Why Margins Don't Matter for Early-Stage Startups | Gili Raanan

1. 0:00 – 1:27

   Intro

   1. GRGili Raanan0:00

      I think it's going to end up with some serious catastrophe for many of the players. The market is not balanced. It means that a lot of that cash that's flowing into the market would be wasted.

   2. HSHarry Stebbings0:11

      What a guest we have in the hot seat for you today. Gili Raanan, founder of Cyberstarts, and one of the most successful seed investors ever.

   3. GRGili Raanan0:18

      Venture is a game. We know very little when we get into investments.

   4. HSHarry Stebbings0:21

      In his 19 company portfolio of Fund One, check this out, he invested in a decacorn, Wiz, seven unicorns, and he had three other companies acquired. That is an insane hit rate.

   5. GRGili Raanan0:32

      We need to be selfish, and we need to be greedy. Those are good traits for an early-stage investor.

   6. HSHarry Stebbings0:37

      Prior to Cyberstarts, Gili spent over 15 years as a general partner at Sequoia, where he invested in some of the world's best cybersecurity companies.

   7. GRGili Raanan0:45

      As an investor, you look at yourself and say, "Okay, I really [censored] up." I'm not in a business of babysitting founders.

   8. HSHarry Stebbings0:52

      Ready to go? [upbeat music] Gili, we have been friends for a while. We did a show remote, and it is just so much better in person, and so I've been so looking forward to this. I also love shows. You've got to remember why I do this show. I do this show because I, I love to learn from people who are so much wiser than me, and it's like the greatest joy to have you here with me. So thank you for doing this, dude.

   9. GRGili Raanan1:22

      Happy to join, and if I knew that you are coming with shorts to, to the interview,

2. 1:27 – 8:27

   Does the Venture Business Even Work Anymore?

   1. GRGili Raanan1:27

      I would come, uh, I would show up earlier.

   2. HSHarry Stebbings1:29

      Dude, do you not realize that we have the table so I can hide them? I look professional from above. Um-

   3. GRGili Raanan1:34

      Oh, I didn't mean to disclose any-

   4. HSHarry Stebbings1:35

      No, it's-

   5. GRGili Raanan1:36

      ... any state secrets, but, uh-

   6. HSHarry Stebbings1:38

      It's, it's fine. It's fine. We know that my shorts are a little too short. But I wanna start, dude, on our conversation that we literally just had, which is does the venture business work anymore when we have entry prices of a hundred and fifty and a hundred X ARRs as we are seeing today?

   7. GRGili Raanan1:57

      So you could say that there, there are multiple answers to that. First of all, the venture business as a whole doesn't, doesn't work. It doesn't work. It shouldn't work. Uh, and, and returns, uh, distribution, uh, are not, uh, divided equally between players, otherwise it would be too easy and, and, and there won't be, uh, winners and losers. It would be boring. None of us would be playing that. We would do something else. So, uh, so the expectation that the venture business would work out is, is, is set yourself for, for, um, disappointment from, from the get-go. It doesn't work. Now, it work for some people. It work for some people for some time, and the number of people it works for them for a long period of time, like, you know, let's take our, you know, favorite friends from, uh, Sequoia Capital or, uh, Andreessen, Benchmark, uh, Greylock, Lightspeed, I probably-

   8. HSHarry Stebbings2:57

      Sure

   9. GRGili Raanan2:57

      ... you know. Uh, that number of, uh, players is, is, is super small. And, and if you look at all amount of money that's flowing into the markets, uh, right now and for the past few years, no, I don't think it's going to work. I, I think it's going to end up, uh, with some, uh, serious, uh, catastrophe for many of the players. Um, so if I'm a, if I'm a limited partner, and I've distributed my venture allocation evenly, I wouldn't sleep well at night. Um, and again, I, I, I'm not, a, as you know, I'm focused solely, um, on, on cybersecurity, so I know very little about, about other domains that you probably know, uh, uh, way more than, than I do. Uh, but, but cybersecurity is, is, is, is probably, uh, an interesting enough market to talk about-

