Is the VC Model Broken? Jason Lemkin, Mike Maples, Eric Paley & Harry Stebbings Debate | E1062

Eric Paley 0:00 If you're coming into a company as a senior executive and you have a CEO who's bragging to you about how big their last round was in dollars and how big the post-money was, ask to see the financials and compare those financials to what they're claiming in the vanity of financings. When you see that massive disconnect, you're in a pretty tough place. That is a place that is probably not gonna play out the way you want it to. (instrumental music)

Harry Stebbings 0:22 Tim,

Harry Stebbings 0:23 I am so excited for this. We were all just saying that if we have this conversation, there's no better group of people to have around the table. So I want to start, and I want to kick off with it's a new world of seed. And I've been speaking to a lot of LPs, particularly investing in seed funds. And when we look at 30 million posts for YC rounds, the- the simple question that I think is just important to start with, and anyone can take this baton, but is the classic seed model dead for the traditionalist, boutiquey seed fund given these pricing environments?

Mike Maples 0:54 Who wants to go first?

Eric Paley 0:56 I don't think it's dead. I think there is a very small class of companies that will price themselves in a way that a large group of investors won't find very palatable. Um, and some of the YC class will end up not getting those types of numbers and others will get investors they're not as excited about, and others will actually get the investors they want. But that's a subset. I will say the rest of the industry, um, as, at least as we see it more on the East Coast, although we do invest a lot on the West Coast, is sort of- sort of rationalizing back toward normal. I wouldn't say they got- they're all the way back at what we've seen, you know, in the 2015 ra- time ra- range. But, um, I think prices have come down. And I actually, all of that could sound lousy to the entrepreneur for a bunch of reasons, but I actually think being overpriced at seed is actually a bigger problem than most entrepreneurs realize, particularly as the market's adjusting, right? It's a very hard time to raise series A in general, and it's a harder time if you're already priced where somebody might want to price your series A. You kind of become uninteresting to investors. And I think this is a multi-round game, and you have to be very aware of that.

Harry Stebbings 2:00 Do you think prices are coming down, Jason and Mike? Am I- am- am I seeing something different?

Mike Maples 2:05 I- I tend to resist, after doing this a while, I tend to resist making too many macro statements, right? Like, I kind of look at it like every startup is its own snowflake. Is the average valuation higher than what I've seen before relative to where they should be? Probably. But I still think that there are lots of ways to make money in seed. And I- and I actually think they're surprisingly similar to how they've always been, which is you have to be non-consensus and right, investing in an entrepreneur who's non-consensus and right. And you know, a lot of people say, "Well, that's changed. Look how big these exits are." But then when I look at those big exits, they all had low prices. Pinterest, Airbnb, uh, Dropbox, uh, Uber, Lyft, you know, Anne, Anne invested $750,000 at 5.5 post in Lyft. And I think the same will be true. I think, here's what people don't understand, in my opinion. When a seed round is priced at 20 posts, 30 posts, it's not non-consensus. It's priced to perfection, and it's priced in a way that everybody believes it's gonna succeed, that it's a hot deal. And that's bad for two reasons. It's bad for the investor, because even if the investor's right, they're probably not gonna make much money. And what Sam Leson said on your show a few weeks ago is exactly right. He's had billion dollar exits where he didn't make much money. Uh, but it's a problem for the entrepreneur too, because if everybody is chasing their deal and bidding up the price, they should be self-reflective about, "Do I really have a non-consensus idea, or do I have an idea that plays well with what's popular?" Which I haven't had as good luck with. So, you know, Coinbase, when it was funded by Garry Tan, it wasn't popular to fund a- a crypto exchange yet. And you know, ride sharing, we weren't sure if it was gonna be illegal or not. An air bed and breakfast is what it was called at the time. People were afraid you'd get murdered in somebody's house staying in one. And so a lot of these seed rounds that end up being really good, the fact that they're not popular is a feature and not a bug. And that's reflected in a rational price. And the more irrational the price gets,

Mike Maples 4:07 the more I think it's a lose-lose for everybody in the game, to be honest.

Jason Lemkin 4:10 Is there, though, you know, it's interesting, the- the- the non-consensus question. I wonder in 2023 with how big cloud is overall, consumer, B2B, whatever, are there any non-consensus categories? I get that crypto's a little bit out of... It's funny, when I started investing literally 10 years ago last week, right? I remember I was brought in by a meeting from a, you know, a top three venture firm saying, "Hey, we- we haven't done a lot of SaaS. (laughs) We want to get to know SaaS. We've only done HubSpot, and we really want to learn whether..." And there were like very few billion dollar plus exits, right? So actually, as crazy as it sounds, when I started being a SaaS entrepreneur, I only knew SaaS, but it was non-consensus. I'm wondering if anything, vertical SaaS, B2B, B2C, payments, fintech, you can rag on these things, they go up and down, but is, what's non-consensus today?

Mike Maples 4:55 And- and I don't know specifically to SaaS, but like, here's my view of that, is that if there is no non-consensus opportunity, there's no opportunity to be an active investor, right? That's what, you know, you could buy the index if you don't know anything the market doesn't know. The way you make money as investors and know something the market doesn't know. You don't make money by doing what everybody else does. You make money by doing something uniquely right that you do. And so, um, to me, that is the job description is to find those opportunities. Otherwise, I should just buy an index fund and call it a day. And so, like, I believe that there are such things, but I don't, I- I don't think that you can do it by chasing what's popular or sort of, I- I think it's like your mind has to be prepared in some way to- to receive the insight that an entrepreneur has when normally you wouldn't been present and awake enough to see it. My view is that the business exists because of inefficiencies, and that is the job of us as investors to find those inefficiencies.

Eric Paley 5:57 We did an analysis recently of the top...What was the hottest theme in each of the last 20 years of venture capital investing? It's a very funny thing to look at, 'cause you're like, "Really? Why was group commerce so exciting?" It's hard to even get your head back into why 150 of these companies would have gotten funded. But what's really interesting as we did an analysis is we looked at, okay, then what was the most valuable company created that year in each of those years? Never, not in the last 20 years, has the most valuable company born in any single year, right, va- valuable as of now, been this... in the theme that was hot in that year. It has not happened. So o- my favorite on this one is in 2015, I believe it is, I'm just going off the top of my head here so if I'm a little off, I apologize, whe- when the company that inspired this year's hottest theme, OpenAI, with generative AI being the hottest theme of this year without question, 2015 it was founded, the hottest theme that year was direct-to-consumer commerce, which is almost unfundable right now. You know, if you were a Warby born today or a, a Way or a Casper or a... this would be a har- it is a incredibly difficult environment to raise money for that kind of company. But I think what Mike is saying is absolutely right, the most valuable company born in 2023 could very well be in direct-to-consumer commerce because that's not where anyone wants to play right now.

Harry Stebbings 7:18 Can I ask you, what happens if the non-consensus actually doesn't align to the capital structure of funds today? And what I mean by that is when you look at energy, when you look at climate, when you look at a lot of infrastructure plays, they're incredibly capital-intensive. Bio in particular as well. They're incredibly different in terms of a capital requirement basis and they don't really align to the current capital providing that we have as seed funds. What happens if the non-consensus doesn't align to our capital structures?

Mike Maples 7:46 Yeah, but here I'd say that that's, that's where entrepreneurs come in. Like, entrepreneurs, right, they, they go after non-consensus opportunity that most people would be dissuaded from going after, but they use their skill and their ability to create these movements, they move people to a different future, and we exist as investors in seed to take those chances with those entrepreneurs before the rest of the market's ready to take those chances. Like, that's where we generate alpha, in my view.

Harry Stebbings 8:11 Yeah, but can we, Mike? When it cost, you know-

Mike Maples 8:13 Of course we can.

Harry Stebbings 8:13 ... I had the founder of Character.AI on the show and it cost $2 million to train a single model. They needed tens of millions of dollars to get off the ground. Is it even possible for traditional seed to play in that world where the capital crime is so much so early?

Mike Maples 8:28 Yeah, and I wish whoever funded that round all the luck in the world, but I don't see that as a non-consensus investment. I see that as a expensive, high-priced investment in- and hopefully it works, but you're not gonna make a thousand times your money on that deal. You're probably not gonna make 100 times your money even in the best of circumstances. And so, like, our job is hard but not complicated. We need to find companies early that have insights about the future that aren't obvious, that have entrepreneurs that can make those insights real, and then we need to have the, the presence of mind to see that before other investors upstream see that, and then make a bet with them, uh, and co-create the future with them to the extent of our ability. That always exists. The opportunity to find inefficiency always exists, but you have to not just accept the conventional rules as they're given, right? We have to be willing to find gaps in the market and inefficiencies and realize that is the job, right? The job isn't to get into the hot deal. The job is to get into the great deal that other people don't understand is great yet.

