Ed Sim: Why Seed Has Never Been More Competitive & Why Pricing Has Never Been Higher | E1076

1. 0:00 – 0:16

   Intro

   1. ESEd Sim0:00

      The point is, the three rounds are there's a discovery round, which in my opinion is less than 2 million. So it's usually, like maybe a first-time founder exploring a new market. They'll graduate to the next round, which would be a classic. And a classic round, in my opinion, would be three to five million. And finally, this

2. 0:16 – 2:02

   Introduction & Background

   1. ESEd Sim0:16

      is the Megatron jumbo round, greater than five. It's usually six to $10 million round, and it's almost always a seasoned founder with a prior exit. So when multi-stage firms see opportunities like this, they wanna supersize it. (laughs) And they say, "You know what? Instead of raising four or five, why don't you raise 10, and I'll give you the whole thing?"

   2. HSHarry Stebbings0:35

      Ed, I am so excited for this, my friend. We haven't done this in a long time. We planned, the world keeps on changing, but fuck it. Let's do it now. So thank you so much for joining me today.

   3. ESEd Sim0:45

      (laughs) I love it. Thank you for reaching out, and I'm glad it worked out. I know we've been planning this for a while, and I think this is number three on your show. It's been spread out over many, uh, epics, uh, I would say.

   4. HSHarry Stebbings0:56

      I mean, many, many epics. We just discovered that your year of entry into venture was my year of birth. Uh, and s- sorry. I'm age-

   5. ESEd Sim1:06

      (laughs) Oh, geez.

   6. HSHarry Stebbings1:06

      Uh, but I- I- I- I ... There is a reason for that. I just want to start with some context before we jump into the seed landscape.

   7. ESEd Sim1:11

      Yes.

   8. HSHarry Stebbings1:12

      People that don't know you and Bold Start, bluntly, who are you and what do you do?

   9. ESEd Sim1:17

      I call ourselves an inception investor. And in my opinion, uh, the world has gotten way too complicated with pre-seed, seed, and what have you. So we love partnering with founders when they have their idea, helping them iterate and battle test their ideas, helping them pre-sell their hires, and having them be armed and ready at incorporation, and leading that round from the very beginning. And those rounds can be anywhere in size. I mean, you're talking about it could be a few 100K in size. It could be up to 10 million in size. I would prefer your classic structure of three to $4 million, to be honest with you, but sometimes there are some opportunities you just can't let get away. (laughs)

   10. HSHarry Stebbings1:57

       Okay. We sai- we said this would just be a chat. Is that not just pre-seed, dude? That's what pre-seed always

3. 2:02 – 25:07

   Understanding Investment Stages and Dynamics

   1. HSHarry Stebbings2:02

      was.

   2. ESEd Sim2:02

      I think pre-seed presupposes that you need a see round- seed round. And if you look at kind of the data, frankly, uh, I just did an analysis on PitchBook. The data is skewing upwards. Did you know that the median age of a company that raises a pre-seed round is 1.2 years of age now? And the median age of a company that raises a seed round is 2.7. This just ... I'm talking about data across kind of, you know, the last 10 years. Secondly, I would tell you is that a lot of times founders who are second and third-time founders don't wanna even be called to have a pre-seed round because it presupposes you need a seed round. And what does that mean to you, Harry? It means that if you have a pre-seed round and you have a seed round, that's another layer of dilution. So what you really would rather have for the best founders is they just wanna get a seed round. I mean, I wish we could just go back to that, but the cat's already out of the bag.

   3. HSHarry Stebbings2:52

      So I, I totally agree with you. So if we just take the kind of years to pre-seed, the thing that worries me most is you have — and I'm seeing this so much — you have person leave Stripe or leave OpenAI or Hugging Face, and they raise 20 on 100. And that's happening more and more. Can you just help me understand why do you think that's happening more and more now?

   4. ESEd Sim3:14

      Yeah. Well, look. Uh, I gotta be honest with you. It's ... (laughs) It's gotten really hard in venture. I mean, people raise way too much capital over the last three or four years. Uh, and everyone kept raising funds, uh, year after year after year. And the spigot dried out last year. All the big multi-stage firms with the billion-dollar-plus funds stopped investing in growth, and the data is there. And if you look at the peak, I think the peak was Q4 2021 that about $200 billion was invested. (laughs) Most recently it was 73 billion in the last quarter, right? 273 billion. So that's a massive drop. And let's talk about it. Looking at the Instacart IPO, who made money, Harry, in that Instacart I- IPO, at pricing?

   5. HSHarry Stebbings3:55

      Y- YC and early Sequoia rounds.

   6. ESEd Sim3:58

      Yeah, first two rounds.

   7. HSHarry Stebbings4:00

      Yeah.

   8. ESEd Sim4:00

      So these folks are like, "Okay, I need to go out and raise another fund. I've been sitting on this dry powder for a while. (laughs) Let me go write out 20, 30, 40, $50 million checks, 'cause you know what? Even if I'm wrong, I get my money back, and I am the first person on the cap table. So likely, if the outcome is enormous, I can, I can make some money." I'm not saying that's a good thing. I'm just telling you that's what the dynamic is in the market right now.

   9. HSHarry Stebbings4:23

      No, I'm f- I'm saying that's a fuck thing.

   10. ESEd Sim4:25

       Yeah.