   10. HSHarry Stebbings3:57

       Sure

   11. GRGili Raanan3:57

       ... and it's sizable enough market to, to talk about. And, you know, uh, the, the, the, the s- the flow of new players into cybersecurity is quite steady for the past, I would say, twenty years. You know, you're looking at around, uh, three hundred and fifty, four hundred new, uh, teams that get funded every year, you know, across U.S., uh, Israel, and, and, and a little bit in Europe, unfortunately. You know, it should be more, I guess, and hope it would get a bigger number over the time, over time. But that, you know, that number, that's, that's the, um, hundred percent of, of the cybersecurity universe. So think about it like the past, uh, decade, there were, uh, about four thousand new, uh, cybersecurity startups, um, and in the next decade there'll be probably four to five maybe thousand, uh, cybersecurity startups in, in a world. That's, that's a, a large number. Um, and over the past few years, the entry price, as you rightfully mentioned, is, is going up, is going up for, for many of those, uh, for many of those, uh, startups. You see, you know, when I, uh, wrote, uh, the first, uh, check to Assaf Rappaport at, uh, We at, uh, Adallom, at this, at, at the first company they, they started in twenty twelve, it was done at, if I'm not wrong, fifteen million dollars, uh, post. Many of those deals done at, at, at high prices, and still if you look... So that's in the incoming stream. If you look at the outgoing stream, you know, you look at, uh, uh, exit prices or even the likelihood of a cybersecurity company to become a unicorn. Do you have any idea? You know, take Israel, whi- which is probably-40% of the market. Um, so we have to, to multiply the Israeli number by two and a half to get the global number. You know, do you have any guess what, what's the number of companies that became unicorns in cybersecurity last year, twenty twenty-five?

   12. HSHarry Stebbings6:26

       Six to eight.

   13. GRGili Raanan6:28

       Two. Uh, twenty twenty-four.

   14. HSHarry Stebbings6:32

       I'm gonna go five.

   15. GRGili Raanan6:34

       One.

   16. HSHarry Stebbings6:34

       Oh, dear. That was bad, yeah.

   17. GRGili Raanan6:36

       So we, we go... It's two or one till twenty twenty-two. The only year which was an outlier, which was an exception, was twenty twenty-one. Twenty twenty-one, there were, like, seven companies that turned unicorn, but that changed the mindset of investors. Uh, but-

   18. HSHarry Stebbings6:54

       And were they synthetic? Like, were they artificially inflated? Have they persisted as valuable companies, or is that twenty twenty-one bubble?

   19. GRGili Raanan7:00

       You know, in, in a way, it doesn't matter.

   20. HSHarry Stebbings7:03

       Mm-hmm.

   21. GRGili Raanan7:03

       It is what it is. That's, uh, those are the stats. Uh, we can argue about the reasons and the drivers, and we are probably be- going to be wrong 'cause we have all kind of biases. Um, but, but the, the, the fact is that out of, um, around hundred and fifty, uh, new companies in cybersecurity in Israel, you know, the likelihood you'll hit a successful, uh, uh, company is still one to 1%. It's one out of hundred and fifty, maybe two out of hundred and fifty. And the prices, the entry prices where you buy stock at the seed stage is going significantly higher means that the market is not balanced. It means that a lot of, uh, a lot of that ca- a lot of that cash that's flowing into the market would be wasted. And it means that you have to be so... You know, not as just an, a limit, as a limited partner, as a founder, you have to pick your financing partners more wisely 'cause this, the numbers and the probabilities are not working in your favor. They're working against you, and it's

3. 8:27 – 10:38

   Are We Just Being Boomers? The Counter-Argument on Outcome Sizes

   1. GRGili Raanan8:27

      just getting worse and worse over time.

   2. HSHarry Stebbings8:29

      Can I interrupt you and say, I can say this 'cause we know each other, and you know there's so much love and respect for you. Do you think you're being a boomer? And what I mean by being a boomer is the alternative argument would be, "Gili, we are seeing labor displacement like we've never seen before. We're seeing outcome sizes expand like we've never seen before. We're seeing, you know, CrowdStrike and Palo Alto Networks reach sizes of market cap that were never before thought possible. Of course, we can pay more on entry because the outcome sizes are so much bigger."

