Nicholas Chirls: Why Big VCs Ruin Startups, VC is a Ponzi Scheme Today & Most VCs are Bankers |E1198

1. 0:00 – 1:20

   Intro

   1. NCNick Chirls0:00

      Your junior partner at these big firms is sort of like a VP at Goldman. They are compensated and promoted based on money velocity, not money returns. What's an ideal company for that model? It's a company that requires insane amounts of capital. Like the foundation models are like a (laughs) a big, big VC firm's dream. They literally require billions and billions of dollars to go buy, effectively, NVIDIA (laughs) GPUs. What is the business model for large venture banks? Deployment. Yeah. It's raise as much money as possible, get that money out the door as soon as possible, and then raise as much money again, and rinse and repeat.

   2. HSHarry Stebbings0:40

      Ready to go? Nick, dude, I am so excited for this. I can't believe it's been quite so many years since we did our last show, but thank you so much for joining me today.

   3. NCNick Chirls1:01

      Thank you, Harry. It's a pleasure. We were just talking about this beforehand, but I think the last time we did this show together was almost 10 years ago.

   4. HSHarry Stebbings1:10

      Yeah. Yeah. I was still in Hogwarts back then. Uh, luckily-

   5. NCNick Chirls1:13

      Yeah. (laughs)

   6. HSHarry Stebbings1:13

      ... uh, Dumbledore let me go. Uh, (laughs) -

   7. NCNick Chirls1:16

      (laughs) Nice one.

   8. HSHarry Stebbings1:16

      Uh, I, I want- I wanna-

   9. NCNick Chirls1:17

      Nice one.

   10. HSHarry Stebbings1:18

       When we last spoke, you were running Notation.

2. 1:20 – 4:19

   Starting Asylum Ventures

   1. HSHarry Stebbings1:20

      Now we have Asylum. Just talk to me about this. What's changed with Notation and Asylum?

   2. NCNick Chirls1:26

      We're launching Asylum this week. Uh, I decided to do a completely insane thing and start an entirely new venture firm, uh, about 10 years into Notation. I ultimately felt like Notation was built for a moment in time. It was the first pre-seed firm in New York and one of the first pre-seed firms in the US, and ultimately, I did not feel like it properly represented who I am and where I think the next 10 years or 15 years of venture go. Um, you know this, Harry, a venture firm is a, a very personal expression of a GP or a set of GPs.

   3. HSHarry Stebbings2:06

      Okay, so Asylum is how big? What check sizes do we write? What's the mission?

   4. NCNick Chirls2:10

      $55 million fund. Um, we write 500K to $2 million checks. Um, my mission is, is personal. I mean, I wrote about this in the, in the, in the launch post. Um, can I tell you a quick story?

   5. HSHarry Stebbings2:26

      Yeah, of course.

   6. NCNick Chirls2:27

      (laughs)

   7. HSHarry Stebbings2:27

      Love a story.

   8. NCNick Chirls2:27

      Okay. Uh, I started my, my first job outta college was at Lehman Brothers in 2007. Uh, I was there for a year, it went bankrupt. I joke that the only good day at Lehman Brothers was the day it went bankrupt for me.

   9. HSHarry Stebbings2:42

      (laughs)

   10. NCNick Chirls2:42

       I found startups in New York shortly afterwards, around the financial crisis, and it was everything that Wall Street wasn't. It was creative, and it wasn't all about the money, and there were these young kids building all these creative new things on the internet. It was kind, it was nerdy, it was everything that Wall Street wasn't. I fell in love with it. Fast-forward to 2021, I felt like, um, basically all the same people from Lehman showed up. Highly transactional, all about the money, um, there was no real art or creativity to it. It was very private equity-like, finding the company, dressing it up a little bit, handing it off to the next guy. Um, and I was about as unhappy as I was in 2021 as I was working at Lehman Brothers in 2007. The big firms have gotten huge. Um, they have gigantic AUMs, as you know, and so we now in- internally at Asylum, we call them the big banks. Um, not all that different than Lehman and Goldman and the others back in the day. And (clears throat) my mission now is to provide an alternative to founders, to the big banks, um, and ultimately, over the next five, 10, 15 years, be a gigantic thorn in the si- in the side to the big banks.

   11. HSHarry Stebbings3:57

       Dude, I, I, I love so much of what you said. We said this before, a conversation where everyone agrees is not a particularly interesting one, so I am gonna take-

   12. NCNick Chirls4:05

       (laughs)

   13. HSHarry Stebbings4:05

       ... the opposing side-

   14. NCNick Chirls4:06

       Please.

   15. HSHarry Stebbings4:06

       ... of the debate.

   16. NCNick Chirls4:07

       Please.

   17. HSHarry Stebbings4:08

       But I agree mostly with you. You'll also hear when I don't agree. Uh, but I wanna unpack quite a few different elements that you said there. Starting on one element, you said about packaging up for different rounds, and

3. 4:19 – 13:15

   The Ponzi Scheme Structure of the Venture Capital Industry

   1. HSHarry Stebbings4:19

      it reminded me of something you said to me before which is, you know, essentially that venture's basically a Ponzi scheme. Why has venture turned into a Ponzi scheme do you think, Nick?