   11. HSHarry Stebbings4:25

       I'm going out of my way to say that's a fuck thing. And me and Parker Conrad — not a good person to pick a fight with, by the way. Note. Uh, but me and Parker Conrad thoroughly disagree. I think that too much cash too early has a net negative impact on 99.9% of companies unless you are an exceptional allocator of capital like he is, like Daniel Ek is, like very, very few generational founders are. Do you agree with me? Too much-

   12. ESEd Sim4:53

       I agree with you 1,000%. Uh, I said necessity is the mother of all invention. And, um, yeah. Look, every person that writes that $20 million check or the 50 million, 100 million check thinks that the founder they're backing, uh, actually is the Parker Conrads of the world (laughs) and, and the Daniel Eks. The reality of it is there's only a few Parker Conrads and few Daniel Eks. So you're more likely to create major issues than you are to actually have an amazing company. And here's why. First of all, your talent has gotten way smarter, way smarter. So when they come in, it's like, "What's the valuation? Oh, you raised 100 million and a billion? Um, how am I ever gonna make money on this? 'Cause you know what? I've been sitting in a unicorn for a long time, and I'm actually not making any money here for the last three years, and I took a pay cut." So one is you've got ... uh, these people are the, the best talent in the world, wants to join a company not on the highest price, but the best price with the right amount of capital for the right, right risk. Second thing is, is that this is what we've been dealing with founders. They'll come out to us and say, test the waters. "You know, Bold Start's a bigger fund. Let me raise three to six." So we're like, "Okay. How much do you really need? You know what? I'll lead your round now if you want three, but not at six." So they come back to us, you know, a few days later. I'm like, "You know what? How about four?" And the reason I do that, Harry, is because I wanna test them.... I wanna test them to make sure that they are okay, and that they wanna operate with constraints around them. Because smart founders, there's a lot of second-time founders that can go out and raise 10 or 12, but there are some smart second-time founders that we just backed, uh, at inception, raising 3 or 4, because they want the pressure. They wanna take the heat off of the, uh, pressure to create and do dumb things and get an- a, a next up round. It's much easier to do. They wanna hire great talent, and they wanna be lean.

   13. HSHarry Stebbings6:33

       Do you really find that... I mean, you mention one there, but respectfully, I come across them every day where they're, they're, mat- they're very good operations. I'm not dissing them in any way, but they're like, "Listen, dude, I love you. I wanna work with you, but I've got Andreessen giving me six on 30 and you're giving me three on 15. It gives me way more time. I just chill." So -

   14. ESEd Sim6:53

       I'm not saying it's, it's three on 15, but I'll move to, like, the four, right? R- you know what I'm saying? So I'm just testing the constraints. That's number one. Number two thing I would say is that this goes into fund sizing, and, you know, as I said, I tweeted the whole thing about what an inception round is, and there's three kinds. But, you know, the way that we've evolved now is that sometimes I have to play ball, Harry (laughs) , right? Sometimes there are some exceptional founders where, okay, you know what? I will split an eight to $10 million round for that exceptional founder, depending on what that price is, and kind of where we go. So, I'll give you a good example. We'd known this founder, Ian Swanson, for 10 plus years, and he came out, uh, he was most recently running go-to-market for AWS, uh, in their AI and ML group. Before that, he sold his other company in the ML op space to Oracle. And he said, "Look, I wanna raise 10 million bucks to go after AI security." This was in, um, October of 2021. We started iterating with him and his idea, and fleshing out the idea. At the time, it was just him. He eventually got two co-founders, kept iterating on it. In March of 2022, before AI security was hot and AI was hot, we led a... co-led a $10 million round with a crew. And fast-forward, he came out of the gates fast and said the goal was to collapse. This is collapsing a round. "I'm gonna do my seed and seed plus or whatever all at once. I'm gonna make it last three years, 'cause I don't know when the AI security market will be hot." And we closed a $40 million round just a, you know, a couple months ago, and he's got a bunch of customers signed up. So m- my point is, is that I didn't want to pass on the opportunity. I didn't love the company raising 10 million, but in that case, it made sense. So you've got to be really careful about how you do this.

   15. HSHarry Stebbings8:25

       Can you just help me understand? You mentioned... you touched on the three types that you see in terms of the rounds. Can you just touch on them so we have an understanding of those?

   16. ESEd Sim8:33

       This is what I'm seeing across the board. This is even what Sequoia and Greylock are talking about, and in my opinion, an, an inception round means you're engaging with founders well before they incorporate. You're helping them ballot test and iterating those ideas. You're helping them pre-sell some of their initial hires. And when they incorporate, you're leading those rounds upon company formation so the founders don't have to dick around trying to raise money for months, and they don't have to dick around (laughs) looking for six people. They come out of the gates on incorporation with six people and money, and they're ready to go, so you save a shitload of time. And it's been happening for a very long time. And the three kinds of rounds I see at inception, um, are basically this. And by the way, this is not incubating a company. That's not a scalable model unless, unless that's all you do, and there are some firms that do that really well. It's pre-accelerator, uh, because (laughs) an accelerator, you've got to be incorporated to join so you can give them your equity. And it's pre-pre-seed. And, and the reason I'm saying it's pre-pre-seed is because as pre-seed has gotten institutionalized, a lot of these firms want to actually see a little more product at the door, are, are taking a little less risky bets around that, to be honest with you. That's what happens when you take institutional capital. And so anyway, the point is the three rounds are, there's a discovery round, which in my opinion is less than two million. So it's usually, like, maybe a first-time founder exploring a new market, maybe like WASM, Web Assembly Markup Language or whatnot. And if they, you know, they're gonna... the idea is there, a big market, but the market's really early, so they're gonna flesh it out for a while. And the idea is it would graduate. It would graduate-

   17. HSHarry Stebbings10:00

       Mm-hmm.