   3. GRGili Raanan9:01

      You can say that. That's, that would be a legitimate, uh, um, you know, argument, and I would accept it with all, uh, humbleness. It would not change the probability, uh, the, the probability facts around this game, and venture is, is a game. Uh, you know, we know very little when we get into, into investments. We, you know, we analyze, if we analyze, uh, product ideas and, and markets. Mostly we, we analyze smoke 'cause, you know, the founders would change their mind in, in just few weeks, and it would be a different product, different market, many different things. So, so we know so little, uh, and you're right. Some of the, the, the, um, outcome, um, definitely in cybersecurity, um, became very massive 'cause, 'cause the pain points in cybersecurity are, are massive. This is not an argument why we should invest less in innovation in cybersecurity. The, the contrary, we should invest more in, in, in, in innovation in cybersecurity for reasons we can, we can discuss in a minute. Um, but we should be super realistic, uh, as investors and, and, and, and limited partners, uh, about the ongoing and lasting impact of entry prices when we invest in, uh, innovative, uh, technologies

4. 10:38 – 12:48

   Will Mega Funds Be Able to Return Venture Economics?

   1. GRGili Raanan10:38

      and emerging teams.

   2. HSHarry Stebbings10:40

      What we haven't discussed correlated to that increasing entry price is the increasing fund size that has been associated and correlated to that. Fund sizes have ballooned. I mean, now we have 10... We, we both love, you know, your Sequoias and your Andreessens, and we have $10 billion funds. I mean, Andreessen I know is combined, so it's a little bit misleading, but, you know, David George has a six, seven billion dollar pool. It's a, it's a lot of money. Do you think the mega funds will be able to return venture-like economics in this generation of venture, given what we just discussed?

   3. GRGili Raanan11:13

      The funds that have the tradition, the textbook, the guardrails, uh, um, to, to, to make great investments, they would continue to do well. So, uh, would I, would I invest in those funds personally? Yes. We should, we should admit that w- we are looking at, uh, at a massive opportunity ahead of us. So it's not, it's not criticism of the opportunity. The opportunity is here, it's real, uh, and, and, you know, the investment in innovation is justified. And, and, and those companies, especially those companies that are, uh, growing very, very fast, they need a lot of cash. More cash than before. And, uh, you know, I don't think that the, uh, Claude, uh, code and, and, you know, AI, which, you know, at least in the next few years, would not change that materially.And, and it takes a lot of money to build large companies. So yes, I, I encourage founders to raise a lot of money if they like to continue and build significant companies. So you can, you can correlate find- fund sizes to that. Um, my concern is around e- entry prices, um, and what, and whether that would limit innovation at some point in time, because disappointment would, would,

5. 12:48 – 16:11

   How to Tell If a Company's Growth Is Real or Engineered

   1. GRGili Raanan12:48

      uh, would show up.

   2. HSHarry Stebbings12:50

      What did you turn down because of price that you later regret, and what did you not see if you do a postmortem?

   3. GRGili Raanan12:58

      You know, we, we are exercising, uh, the science of greed, so almost by, by design, uh, we need to be selfish and we need to be greedy. Um, those are good traits for an early-stage, uh, investor. Those are not bad, negative tra-traits for anybody who's dealing with early stage. Yes, price is a, price is an important, uh, consideration. And whenever I see a, a, a, an inflated price seeded a deal where essentially it's a bet on a team, I, I get more, more skeptic. Now, whether I turn it down or not, it, it depends on many other factors.

   4. HSHarry Stebbings13:42

      I think one challenging thing about where we are today is so many of our, like, prior assumptions or beliefs are, are questioned, and one of them is around growth. The growth of companies today is so much more significant than it has been in the past. H-how do we value companies when the growth trajectory and pathways are so very different?