Eric Paley 9:34 But what's really tough about what Mike's saying, and I would say this to any friend of mine who's a new manager, is the short-term incentives do not align to becoming a very good long-term investor. Most VCs are interested in markups. They're interested in TVPI 'cause frankly it helps them raise more funds, bigger funds, or even just get to your next fund, which I understand for new managers is, of course, very important. And investing in the theme of the moment is the most likely thing to be able to upsell to another investor. So in some ways being the most consensus has very strong short-term benefit. Long-term, that doesn't pay, and you're not gonna have... It's why most VCs get paid on management fees. They don't get paid on, on ca- on, uh, carried interest because TVFPI- TVPI in that case doesn't actually translate to DPI. We're gonna have an era, many years now, where, where a lot of TVPI does not translate into DPI.

Mike Maples 10:27 Yeah. And Eric, as, as an investor that I respect a lot, what you said, that's the beauty of it, right? That's, that's... You know, it's like patience is a form of arbitrage, and, you know, the ability to play your game to seek, uh, inefficient markets while everybody else is regressing to the mean by chasing what's hot, that is the arb, right? The arb is to be patient and to play that game when everybody else is playing the popular game.

Eric Paley 10:54 I love that. Patience is an arbitrage.

Harry Stebbings 10:56 You are poetic, Mike. I mean, God, I wish I had your lyricism. I feel like you could be writing songs. Uh, does that mean then that we're not investing in AI? I mean, I wrote my investor letter recently, I said, "The worst place to invest right now is AI at seed." Given what we've all just said, does that mean we're not investing in hot AI seed rounds?

Jason Lemkin 11:15 Well, I'll tell you, I'll add one thought, I'd be curious other folks thought. I think as a seed investor, you do have to be cognizant of the next round, whether the company is self-sufficient with one round or whether it'll need another. And I will say the theme of talking with a lot of B2B GPs over the last couple of months is basically no one will touch a deal that isn't AI, right? I had a discussion with Byron Deder on it recently. David Sacks did an opener with me. He said, "Of Kraft's 3.3 billion," they said, "80% is going into B2B AI." Now whatever, forget about whatever that means, we could debate it, but I think if you don't have an AI story, I worry, at least in my domain in B2B, you cannot raise an A, and maybe that's fine, right? May- maybe it's okay or you have to cobble together a seed extension, but I just think in today's world, a lot of A, and later, aren't touching anything without an AI story.

Eric Paley 12:00 So I, I have a little bit of a, uh, unconventional view on this which is, if you are able to show that your experiments are working, which is really the point of seed, and drive evidence towards your, you know, in, in demonstrating your thesis-There's a lot of money out there in the world. Um, you may not get the big markup, which is fine. I don't think that's the whole game or, or frankly, in many cases, it, it's actually counterproductive to the whole game. But you, you can find money. And so I think, yeah, it's gonna be harder. Uh, the venture industry needs a new bubble and, and we're, we're inflating one as, as fast as we possibly can-

Mike Maples 12:35 (laughs)

Eric Paley 12:36 ... because it serves a lot of people's short-term interest. I think the other side of it, just to be clear, I'm not speaking out generally against AI. I view AI as sort of just a- another progression of, of software, most of which is gonna be open source software. I think, you know, if we're having a conversation about like, "Is open source software gonna be in all of our companies going forward?" Of course it's been in all of our companies since we started our fund and it will continue to be in all of our companies. And so I, I think AI is gonna be part of it. So are, are we really just talking about companies that are totally 100% focused on innovation in AI or are we talking about companies that just have an AI narrative? We, we all know of many very huge companies that are trying to tell AI narratives. We were talking about one, uh, earlier today. And I think those are all kind of different things. But, but look, we're, we're in the, in the business of, at least for our fund, and Mike and I have talked about this a lot over many years, we're in the business of following entrepreneurs who help show us a map of where they're trying to go. Interesting ones will be interested in AI and, and we will, we will follow them there, but we're not, we're not thematically trying to chase AI because the market loves it right now. That, personally, I think that's, that's a bad short-term trade-off or, or trading off short term for the long term.

Mike Maples 13:49 There's an investor I have a great deal of regard for, um, Howard Marks, um, from Oaktree Capital, and he has an idea that I think applies to any category of investing, including seed, which is you can't predict the future really. Nobody can. Lots of, some people think they can, but they can't. The, the future's gonna happen. It's a probability distribution. But what you can do is notice what people are doing in the present. Let me give an example. Right now, almost everybody I talk to says commercial real estate's gonna be hosed. Now, that may be true. Everybody seems to think it right now, right? And so, and, and, you know, the end of the world doesn't come that often, right? And so, like, maybe it will be hosed, but maybe not. If I was gonna try to make money in a field outside of my field, that would be, that would be the vein I would tap because I'd be like, "Everybody is too over-rotated to believing the same exact thing for it to be 100% that true." And so to me, venture's a lot like that too and that's why I think Eric's so right. The hot topic of the year is, is a way to qualify the over-rotation of the present. You can pay a high price and still make money, but your probability of making money in the future is lower because there's just fewer ways to make money. There's a lot more ways to make money if you buy something at a low price today that nobody wants. And so, you know, whenever people say, "There's no price too high," that's a bad sign. And when people say, "You couldn't give that away to me," that's a good sign, right? Because it means that there's something happening in the present where people are, um, it's become psychosocial, you know, in terms of, uh, how people are thinking about it. And I, and I think that that's having a firm grasp of the present is one of the, one of the best unlocks I've ever learned as an investor from Howard Marks. When I talk to my LPs, I'm, I'm trying to learn about what's going on, but part of what I'm trying to learn is, uh, what is the same thing they're all saying? Because that, that probably means that people are overly concerned about that thing. It doesn't mean it's not a concern, but it probably means that it's being overemphasized relative to other opportunities. So the, the thing that I'm-

Jason Lemkin 15:58 Eric, can I ask one question to you guys, to the three of you? Just curious. What do you... On a scale of one to ten for each three of you, just for venture, not, not for the world, for venture, how much of an

Jason Lemkin 16:07 AI bubble are we in, if at all? One to ten, how much of a bubble?

Eric Paley 16:10 If you're describing bubble as the asset prices related to that general idea, I think we're in a very extreme bubble. I also wanna throw out there, and I think this is very relevant... Oh, yeah, I mean, I th- I think we're, we're not quite at NFT level, but we're, we're, we're probably at a, at an eight or nine. But one of the things I really wanna throw out there is there's another whole problem that we're, that I, we touch on but we're not hitting on enough that was very relevant in 2021 and is relevant in, in AI right now and every theme of every year, which is I'd love to see historically how many companies that ever got 50 to 100 times revenue at sub-10 million, uh, in valuation, at sub-10 million of revenue that really ever became a success, right? And probably true for 20 million in revenue. Maybe at 100 million in revenue it starts to become a little less of a problem for a bunch of reasons, but meaning a company that is, you know, in its adolescence in many ways in terms of its development getting extraordinary amounts of capital. Now, you should... We all should believe if capital is really an asset, uh, you would think that can't be a bad thing. And, and at, at a minimum, it really should be a positive, both in terms of selection bias. The companies that get access to that kind of valuation probably are the best companies, the best entrepreneurs. And the capital should be valuable. And I would say I have just seen this time and time again. When a company is materially overvalued, particularly at an earlier stage, but probably true forever, it all goes wrong for a whole bunch of reasons that we can get into the why, but it's another reason why being in the hot theme of the moment is actually detrimental. It's not just the over-rotation. I agree with that. I think that's absolutely right. But it's also that the easy access to money at a, uh, accelerated stage that the company is not ready for usually will destroy the company's value.

Mike Maples 17:57 It makes you stupid, right? You, it, it, it, it contributes to doing stupid things.

Eric Paley 18:02 I, I'm more charitable. Like, I don't actually think people are per se wasteful. I think there's extremely limited capacity...... for good decision-making, prioritization, and experimentation. It's like intellectual capacity. You can't just hire lots of people before you've built the platform that really is valuable to go figure that out, right? And so you just, you just can't help but lose focus. And the reason I'm charitable is there are very few companies that wouldn't want, if they could, to add five more engineers or f- or five more salespeople. Or you have so much constraint always that it, it's not, you know, it's not lavish parties in most cases, um, that people are throwing with the money, right? It's just that the, the, the lack of focus that comes with that, the m- amount of parallel processing things that aren't really working, the push to scale things that are kinda sorta working, but not really working, all of those things drive detrimental long-term value.

