kids not sleeping.
- DTDavid Tisch
Yeah.
- HSHarry Stebbings
Whatever.
- DTDavid Tisch
All of those factors go into gut. And if you cannot find zen, some focus, some, some operational place that you are making clearheaded decisions from, you are likely gonna be on tilt, to use a poker analogy, and bad decisions will happen. And so, if I look at the firm, we have, again, nine of us, I believe the job is to try as best as we can to all of us, on a daily basis, operate in some form of evenness. And I think that's really hard. But when I look at Box Group and I look at the evolution of what we've built here, staying consistent to where we play, to how we do the job, those are really important holds to allow that equilibrium, that zen, to happen. If we, instead, every fund cycle changed our strategy, changed how we operate, where we invest, like, the style of investing, you have no ability to actually get better and to try to find that zone of clarity to make investments from.
- 1:04:01 – 1:05:22
Cashing Out vs. Staying Invested
- HSHarry Stebbings
Genuine question, like, at this- at a stage, like Terrance said there, $10 billion, does it not just make sense to take 30- 20- 30% off, return a great amount of cash, and still ride the upside? I'd ju- genuinely love to understand why not.
- DTDavid Tisch
Does it make sense? Sure. I think if- if you believe that that is the outcome size of that company and there isn't another 10X or 5X on the table, sure. But I think to Terrance's point, the compounding at the end is so much more valuable than the compounding at the beginning. The- the path from zero to one billion is impossible. The path from one billion to five billion is more predictable and it's more easy to see at a given moment. But I ... Do we, like, fundamentally reject the idea of ever doing a secondary? No. But I don't believe our job is to figure out how to hack the system. Our job is to figure out how to back unique outlier, long-term, generational companies. And if you look at the time that it takes to build those companies, you have to stick with it sorta till
- 1:05:22 – 1:09:18
Staying Relevant in Investing
- DTDavid Tisch
the end.
- HSHarry Stebbings
Yeah, I remember I had Bryan Sinkman on the show from Founders Fund, and he said, "We consistently underestimate the power of the next double." And it's the move from five to $10 billion, which actually become-
- DTDavid Tisch
It doubles your seed return. It's- that's the easiest math in the business.
- HSHarry Stebbings
I- I agree totally. Uh, (laughs) strange. We can record this and I'll send it to you afterwards, David. (laughs)
- DTDavid Tisch
We're just gonna TikTok I agree. You said I agree about 10 times, so if you just-
- HSHarry Stebbings
(laughs)
- DTDavid Tisch
... cut that and make that the TikTok and me saying something and you saying, "I agree," we could go super viral, and then I could do content marketing, I can see deals, and then this becomes really easy, and then I'll blog about it, and I'm good.
- TRTerrence Rohan
(laughs) And he knew all along.
- DTDavid Tisch
Yeah.
- TRTerrence Rohan
David knew all along. (laughs)
- HSHarry Stebbings
(laughs)
- DTDavid Tisch
How do we compete in science? How do you compete in all of the spaces that we as a firm spend time in? How do we understand what we should be excited about and what we shouldn't? Um, and how do we, you know, get into the next network? I think the next network of great founders exists somewhere, and our job is to find that network and be relevant in it. And so every day the panic that we have is are we seeing things and are we understanding them? And if you don't understand them, you're probably not looking in the right places to see them. And if you see them and you don't understand them, you're gonna miss them. And so it's this- it's this very complicated...... start every day from scratch in this business. I think the one thing that does matter a- and help is that network compounds and brand compounds. And so when I look back, founders that we backed 15 years ago, five years ago, two years ago, if we build that great relationship with them and they're willing to send us their friend who's starting a company, um, and tell their friend that they love us, those things matter. And I think that our job is to just do great work for the people we're fortunate enough to back and wake up tomorrow as hungry as we were yesterday.