   2. NCNick Chirls4:28

      So, like, I have this view that every, particularly private, uh, asset class has its own version of a Ponzi scheme. So, like, I'll walk you through, like the hedge fund Ponzi scheme. The hedge fund Ponzi scheme is, you take a lotta money, you take insane amount of risk, you double that money one year, you take your 20% of the bonus in cash, the next year it goes to zero and you don't have to give that money back. That's the hedge fund Ponzi scheme. By the way, I saw this at Lehman Brothers back in the day, traders, you're, you're gambling with someone else's money, so you're incentivized take, to take as much risk as humanly possible with the bank's money. They've, they've sort of changed regulations (laughs) to, uh, make this harder to do, but like, you take a ton of risk, you get a $20 million bonus that year, great. You lose all the money next year or you get fired, you go across the street to another bank and do it again. I, I think hedge funds are sort of a similar proposition. The private equity scam is like we probably all know this, is like, you can invest in a company, it doesn't actually matter how well that company does. Um, you can take a lot of money out of that company and if it goes bankrupt, it doesn't matter. The venture, uh, Ponzi is you raise a fund, you take 2% management fees for 10 years guaranteed, it does not matter how well that fund does, and you've taken 20% of that fund and put it in your pocket. That seems absurd to me, and I... You know, it's, it's obviously the main driver of incentives throughout the venture industry.

   3. HSHarry Stebbings5:58

      Mm-hmm.

   4. NCNick Chirls5:58

      You don't have to make a single dollar-... and you take 20% out of the capital raised and you put it in the pockets of mostly employees that work there. Uh, the other thing I would actually say is I've never understood why venture doesn't have a hurdle. That exists in most other private asset classes. You can do reasonably well and not even do as well as the NASDAQ and the S&P and you're still making money.

   5. HSHarry Stebbings6:21

      What is a better solution then, Nick? A budget system?

   6. NCNick Chirls6:24

      I think a lot about how many VCs would be doing this if they had to actually pay back the management fees, if they didn't make any money. Like, how many VCs would be confident enough-

   7. HSHarry Stebbings6:36

      You, you could say that about a- I'm being deliberately divisive, you could say that about any job.

   8. NCNick Chirls6:40

      Sure.

   9. HSHarry Stebbings6:40

      How many people would do any job if they had to pay back all of the salary if they weren't meeting targets and successful? No one would do the job.

   10. NCNick Chirls6:48

       Yeah, but the, the job is to make money. The job is to perform, right? So like, if you're-

   11. HSHarry Stebbings6:56

       But if I said to a marketing team-

   12. NCNick Chirls6:56

       ... in a non-financialized job-

   13. HSHarry Stebbings6:57

       ... "You'll, you'll only get paid if you deliver a three to one LTV to CAC, and if you don't, you owe me back all the money," I would have zero people outside my door, I think.

   14. NCNick Chirls7:06

       (laughs) Uh, maybe, or maybe you would have so- some of the best.

   15. HSHarry Stebbings7:09

       Maybe. But they don't need to do that. Why would I need to? Sequoia don't need to do that. Benchmark don't need to do that. Th- uh, actually to the extent that even more so, Nick, they can charge premium fees. They can charge 25, 30% carry and two and a half percent.

   16. NCNick Chirls7:26

       Yeah. So I think, I think at... If you have a long track record of producing, uh, returns for your investors, if you have a long history of producing returns for your investors, I think you have arguments to charge a certain rate, right? Like, I mean, Rena- you can take Renaissance, right? That's probably a very good example. I think famously they had, they charged like 70% carry and produced, by the way, like net to LPs, like 60% (laughs) or whatever, some insane rate of return. Um, the reality is, like most venture firms don't make money.

   17. HSHarry Stebbings8:04

       I get you. Let's push back again. Track is a lagging indicator. There's a lot of firms that got lucky on a couple of deals, go forward, they're not aspirational capital, they don't have pr- like, really different ways to find great entrepreneurs and they can't win. I think track's a bit of a lazy way to do it.

   18. NCNick Chirls8:18

       Yeah. So maybe over multiple funds.

   19. HSHarry Stebbings8:20

       So I'm like, you know what? I think it's a, I, I, I'm just saying here, like, you need to pay teams. You need to pay for offices. If you wanna get the best people, which we've been through, the best people cost money. (laughs) Uh, I can play the game on the field or I cannot, but then I'll be sitting on my own with a budget-based system and no talent.

   20. NCNick Chirls8:41

       (inhales) I mean, build a budget to v- go hire the best talent.

   21. HSHarry Stebbings8:44

       We did. That's why we have-

   22. NCNick Chirls8:45

       Present, present that to LPs and don't take a single dollar above it.

   23. HSHarry Stebbings8:50

       D- i- is that w- is that what you did?

   24. NCNick Chirls8:52

       I don't, I don't pay myself at Asylum.

   25. HSHarry Stebbings8:55

       You don't pay yourself? Why?

   26. NCNick Chirls8:59

       I'm putting every single dollar into the f- into hiring people and building the firm.

   27. HSHarry Stebbings9:06

       What would you say to people who go, "Ah, but you're in a for-" th- that's amazing Nick, by the way. I'm like, thank you for sharing-

   28. NCNick Chirls9:10

       (laughs) Yeah. I mean, I, I do live by it.

   29. HSHarry Stebbings9:12

       ... a very personal, a very personal statement.

   30. NCNick Chirls9:13

       I do live by it.
4. 13:15 – 36:18

   Multi-Stage Funds Are Tightening Margins for Pre-Seed Investors?

   1. NCNick Chirls13:15

      a very long time.

   2. HSHarry Stebbings13:17

      (exhales) I don't know. (laughs) I don't know.