   18. ESEd Sim10:00

       ... to the next round, which would be a classic. And a classic round, in my opinion, would be a first or second-time founder, and this is where it becomes interesting. It's about three to five million, and this is the round that I prefer the most (laughs) . And it's where that... this founder could probably raise more capital in a lot of cases, but they wanna be more constrained and, like, say, "You know what? I'm gonna take the air out of the balloon. I'm gonna take four to five million dollars, uh, I'm gonna build a lean team, and I'm gonna operate." And the reason that this is interesting is because your traditional seed-funded company now, Harry, th- if you look at the data, the median number is 2.7, uh, years old, right? That means they've usually raised a pre-seed round. Maybe now they're out going to raise a seed round right now. So that's really not an inception play. And finally, here's the, the jumbo. This is the Megatron jumbo round, you know, greater than five. It's usually a six to $10 million round, and it's almost always a seasoned founder like an Ian, that I mentioned earlier, with a prior exit. They're probably building their next company. It's probably iteration number two or three on the same idea that they've had and made money on before, and they're maybe in- reinventing an, an existing market with a huge TAM. So when multi-stage firms see opportunities like this, they wanna supersize it (laughs) and they say, "You know what? Instead of raising four or five, why don't you raise 10? I'll give you the whole thing." And that's kind of what I'm seeing in the market today. Those are three rounds, and they're all, uh, people with ideas trying to get going, and they can raise anywhere from zero to 10. And by the way, I'm saying this is because you'd say this was pre-seed. I wish this was just called seed, 'cause that was what it was when I started in 2010. There was seed and an A. And that's what would, would make the world simpler. But pre-seed usually is a smaller round in people's minds, and that's almost like a negative connotation for a really good founder.

   19. HSHarry Stebbings11:41

       Listen, I, I totally get you on those three, and I agree with you. (laughs) The first thing I go to is, what worries me is, people don't think longer term on the jumbo rounds and say we're just doing a 10 on 50, yeah, just base case, 10 on 50 is the jumbo, which we both see a lot. We see 20 on 100 a lot. Okay, sure. Let's project this out 12 to 18 months. It takes longer. Customers don't convert like they thought they would. Market doesn't move like we thought it would. You're pretty fucked.

   20. ESEd Sim12:09

       ... yeah.

   21. HSHarry Stebbings12:09

       'Cause you can't do another 10 on 50.

   22. ESEd Sim12:11

       Yeah.

   23. HSHarry Stebbings12:11

       But if you raised three on 15, you could very easily do seven on 45. That happens. So you put yourself in a shit position, though.

   24. ESEd Sim12:21

       Yeah. And that's why I, I sometimes test founders. I know you can raise... They'll come out and say, "Three to six," and I'll say, "Why not raise three to four? And here's why." And some of them say, "You know what? I'd rather have some more comfort in my own mind to have 10 million in the bank, 'cause then I have three years of runway." But the reality of it is, having more comfort- comfort screws you.

   25. HSHarry Stebbings12:37

       Also, this, like, this idea of, like, "Oh, but then it buys me the runway." I- i- that's if you put it in a bank and do not touch it. How often does one put it in a bank and does not touch it? "Oh, that'll stretch higher. Oh, that new geography we could open up or a new product."

   26. ESEd Sim12:53

       (laughs)

   27. HSHarry Stebbings12:53

       Do you know what I mean?

   28. ESEd Sim12:55

       Um, it's a very rare founder that, that does that. You know, you know who actually is one founder that did that was Rahul from Superhuman. So we gave him one of the first checks, uh, back in Report If before he s- uh, from Fund 1. Fund 2, he wrote his first check into Superhuman. Uh, and he raised quietly. You know, he made us put three or four different checks in, in seed rounds, in seed notes, just to get our ownership because we'd always ask for more; he'd cut us back. That was his strategy. Then he raised pre-, uh, raised a $10 million A round and he put it in a separate bank account and said, "I'm not gonna touch this thing. I'm literally just gonna put it there. I don't want to see it. It's in a separate bank account. I'm only gonna operate on the seed money that I had." And you know Rahul

   29. NANarrator13:31

       (laughs)

   30. ESEd Sim13:31

       ... Harry, the guy is a, he's an operating machine, that guy. So having been through the experience where he's scarred for life, where when he sold his company to LinkedIn he basically had no money, he's like, "I'm never gonna be there again." And so in some ways that almost killed him because he would not move as fast as he could 'cause he had the runway. But I'm just saying it's a very rare founder that can do that, and most people can't. And you're better off feeling that pressure. When your backs are against the wall, the best people perform. When you're actually too comfortable, you don't perform. That's the bottom line.
4. 25:07 – 33:24

   Current Market Analysis & Trends

   1. HSHarry Stebbings25:07

      seed immortal to macro externalities or will this shake down to the seed markets eventually, do you think?