   5. GRGili Raanan14:04

      I believe, first of all, I believe that trajectory, velocity, um, growth rates are the most important indicators for, um, for a healthy business. Um, and, and I think that part of our job is to, to look at that, uh, growth and, and try to sense whether it's been engineered or it's being organically, um, achieved. And there are ways to, to, to engineer growth. Uh, but, you know, whenever you see a, a, a company that's a business that's growing, uh, very, very fast, it's a good company. You know, a- as a general statement, I mean. Um, c- 'cause that's, that's the best, uh, that's the best, um, predictor for, for, um, um, for a company that does well. And, and over time, I learned that whenever a business is getting to a point it's growing super fast year over year, it becomes part of their DNA, so it would not slow down just because. Just because, you know, averages and, and things like that. There, there need to be a, a, a, a significant external event to slow them down. So if a company, um, uh, grows fast, it would continue to grow fast. It's part of the DNA. They, they probably do something very right at that company. Now we can go and analyze that and, and, and, and, and, and backtrack, uh, uh, that and, and, you know, attribute that to all kind of, you know, founder traits and, and, and, and market dynamics and, and things like that. But it's,

6. 16:11 – 19:40

   Wiz vs Sierra: What Fast Growth Actually Looks Like

   1. GRGili Raanan16:11

      it's-- it doesn't change. You know, if you look at the way, um, companies like, uh, Wiz or Cyera have, have, have, have grown, you know, we, we, we... At Cyberstarts, we do the same type of, you know, exercise, product market fit exercise with all our companies. And, you know, we call it Sunrise. We spoke about it last time we, we met. And, uh, um, it's, it's an attempt to get into some sort of alignment between the pain point in the market and, and the solution you have. So, you know, uh, you really sell something that people would use and love and, and, and, and buy more and recommend to their friends and colleagues. Um, that's, that's product market fit. And at Wiz, uh, when you look at the first year of selling software, you know, the, the first quarter was a million dollar, and then second quarter of selling software was two million dollars, and then eight, and then twenty-four. So that's, that's an amazing year. That's in twenty-twenty, or maybe partially twenty-twenty and then early twenty-twenty-one. When you see that level of grow- of growth, this is not a one-time event, and the company continue... By the way, we had the records of, of companies like, um, you know, Palo Alto Networks or, or ServiceNow, who are, you know, part of the Sequoia Capital portfolio. So I had access to, to the numbers, and, you know, [chuckles] this is, this is ins- you know, this is insane pace what Wiz demonstrated.

   2. HSHarry Stebbings18:01

      Do you think great companies are up and to the right, though? 'Cause I was always of the belief that actually companies zig and zag, and they cancel.

   3. GRGili Raanan18:07

      I, I'll give you the other... So Cyera, uh, they had an amazing start. You know, they sold probably half a million dollars in the first quarter, and then a million dollar.And they, they sold zero for two quarters. Literally zero. It was, "Okay, what's going on?" As an investor, you look at yourself and say, "Okay, I really fucked up." And then we, you know, the, the, the, the team, um, and I, I, I really attribute that to, to the founders, to Yotam Segev, the CEO, and Tamar Barilan, the CTO. They really analyzed what's going on. They made some modifications, and the next twelve months, they sold twelve million dollars of new business. So they went two to twelve. And then I, I don't like to disclose all the numbers 'cause it's all, uh, still in, in, you know, it's a, it's an active company that's, uh, making terrific progress. But it continued, you know, it continued to grow extremely fast. 'Cause when you see a company that grows that fast, it's part of the DNA. There's something about the company that make them grow fast. It may be amazing execution on go-to-market. It may be weakness on the competitive side. It may be perfect timing with market. It's probably product market fit, but there's reasons that you can analyze. But that thing that makes them move so fast, typically, most of the cases would

7. 19:40 – 21:36

   Does Market Size Determine Whether a Company Plateaus?

   1. GRGili Raanan19:40

      not simply, uh, fade away.