   3. NCNick Chirls13:19

      You don't think so?

   4. HSHarry Stebbings13:19

      No. I, I don't. I think that actually this is where the p- kind of prevailing strong winds have come in. You see multi-stage funds provide such solid products at pre-seed and seed, and created individual products, you know, Index have a separate seed fund, in particular, just for this asset class or for this sector. I know we don't like asset class as a word. Um, but just for this stage, I actually think that they've come in with such efficiency that actually they've made it so much harder for the existing pure seed players. They've increased price, they've increased supply. I think you will see returns significantly denigrate. We all saw 5X seed funds when our entry prices, Nick, were 12. Yeah? Well, when they're 25, we've just been hit to two and a half X. When you can get 10-

   5. NCNick Chirls14:04

      Totally-

   6. HSHarry Stebbings14:04

      ... 10 years and-

   7. NCNick Chirls14:04

      Totally disagree. Totally disagree.

   8. HSHarry Stebbings14:07

      Would love to hear why.

   9. NCNick Chirls14:09

      I think that's true for the average seed fund or pre-seed fund, for sure. Uh, we're not, I don't think, doing this to be average. My view is that the, they're 25, so like if I've learned, I don't know, one thing, uh, over the last 12 years or 13 years investing is that the only way that w- I personally have ever made money, and I think this is probably true for most of early stage investing, is to invest in something that no one cares about yet. That's it. And the things that no one cares about yet are not 25 post. They're five. Or 10. That does not go away. So like I'll give you, I'll give you some examples. Like the, the way this works, right, is that I, I think the way that this basically works is like there's a new category as defined by a company. Some VCs were in that company. The big firms then say, "Holy shit, we miss that company. We need to go fund lots of similar companies like that." They put out a siren call, and then all the little firms run around town to try to go find that company for them. Um, they're all playing catch up. They're all playing this weird game of momentum and copycat. It's not gonna make you money. So like that's happening in AI right now. Right? OpenAI is huge. Everyone's trying to play catch up. And yes, every single AI company is gonna be 25 or 30 post. Um, you should have been making these investments years ago when no one cared. That's the whole job. That is the whole job of a small firm, is to actually take risk on markets and companies that no one cares about yet, that they may care about in three, five, seven years, or they may not. That's the whole job, and that's not going away. And you will continue to be able to make lots of money and work with amazing founders just doing that.

   10. HSHarry Stebbings16:16

       I actually agree with you there. I think there's two ways to do venture, generally across stages even, which is like contrarian and right with less competition but you're going where no one else is, you're finding diamonds in the rough, or you're saying, "This is a diamond and everyone else sees it too but I'm gonna beat you with my better cash." Kind of the two ways to do venture. I do think you can be non-contrarian. In other words, pick the trend, invest in the winner, and win that trend. It doesn't have to be contrarian. But I completely agree with you there. So if you look today though, Nick-

   11. NCNick Chirls16:49

       I'd much rather do momentum investing or, you know, not, uh, you know, consensus investing in the winners at series A, series B. I know less about those stages, but in my view if I'm trying to pick the winner in a very crowded competitive category, I'd like to see some, some data across how the teams operate, across how the companies-

   12. HSHarry Stebbings17:15

       Yeah. I th- I think the really interesting part there is actually series A is the worst place for that, 'cause the price inflation-

   13. NCNick Chirls17:19

       Or maybe B.

   14. HSHarry Stebbings17:20

       Yeah, maybe B. No, no, no. But the price inflation point, I don't know if you find this, it's very high, but the company progression rate is like a little bit-

   15. NCNick Chirls17:26

       Right.

   16. HSHarry Stebbings17:26

       ... less steep. And so you get a f- you get a 5X, but the company's only got a million or two in revenue.

   17. NCNick Chirls17:32

       Yeah.

   18. HSHarry Stebbings17:32

       It's not exactly de-risked.

   19. NCNick Chirls17:34

       So maybe it's B?

   20. HSHarry Stebbings17:36

       Yeah. I, I would actually say B, C, where there's that crunch.

   21. NCNick Chirls17:39

       Sure.

   22. HSHarry Stebbings17:39

       Where you're not pre-IPO grow- like growth growth yet. So yeah, complete-

   23. NCNick Chirls17:43

       Sure.

   24. HSHarry Stebbings17:44

       ... complete, but let's-

   25. NCNick Chirls17:44

       Sure. But if you're doing, if you're doing non-con- if you're doing really true early stage investing... I hate, like for example, like okay, we see an idea. It's a pretty good idea, like the market will understand this. Right? Our assumption now is there are at least 10 to 15 competitors to that company.We probably don't, we probably, maybe we know a few. It makes me really uncomfortable to invest in a company where there's 20 others that are doing the same thing that I don't even know about. I don't even know who they are, where they are, how good the teams are. What I love investing in is companies, not, I wouldn't describe it as contrarian. Like, it's not like the market is like, "We hate this thing." Actually the market is, "We just don't care. This doesn't seem like a interesting big opportunity. Like, we just don't care." And my, and my, my bet is that for some, for some subset of those companies, in the next three to five years, people will care. The venture market will care, the market will care. That, I, I think that's the only way, at least (laughs) that's the only way I've figured out how to do this. Um, the other advantage of that, by the way, is that the founders, um, are, are real, right? Like, if, if a founder is build, obsessed with a little thing that no one else cares about, like, that's real. There's no u- It's much easier to figure out what the, what the, um, you know, what that founder's incentives are and why they're doing that thing. I think for independent-minded investors and for independent-minded founders, it actually does not matter how much competition there is in the market. You need to find the things that no one else cares about yet.