   2. ESEd Sim25:15

      I don't even know what the fuck a 20 and 100 post is anymore, frankly. I mean, that's just (laughs) I think at the end of the day, dude, it comes down to being disciplined, right? (laughs) And I mean, I don't know, I- I think that there are some lessons that haven't been learned. And- and I'll just- I'll go on my rant. I mean, I think this whole AI thing, frankly, I think AI is the most transformational thing that we've- that we're ever gonna see in a long time. However, I still think it's really fucking hard to make money there. This is a place, I- I totally agree, that- where, um, data moats matter. I think companies, anyone could take a API call to OpenAI and test things out. I mean, fucking look at Adobe. They've done an amazing job kinda going after that space. So I think chasing anything with a .ai in their domain or an AI thing, I think is insane. However, I do think there are some opportunities there, but I'm not gonna be funding these things at 100 posts. That's what's regularly happening now. I'd love to hear your thoughts here. You're probably seeing a ton of AI, LLM, next gen stuff and I just think that this is just like I saw in an internet bubble. Everything had a .com on it back in '96 'cause I saw that, I lived through that shit, and, uh, we're gonna see the same thing.

   3. HSHarry Stebbings26:19

      (laughs)

   4. ESEd Sim26:19

      There are gonna be some massive companies built, no doubt, but it's not gonna be built chasing a portfolio of, uh, 100 posts, uh, across the board.

   5. HSHarry Stebbings26:27

      I would say unlike other trends, where I remember when it was like chatbot trend craze, the D2C craze. Obviously, I'm a generalist investor so we will move with trends. But, like, I now see 85% of our deal flow now purely as AI first deal flow. Like that's-

   6. ESEd Sim26:45

      But- but- but- but what does that mean to you, right? 'Cause I just did an analysis on my portfolio, okay?

   7. HSHarry Stebbings26:49

      Mm-hmm.

   8. ESEd Sim26:49

      And- and I just said, okay, so, um, currently in the portfolio of our companies that are running from funds four through six, 55% of our portfolio companies have an AI-related offering today. And within the next 12 months, okay, 80% of the portfolio will have an AI offering. And in my opinion, does that mean I'm an AI investor? Well, if you want to call me an AI investor, you can, but I don't really think of myself that way. I always think about what problem are you solving first, how are you doing it uniquely, and, oh, by the way, if you're adding AI, very cool, then, you know, let me know kind of how people will pay for it and why it's gonna be better. But versus the, "I'm an AI company." I don't know, that's just-

   9. HSHarry Stebbings27:25

      No, I- I- I- I totally get you. I think, like, anything that offers it, like, as an enhancement, which is, like, I don't know, lattice that say, "Hey, we now have AI to make more intelligent human resources automation," or whatever decisions around your people management. That's not an AI company.

   10. ESEd Sim27:40

       Yeah.

   11. HSHarry Stebbings27:41

       This is like in the front one-liner, "We are an AI-powered wealth manager. We are an AI-powered, you know, e-commerce conversion optimizer." That's what I call kind of, like, 85%...

   12. ESEd Sim27:53

       Versus being an e-commerce optimizer, uh, that has AI in it. No, I'm just, I'm just doing the flip arou- flip way around.

   13. HSHarry Stebbings27:59

       Tha- tha- that has 100 people in a third world country-

   14. ESEd Sim28:02

       It- it- it- it- it- exactly.

   15. HSHarry Stebbings28:02

       ... selecting mid ones. (laughs) Uh, but- but- but- but no, so I- I see that. I think honestly the people best, uh, suited to win are actually your Canva styles of the world, who actually, dude, have all the data, but none of the incumbent regulatory downsides of being a public company. I think it's your high growth pre-IPO companies that data-

   16. ESEd Sim28:23

       I- I agree. I agree 1,000%. Did you see, uh, Snyk? I don't know if you talked about it with Guy recently, but Snyk has, uh, Snyk DeepCode AI, right? And they-

   17. HSHarry Stebbings28:29

       Yep.

   18. ESEd Sim28:29

       And Guy actually had bought a company four years ago with his own machine learning expertise. And the strategy there is that, hey, you know what? Everyone's using GitHub Copilot, but they're also using CodeWhisperer and they're using everything else. But guess what? There's a hallucination problem and you need one kind of pr- a- and you don't want the fox guarding the henhouse, meaning that how are you gonna trust the, uh, company spitting out the code to also secure the code? So you need a Snyk to come in and you need AI to protect AI. But the point is, is that we wouldn't even be there if he didn't buy the company, nor if we were sitting on a data moat with hundreds of thousand customers using- using them and fixing vulnerabilities.

   19. HSHarry Stebbings29:04

       Totally, but also, he probably couldn't have done that deal in terms of buying the company or moving at speed if he was a public company. It's not possible when-

   20. ESEd Sim29:11

       E- exactly. And he wouldn't be able to do it now either because, uh, he did it when AI wasn't hot.

   21. HSHarry Stebbings29:17

       So I think M&A is gonna go to shit. Um, I think anything sub a billion is not meaningful enough for M&A teams and corp dev teams to actually engage with. And I think anything over a billion is gonna be incredibly arduous to get over the line from a regulatory perspective. Do you agree or am I overly negative?