   2. HSHarry Stebbings19:42

      So one of my biggest lessons is the importance of market size and just having mega, mega markets, because to your point on like up and... like if, if you hit target and you continue to hit target, I honestly, I was like, "Yes, but so many companies plateau. They hit twenty, thirty and then [blows raspberry] and the markets are just not as deep as we thought. They're more crowded than we thought. What-- The market is not what we thought it was." Am I wrong? And does great quarter compound to next great quarter? And how do you think about that? The majority do plateau.

   3. GRGili Raanan20:12

      I don't think you are wrong. I, I'll give you two, two, um, two contrary examples and, and, and, and, you know, that's the beauty of our profession, that it's, it's, it's, it's made up of the exceptions. Uh, 'cause the rules, who cares about the rules? Um, so, so, uh, take a company that focused early on, um, one of my portfo-portfolio companies, uh, in, in fund one called Noname. It was focused on, on API security. Amazing company. And, and, uh, you know, they did first year, I believe it was three million dollars or so. Second year, fifteen. Okay, that's amazing. And they, they slow down. Why? The market for API, uh, security was, you know, it wasn't a market. It was a niche segment with-- within application security. Uh, and the company, in order to really sustain that growth, had to really reinvent itself into a much bigger product vision, market vision, and it was super hard, and eventually we, we sold the business, uh, to Akamai for half a billion

8. 21:36 – 21:46

   Does Too Much Money Defocus Great Founders?

   1. GRGili Raanan21:36

      dollars or so. And, you know, that was end of story. Um, on the other hand, another company in our portfolio, you know, same year, founded on the

9. 21:46 – 26:36

   Island - Building a Market That Didn't Exist

   1. GRGili Raanan21:46

      same year, twenty nineteen, company called, uh, uh, Island. Um, amazing founders. Uh, Mike Fey is the CEO, Dan Amiga is the CTO. And the company is, is, is, is basically selling browsers, and their idea is enterprise browser. Now, believe me, in twenty nineteen, the number of, uh, uh, uh, customers, number of CISOs, number of chief information security officers that told, told us that they need an enterprise br- an enterprise browser equals the number of CIOs or users that told the market in two thousand and six that they need an iPhone. You know, it's a market that doesn't exist. And still, the company is growing super fast. You know, it's a five billion dollar, uh, company today in valuation, selling, growing with, growing very, very fast in a market that it, it... actually they define the market. And the market is growing. I can't talk about the specific customers they have, but they have tons of, uh, financial services and Fortune one hundred, uh, customers. And, you know, think about a bank that's using an Island browser instead of, uh, Google or Microsoft browsers. That's, that's unbelievable 'cause you're essentially competing with free, and which, which is a tough competition. The conclusion, again, in my mind, is that we are, we are, um, exercising, uh, the science of exceptions. And it's good that we share that, those lessons, but if you just take those lessons and, and apply them linea- linearly, um, I think that it would be very hard for you.

   2. HSHarry Stebbings23:38

      You mentioned two incredible businesses there with Cyera and Island. I am interested 'cause when companies are on a trajectory like they are, and I'm, I'm not choosing them, so I'm kind of just saying a trajectory that's amazing and fast-growing companies that are clearly looking like winners, capital concentrates, and what happens often is the foie gras-ing. You know foie gras? Funnel explodes. Do you worry that too much money goes in too quickly and the founders are defocused and distracted?

   3. GRGili Raanan24:07

      I'm never worried about that. Never worried about that.

   4. HSHarry Stebbings24:11

      Why?

   5. GRGili Raanan24:12

      'Cause it takes a lot of money to, to really build those companies, and if we don't need the cash this year, we need it next year. So I'm not worried about that.The contrary example of engineering growth, if you are taking good money and your magic number is horrible, and, you know, for every dollar you spend on sales and marketing, you generate ten cents, uh, in new ARR, you're in a horrible business. And yes, you can take that money, throw it, and, and your efficacy, your yield is so low that, you know, you would not, you, you'd not be able to sustain it. But if your yield, if you've done-- if you've built a product that fits what the market needs, product market fit, you've got a team, a go-to-market team that executes in a decent way, decent plus way, your yield would be significantly higher. Now, it may not be as you'd like it to be, to be, I don't know, hundred and forty cents on the dollar. Maybe it's going to be, 'cause it's early, it's going to be sixty-five cents growing into eighty cents on the dollar, but the yield would be decent. You can see how you can turn it into a profitable business. And, and then why would you care that you, you have, you know, another extra two hundred million dollars in the bank?