- HSHarry Stebbings
Do you worry that our supply of great founders is impacted by the ability of AI to reduce costs in a number-
- DTDavid Tisch
No.
- HSHarry Stebbings
... of different ways? Meaning that they don't need the seed round that they used to?
- TRTerrence Rohan
I think the seed round is o- like, if there's one round, and I think this is, like, an interesting topic, like, how funding dynamics and whether you need VC. But I think if there's one round that is- will be essential for- forever, it is that first round, right? It- it- it is- it is that, like, "I need money to get going." Sure, there's gonna be founders who are- this is their second show and they can self-fund fine. But, like, as a persistent basis, like, the one- the one round you need is the one to get going. And then, sure, you- AI and other tooling, I mean, I've seen this across my own portfolio, these companies can become and get scaled. They can become hyper capital-efficient, hyper-profitable, and venture capital is kind of really optional to them. Um, and I think that's actually, like, beautiful. I think that's actually, like, where you actually want to get. And i- it's often how I guide my own founders is, like, I think it's the right way to look at venture is, like, you know, raise- raise that initial capital. And if you get to the point where venture capital is optional and you can d- dip in and dip o- out, that's the ultimate. And you've, you know, you choose your own destiny. You control dilution, you control- controlling your board. Um, you can grow when you wanna grow. You take on more, and then you don't. Um, you don't necessarily need to take it every step of the way. And if AI will do anything, I think it'll- I think it'll just make companies that much more capital-efficient in the long term. I mean, once we get out of this infrastructure phase, but more on these applications. But seed- seed's not going anywhere. And I think that's also why, you know, some of these funds, some of the multi-stage funds continue just to- to look upstream because I think- I think that's partially understood.
- 1:09:18 – 1:23:07
Quick-Fire Round
- TRTerrence Rohan
- HSHarry Stebbings
I wanna move into a quickfire round. While- while we're on the seed will always be the most important round, I think that's a- a good (laughs) -
- TRTerrence Rohan
(laughs) .
- HSHarry Stebbings
... a good transition to a quickfire. And you've both, I'm sure, been given much advice in your investing career. What's the best investment advice that stuck with you most?
- DTDavid Tisch
Our job is to say yes, not to say no. And our job is to, uh, communicate that decision to a founder in a transparent and quick way. And our job isn't to waste people's time, and our job isn't to, um, mislead people. And I think as I've looked at this business, um, for years, there's- there's people that come and go that are just wasting founders' time. Our job is to not waste their time, and our job is to give them money and get out of their way until they ask you to do something, at which point you should try to do it, um, as best as you can and as quick as you can with as little friction as you can. And so, uh, my job as an investor is to invest, and it's to give people money and do what they ask me to do.
- TRTerrence Rohan
Another bit of advice that also sticks in my head is founders that are gonna be the most successful need you the least, um, so it's (laughs) -
- HSHarry Stebbings
(laughs) .
- TRTerrence Rohan
... so it's- i- i- and which is also true. Um, and- and it does inform, you know, the way that I- that I invest. I- I- I do think if there's anything that you can sort for, at least in myself, is- is I do tr- really try to kind of underwrite and pick really special people. Whether they build something amazing, who knows? But at least in- in my belief that they are some- sometimes, um, you know, special.
- HSHarry Stebbings
What's your biggest advice to managers out-raising today?
- TRTerrence Rohan
Biggest advice to out- is just, uh, I think that the h- like, the cold water plunge, just the shock to the system for any seed manager is that we live in this- our front office job is so fast, and it's, like, deals get done very, very, very quick. Like, and you're just used to this, like, introduction to meeting being within days, decisions, this all h- And you think, like, that's the world that capital moves, but there's this whole other world, which is (laughs) the LP world. And they're patient, and you get an introduction, and their first meeting might not be for three months, and you just gotta just, like, this is gonna take a really long time. There's a different sort of protocol and culture around this, and it's going to be hard. It's not hard in terms of, like, intellectually hard; you're just gonna get hundreds and hundreds of nos, and you just have to slowly crank the turn. And it's just realize that fundraising, especially fund ones, can take time, and you have to be patient. 12 to 18 months is fine. People not meeting with you for a couple months is fine. People taking m- you know, months, if not sometimes a half a year to reach a decision is fine. It's not even fine, it's normal, right? And- and- and I think that's, like, the- I think that's, like, the hardest thing to understand if you're a hungry angel investor who's never- who's only dealt with, like, the front office. Like, the back office just moves in a totally different pace.