   22. ESEd Sim29:34

       I think we're gonna see a lot more M&As, uh, kinda coming ahead right now and- and I'll tell you the kinds we'll see, right? All right. Well, let's look at it. There've been a lot of companies and there's, what, a thousand plus unicorns out there right now. Not all of them will go public. Many of them are overvalued right now. And guess what? There are probably some growth investors sitting around saying, "You may have five to seven years of runway, but if I can get my money out right now, um, on the tech stack, uh, on- on the stack right now, get my money back." And investors, by the way, you know, down the stack, will get their money back. And by the way, founders will probably make money. Let's just, let's just say if there's an opportunity to go do that, that would be a brilliant opportunity for people to, um, maybe exit out, take their 1X.... and they can go reinvest it somewhere else. And I'm talking to lots of growth investors who are kinda looking and saying, "Man, you know what? If can get 1X out after a few years, and actually reinvest that stuff in- into something else at a better price, or, or do some..." So, I, I think that the realization of holding onto these

   23. HSHarry Stebbings30:28

       But th- th- they're- they're n- they're not get... I mean, this really... They're not getting that, dude, because the founders are sitting on this pile of cash going, "We are not having your money back." And they're going, "Please g-"

   24. ESEd Sim30:37

       Oh, oh, no, n- no. I- it depends though. I- in situations like a Loom. Look at, look at Loom's situation, right, where they had a... That was a great exit for the founders. Look at those numbers. Fucking incredible, dude. God bless them. Right?

   25. HSHarry Stebbings30:48

       Yeah.

   26. ESEd Sim30:48

       So it cleared the pref stack, even though the last round investor, um, came in at, uh, a much higher price than the headline valuation, and it was a huge win for the founders. So I'm pointing at situations like that where, you know, where in the past, you've probably heard stories about VCs not wanting to get 1X back. Well, guess what? You're gonna see some smarter investors be like, "You know what? Maybe I'll take that money off the table now and put it somewhere else," and the founders in that situation killed it. I mean, the- they should. They built a great business.

   27. HSHarry Stebbings31:19

       Uh, I love the TechCrunch article where it's like, "Joe put a positive spin on it." I'm like, "I'm not fucking surprised he put a positive spin on it."

   28. ESEd Sim31:25

       (laughs)

   29. HSHarry Stebbings31:25

       I messaged him afterwards being like, "What a joke." (laughs)

   30. ESEd Sim31:28

       Oh, oh, oh, yeah. Incredible. And, and so yeah, and some people then say the investors failed. Well, guess what? Maybe they didn't. Maybe that was a great opportunity for them because they can go reinvest and do some other things with it, and it's a, a huge win for the founders. So, I guess what I'm trying to say is, I think those growth kinda funds that put the money at the peak, uh, I think the ones that deliver on 1X or slightly above will probably do very well. (laughs) Will be above, you know, 'cause there'll be a lot of ones that are underwater, i- is my opinion.
5. 33:24 – 37:37

   Advice for Founders & Investment Strategy

   1. ESEd Sim33:24

      that when the markets are pretty hot, we got ahead of it, we got a lot of our companies funded with a lot of capital, so, you know, I think the bigger challenge we might have is that there are some companies that have too much capital, and we had to work with them to get more efficient.

   2. HSHarry Stebbings33:35

      Mm-hmm.

   3. ESEd Sim33:35

      For the ones going from, um, you know, seed to A or kinda A to B, I was doing the math, I think we got 15 next rounds done, uh, from our last annual meeting from a year ago to now, so we did get a lot of rounds done in the, in the heat of the market. We even got a cr- like, a crypto infrastructure round done in an up round, a $10 million A-round done, uh, in this market. Uh, that co- founder, founding team, by the way, happened to go from zero to 1.4 million of ARR from a standing start in 16 months. But the point is, is that the best founders now aren't... As we tell them, "Let's not worry about what the best price is, because the best price could once again set you up for performance issues down the line, uh, a lot of talent." We want to... you to get the best partner who believes in your business in the longer term, uh, at a fair price. I think the days of founders being obsessed about the highest price possible I th- I think for the most part are over, um, and I think the smarter founders want to actually, you know, get fair prices, you know, above average prices, but they also know that, A, they don't wanna take in way too much capital, which means more dilution, uh, and they also don't wanna set the bar too high, because they see what's happening in the, in the exit markets right now, that you limit your options to create value when you take money at too high a price. You're gonna... You're not gonna be able to sell your business 'cause someone's not gonna pay, pay multiples on that.

   4. HSHarry Stebbings34:53

      I agree with you and I get you in some ways, but then I was speaking to a, you know, a, a founder the other day operating, guess what, in the AI space, and they were like, "Yeah, I get you Harry, but I need $10 million. Like, we need a lot of compute, um, uh, we need a lot of c-"

   5. ESEd Sim35:06

      As I sa- as I said, I- I'm not playing in that, uh, AI compute game right now, so I do understand the need for those founders to go out and raise capital, and go do it in the way that they need to. But, you know, I'm just saying that history rhymes, and, you know, you and I both know there's some lessons that we should probably learn from the last two years, and I've seen-

   6. HSHarry Stebbings35:22

      Is there any other lessons that we should learn? 'Cause I'm looking at some of these. I sent you that deck for the ridiculous round, and this was from pedigree investor who's been through cycles at one of the best firms. Are there lessons... Who should know better. Are there lessons that we should have learnt that seemingly haven't?