Mike Maples 18:57 So Eric, I, I, like a thousand percent agree. I had this conversation couple years back with Michael Seibel at YC. So I'd invested in his company back in the day, Justin.tv, and he asked me, "Have you ever worked with a company that got real product market fit and wasn't wildly successful?" And I was like, "Damn, that's a good question," right? And, and I was like, "Let me think about it. Let me think about it." I, I couldn't name a single example. R- regardless how well-run it was, regardless of, uh, like if they got real product market fit, I, I never had anything but massive success working with that team. So I asked Michael, "Can you name a single example? You've now seen thousands of companies at YC." The only one he could name was Zenefits and they broke the law. When I think about that, when I internalize that, and the point you just made, Eric, what I think people are doing is they're hiring ahead of product market fit. And to get product market fit, there's an advantage in being lean, and there's an advantage in having n-1 resources rather than n+1. Because, like, having too many resources lets you pursue losing ideas for too long. Having too few resources forces you to say, "Get product market fit, eliminate distractions." And you don't need that many people to do that. And so what I saw happening was, "I have the money, I might as well spend it. I could get these great engineers. I've known them. I know what they're capable of." And before you know it, you develop too much product footprint too f- soon, too opinionated, and now you're trying to sell your opinionated product that nobody wants. Whereas you would've been better off having a tiny team of super focused people in one room having product pulled out of them by customers, and you escalate your commitment as you escalate your certainty. That's what happened, right, in 2021 is what happening now in a lot of cases is people are hiring as if they already have product market fit before they have it.

Eric Paley 20:43 I agree with all of that, but I think just to be in the nuance is a little bit where I think it does get complicated is I've seen lots of companies with, let's call it seven out of 10 on product market fit become very successful companies. So you don't need perfect... You know, I, I don't know how good p- HubSpot's early product market fit was relative to the value they ended up creating in the market over time, but, and I think they're... I don't mean to pick on them. I think they've done a phenomenal job, but I think they were very good at go-to-market. There are companies that, you know, product market fit's a spectrum. You need adequate at a minimum to do reasonably well. And obviously if you nail it in the way that I think you and, and Michael were talking about, the product will just be ripped right out of you, right, and you're not, you're not gonna fail. But I think what's tricky is those five to seven or five to eight scale product market fits where something's working, it's working nicely, but you are reliant on really good go-to-market. And when that go-to-market is not that well tuned, but you're trying to live up to these extraordinary valuations, you just accelerate, whereas you should actually be slowing down and fixing it. And not only do you accelerate, capital always has dimi- diminishing return of performance. So when you accelerate, you don't even get the same mediocre performance you had acceleration, you have declining performance as you accelerate. And the question is, what do you do then? Well, you just double down because you have all this money and you're trying to live up to all these expectations, and you don't want to go to your board and say, "We're in trouble. I want to cut the company in half," right? And so th- this is where I would say 80% of the companies that get extraordinary financings end up living, in my opinion. And it's why most of them, we say besides product market fit, the biggest risk to a venture-backed company is bad capitalization. And we don't mean under-capitalization, we mean over-capitalization, and by the way, in many cases, just bad investors who think capital solves all problems, and we like to say capital has no insights. It has value, but it doesn't have insights. It doesn't solve your problems.

Harry Stebbings 22:36 Mike, do you not think there are many companies that just don't have business model fit? They have product market fit, but not business model fit. It could be a WeWork of the world, but fundamentally the business model isn't as good as one thing's. Allbirds, the margins suck. (laughs) Like, there are businesses that have product market fit and customer demand, but the business isn't good.

Mike Maples 22:54 Yeah, so Harry, I hope I'm not being too parochial by, uh, using a US analogy here. Uh, I am very respectful of the Brits, but I'm, uh, you know how the people talk about, um, you could be a strict interpreter of the constitution or a loose interpreter? When it comes to product market fit, I'm pretty strict, right? So, like, my view is that product market fit answers a very important but profound question, which is, what can we uniquely do that people are desperate for? And what happens too often is product needs to be four out of 10 better for people to be desperate for it, but it's only two out of 10 better or one out of 10 better. Um, and so, like a lot of these companies that you're describing, I, I don't think they had business models that were good, but that's just an emergent property of the fact that they never answered the important question in the first place. When you say, "What can we uniquely do that people are desperate for?" that contains two things. One is, do we have an insight? That's the uniqueness. And then we have to navigate that insight to the desperate. What happens too often is we over-fund the company before we've d- identified the desperation. And so then what we do is we, we sell to semi-attractive customers rather than customers who said, "Uh, where have you been all my life?" I would rather, it's kind of a Thinking, Fast and Slow kind of thing, I would rather go slow to find the desperate, because once I've got 'em...I don't have to throw money at the problem of growth, I only have to syndicate the truth because I found people who truly are desperate for what I have, who value my advantage. And so to me, in the zero to one phase, that's what I like to say to founders, "What can we uniquely do that people are desperate for? Eliminate distractions." And if somebody wants to give us a bunch of money at a goofy price, I'm like, "Great, put it in a lock box, but let's not breathe our own fumes here." Right? We don't have product market fit yet, the job is still the same, but fortunately now we have time. We're not gonna run out of money, we're just gonna run out of iterations, but now we have time. But, like, let's not, let's not pretend we accomplished something that we didn't because, like, when you have product market fit, you know it, right? The feeling is visceral and palpable. Uh, and, and yes, I get that it's a continuum, but if you start to say real growth is the accelerated accumulation of attractive customers desperate for your advantage, it focuses the mind on who you spend your time with and what success looks like and what revenue chasing looks like that isn't valuable. And that's what I, like, the phenomenon Eric's describing, I think that the companies get in trouble because they get e- they get engaged in revenue chasing. They, they have to make some artificial number they promised to a VC in a spreadsheet and so they go get that revenue any way they can and they say yes to features that aren't additive to the strategy or they say yes to customers who aren't gonna stay with them over time and next thing you know, you have a leaky bucket and you have a screwed up sales model and your unit economics go down. And it's because your marginal next customer should be increasingly attractive if you're, if you're getting product market fit rather than what Eric described, which is the reverse. A lot of times they become marginally unattractive.

Eric Paley 25:52 But, but what Mike is saying is not something, in my opinion, that's very well understood among the people who are venture capitalists sitting on boards giving direction. I have so many of our entrepreneurs say to me when I, when I talk about the kind of patience Mike's talking about, they say to me, "Well, my other VCs are pushing me to go faster." And I always say, "Well, do they want you to learn faster or do they want you to burn faster?" Right? 'Cause it, it doesn't sound like-

Mike Maples 26:16 (laughs)

Eric Paley 26:16 ... they're that interested in what you're learning. They're just upset that the, the lockbox that you should have created, that w- we also encourage the founders to create in these moments, that you're not burning that down faster 'cause they think if you do, somehow you're gonna magically get them the markup they want and the glory they want and the story they want, right? But they're not actually interested really in the pivotal question, which is what are you really learning about what you can do for your customer? That's a real problem, right? Because you're sitting on boards, including Mike and I are sitting on boards with people who are saying the exact opposite thing from what we're saying and frankly, I think the advice is dangerous. And I'd go one step further, which is, it has become the conventional wisdom of the industry, which is go faster. What the hell does that mean? Does it mean learn faster or does it mean burn faster? Right? It means burn-

Harry Stebbings 27:05 What about blitzscaling? Isn't that the solution to every problem, blitzscaling?

Eric Paley 27:09 Yeah.

Harry Stebbings 27:09 I thought it was the answer.

Eric Paley 27:10 I think blitzscaling is this beautiful, beautiful idea of exactly what Mike said applied wrong in all, almost every context, right? Which is-

Harry Stebbings 27:18 Lean startup and the blitzscaling are all applied wrong, right? (laughs)

Eric Paley 27:22 Right. You have true, true product market fit. Okay, that's a magical moment. I do believe Uber had that, right? For... And we can talk about it, right? And what I saw, you know, luckily being part of that, that journey, you know, as, as a customer, as a investor, it was incredibly competitive, obviously lots of mistakes were made, but the product market fit was extraordinary. And by the way, first mover did matter, network effects did matter, and, you know, there was this incredible blitzscaling burden and ex- and opportunity to go everywhere at once, right? Which by the way has a lot of challenges, too. But it makes sense in that context. The question is how many founders get themselves into that context?