   26. HSHarry Stebbings19:35

       I completely agree, and I, I love the way you use the word there obsessed. I always wanna start Obsession Capital. I think we always overestimate passion. It's easy to be passionate. It's very different to be completely a, like, you know Nick, you've known me for 10 years. I'm fucking obsessed and I've never been more than-

   27. NCNick Chirls19:49

       (laughs) You are.

   28. HSHarry Stebbings19:50

       ... obsessed today.

   29. NCNick Chirls19:50

       You are.

   30. HSHarry Stebbings19:51

       Yeah. Like-
5. 36:18 – 46:43

   Why Do Big VCs Favor Funding Capital Inefficiency?

   1. NCNick Chirls36:18

   2. HSHarry Stebbings36:18

      Speaking of these kind of massive banks, the way they operate, you said something that I thought was really interesting to me before which was, you know, we actually, well, big VCs ruin startups because they want to fund capital inefficiency.... which kind of goes counter the narrative today of everything that we hear. Why do big VCs want to fund capital inefficiency?

   3. NCNick Chirls36:39

      What is the business model for, for large venture banks? Deployment. Yeah. It's raise as much money as possible, get that money out the door as soon as possible, and then raise as much money again, and rinse and repeat. Your junior partner at these big firms, sort of like a VP at Goldman equivalent, right? They, they are, they are compensated and promoted based on money velocity, not money returns. So what's, like, what's an ideal company for that model? It's a company that requires insane amounts of capital, right? Like the foundation models are like a (laughs) a big, big VC firm's dream. They require, they literally require billions and billions of dollars to go buy (laughs) effectively, NVIDIA GPUs (laughs) , right? And that's a dream. I believe that the big venture firms... Defense tech, uh, is great, right? Defense tech, those companies are gonna be insanely capital effi- inefficient. They're gonna require insane amounts of money. My view is like, American dynamism and defense tech is a theme, it's just a, it's just a great category for huge venture firms to be able to deploy insane amounts of money so that they can go raise their next fund.

   4. HSHarry Stebbings38:05

      Does this not shake out in returns though, eventually, and then the party stops?

   5. NCNick Chirls38:10

      The returns need to just look like about the NASDAQ. It just needs to be, it just needs to be roughly, um, in line with the NASDAQ for them to continue to raise... And by the way, that's true for all of venture. That's true for all of venture, which again is why, like, how many, how many venture firms actually have alpha in their returns versus truly, it's just, it's just literally beta to the NASDAQ. And by the way, it's, it's a way worse investment. It's illiquid. Um, it's s- much riskier than investing in the NASDAQ. I think as long as they perform in the range of the NASDAQ, um, venture firms will continue to raise money.

   6. HSHarry Stebbings38:59

      Do you blame founders for raising more? I look at the, you know, we've, I've done 170 investments now over 10 years. The worst category of seed investments that I've made have been five on 25. They are slower, they lose urgency, they try and do too much too soon 'cause they can do more than one thing at once. The founders lose proximity to customers. They're the worst. But if five's on the table then, eh, why take two? How do you think about that?

   7. NCNick Chirls39:27

      I would actually say I, I've, I've had a similar experience, in that, again, going back to the, the way I believe er- really true early stage venture has to be done, right? You need to find things no one cares about yet. Our largest outcomes, like realized outcomes to date, have been a company called Bison Trails that was sold to Coinbase for a, a huge amount of money. I don't know if they've ever, uh, reported this and is now Coinbase Cloud.

   8. HSHarry Stebbings39:54

      Did that return on the fund?

   9. NCNick Chirls39:55

      Many, many times.

   10. HSHarry Stebbings39:57

       Wow.

   11. NCNick Chirls39:58

       Um...

   12. HSHarry Stebbings39:58

       'Cause that's a w- that's a really interesting stat, which is in the top decile of funds, they have guaranteed fund returners. Like, eh, you know, again, and this goes back to the obvious, but great venture returns are made by fund returners, not many half fund returners.

   13. NCNick Chirls40:12

       I tell this story often 'cause like, this is, this is a, this is a, uh, an ideal investment, right? And a- and also lucky, and also lucky. But, um, Bison Trails was the first crypto staking company. At the time, there was one crypto network that was a proof-of-stake network. It was, uh, uh, it was an early crypto project called Tezos, okay?

   14. HSHarry Stebbings40:35

       Yeah, I remember that. Yeah.

   15. NCNick Chirls40:35

       So if you had, if you had done the TAM analysis there, you would have found that the global TAM for Bison Trails was probably a couple hundred thousand dollars a year. Like if they, if they, if they, if they got 100% market share (laughs) , they would've, they would've made, been making about $200,000 of ARR that year. 18 months later, they were doing almost 30 million in revenue and they were a monopoly on the market. Tezos proved that, uh, proof of stake compared to proof of work was a much more efficient way, uh, to run blockchains. And within 18 months, there were dozens or maybe, I don't know, 40 or 50 blockchains that either had changed or had launched with a proof-of-stake consensus algorithm rather than proof of work. You're investing in a company where no one cares, the market is tiny.

   16. HSHarry Stebbings41:32

       How big was the round that you did?