   7. ESEd Sim35:41

      Certain firms that have lots of capital to work, checks like that, a $10 million check, may be a complete option check for that firm, you know, or maybe they're almost fully invested right now, and so I don't know what the reasons are, but, you know, I'm just saying that everyone along the stack has to do something that makes sense for them. Uh, I mean, just from my perspective, I, you won't be finding me participating in 20 to $100 million, uh, inception rounds from a, you know, a seed firm, uh, or an inception firm. But, the multi-stagers are doing it across the board. These are option checks, still option checks for them.

   8. HSHarry Stebbings36:11

      What would you say to founders? What do you advise founders looking at this today going, "Oh gosh, you've given me three kinds of inception round. There's all these different options. Which one should I do?"

   9. ESEd Sim36:23

      I think the founders, for the most part, come to us knowing kind of what they want as well. They kind of know. You know, the ones who are more confident about their abilities, who have been there, done that before, usually we'll probe around and start with a $3 to $4 million round. Uh, and then sometimes what happens is, they- they will get supersized by a, um, large multi-stager, and then you need to make a decision. You know, we need to make a decision as to do we wanna, you know, co-lead in that one or not. And then, you know, as I said, there are other founders who come in, like in the Wasm infrastructure space that know it's very early, and we're like, "Look, we can write a check, like, tomorrow right now for a $2 million round 'cause there's not much we need to do, right? We know who you are, we know where you came from, we know what you can build, and then let's figure out and you can get going right now without having to hassle and raise money and ch- tell people what Wasm is." And they can go out and raise kind of that next round later. So it really depends on every situation. I don't try to tell anyone what to do. They already have an idea in their mind, and you kind of work with them as they- as they touch the market to see how the market responds.

   10. HSHarry Stebbings37:20

       My biggest lesson from the last few years was actually just to sell at some points. You know, we were always told, "Lean in, lean in." Bullshit. You need to lean out strategically over increments over time. That was a big lesson for me. What was a lesson for you, in hindsight, you wish you'd done differently?

6. 37:37 – 43:19

   Personal Reflections & Lessons

   1. HSHarry Stebbings37:37

   2. ESEd Sim37:37

      I would say that the biggest lesson is not much different from you. I have two lessons that I think about. One is, no matter how disciplined you are, we talked about it, too much cash can kill startups, right? No matte- at- at any stage, okay? No matter, no matter what, right? It just, as I said, there's- there's a death spiral that can happen if you miss- miss a quarter or- or a quarter or two and just the pressure goes up, and the last batch of hires who are usually the largest percent of your business, if you're growing and if you're in hyper growth mode, are feeling like the- they're underwater, right? So that creates lots of issues from that perspective. So that's number one. Number two would be, ownership matters always, but also you have to balance that out with, you know, a valuation, uh, (laughs) a valuation as well. So I'll give you an example. There are so many preemptive rounds happening over the last few years where, you know, every six months people are raising rounds, that usually there hasn't been enough data points to merit kind of coming in on the next round or the round after, and- and, you know, the company hasn't performed enough for you to de-risk yourself in between rounds 'cause, let's say you got three rounds down, uh, done in 12 months, and there should've been situations perhaps where we shouldn't have gotten into every single one of those rounds because maybe it wasn't de-risked enough, uh, between the time you closed a round and to the next round. I think moving forward, since there are less preemptive rounds, there is more time to understand, has this been de-risked enough? Is this an appropriate time to lean in even more to actually do your pro rata or get more ownership? So, tha- that's kind of- kind of where I'd say ownership always matters, by the way, on these exits, particularly in a world of lower, uh, multiples, but you've got to be careful about what that, uh, how much you lean in.

   3. HSHarry Stebbings39:15

      I take a different approach to pro rata and reserves than most people, and I think m- many LPs are shocked by this. I think actually it's often predicated on very misleading signals, and immediate traction doesn't signify sustainability over the long term. If I were to invest according to the signals, I would have put the most money into Clubhouse, Hopin, BeReal. They were, like, the outperformers within the first year of investing. They weren't the most sustainable. Snyk is not the most sustain- like, is not the most, like, outperforming in that first year. And so I find most managers invest, observe for a year, and then double down on what's working. But what's working often is unsustainable, and it's your Snyks, your Figmas, your BigIDs, which actually may take a bit longer, but you wouldn't allocate to them if you were doing it on traction.

   4. ESEd Sim40:10

      Well, we kinda- we kinda did, right? I mean, BigID, we gave three rounds before their (laughs) A round too, but their traction was different. I mean, I'm just saying so, to your point, it's a meandering path to getting to kind of product-market fit. And I've- what I've seen is that the easier it is to build a product and the more social the product is, and the more, let's say, PLG-oriented something is, is the easier that everyone tweets about it and goes out there and talks about it. But the reality is, to your point, is that doesn't mean... Those aren't the signals that you really wanna be investing in right now, even though some people may be writing checks against it. The signals you really wanna be investing in is, is this product built for the long haul? You know, what are people paying for this? And, you know, what is kind of the technical moat around- around kind of their business, right? And so some of the hardest problems to solve will take longer, and it'll look like your slowest-plodding company to start with. But in the long run, to your point, these things are the ones that can actually go, you know, hit the J-curve pretty quickly.