   6. HSHarry Stebbings25:36

      I think the concern is that you have a brilliant but young founder who suddenly brings forward a product roadmap, does four things, not one, becomes defocused, opens up new geographies too soon, hires too aggressively and poorly, and then suddenly the core business that we liked, we loved, is now all over the place, and we need to rein it back in.

   7. GRGili Raanan25:58

      [scoffs] Um, intellectually, I get it. Uh, I respect that. It-- I don't have that concern. I, I'm not in a business of babysitting founders. And, and, and for me, this is like babysitting the founder. If we trust them to build, in my case, an important cybersecurity company that's critical to all the major banks in the US, and you, you put in their hands the safety of our, uh, nation's, uh, most sensitive information, and then you tell them, "Okay, and you can't handle the idea of that you have some extra cushion in the bank or-- and you are going to get sloppy and

10. 26:36 – 32:05

    Do Gross Margins Still Matter in the AI Era?

    1. GRGili Raanan26:36

       lazy." Okay, I don't buy into that.

    2. HSHarry Stebbings26:38

       You mentioned engineering growth. One way that you can engineer growth today is actually in your COGS and spending on inference and r- allowing for a reduction in margin. Now, I was always taught that margin mattered, but we're seeing margins denigrate in a wave of AI as more and more is spent on inference. Do we just appreciate that margins will come good eventually, or do we appreciate that AI is just a different margin profile that we have to get used to?

    3. GRGili Raanan27:06

       I'm not sure what's the right answer, um, 'cause I don't think that we have seen enough of healthy, profitable AI businesses to really, you know, drive back the, the important vital signs, uh, for, for a healthy AI company. Who knows? Um, I can tell you for sure that the vital signs for a healthy cybersecurity company, uh, involves, uh, uh, uh, high, uh, healthy gross margins. Uh, so my instincts are that, you know, gross margins, uh, matter. Now, are they important? How much I discuss, how often I discuss gross margins with, uh, with my early-stage, uh, companies? Never. I, uh, you know, 'cause pa-part of the journey and, and part of our job as, as investors is, is, you know, 'cause... is to really help the founders realize what challenges, what problems they need to tackle right now, this year, uh, let's say twenty twenty-six, and what are the challenges and problems they, they, that they would tackle in twenty tw-twenty-seven and twenty twenty-eight. So if you have, you know... If I would be lucky enough and, and, and, and, and you become a, a founder of a, a, a young cybersecurity company in the Cyberstarts portfolio, I would tell you, you know, gross margins are important. Let's talk about it in twenty twenty-nine. Co- And, and let's build the found-foundations of healthy business, assuming that we would get to deal with gross margins. Now, that's true for cybersecurity. It may not be the truth for AI businesses. As I said, I don't think that we as an industry, uh, have enough, enough track record and, and history with that. But I think that, uh, I suspect that gross margins would continue to be important.

    4. HSHarry Stebbings29:23

       Has your expectation on the growth rate of companies changed? Before triple, triple that, going from three to ten was, was good. Now, with a Lovable, with a Legora, a Harvey, you need to go to fifty and fifty to two hundred in, in two years. The growth rates are so different. Have what you expect changed?