   17. NCNick Chirls41:34

       I won't say, but it was a, it was, it was a small pre-seed. We, we, we effectively helped the company get going. And, uh, we actually, the same founding team, we had actually previously all, as a s- basically a side project, built a Bitcoin mine together in Oregon: Mm-hmm. Um, and so there was a long history. I had actually backed their previous company. There was a long history of working together, um, and a lot of trust, by the way.

   18. HSHarry Stebbings42:00

       Was it an easy decision to sell?

   19. NCNick Chirls42:02

       It was.

   20. HSHarry Stebbings42:03

       I'm still in shock dude. That's all, I'm so happy for you. You're such a nice guy.

   21. NCNick Chirls42:06

       Yeah. (laughs) Ah, thank you. Thank you.

   22. HSHarry Stebbings42:08

       So I'm, I'm, I'm sure it was for me. Uh-

   23. NCNick Chirls42:09

       Yeah, we don't, we don't talk about this stuff that often. I mean, you can, you can, you can, uh, you know, whatever. I don't mind people knowing, but anyway, Bison Trails is one example. There w- there's been a couple others like Bison Trails. We, we invested in the Solana Series A, um, so that's kind of similar.

   24. HSHarry Stebbings42:24

       What f-

   25. NCNick Chirls42:25

       No one cared.

   26. HSHarry Stebbings42:25

       What, what, what fund was that in?

   27. NCNick Chirls42:28

       Uh, that was the same fund. (laughs) There was no access problem. There was no, uh, competing over to get into it. Anyone...So, if you're doing the hot five on 25s, the 10 on 30s, whatever, you've gotta know that that-- that's consensus. The market already believes what you believe, and you've gotta really believe that that one is gonna be the winner against, inevitably, lots of competitors that are doing the same thing, 'cause it's already well-known in consensus. So if you have a strong belief that that's the one, then that can be, then that, then that can work. I, I have, in my, in my, in my history, I have never done a good job of figuring that out. I'm much more comfortable investing in a thing, right, investing in a founder. I get, by the way, in every fund, I get like 25 of them, so I can be wrong a lot. Like I could be wrong almost all of them. Right? We just need one or two or three in a really great fund where, "Oh, that thing that no one cared about, um, whoa, turned out that like people care."

   28. HSHarry Stebbings43:44

       What do you do if you don't get the space? You just, you don't understand it. S- it's in deep tech, hard tech, you name it, whatever that is. You don't get the space. But you and I both know founders. We've met thousands. This is a fucking great founder. Do you back it up anyway even though you literally don't get it? Or do you go, "No." I'm struggling with this now.

   29. NCNick Chirls44:06

       I would really like to understand it if I can. (laughs)

   30. HSHarry Stebbings44:09

       No, I'm, I'm struggling with this now.
6. 46:43 – 55:05

   The Myth of VC Value-Add

   1. NCNick Chirls46:43

      it.

   2. HSHarry Stebbings46:43

      Nick, a lot of the big banks sell VC value add as a way to win deals. Do you believe in VC value add?

   3. NCNick Chirls46:52

      (laughs) No.

   4. HSHarry Stebbings46:53

      Why?

   5. NCNick Chirls46:55

      I've never found, um, that, uh, any investment we've made ever, or really any, I've never seen any VC be truly the difference between success and failure of a company, period. So like you can maybe help around the edges, but like, I don't know, let's, let's use an example here. Would, would, would Coinbase not have been successful if they hadn't taken money from Andreessen Horowitz and USV? No, I think they would've been just as successful. I think either no doubt those firms helped around the edges. They weren't the dis- difference between success and failure of that company.

   6. HSHarry Stebbings47:41

      I, listen, you have USV, I have Sequoia. Doug Leone actively walked Fred Luddy back from selling ServiceNow for a couple of billion, a billion, whatever. There are quite a few stories of, of where that is the case.

   7. NCNick Chirls47:55

      That may have helped maximize financial returns. That was not the difference between success and failure of that company.

   8. HSHarry Stebbings48:03

      160-

   9. NCNick Chirls48:03

      So yeah, around, around the margin.

   10. HSHarry Stebbings48:05

       160, 160 billion of enterprise value. (laughs) Yes. But sure.

   11. NCNick Chirls48:11

       Sure. But like that enterprise value would've been created regardless. The question is, who does that enterprise value go to? So that might've been a very financial, financially savvy decision around accruing more of that 165 billion in enterprise value.... it was not the difference between whether or not that company would get to that value.

   12. HSHarry Stebbings48:34

       I think there's a real under-discussed misalignment in venture when you have heavy returns in venture models. And what I mean by that is if I do, uh, seed A, B, um, or even I just do seed but I have heavy reserves, the founder is not always incentivized to tell me just how bad everything is, because they quite rightly want the follow-on check. They want me to lead the A, they want me to lead the B. There is this really imperfect information that comes from that. Do you agree? Do you see that? How do you think about that?

   13. NCNick Chirls49:05

       Let me say one more thing on, on VC value-add.

   14. HSHarry Stebbings49:10

       Yeah.