- DTDavid Tisch
For a n- for a new fund manager, uh, my advice is have a reason and a vision. Why are you doing this? Why are you starting a fund, and where is it going? Because if fund one is the vision, define that. If fund one is not the vision, define that. And so I think you don't just do this because it's easy to do, 'cause it's not easy to do. And the timeline for ROI on- on this business is egregious, and so have a reason and have a vision.
- HSHarry Stebbings
What was the worst no that you've said? What no do you regret the most?
- DTDavid Tisch
The mistake we made yesterday-... whatever that was, the most recent one. Like, I don't know. It's gonna be something in the past year that we said no to, that we know better to have said no to. And I, I will-
- HSHarry Stebbings
No. That must be, that must be a specific company, where like, "Ah, fuck."
- DTDavid Tisch
That's just, uh, so I said this one, I said this one-
- TRTerrence Rohan
I, I tend to almost, almost Sorry, go. ... you, you still don't know, like these things could even be at a $10 to $20 billion and still flame out. Like, you don't know un- until it's end. The thing that I get most upset of is if I'm just not true to, like, the style of investing that I do, that, uh, sometimes you might get caught up in, like, a round or, you know, y- you're just not doing ... you're not investing in a way that's true to yourself. Like, that, that I really beat myself up over. If I play the game the way that I believe you play the game and I miss, fine. But, but, but sometimes, I mean, you're just not being true to your principles, that's when I beat myself up a little bit.
- DTDavid Tisch
I answered this with a specific answer on a stage once, and the founders got furious that I named a name. And I, I thought it was a compliment. It's like, "I screwed this-"
- HSHarry Stebbings
So has done- I've had people come up to you-
- DTDavid Tisch
Yeah. I thought it, I did-
- HSHarry Stebbings
... and-
- DTDavid Tisch
I thought it was like, "I screwed this up, what a mistake," and the founders were pissed. And it's not a, a ... I don't wanna just avoid that because I don't wanna not bother somebody. It's that, to what Terrance said, like, the nos that look bad today might not be wrong tomorrow. So, I wake up, I literally try to wake up every day and find myself in that zone of clarity to get these, the picks right. And we screwed up something in the past year, and I don't know which one it was and, uh, and how many, and those are the ones that haunt me.
- HSHarry Stebbings
Okay, penultimate one. You can be an LP in a seed fund, a series A, and a growth. Which ones are you?
- DTDavid Tisch
I think there's a power law dynamic in venture that is very hard to break. And I think the best firms will continue to be the best firms until they are suddenly not, mostly on internal errors and unforced errors. And, um, it's not that challengers don't emerge. I think there's some great firms that have started in the past 10 years to challenge the, sort of, establishment. But I do believe that the best firms remain the best, uh, for a long time.
- HSHarry Stebbings
So, why don't I give you a, a hint here, David? Uh, I'll say Adjacent for the seed, which is Nico Wittenborn. I would say Benchmark for the A, and I would say either Thrive or Sequoia for growth.
- DTDavid Tisch
You're picking favorites.
- HSHarry Stebbings
It's content, David.
- DTDavid Tisch
I am a collaborative seed investor.
- HSHarry Stebbings
Yeah, I-
- DTDavid Tisch
We work with everybody.
- HSHarry Stebbings
Oh, no.
Episode duration: 1:38:44
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