Mike Maples 28:03 Right. Y- y- you have s- you have some scenarios where the product market fit is so strong and so obvious that the market will be satisfied. Like when, when I was involved with, and Ann was involved with Lyft, right? While Eric was involved with Uber, like Travis is gonna raise a ton of money and go to every city in the country and every city in the world and you're sitting here as Lyft, do you need to raise a lot of money? You betcha. Right? Like the, the option to not raise a lot of money and be capital efficient is not available to you if you're... unless you're in a state of denial. Or like with Okta, you know, we had product market fit, Microsoft was gonna come in with our identity solution, the market was going to be satisfied. So the question is who's gonna satisfy it? And if you don't go fast enough to penetrate the market at an accelerated pace, you'll just get out muscled by the incumbents or by the person who's willing to do that. But the problem is, I agree with Eric, we got to a place in the industry where people thought blitzscaling was the answer every time. It's, it's really not. It's an edge case for a very rare condition where it's clear that the, that the market is pulling th- these features out of the market massively quickly and somebody has to fulfill that demand the first.

Harry Stebbings 29:14 Can I ask a really unfair question? Um, which is, so many times on the show people say, "Oh, we think it's a market that's big enough for multiple venture sized outcomes." And that can very often be the case, but the actual outcomes vary extraordinarily in size. Respectfully, Uber and Lyft are very differently priced today. How important do we think market dominance is when we think about enterprise value investing today and how that leads

Harry Stebbings 29:41 our thinking when investing?

Eric Paley 29:42 So thi- this is sort of counter industry, but I'm not a, a macro markets investor. I think later stage investors, maybe it makes a lot of sense, so I, I don't want to dismiss the importance of it. I just think in venture, we all want to feel like we're smarter than we are. Like you're gonna do this really sophisticated market analysis... By the way, there is no market analysis on Uber and Lyft. I don't say there was none 'cause clearly the world went the way it did, but I don't think anyone who is good at market analysis-... could have predicted how that played out. And I'll, I'll tell you another story. You know, with Trade Desk, one of the reasons, one of the reasons we didn't raise a lot of money was we were the last ones in and people just thought it was played already in the, in the programmatic advertising market. But one of the reasons we didn't raise that money is Jeff always wanted optionality to sell the company for a couple hundred million dollars-

Mike Maples 30:26 (laughs)

Eric Paley 30:26 ... because he wasn't convinced he could build a big enough company, by the way, now was up to $400 million.

Mike Maples 30:31 That's a good story. (laughs)

Eric Paley 30:32 Right. But he really didn't know and he wasn't sure, and he didn't want to have all this capital stack that he had to satisfy that would screw up the value. And so, I think the truth is like, a lot of the very best things we've invested in, there were so many reasons you could argue the market wasn't that interesting. And I think the markets that are the biggest, if you really want to do market analysis, they're unbelievably crowded. So then you get into, like, "Well, how much of that market can somebody really take?" So, we get into this sort of a little bit of a threshold question of, like, is there a market? Like, do we believe there could be a market that is of any meaningful size? And then we stop and say, "The rest of it, we don't know." We can just sit around trying to feel really smart about this. It's back to Mike's, like, you know, can you predict the future? I think a lot of VCs want to believe we're in the future predicting business. I'm not in the future predicting business. I'm in the following people who have very, very clear points of view about how they want to solve a customer problem business. And when they explain that to me, there's, like, this magical experience I have of, "Wow, they've really thought deeply about this" and they might be right and they might be wrong, but they're doing a lot of things that make me think they're going to get this right, and I want to go join them in this journey. And I don't spend a lot of time going, "Well, is it only a $3 billion market or is it a $200 billion market?" I, I think that's a very dangerous model that makes you th- you know, talk your way out of... Like, what would you say was the market for Pinterest? You could either say it was all of e-commerce in the world, maybe, or, you know, it's like a, a digital collection, um, you know, website. Like, what... I don't know. Does it even have a market? I think that's... And we were not investors. You know, would have been great to be investors, but, um, I, I think it'd be easy to talk yourself out of that company, uh, just on that basis.

Mike Maples 32:17 Yeah. And it, and it relates, I think, to the prices people are paying in seed right now. So, like, a, a, a variation of what Eric's saying is, some of these markets are so big, any price is justified in the seed, and I just, I just don't think that's true. Like, not even close. And so, I think even back to some of the ones that have worked, if you, if you pay five and a half post for Lyft, or, like, what, what did you guys do Uber at? Like, similar price, right?

Eric Paley 32:43 Yeah. It was actually, if I remember correctly, it was at about five and a half post as well.

Mike Maples 32:46 Right. (laughs)

Eric Paley 32:46 It was four pre. About a million now.

Mike Maples 32:48 Okay. Okay, so, like, let's just stick with that.

Jason Lemkin 32:49 The old days of venture, 2020 VC. (laughs)

Mike Maples 32:52 So, so Ann, so Ann bought th- 13.6% of Lyft for $750,000, right?

Jason Lemkin 32:57 Yeah.

Mike Maples 32:58 Now, let's say that you paid 20 post. You'd have to invest 2.7 million to get the same amount. Let's say 30 post. You'd have to invest over four million to get the same amount. Now, how big is your fund? How many deals can you do? And if you can only do a fifth as many deals, then you're taking 5X the risk in terms of just the probability of getting N equals more than one outliers, right? Because, like, seed funds are, like, crazy, ridiculously risky, right? And so, you need enough shots on goal so that if you have some skill, you can get some outlier results. But if, if at a given level of ownership, you're required to invest 5X more, you either have to have five times bigger fund, which means you have a five times bigger hurdle, or you have to do a fifth as many investments, which, you know, now your, your risk is ratcheted. So-

Jason Lemkin 33:49 That's been my model. And I realized what, what took me a while to figure out, that means a- as a seed investor, and I tried to do late seed, okay? And there is a difference. Half of mine, at least half have to be winner, real winners. At least half. That's the insane... To make that, I'll do the 30 post, right? The 20 post, I'll do it, but I have to believe there that with a relatively high degree of certainty, it will, it will be successful.

Mike Maples 34:11 That's right. It has to have been de-risked, right?

Jason Lemkin 34:11 Right? And it's crazy. Half have to win.

Mike Maples 34:13 Yeah.

Jason Lemkin 34:13 Half have to win-

Mike Maples 34:14 That's right.

Jason Lemkin 34:14 ... as a seed investor. Half.

Mike Maples 34:15 Which, which means it has to have been de-risked, right? Somewhat.

Jason Lemkin 34:19 Yeah.

Mike Maples 34:19 Uh, you know?

Jason Lemkin 34:19 Some- somehow.

Mike Maples 34:20 And, and so, like, I look at it like, price and risk don't just have a relationship. They, like, they have an almost direct relationship at seed. Like, the higher price you pay, the more risk you're tolerating by paying that high price, and the more risk takeout you should expect to justify that high price. But that's not what's happening here. You know, you see companies with, like, two L- LOIs raising at 30 post. You may make money on that one deal-

Jason Lemkin 34:47 That's the problem. That's the problem, right? But-

Mike Maples 34:48 You may make money on that one deal, but if you do a portfolio of those deals, that's a recipe for getting creamed.

Eric Paley 34:54 I want to run a hypothetical for you for just a moment on Lyft, Mike, and, and I'm not intimate in the story, but to me, if Zimride had raised $6 million at a 30 post day one, and it was Zimride, right? It was a pretty big pivot that happened, and they were burning, you know, just run the math, the typical venture math of, you know, divide by 18, $6 million, or divide by 24. So, they're burning $300, $400,000 a month and they're running out of money and they say, "You know what? We're realizing that we'd rather be in ride sharing. We don't really think this carpool thing is the right a-" I mean, it was a different kind of carpooling thing, but is the right approach. "Let's go raise more money." Even today, would they find a market l- for, for capital? Like, for a company burning $300,000, $400,000, $500,000 a month in the middle of a pivot with a 30 million post? My instinct is like, no. Some of the reason why you can get capital in that moment is because there's room for investors to give you another shot because your burn rate's low. Your, um, they can still come in at a reasonable price without trying to recap a c- I mean, recapping companies that are not clearly worth anything yet, it's not a business anyone's in. Right? There, there aren't investors. I mean, maybe insiders a little bit, but there aren't investors running around looking for opportunities to recap zero revenue companies.