   15. NCNick Chirls49:10

       Because ... And it's related to that question, and I think that, um, there's different ways to define it. So, like, what I, what I think I'm, what I said, what I don't think has, what I don't think moves the needle is services. I don't think that services, you know, a business development team, a recruiter, et cetera, are actually gonna be the difference between success of a company. Now, I do believe that there is value. You mentioned Doug Leone. I do believe there is value in having a really trusted partner or people around the table for a founder, to make good decisions both for the company and financial decisions. Now, that doesn't just need to be VCs, by the way. That can be other founders, that can be independent board members, um, but it can sometimes be VCs, right? It can be Doug Leone. Um, I think one of the most important, we talked about this earlier, I think one of the most important pieces is there's a financial component to venture, and I think there's a trust component to venture. I think having a track record of building real trust with founders is extraordinarily valuable to, to you and to the founder. Now, it's really hard to pitch trust, actually, right? Like whenever you hear someone being like, "Just trust me," you're like, "Holy fuck." (laughs) "I'm not gonna trust this person." Right? Like, the "Just trust me" is terrifying. So like, it, it's, it's something, it's something that it's ... I- in other words, it's har- it's much easier to say, "Look at our team. We have 100 business development executives here." It's much harder to say, like, "You should work with me because I'm highly trusted. Uh, we're gonna do the right thing." Um, and that's really important. Like, it's not as good of a soundbite.

   16. HSHarry Stebbings51:09

       I think the big venture firms actually know that the best founders aren't gonna be sold by BD team or a recruitment team. I think they love the fact that it's a great justification at a low cost for the egregious fund sizes and the big fees. LPs-

   17. NCNick Chirls51:22

       Yes, and-

   18. HSHarry Stebbings51:23

       ... look at it and go, "Wow, this is-"

   19. NCNick Chirls51:23

       ... and, and also, I think it's ... I also think it's a way to just not do the work.

   20. HSHarry Stebbings51:27

       Sure, absolutely, and we don't get-

   21. NCNick Chirls51:28

       Like, "Just don't bother me."

   22. HSHarry Stebbings51:30

       See, it's-

   23. NCNick Chirls51:30

       Like, you- you know you need some help with like a BD thing, don't bother me. Go talk to the BD people.

   24. HSHarry Stebbings51:36

       I totally agree. Vinod Khosla says that 90% of VCs actually detract badly. Do you think that's a little bit unfair, or do you think that's right?

   25. NCNick Chirls51:42

       In my experience, actually, it's a smaller percentage that actually destroy ... Like, like, when I think about lots of VCs in the community that we work with, like, th- there's not a long list of folks where I'm like, "Oh, this person is gonna be like dangerous to the company." The biggest, um, issue is just not caring. Like, that, that's the thing that actually bothers me, is like they just don't care. Don't care about the people, don't care about the investment. "Oh, it's 1% of my fund." They just don't care.

   26. HSHarry Stebbings52:16

       Is that not just rational? If you're thinking about concentrating finite resources, time, or money-

   27. NCNick Chirls52:22

       Short-term, short-term rational, long-term irrational.

   28. HSHarry Stebbings52:25

       But you can't do everything, dude. You cannot do everything, and you have to prioritize.

   29. NCNick Chirls52:29

       You can if you don't make that many investments. You can't do everything if you make a ton of investments every year, which the average venture firm does.

   30. HSHarry Stebbings52:37

       So one thing that's very helpful with media, by the way, on that, which is the average venture firm also does, 'cause it helps with relevancy. Doing deals keeps you relevant, keeps you in the news, in the founder flows. The thing that I love about us is I can do fuck-all deals for a year and put out some banging episodes and we're just as relevant. (laughs)
7. 55:05 – 1:04:07

   Raising Money as the Default Path for Today's Founders

   1. NCNick Chirls55:05

   2. HSHarry Stebbings55:05

      I think the hard thing is, honestly, maybe, you know, we've been a part of the problem bluntly at 20VC, but like, you've got a generation of founders that's just taught, you have an idea, you raise money. It's not, you have an idea, you build products, you get customers. It's, you have an idea, you raise money. Mo- th- that is the chosen path. Do you agree that that is just perception now within generation that is so used to that as the dominant wisdom?

   3. NCNick Chirls55:28

      Yeah, it makes no sense. Companies have gotten so cheap to build. You don't need this much money.

   4. HSHarry Stebbings55:34

      Do you think that everyone is an entrepreneur?

   5. NCNick Chirls55:36

      No. I, w- we've, we've talked about this. I think, I think there's an, there's an, uh, there's another, uh, Silicon Valley meme where, um, everyone should be a founder. I, I think it's similar to like the meme back in the day where everyone needed to learn to code. We've been playing around with different taglines at Asylum, um, one of which is don't do this. (laughs) Um, I don't know if that will actually be, I think that might get cut, but like the, the basic idea is that people say this, but I don't think they really internalize it. Like, building a startup is, um, truly awful. It's like a truly, truly bad experience. Um, and it will ruin your life basically in various different ways. And by the way, that's if it goes well or if it doesn't go well, either way. It goes well, problems get harder, um, huge teams, uh, often, lots of capital raised, lots of pressure, um, like it is going to take a lot out of you. Um, and I've seen this through relationship breakups, founder breakups, divorces, bankruptcies. Like, um, what I will say is after many years of doing this, I have more respect for the founder journey than I ever have. Like it actually even just really thinking about it makes me like a little sick to my stomach, like actually physically sick. I'm like, "This is gonna be a truly awful experience."

   6. HSHarry Stebbings57:13

      That's why we go back to obsessed. So you-

   7. NCNick Chirls57:15

      Obsessed.