   5. HSHarry Stebbings41:03

      Two final ones, and they're associated. What's your biggest investing win, and how did that impact your mindset? And what's your biggest loss or mistake, and how did that impact your mindset?

   6. ESEd Sim41:13

      Yeah. So I'll give you this. So m- my biggest win to date, and- and win I'll call a realization, was kind of leading the round in Inception with, um, Kustomer with a K, uh, and, uh, that was like, I don't know, eight or nine pre, I think. And we're like... Basically wouldn't let the founders out of the room, wanted to give Brad and Jeremy the check right there. They were like, "Hold on, let me incorporate first." (laughs) "Let me get my 83 (b) election filed with you guys." And I, by the way, in the enterprise space, I'd already been the first investor in LivePerson, which was one of the first hosted chats back in the day. So I was that first check in, and then I went public. I did GoTo Meeting, which had GoTo Assist. We sold that to- to, um, uh, Citrix, and then ev- eventually, you know, did 600 million of AR. So I knew the space cold, and this was their third startup, right? This was one of the ones where you're in the room, you meet them, you got the energy, you're like, "Yeah, fuck yeah." (laughs) "You gotta do this," right? So fast forward, there were some tough times. What we learned in that process was that someone going after an incumbent, at that point in time it was Zendesk, you know, it takes longer. Do you know why? Because no matter how visionary your product is... And they're- they basically built a data architecture that said, "Hey, instead of having, uh, each..."... uh, interaction be a ticket, whether it's email or chat or whatever, they're all different tickets in different databases. Let's create it as a customer. So it's Harry, and Harry chatted with me, he did a voice call, whatever. And if you do that, uh, number one, and then two is, append custom data. Like you could take in, for example, from Ring, Wi-Fi data in, and when you reached out, I immediately knew everything about you from any signal that you reached out to me, I knew that your Wi-Fi was down, why your doorbell w- was down. If you did all that, we could actually re-architect and rebuild, and actually have better customer support. The problem is, is that we went out to the market to sell the products, they're like, "Oh, you need a knowledge base now. Oh, you need FAQs. Oh, you need this." And every time we're about to sell something, we're like, "Shit, you need more product." So to go after incumbents, you actually have to build more, so it took us longer, and we had given them a bridge round between the A and the B. There's not a reported price, but let's just say it was over a billion, according to the news, um, and that was my first kind of really big win.

   7. HSHarry Stebbings43:14

      And so the lesson there is that you need to build more depth to chase incumbents.

7. 43:19 – 45:26

   Competitive Dynamics

   1. HSHarry Stebbings43:19

   2. ESEd Sim43:19

      Yes, you do. So no matter how, how, how big of a vision you have, you still need at least the table stakes of, you know, checkbox of four things that they may need before they even believe in your vision. So it takes longer. So that's one. And that has implied kind of similar investments now, 'cause there's a lot of founders coming back and reimagining things, 'cause that's what happens in enterprise. It's the same shit getting rebuilt every 10 or 15 years in a different way with a different pitch. Second thing I'd say is, my other potentially big win right now is Snyk. I mean, it hasn't been, you know, exited yet, but, you know, we had funded Guy in the, in the first company, right, when he sold his company to, um, Akamai, and I bothered Guy every quarter, I was like, "Hey, when are you starting, when are you starting your next thing?" And eventually he's like, "I got an idea." And I was like, "Those first two ideas are okay. The first one's terrible. The third one, I'll give you a check right now." That was Snyk. You know, those were some hard times, right, in terms of he was creating a new category. So that's a different kind of play, creating a new category. Category creation takes a long time too. It took him two and a half years to kind of get out there and get his first, you know, two and a half to three to get his first million of ARR, and there were some times where it was really fucking slow. But there was, the signs were there. The, the, the product love was there, the product is cranking along, the, the pipeline was building, it just wasn't converting. It just takes time. The, the biggest mistake I, I made probably would be, you know, as I said earlier, is that when companies do preemptive rounds, uh, and- preemptive round after round after round, uh, in a short period of time, I never fault myself for the first check, right, 'cause you have to believe in the first check. Never- usually never fault myself for the second check. But the third or fourth, th- third check, perhaps, yeah, that, that should be an opportunity where like, "You know what, dude? You own enough. Lean back a little bit." So ownership matters, but you have to be careful at kind of the pricing and everything else. And you can read between the lines, Harry, in that one, but tha- that would be leaning in too much, too quickly, without enough signals changing things, um, from those rounds. So those would be the two balanced answers.

   3. HSHarry Stebbings45:10

      Uh, no, listen, I love that and, uh, I totally get that. I wanna do a quick fire round with you, Ed, so I'm gonna say a short statement, you're gonna give me immediate thoughts. That sound okay?

   4. ESEd Sim45:19

      Yeah.

   5. HSHarry Stebbings45:20

      So will 99% of money going into AI startups today go to zero? Venture money, that is.

8. 45:26 – 50:31

   Quick-Fire Round

   1. HSHarry Stebbings45:26

   2. ESEd Sim45:26

      I don't really know what an AI startup is, so I think AI is gonna be incorporated into every piece of enterprise software, where it makes sense and som- where someone will pay. So in my opinion, that'll probably be 80 to 90% of the software anyway. So I don't even know what the fucking AI startup is, but let's just say the money chasing all these LLMs, there'll be a lot of money vaporized, uh, uh, for sure.