Mike Maples 36:10 No. (laughs)

Harry Stebbings 36:13 (laughs)

Eric Paley 36:15 So, I just think there's another problem outside of... It's a different form of risk, which is the likelihood of success, in my opinion, goes way down for those companies. Y- which is super counterintuitive because you're like, "Well, but they have more money at a higher price, doesn't that make them more, more likely to be successful?" And I don't think so.

Harry Stebbings 36:32 But I think that's why Series A is actually the most attractive place to be investing right now, because actually, many of them have been significantly de-risked, but because of the markets today, the price of inflection is actually significantly lower and less than it was. And so you can get your two million ARRs, three million ARRs with actually a lot of de-risking done at 30 to 40 million, which is not bad. It's a lot better than it was, for sure. It's a lot better than seed is right now, where you can often pay 20 to 30 for none of that de-risking. I'd rather pay a 15, 20% bump for that extra de-risking, wouldn't, wouldn't we all?

Eric Paley 37:07 On this whole thing, can I challenge the group? Uh, here's what I think about all these rules, the 20, the 15, the five posts, they're all accurate, right? 62 investments. But here's the challenge I always come back to, like, and I know there's math in venture, but it's a business of outliers. And so a lot of these rules make sense on paper, but, like, hooray, the Series A is at 30 posts instead of 60. But if it's not an outlier, it doesn't matter, right? It d- it doesn't matter. Um, and some of these rules, uh, there's all... All these rules are so good, but do they, do they, do they apply to the ones you really want to invest in? (laughs)

Mike Maples 37:40 So, so Jason, here's the, here's the thing I would put out there, and I don't know if you guys would agree with me on this, but I'm, I'm becoming more and more believing this. I believe that the outliers usually start out at a low price, because they're outliers, because they're non-consensus and right. People tend to believe that the, the world is divided between low price deals with low upside and high price deals with high upside. I don't agree with that, right? I disagree with that. And so I believe that most outliers, it's axiomatic that they're gonna be somewhat unpopular and strange at the time you had to decide at seed. And so it's... Most of the great investments in seed investing have been outliers at a reasonable price. But what's weird is, it's not because we negotiated well, it's not 'cause Eric negotiated well with Uber or we negotiated well with Lyft, it's because we saw potential that others might not have seen. It wasn't... Uh, uh, you know, it wasn't like we took advantage of somebody. It was just like, w- that was the market clearing price for a non-conventional idea with a lot of risk. But, but to me, that is the job description of seed. Like, that's our job, is to find those. If there's too many investors paying too high prices, I think we just have to deny the premise of those rules, so I think we have to avoid the tendency to want to chase that, 'cause I just don't... I don't think it's gonna lead anywhere other than just indexing startups.

Harry Stebbings 39:00 Can I, can I put you guys on the spot? I... Hands up first, I haven't stuck to that discipline always, but a lot of my portfolio is a lot lower ownership at a lot higher prices. I was like, "I either deploy or I don't into good founders." Have you done the same, or did you stick to discipline?

Eric Paley 39:16 Yeah. So the way we think about that question, Harry, is, uh, first of all, we do not focus on ownership. We actually think that's a very problematic mindset. There's a whole bunch of downstream issues, including, first of all, our mission's about alignment with the founder and the whole ownership mentality. You can twist yourself in pretzels trying to explain some notion of how that's aligned to the founder, but I don't think it's aligned to the founder. I also think it forces you into a position where you really can't be a great collaborator with other investors, because you always have to own what you always have to own. So it becomes a great excuse to sort of try to create a context in which you get to express your conviction with, with, you know, with, you know, a fixed rule of some sort, but I think to a great detriment, both to the founders and frankly even to returns for a bunch of reasons. But we still do believe in, if you have conviction early, you should be trying to write the appropriate check, not more than is appropriate for the company or the founders want. So we don't really focus on ownership. I think the, the other thing I'd say sort of on your point there is, you know, do we ever lose discipline on price? When we see a founder we really wanna work with, are we willing to pay more? For sure, right? We look at price as one attribute across the whole decision-making of an opportunity. So there are without question companies I would have invested in over recent years if they had not been priced so high. But given where they were priced, I just... It just tipped me in the wrong direction, right? I just felt like the risk/reward of this opportunity isn't where we want it to be. Now, will we ever regret some of those? There's no question. We're gonna end up regretting some of those. But if every single time I liked something, I was just prepared to pay things that I thought the risk return on was kind of crappy, I don't, I don't think that would have been a great way to express our, our work as investors, right? So we are looking for, look, for where this company is right now and what they're trying to accomplish, and us also feeling aligned in the journey, are they priced appropriately? And we do index that to what's going on in the market. So it's not just, "Well, jeez, we got to do some of these other early investments that were extraordinary at five posts, therefore anything that's over five posts, we're not interested."

Harry Stebbings 41:21 (laughs)

Eric Paley 41:21 We, we do express it in the context of where the market is at any given time. But yeah, when we look at something and we say, "Look, there's such a good chance at Series A this isn't gonna be worth anything more than what the founder's asking for today," uh, that doesn't seem like a very good risk/reward trade-off. And I don't think the founders often appreciate two things, is how much they're turning off investors that might have been good investors for them, but even bigger, how much risk they're actually taking on their next round, what this round does in terms of creating

Eric Paley 41:52 risk for the next round. I don't think f- I think founders have lost all perspective on the risk they're taking in the next round. Venture has been so gamified the last five years, and everyone's to blame. Uh, everyone's to blame that, uh, I just don't see... Uh, raise 150, 200, it's just a ga- Even to the best founders, it's a number. I don't see... Literally the smartest people I have worked with n- lost all... It's just a num- it's just a number.

Mike Maples 42:15 It's-

Eric Paley 42:15 It's just a number.

Mike Maples 42:16 ... it's unsolvable, I think. You know, uh, I remember when I was a founder and I was raising money, people say, "Don't raise at a high price that, you know, these people are giving you, because if things don't go well, uh, you're in, you're gonna be in bad shape." Well, you're like, "I'm gonna be the one that wins. That's why I'm doing this. If I didn't think I was gonna win, I wouldn't do this startup."

Jason Lemkin 42:32 (laughs)

Mike Maples 42:32 And so, it's impossible to get into a head space that says, "Well, you know, this may not work out. Customers may not want what I'm selling." You have to believe even when you don't believe when you're a founder. And so I just think it's... Uh, I, I think it's hard to get somebody in the head space of quantifying risk like it's an investment thesis. I think they either think they're gonna succeed or not succeed.

Eric Paley 42:53 But I actually think what I've seen is for investors that a founder wants to work with, they will actually accept, "You know what? I don't need to optimize. I'd rather work with this investor. I think it's a better, uh, opportunity for me than, let's say, some party round of investors or some investor that gave them a very high-priced term sheet, but they're not excited to work with." When I was graduating from my co- from college, my, my mom would talk to me about all these other kids that she knew around my age getting amazing jobs at Morgan Stanley or Goldman Sachs. And what she meant is-

Mike Maples 43:25 (laughs)

Eric Paley 43:25 ... these are good brands, and they're high salaries. And I was like, "I don't know why you think that's an amazing job. Like, what makes it an am- help me understand, 'cause maybe I'll go pursue it if you help me explain... if you can explain to me. Why is that an amazing job?" But I think it's a lot of the same logic, right? People who self-select to realizing that those brands and those jobs are not what they're really looking for, even though the salary might be higher, pretty quickly realize, like, this is not the optimization equation that I'm chasing after. Now, that doesn't mean there are lots of people I try to explain that to and they don't wanna hear it. I, I totally agree with you. But there are a lot of founders who really do get that it's not the optimization they're most interested in. Doesn't mean they ignore it completely.

Mike Maples 44:09 Yeah, I agree, I agree with that. Uh, but I guess the distinction I would make is that it's less about do they believe they might not raise in the next round. It's more just like, "Hey, I, I wanna work with Eric, so I, I value the advantage of working with Eric. I'm willing to take a little bit more dilution or lower price for that privilege," right? Because that's, "I wanna work with who I wanna work with."

Eric Paley 44:29 I just think of it as a different optimization. And getting out of this motion that the, the only optimization that matters is the price of your round and the dollars. The other thing that's interesting is, and I was debating this with a we-

Jason Lemkin 44:39 I think it's 20%. I think a great founder will take a 20 per- will take a 20% lower or delta term sheet to work with a high, someone they really wanna work with. Beyond 20, I think it may be mythical.