   8. HSHarry Stebbings57:16

      ... have to do-

   9. NCNick Chirls57:16

      And so, so, so why would you do that? Why would anyone do that? Um, because they're obsessed, because they need to do this thing, because they will be up all night every day thinking about this thing. Um, there's a problem that they just, they can't not do, right? Um, those are the people that should start companies for sure. Um, and, and I'm deeply grateful to those people that do. I think our job, in addition to trust, by the way, is to make that experience just a little less shitty. Like, it's that simple. It's that simple. Build trust with the founder and try to make what is gonna be an awful experience building a company. A, there's, sorry, I keep saying awful. There will be some joy in it too, incredible joy, like incredible highs in joy of really doing something meaningful and building something beautiful. But there will be many moments where it is truly awful. And I, I think our job is to be a steady hand, a place of calm, a place of trust, and to try to create an environment in which the founder can do their best work.

   10. HSHarry Stebbings58:36

       I, I do just wanna, before we do a quick fire, you know, we mentioned A24 and the kind of guiding inspiration there. Truth be told, honestly, Nick, I've been in some rockets that then turn out to not be rockets, your Clubhouse, to your Hopin, to your BeReal, and they are portfolios with assets in, whether you like it or not in terms of naming. And I should have been much more proactive in terms of managing positions and exiting when I could have done. Is there a way to navigate, in your mind, this much more banker-like mindset towards positions, position sizing, liquidity timing, but also retaining the artisanal element that you like? 'Cause I think we're both in the same camp of you do need both.

   11. NCNick Chirls59:18

       My view has always been, uh, trying to find alignment with the founder. We have seen many experiences. Now, when a founder's selling a company, right, usually, you're selling with them, (laughs) right? So that's, that's aligned. Um, we have sold, uh, shares in founders' companies over the years, um, actually a number of times. Um, we will only do that when the founder is selling. Um, uh, but, but I will say when the founder is selling, we almost always do it. I wanna be aligned with the founder. I think there are many investors that are, that are actually terrified to have those, even those conversations, which also again goes back to honest conversations and trust. My approach has always been if I built trust with the founder, if they are choosing to sell shares in a round, I give them a call. By the way, we've, in most every situation, we're basically the first investor in the company. And I say, "Hey, look, been amazing working with you for many years as it is. Um, you're selling a little bit? Hey, it would be really helpful and valuable to us if we could sell a little bit alongside you." And by the way, valuable to us and to our investors, and it allows us to continue to do what we do. Uh, we never sell, we never sell all of it.

   12. HSHarry Stebbings1:00:47

       I wouldn't want that 'cause like quite often, like a founder will take a million or two off in the A, and I completely support that and understand that is to buy not lifestyle retirement, but just...... a home, kids' school fees.

   13. NCNick Chirls1:00:58

       Yeah, totally. I'm also-

   14. HSHarry Stebbings1:00:59

       I wouldn't, I would- I wouldn't wanna take-

   15. NCNick Chirls1:01:02

       ... supporting.

   16. HSHarry Stebbings1:01:02

       I wouldn't wanna take money off, though, when they're doing that. Do you?

   17. NCNick Chirls1:01:05

       Why?

   18. HSHarry Stebbings1:01:05

       Uh, well, I mean, it's, uh, if I believe in the business, just because the founder needs a little bit of cash for school fees, and I believe that-

   19. NCNick Chirls1:01:12

       I, I think that's fair. I think that's fair. There, there's been situations in which it's very small amounts. I'm mainly talking about, like, series B or C when the amounts become meaningful.

   20. HSHarry Stebbings1:01:21

       What was the single biggest mistake you made in Zurb? I mentioned mine, not selling.

   21. NCNick Chirls1:01:25

       (laughs) Hey, man, you can bring that, you can bring those learnings for you forever. I think my two biggest mistakes in, at, at Notation over the last, uh, call it 10, 12 years, and, you know, I was, I was an investor at Betaworks before that. Um, I think my mistakes tend to be, um, getting antsy. I haven't made an investment in a while, and I start to think about that and it gets in my head, and now I'm much more aware of it. But, um, I don't make many investments a year. I make three to five investments a year. And when that happens... And sometimes tho- those come in chunks. So, like, there'll be long periods where I haven't made an investment. Um, I think it is human nature to start thinking, "Am I not seeing the right stuff? Am I overthinking these things? What are my LPs gonna say? What do they think I'm doing?" Right? Like, these are toxic, (laughs) toxic little people in your head. Um, I've learned to listen to them and understand where I'm at and to be patient. So I've made some mistakes there. Um, I think I've made some mistates- mistakes around, we talked about valuation, I think I've made some mistakes about being, uh, too precious around valuation. So, like, there's a big difference between a $5 million post and a $25 million post. Like, that, I think, you need to really think about and consider. Um, if it's 5 or 8 and it means you potentially, you know, winning the investment or co-leading or whatever, it don't, you don't need to overthink those. And I think there was a, there was a stage in my career earlier on where, um, I got too into the minutiae around is it 5 or 5 and a half or 10 or 11? Like, the- these, these small differences do not matter long-term. If it's a 2X or a 4X or a 5X difference, 5 or 25, then, like, that matters, and you should, like, give that some thought. And I do think that, um, you need to have the tool in your tool belt to be able to pass on valuation. That's gotta be in there.

   22. HSHarry Stebbings1:03:38

       I don't understand how you do a 5 million post, 'cause then you're gonna get 5-

   23. NCNick Chirls1:03:42

       Well, those are rarer. Those are rarer these days. (laughs) But I'm saying in the very early days of Notation when pre-seed was-

   24. HSHarry Stebbings1:03:47

       I was about to say, like, shit me? (laughs)

   25. NCNick Chirls1:03:48

       Those are rare these days. No-

   26. HSHarry Stebbings1:03:50

       Uh-huh.