   3. HSHarry Stebbings45:46

      Will more money go into AI startups next year than it will this year?

   4. ESEd Sim45:51

      Once again, I don't know what the fuck AI startups are, 'cause every c- company... So let's just say if every enterprise software company has some AI rel- related feature to it, then the answer is yes, 'cause in my opinion, every enterprise software company is gonna have some AI incorporated into their product.

   5. HSHarry Stebbings46:06

      What would you most like to change about the world of venture, Ed?

   6. ESEd Sim46:08

      It's gotten so fucking competitive out there, man. It, it's insane. And there's too much money out there, chasing things, and I think there's a lot of irrationality right now. I mean, gu- as I said, I'm looking at the inception rounds, right? I laid out a framework from zero to, zero to six, zero to eight, zero to 10, but, you know, you're getting 30, 40, $50 million, you know, inception rounds done, and I think it's just bonkers, man. And it skews people's brains and memories. So I just, I just wish there was some more rationality around, you know, what everyo- everything a- and everyone was doing.

   7. HSHarry Stebbings46:35

      What do you advise LPs today, looking at the landscape, trying to get a grip on it, trying to understand what's going on?

   8. ESEd Sim46:41

      Well, look, I mean, the LP, the LPs will advise me too, but the answer is, is that I think being first on the cap table really makes sense in terms of making money i- in any environment, uh, with multiples compressed. I think two, I think ownership, uh, is going to matter. Uh, and I think three is, I think there's gonna be a new generation of firms kind of coming around that, uh, are building, you know, different businesses, uh, and different VC funds and trying things differently. I think that there are some legendary brands out there, and I am so impressed with how long they've been around and the teams that they have, but I think there's also, given that the industry expanded a lot, you know, the question for them is gonna be, who's gonna be the next generation of, of funds out there that, that are gonna win for a long time?

   9. HSHarry Stebbings47:22

      What will crack open IPO windows, do you think? We mentioned Instacart earlier. Instacart, Arm, they, they didn't. Uh, Klaviyo sadly didn't with it.

   10. ESEd Sim47:31

       I think it's very simple, Mr. Jerome Powell signaling to the world that, uh, interest rates are under control now, and we're gonna s- and the air has been taken out of the balloon, and the interest rates have to go down. I mean, there's a direct correlation, I think, that, uh... I had some of my friends at JP Morgan gave me a chart. At its peak, I think any company growing greater than 40%, um, and there's an in- inverse relationship to interest rates and, and forward valuations, 35 times forward. Do you know, uh, today, um, that number is at 6.8 times forward as interest rates kept hiking up? And the five-year historical number is 13.9 times. So do I think we're gonna move back to a world of 35 to 40 for companies greater, going greater than 40%? Never again. Do I think 6.8 might be the low point? Yeah. Is it the five-year kinda average of 14? Eh, let's just say somewhere between 10 and 14. So you've gotta build your business and your investment strategy and your ownership strategy around looking at a world where we get 10 to 14 for the best companies forward next year's numbers. And if you can do that, then I think you'll have an opportunity to make a lot of money.

   11. HSHarry Stebbings48:36

       If we project out, where do you want Boldstart to be in 10 years, Ed? Like when are we... you know, think about firm design.What do you want Boldstart to be?

   12. ESEd Sim48:44

       Uh, I think we're pretty much the same that we are now. I mean, I think what we're gonna do is that, you know, (laughs) w- we have four operate- four investment partners. We've got an operating partner, Anna, out of London, who, who you may have met with. She worked with Guy at Snyk. She was employee four.

   13. HSHarry Stebbings48:57

       I did.

   14. ESEd Sim48:58

       Um, so, so we're gonna continue to add more operating partners to help really these inception-stage founders, um, get there faster. Like in Anna's case, she's bringing product expertise to the team that she learned from Snyk, all the hard-learned lessons and things that didn't work well along with the things that went well with our, you know, founders, and it's been working like a charm. We have a few others identified that we're gonna bring to the team. But I think we're gonna s- we're gonna stay where the market is in terms of we want to be in that inception round. I don't wanna lead A rounds. I don't wanna get so big where I feel like I have to put money to work to make bad decisions. I gotta tell you this. We only did... Last year, we announced our two new funds, we... and which were the, which were our largest ever. We only did three net-new lead deals in the back half of last year because we thought the markets were going a little crazy. We were seeing a lot of inc- incremental ideas, not big ideas. And then in this first part of the year already, we've done seven net-new, and we have an eighth one we're about to do, so we'll be up to 11. And that's not because we're chasing AI or anything like that. It happens to be because we have a lot of founders that we've known for a long time, second and third-time founders coming out of the woodwork, you know, ready to get going. So I wanna stay in that range. Uh, whatever you call it 10 years from now, I hope it's kind of inception investing. I wanna be in that place and no bigger. I, I don't wanna be an asset manager. It's really hard to deliver returns in this market the bigger you get.

   15. HSHarry Stebbings50:17

       Dude, listen, I love chatting to you always. I can't thank you enough for this, and this has been such a pleasure as always, man.

   16. ESEd Sim50:22

       Dude, thank you, d- uh, y- your questions, (laughs) just piercing questions, my man. I, I, I love, I love working with you and thank you. Uh, it's, it's been, been a lot of fun.

Episode duration: 50:31