Eric Paley 44:52 Yeah. You know, I think, I think it is a lot. The, the other thing I was gonna, I was gonna share on this, I was, I was talking to another investor founder from the West Coast this past week who's saying, "Look, the advantage of a lot of money at really high prices is that's where the talent wants to go," right? And I think that's been true, but it's actually started to become a little less true, 'cause I think there's a lot of talent who realizes, "Boy, that's a big capital stack for a company at that... at, at, at the, at your phase." "Wait, you onl- really, you only have $5 million, and you're bragging about your 300 million, um, post-money valuation and the 60 million in capital you just raised? God, like, I, I'm not sure that's the best place for me to be." So I think this, some of this stuff is starting to shift a little bit, largely 'cause so many of these unicorns are gonna be, you know, un- unhorned or whatever the right term is, unwinged, unhorned.

Jason Lemkin 45:39 I think it's true for the seasoned folks, right? The folks that have been around for a while, that have some scar tissue. I'll tell you, I've interviewed 10 or 15 up-and-coming first-time head of sales recently, okay? All out of decacorns and unicorns with good outcomes. Every single kid wanted to join, uh, whatever, a, a, a heptacorn or penta- pentadecacorn. There was no one, no kid, and I, I put kid in quotes, it could be any age, but raring to go the first time, they all want, they all wanna go work at the hot, the hot startup, right? I just think it's the more mature folks that, that maybe view it differently.

Mike Maples 46:10 And, and by the way, this is, I think, another facet of what Eric was describing earlier, the problem of raising too much money at too high prices. It, it totally distracts you from the real question. Are we getting product market fit? Like, if somebody's saying, "I can't hire a bunch of high-priced prestigious people into my company unless I raise crazy amounts of money at crazy prices," you're answering the wrong question. If you have product market fit, you're gonna be able to hire at will from the best people all the time. But, like, if you don't have product market fit, you, you have a first-order question that you haven't answered, and that's what the purpose of the round should be and that's who you should partner with, not based on nonsensical status-seeking silliness.

Jason Lemkin 46:48 I mean, listen, we all, we're sophisticated folks. If you're new to the industry, you're looking for s- everyone has to look for signals. As a new hire, as a first-time, you've gotta look for signals. Listen, we can mock a unicorn round or a decacorn round, but gee, I only get one job at a time, right? It's not like I get to make 20 or 30 bets as a first-time head of sales. I've gotta look for signals, right? So I do think these signals matter because they're not, they're not, they're not the, they don't have the luxuries the four people here have, right?

Eric Paley 47:11 Well, I think this, this argues in favor, to some degree, of what you're saying, but at least I'll throw it out there as advice. If you're coming into a company as a senior executive, okay? Uh, and your, you have a CEO who's bragging to you about how big their last round was in dollars and how big the post-money was, ask to see the financials. And compare those financials to what they're claiming in the vanity met- in the me- vanity of financings. When you see that massive disconnect where you're like, "Wait, that's crazy. Like, this company hasn't done much yet," you're in a pretty tough place, right? Like, that is a place that is probably not gonna play out the way you want it to.

Jason Lemkin 47:48 I can't tell you how many VPs I interview all the time, from my own portfolio companies, like ethical founders, and I ask them, "Well, what do you, what do you think of the metrics?" They don't know them.

Harry Stebbings 47:56 My question, seriously, there, there's a huge amount of these unicorns with these, uh, r- kind of ridiculous valuations and a million in ARR. What happens to them? I mean, there's, there's, there's literally 1,000, I'm sure. Close to 1,000. So what will happen to unicorns that are doing okay, but they're never gonna get back to that last round price? I had over 1,000X ARR in my first fund. 500K ARR, 750 million pre by one of the best growth funds. What happens to these hundreds and hundreds of unicorns that aren't there?

Jason Lemkin 48:27 Harry, that's the beauty to, to it being in the last fund-

Harry Stebbings 48:30 (laughs)

Jason Lemkin 48:32 You, you don't have... Every venture, everyone in venture gets one duo. Du- uh, one, two... This is what I was taught when I entered. You get one, you get one mulligan fund. This is what I was taught, you get one mulligan fund. Maybe that's not true today, but I think there's gonna be a lot of mulligan funds out there. (laughs)

Harry Stebbings 48:45 Okay. But then, but that's actually also a really interesting point, which is, Mike, you said that you like to speak to your LPs and hear the commonalities with what they're saying. I speak to mine, and they all say when they look at their venture books, "I got no idea where to place them." If you guys were to answer that to LPs, where should we, how should we think about the book values of the last vintage? Is this just a load of mulligans?

Eric Paley 49:07 It's really interesting, one of our LPs was sharing with us that, um, despite the market being up the last two quarters, in December, the end of the year quarter and the financials they got in April from most funds was the first time they really saw the, the venture valuations dramatically fall. And his thesis was, it's not like we all started grading our own homework better, it's just that we really actually had to show stuff to auditors. And because we had to do that, it changed things.

Harry Stebbings 49:35 (laughs)

Eric Paley 49:35 And, and the funny thing about that is I don't actually think the auditors really do that much on valuation, in my opinion, besides just make sure you're following your own rules. Right? But I think some of it is the 18-month safe harbor that was nonsense all along that everyone has used, um, all of a sudden that's starting to expire for a lot of-

Harry Stebbings 49:52 Yeah.

Eric Paley 49:52 ... funds and companies. But I think the answer to your question, Harry, is a little bit of a depressing one. One of three things are gonna happen to those companies, right? They're either gonna take the extraordinary amount of cash they got, cut their burn rates down, and figure out how to build real companies. And by the way, many of those will still never raise money ever again, but they'll build real companies and find real exits. They're gonna find a kick save somewhere because they might have something kinda working and there's someone out there who's willing to buy it, but it's gonna be for catastrophically low price relative to the valuation. Or they're just gonna go under because it takes them so long to realize that this extraordinary amount of money they raised is actually a liability, not an asset, and they're just gonna keep going because they're gonna think they can fake it till they make it, and nobody is ever going to fund them again. If you're recapping a $100 million revenue company at a billion-dollar valuation but it, it really should be recapped, um, people will do that work. But if you're recapping a $3 million run rate revenue company with a billion-dollar valuation, there aren't a lot of people who are willing to do that work.

Jason Lemkin 50:55 Life is too short.

Eric Paley 50:55 Right? It's just not work that people wanna do. Go ahead, Mike.

Jason Lemkin 50:58 Yeah, I said life is too short. Do you think of the 1,000 unicorns, uh, uh, that all makes sense. I, I'm, I think a lot of them will, will, will quiet quit. Like, "I raised 300 million to a billion, I can't see it, Eric. Like, I could see... Great, there's a $200 million exit and yeah, I'll get a carve out and I'll make some money, but I can't recruit a team anymore, it's too much wor- like, I just, I'm not gonna truly quit, but, um, you know, I'll go to Spain. You know, I'll, I'll do whatever or I will work three days a week." And like, s- I mean, I just, it's, it's almost natural to quiet quit if the weight, if the weight is too crushing, right, of expectations.

Eric Paley 51:29 I think some of them are actually gonna loud quit. You know, they're gonna just-

Jason Lemkin 51:32 (laughs) There'll be more loud quits, too. See ya, see ya. (laughs)

Eric Paley 51:35 Yeah. I, I mean, I think it's a great era for giving money back. I really do. Like, I actually think that if you wanna maintain your-

Jason Lemkin 51:41 Give it back. (laughs)

Eric Paley 51:43 ... integrity, you wanna maintain your integrity and you don't have product/market fit and you, you raise money at a crazy valuation and you don't wanna have this thing, this burden on your back for possibly years... And by the way, the quiet quitting thing doesn't really get rid of the burden. Maybe you don't day-to-day stress about it, but career-wise, it's still sitting there for you. Giving back the money on your balance sheet makes sense in that context. So there's a difference between, you know, an investor walking in the door and saying, "I've lost faith in you. I want my money back." That's actually terrible. For a lot of reasons, that's a pretty terrible moment for a founder and a terrible experience. It's, it's really different... By the way, we've had situations where we were disappointed that a founder wanted to give money back, 'cause we really thought they were doing interesting things and we weren't gonna say, "Look, if your heart's not in it, we want you to keep going." That's kinda crazy. Right? It's like when a founder wants to sell their company, you say, "Yes, you should probably sell your company." VCs who say otherwise are, are, I think, are nuts. I think similarly here, you know, there have been times where w- I would have loved somebody to keep going, 'cause I really think they would have found their way and they just, their heart wasn't in it. But I'm talking about when the founder has an honest relationship with their investors and they're talking about, "Look, we're in a tough place. I'm trying to figure out h- how to handle this."