   27. NCNick Chirls1:03:50

       ... these are rare these days. But-

   28. HSHarry Stebbings1:03:52

       But what's your a- what's your average entry price today at s- pre-seed?

   29. NCNick Chirls1:03:55

       Um, eight to 10.

   30. HSHarry Stebbings1:03:57

       Eight to 10? And checks are one and a half to two?
8. 1:04:07 – 1:09:17

   Quick-Fire Round

   1. HSHarry Stebbings1:04:07

      I wanna do a quick fire round with you. So I say a-

   2. NCNick Chirls1:04:08

      Let's do it.

   3. HSHarry Stebbings1:04:09

      ... short statement, you give me your immediate thoughts. What do you believe that most around you disbelieve?

   4. NCNick Chirls1:04:14

      I believe actually the, the, the less institutional and banker-like you can look to founders over the next decade, the more likely you are to win. So I think the, the most of venture is deeply focused on becoming institutional. It, it feels, it feels more professional. I think the m- the more you can avoid that in the next 10 years, uh, the better.

   5. HSHarry Stebbings1:04:41

      Which venture investor do you most respect and learn from?

   6. NCNick Chirls1:04:44

      This has changed over time, but, but right now probably Andy Weissmann and Bryce Roberts. I think they represent, uh, many of the things that I just described about being the alternative to the big, the big AUM firms. They think independently, and they have the guts to be themselves and do it, do it their own way.

   7. HSHarry Stebbings1:05:05

      Most contrarian or unorthodox advice for founders listening?

   8. NCNick Chirls1:05:09

      Don't do a startup unless you absolutely need to, and find a person that you truly trust, um, to either do that with as a co-founder or, or as, uh, or with your first investor.

   9. HSHarry Stebbings1:05:22

      Sourcing, selecting, and servicing, rank one through three what you're best at to worst at and why.

   10. NCNick Chirls1:05:29

       Selecting, sourcing, and servicing. From a selection perspective, I think that I've 12 or 13 years of data now of hands played that I can go back to, and I think I've learned a thing or two there. And I also think I'm just more patient than 90% of VCs in the market.

   11. HSHarry Stebbings1:05:57

       What's been your biggest miss, Nick?

   12. NCNick Chirls1:05:58

       I miss both Hugging Face and Runway at pre-seed, um, which is, which is painful. They're both, both New York companies. Um, absolutely represent the thing I'm describing, which is they were building things before anyone actually cared. Great teams. Um, those were-

   13. HSHarry Stebbings1:06:20

       To be fair, to be fair-

   14. NCNick Chirls1:06:20

       ... both, both really painful.

   15. HSHarry Stebbings1:06:22

       To be fair on Hugging Face, it was, like, a very different business. Very diff-

   16. NCNick Chirls1:06:27

       I met them, I met them when they were a, uh, avatar app. That one was a pivot. Runway was also a little bit of a pivot. I mean, they were both sort of pivots, but they were, they were poking around a market that was genuinely interesting. Like, AI had been rapidly evolving, even before LLMs. And those would have represented, I think, really interesting bets on how, um, AI might evolve in the years to come.

   17. HSHarry Stebbings1:06:59

       Final one for you, man. What question are you never asked that you should be asked more?

   18. NCNick Chirls1:07:04

       Maybe relevant for this conversation, like, why do, why do I hate banks so much? (laughs)

   19. HSHarry Stebbings1:07:08

       Why do you hate banks so much?

   20. NCNick Chirls1:07:10

       Okay, this is a very personal story. But, um, I, uh...I grew up in New York City. My mother worked at an investment bank. Um, she, uh, she passed away, actually, when I was a teenager, and I think in many ways I went to go work at Lehman Brothers to feel closer to her. Ultimately, what I walked away with is I couldn't help but think that there was no possible way she wasn't, uh, mistreated or dehumanized over the course of her career at these places. Ultimately, uh, I was obviously deeply disappointed. I went there to be closer to her, and I actually came away feeling like, um, in some ways we both must have been mistreated, and I think that has likely led to my 20-year (laughs) revenge arc now against bankers and these big banking firms because I think ultimately they do a disservice, um, to the people working in these places.

   21. HSHarry Stebbings1:08:22

       Dude, I'm sorry about your mother. I-

   22. NCNick Chirls1:08:24

       (laughs) It's okay.

   23. HSHarry Stebbings1:08:24

       I'm very close to mine, and I think mothers are incredibly, incredibly important, and you know, I'm, I'm really sorry to hear that, and thank you for sharing it. Um, dude, I do this show because of interviews like this, because of (laughs) relationships like this where we don't need to talk that much, we only need to talk for years, but when we do, suddenly it's like this is why I love what I do. So thank you for being so brilliant. Thank you for putting up with my shit throwing back. I agreed with most of what you said.

   24. NCNick Chirls1:08:52

       No, I, I, yeah, I, I, I, um... Sorry, I didn't mean to interrupt.

   25. HSHarry Stebbings1:08:56

       No, I agreed with what most of what you said, but you were just incredible, dude, so thank you.

   26. NCNick Chirls1:09:02

       Thank you so much, Harry. Um, uh, sorry I went a little dark (laughs) for a few years there, um, as I was sort of planning my new thing, but, um, it's been so good to reconnect and I'm, I'm so grateful, um, that you offered me the opportunity to do this.

Episode duration: 1:09:27