Jason Lemkin 52:56 I offered to give money back as a founder, right, for my series A when I wasn't sure. They said keep it. Right? Stewart Butterfield offered to give his back. I think my learning from Harry and Eric, I know you think Mike, you can't ask. Maybe you could send a link to this old article on Stewart and, and... But, but if you a- like, and it, it, it, for a million reasons, it doesn't work. Right? There's no point in asking. I don't think there's any point. Right?

Eric Paley 53:16 I actually would go as far as saying it's quite inappropriate, because I think that the assumption-

Jason Lemkin 53:20 Maybe.

Eric Paley 53:20 ... of asking, in a way... I mean, maybe if you're the only investor in the company. But the assumption of asking, in a way, is this sort of notion as the VC, "Well, that's still my money." It's not your money, it's the company's money, and there are multiple parties to the table and stakeholders that need to be thought of. And so to be like, "Hey, I'd like my money back," you know, that's very different than like, "Let's problem solve what we're gonna do about where the company is, and here's a range of options." Right? And you, you could say, "Look, one of them might be we, we send the money back." But, but you, you gotta be very careful where are you crossing that line between, you know, "I'm starting to act like this is my money," versus, "I'm one of numerous parties and it... and I acknowledge this is the company's money. This is not my money."

Harry Stebbings 54:02 Yeah. What if you're doing it- what if you're actually doing it because you're aware of the damage that will be done to them if they don't with the lead investors who would maybe not say good things about them? There are cases where I've, like, been an angel before and I'd say, "Hey, I will probably give money back. There's 60% left. I don't mind, you can keep it. It's, like, 25K of my money." But actually way better to give back 60%, say, "We tried, it didn't work, but thank you for your support and I'd love to come back to you when I do my next company," than run down a clock that you kind of know isn't running down and lose the big firm's money, kind of piss them off with lack of progress and losing their money, when actually you could have saved your most valuable resource, which is time, anyway.

Eric Paley 54:43 I think the truth of the big firms is they barely care. Right?

Jason Lemkin 54:46 That's... They barely care, right? Barely care.

Eric Paley 54:48 I think, I think it is, um, completely, I- in most cases, quite disengaged capital. Sometimes you need them to do basic things just to complete a sale or whatnot that is very important still to the founder, and you can't even get... But this isn't everybody. There's some great funds out there. You can't even get them to sign off on documents, right? Like, you have to call your other VCs to make phone calls to convince them to respond. So, I think we've had a s- a, a period of quite apathetic capital-

Jason Lemkin 55:13 (laughs)

Eric Paley 55:13 ... where it's like, "Look, if you've become very important in my portfolio, I care. And if not, I don't care." And I think frankly being in business with people who don't care, there are actually some upsides, but mostly it's not a great place to be.

Mike Maples 55:26 I'll say one of my top investments right now, like, I mean, there's a few asterisks and daggers, but there's nothing not to love, okay? Double digits in ARR, growing triple digits, a very multi-billion dollar fund led the pre-seed, right? Owns 15% of the company. Asked 28 times to just show up to one board meeting, just be an observer, just come to, uh, one board dinner we had a while back that was 40 minutes from their home. Nuts. Won't come to a s- very nice, won't, won't do anything. Like, you know, uh, nothing for 15% in the pre-seed, right? That's just, it's not, it's just, it is what it is, right? But to me, it's, there's, like, nothing not to like about this company other than it might not be a snowflake.

Eric Paley 56:02 This is also the big problem of the unicorn hunting, y- the whole business is outliers, all that matters is outliers mindset, which is anything that's not an outlier, you're irrelevant. But these are still people's lives, right?

Jason Lemkin 56:15 (laughs) They're people's lives.

Eric Paley 56:15 And by the way, almost every one of our best, almost every one of our best companies, almost every single one, the founder founded something before that wasn't a success or a m- or a big success. And so, you know, like, even if you say from a self-interested standpoint, which I think is kinda lousy given how many employees we're talking about, how many individuals' r- lives that they really care deeply, deeply about the company, even if you say self-interestedly, you know, behaving like this, I think, has a real cost, right? And I think it's one of the reasons people love Ron Conway in our industry. He always took such a long view of his role and his job instead of treating people like you just described, Jason, which, which I know you would never do, but it's, it, we see this, we all see this, and it's appalling.

Harry Stebbings 56:59 But Jason, do you not view that as your responsibility to just call up the ambassador and say, "Hey, like, get to the board."

Jason Lemkin 57:05 I tried four times. How, how many, how many emails and Zooms can you do? Especially so- the great deflection is being nice. See, if they're a jerk, then, then, then there's a playbook. But if they're just nice, but I can't make the wedding hairy, nice, but I ca- I'm li- I ca- I just can't. It's just, I just think it's a- going the other s- I think it's an interesting sign of the times. When I started as a founder, you would n- I, I would never see this activity, right? You've never seen someone own double digits of a, you know, a top, a top-performing startup not even show up to one board meeting, but it's the sign of the time.

Harry Stebbings 57:32 Can I just direct conversation? I do just want to ask this for, for LPs that are, are asking, as e- every LP is asking me, how should they view the prior vintage? Is it mulligans? Are we all getting a write-off for it and, you know what, it was just a bad era?

Jason Lemkin 57:48 (laughs)

Harry Stebbings 57:48 How should they view it?

Mike Maples 57:49 I, I think that in the end, y- you have a long-term relationship with your LP and they come to some conclusions about your overall judgment and whether they wanna still be in business with you. I'm not a big fan of mulligans. Uh, you know, I'm, I'm kind of a, I kinda believe everything counts in this world.

Jason Lemkin 58:07 (laughs)

Eric Paley 58:07 (laughs)

Mike Maples 58:07 Uh, and so, you know, I think that part of why people want mulligans on their 2021 funds is, um, they were investing their funds in an 18-month cycle. And, you know, what they should've been doing is investing in a five-year cycle because the, the, everything was so frothy. And so, that's why I sometimes struggle with the mulligan idea. I kinda feel like, um, i- it's a big responsibility to have all this money, and, uh, we should try to do a good job when we invest it. You know, we'll make mistakes. I've made more than my share. But like, but, but I hope I come by 'em honestly, right? I, I hope I can explain to my LPs, "This was my strategy. Here's why I did what I did. It didn't work out or I was stupid or whatever," but, like, I don't buy that really, to be honest.

Harry Stebbings 58:49 So what would you say to those LPs, Mike?

Mike Maples 58:51 If you have money to invest, you should invest it in the people who you think are gonna do the best job generating returns.

Eric Paley 58:56 Almost the entire investment world is a momentum investment world. And we all have our time, including... I mean, I think of the big dollars. Sovereigns are also m- momentum investors. Why? Well, because any asset class that you see appreciate like crazy over even a short period of time, you start wondering whether you're foolish to sit it out. And so money just flows like crazy into these things, and you've got to decide as an LP, do you want to be part of that momentum investing pattern and then go find the best momentum investors? And I think that, you know, a- all four of us have an idea of some of who those folks are in our industry. I think if that is less... And by the way, when you bet on those momentum investors, when a cycle shifts, they're gonna get destroyed, right? Like, the best performing fund of the dot-com era was the form- fund that had the worst, um, outcome after that era, right? And w- we don't need to name names but I think most of us know who that was. And I think you just gotta decide, like, do you wanna be a participant in the momentum and then it's, it's not that hard to figure out who's really good at that game or do you wanna work with people who have a much longer view? And then you've gotta figure out who's a fit for that game. There are good times to be buyers in our industry and there are good times to be sellers. Rarely is it both. It's rarely a great time to be a buyer and a seller.

Jason Lemkin 1:00:12 (laughs)

Eric Paley 1:00:13 2021 was an incredible time to be a seller. And anyone who didn't see that was completely playing momentum. So you can't sit it out in venture for a whole bunch of reasons and, and I don't think very many do, but I agree with Mike, that was a go slow time because it was a lousy time to be a buyer. It was very hard to buy if you cared about what is intelligent buying. I mean, I, I joked, I, I tweeted this, but I never felt more like a day trader in my life. We- it was COVID. We were all sitting in front of our computers all the time. We'd do pitch after pitch, just one after another after another, and we'd have no time to get to know anybody. They would just say, "Hey, listen. I have a term sheet. We'd love to work with you guys. Are you interested? By the way, the price is astronomical. What do you think?"... and, and felt like a day trader. And I don't actually think, I think there are aspects of this business, back to Thinking Fast and Slow, which Mike mentioned, but there are aspects of this business where thinking fast can be very valuable, but I think the really good investing is not thinking fast, it's generally thinking slow, and that period was not very conducive to that. Do we get a mulligan? Does anyone get a mulligan for that? I don't think so. I think it's, it's indicative of who do you, the wh- what type of person you want to bi- be in business with. 'Cause we could have another bubble, maybe we're starting it right now with AI, that goes crazy right now, and you might want to be in business with the best momentum investors for the AI bubble, because th- it, it might go fa- you know, there might, there might be enough outcomes fast enough that there's real money to be made there, and you just have to decide, like, how do you think about investing as a LP, and then, yeah, you maybe you don't punish the guys who had the crazy momentum because they got wiped out after that because you get it, right? You, you, you know, y- otherwise you're just a momentum investor too, which is, you know, that's fine if that's what you want to be.

Jason Lemkin 1:01:55 Jason-

Eric Paley 1:01:55 Said with a tiny bit of cynicism, but yeah.

Jason Lemkin 1:01:58 I, I mean, listen, I, um, me, I, I, I think Mike and Eric could add more value to this, but I, I agree with that, but when I, the thing about it, uh, LP is a tough job, you know? It's, it's, it's so slow and you have to hunt-

Eric Paley 1:02:09 Right.

Jason Lemkin 1:02:09 ... your own outliers. I don't think you could say too many times on 20 VC that you can't make money in venture unless you invest in the best managers, right? Um, and then the best managers, most of them peak, and then you end up investing when they're in their declining (laughs) phases, and hopefully they've built a team under them, but like, it's cr- you might as well invest, put it all in QQQ if you can't find outlier funds, right? It's so hard. But what I would say is, what I've learned from ILPs, and it's a small base but they're good, is listen, you have to have a construct, and if you don't else, they're all going through some sort of mulliganism because otherwise you can't survive. You've got to take a batch and say, "This one's, this one's bad." And for many folks, it's not just that, it's the distributions have been awful, right, in many cases. The, the distribution, and you have to, you know, if you don't give your, if they don't give themselves a mulligan, they, they may have trouble with their, with their own sources of capital and their own jobs. So I think mulliganism is gonna go up and down the stack because LPs have to survive too.

Harry Stebbings 1:02:59 Jason, you beautifully teed me off, uh, one final topic before, before I let you go. You said distributions there. The question that I'm asking is what will crack open IPO windows? We saw Arm price way up on the first day. That was a surprise, I have to say. I di- I wasn't expecting that. Uh, we saw Klaviyo now go, I would say, being priced at, uh, upwards to 6.8 billion.

Harry Stebbings 1:03:21 What will it be that will crack the IPO window open again?

Eric Paley 1:03:24 So I, I have a funny view on IPOs that I'm not, I'm not sure is, is, uh, very popular, but I, I think there's sort of this, first of all, this obsession with going public that is kind of unhealthy. Like, I, I think going public is not really what I think most people think it is. It's, it's certainly a liquidity event, potentially six months later or more for investors. It very rarely is for the founders or management in a meaningful way. So I think the question for the founder or the CEO or the management team in these situations is, do I see a very, very long road where I want to be building this business and I'm really excited about? Or at least, do I believe this business will thrive over a very, very long period of time? And if that, answer to that question is n- not necessarily and you want liquidity, it's a great company to sell. Don't go public, right? I think the SPAC craze was just a waste of everyone's energy and a bad idea, and I'm not saying there weren't any good SPACs, but generally speaking, it was a path generally, there were exceptions, but it was a path for companies that were not ready to be public companies to go public 'cause there were financial sponsors who made money taking them public, and there was glory, and then the next day they were a public company and they weren't really ready to be a public company. And by the way, being a public company, if you're not ready, is miserable. So I don't, I don't, you know, I understand why on a macro basis investors are very interested in where's the IPO window. I think if you're a strong company, you can go public in almost any period of time, as long as the market volatility is not insane like the great financial crisis. If you are a strong, if you're really ready, you probably can go out in almost any environment, right? Certainly gets easier when there are other people doing it and getting good results. The other thing is, who cares what the first day price is? Like, I just think it's like this obsession that's just kind of silly, right? And I think the reality is, if you're gonna go public, it's 'cause you think you're going to be able to build value over a very long period of time. Just 'cause the market isn't friendly in the first three months, who cares, right? Like, that should not be how these decisions are made. But again, this is all part of the short term thinking of, you know, the people who get to benefit in the short term instead of the long term thinking of the people who really are the ones building value, so it's sort of like the builders versus the transactors.

Harry Stebbings 1:05:34 Okay, let me put this back on you then, Eric. Stripe could go public at, in the next six months. If it were to, it'd be priced at 15 to 20 if you were to mark it as a comparable to Adyen. If you had your long term view of it being a $200 billion company in 10 years, it probably should do that, actually. It probably should.

Eric Paley 1:05:51 Yeah, I, I think if they have a long view in the company, who cares what the price was in a moment of time? It's just another example of why over capitalization, overpricing causes so many problems. But if you're a Stripe investor who got in at 100 billion, right, I don't really understand very well why you would be upset about them going public at 20 billion.

Harry Stebbings 1:06:10 (laughs)

Eric Paley 1:06:10 Either you believe... Well, hold on. E-

Harry Stebbings 1:06:13 You're missing, I'm with you. I'm with you. (laughs)

Eric Paley 1:06:14 Hold on.

Jason Lemkin 1:06:14 I'm lost. (laughs)

Eric Paley 1:06:15 Might be upset 'cause it's embarrassing or 'cause you overpaid at the moment in time, but you're captive to that. That's a fact now. So the question really is do you believe the company's ever going to return for you or not? But if the company's ready to be a public company, then sure, like, you'd rather have access to liquidity when you want it than just have it be private forever, as if, like, private companies' valuations are not going up and down anyway. We just don't see it. We just pretend, just like the private companies are more volatile than public companies in truth, we, like, pretend they're not at all volatile and somehow their valuations are whatever happened in the last round some months ago. And I just, I just think it's silly and I think if you came in at 100 billion-So let it go public at 20 billion, either will become much more valuable in your return or you're gonna cut your loss at some point and accept the fact that it's never worth that. I- I'm not the one to say it will be or won't be. I- I- I probably ... It very well could be, but I don't understand this obsession of like, "Well, the day it goes public, somehow it has to be worth more than what I paid." W- I don't- I- it makes no sense.

Mike Maples 1:07:20 There- there's only one- there's only one window where I think you could argue being somewhat short term makes sense. In venture, you get these acceleration period windows, like, you know, um, late '99, early 2000, uh, you know, what we saw in 2020, '21- '21, where companies are valued in ways that are detached from their fundamentals. And I think a big part of success in venture, for better of for worse, is you have to have enough companies in flight at critical mass in those windows, number one. And then number two, you have to be smart enough to sell. As much as we loved Lyft and Okta, you know, in those years leading up into 2020, we're like, "Okay, we need to monetize these things," right? B- because there's a lot of excitement about tech stocks right now, and these prices are really high. And it doesn't happen very often. I- it may not happen again for another 10, 15 years. Uh, e- in the next 10 to 15 years, it's- c- companies, I think, are gonna be much more valued on fundamentals and what they're really worth. But there are these windows, usually they last about 18 months, where the- the difference between selling then versus not is massive on your returns.

Eric Paley 1:08:30 Those are great windows for selling companies.

Mike Maples 1:08:32 Right. Right.

Eric Paley 1:08:32 I actually think the- the IPO inflation of those periods really has long-term detrimental effects on them. It's very hard to work for a company that went public at 10 billion that today is worth one and a half billion.

Jason Lemkin 1:08:44 Very hard. That's right. Very hard. That's right.

Mike Maples 1:08:46 That's right.

Eric Paley 1:08:46 It's so destroying for the whole company.

Mike Maples 1:08:48 And so- and so- so the- yeah, so the best VCs in 2021 were not doing that many deals 'cause they were selling, right? And- and, like, that's- the- the people that impress me the most are those people, right? And I know a few. I'm not sure they want me to mention who they are, but like, there's a lot of people I knew who understood what was happening and- and were like, you know, "Right now, it's time to sell, not to buy." And they did it.

Jason Lemkin 1:09:13 A few.

Mike Maples 1:09:13 Yeah, a very few.

Jason Lemkin 1:09:15 (laughs) A few.

Mike Maples 1:09:15 But boy, did