    5. GRGili Raanan29:47

       I think that exceptional companies traditionally went in extremely high pace. And, and extremely high pace for me is, let's say, in the first five years, uh, from the moment you start to sell till the fifth year afterwards, if you go, uh, four X, four X, three X, and three X on new en- new ARR, not ARR, new ARR. So you, in the first year, in the second year, you do four, four times the new ARR that you have done in the first year.I'll save you the math. That's hundred and forty-four X after five years. Which means that in the first year, even if you have booked a million dollar of new ARR, in the fifth year, you'll book hundred and forty-four million dollars of new ARR. That's a nice, nice company. That's a nice company. Now, if you've done two million dollars in the first year and you follow the same velocity, you'll do two hundred and eighty-eight million dollars of new ARR. That's even a better company. So I, I don't think there's a limit on what great is, you know. Uh, I just gave you the amazing numbers of Wiz, and I'm confident that five years from now, I, I, I'll be able to t- to show you. I'll, I'll be able to demonstrate another team that, you know, showing that actually Wiz was a slug and they can move much faster, and they've done whatever it is. Uh, but bar for real greatness for companies, I think pretty much just stay the same. Now, you can do higher than the bar, that's great. Good for you. Do that. You know, you can grow from five to fifty to two hundred, please do that. But even if you do, I don't know, in, in, in new ARR, uh, one, four, sixteen, forty-eight, uh, those are terrific numbers. You'll do, you'll do well. You may not be the most iconic company ever,

11. 32:05 – 34:11

    Why Public Markets Are Crushing Software Multiples Right Now

    1. GRGili Raanan32:05

       but you'll be a, you'll be a very, very nice company.

    2. HSHarry Stebbings32:08

       They're terrific numbers, and they're even more exciting if the multiples on them that we value those companies at are good. [sighs] Gili, I look at my public market book, and I used to think I was so good. It used to just be green, green, and now I look at it, and it's all red. It's all... I mean, not Google and Nvidia aside.

    3. GRGili Raanan32:29

       [laughs]

    4. HSHarry Stebbings32:30

       And I look at it and I'm like, "Oh, maybe I wasn't so good." And the multiples are so low. You have Monday trading at, like, one and a half X. You have Wix trading at two and a half X. They just announced a buyback, which is enormous at their four billion dollar market cap. What do we do in a world where these multiples are so low and public markets don't value what we always sold?

    5. GRGili Raanan32:52

       I'm not always sure I, I, I understand public markets, and sometimes I'm, I'm confused, uh, and, and baffled, uh, exactly as, as you are. Uh, my guess, my guess is that markets have expectations about growth rates that we... exactly as we have discussed. And for whatever reason, if they believe that the growth rate of a company would decline because of whatever reasons, in, in those specific cases, my guess is that, is there's an expectation that, you know, autonomous, uh, uh, programs would, would displace and, and would eat the, uh, part of the business of, of, of those companies. But again, I'm not sure when, and I'm not confident about what I'm saying. But that, that's my assumption. Then you, you, you'd see the multiplier declining. But if those companies would continue, regardless of the market, would continue to grow at incredible pace, the mi- multipliers would, would, uh, rebound, uh, back, uh, to where they are. You know, the multiplier is just, uh, the market anticipation

12. 34:11 – 35:34

    Is the Extension of Private Markets Fundamentally Good?

    1. GRGili Raanan34:11

       for your growth rate.

    2. HSHarry Stebbings34:13

       Can I ask, with the extension of private markets, because I think so many people are so baffled by the public markets, that they don't want to go there, like your Stripes or your Canvases of the world. Do you think the extension of private markets in the way that we're seeing is fundamentally good?

    3. GRGili Raanan34:28

       I think it's functional, and I think it's sustainable. Um, for me, you know, going public is not a financial event. It's a branding event. It's a, it's an, it's a, it's an occasion where you tell your customers, your partners, your employees, your future employees, "I'm, I'm here to stay." That's IPO, because typically it's, it's, it's, it's not a financial event. It's not a liquidity event. It's contrary. It's, it's the opposite of liquidity event. You get shackles on your hand. You cannot sell stock. You've got all kind of limitations. It's hell for liquidity. But it's an important marketing event. So I believe that still many founders and many companies would choose to, to go through that exercise, uh, and pay the price for, for flexibility, lack of flexibility and, and, and, and, on lack of liquidity, just to, to gain the value, the long-term value of that marketing event. Uh, but IPO for, by itself is not a financial event. It's

13. 35:34 – 41:06

    Using Secondaries to Retain Talent & Return Capital to LPs

    1. GRGili Raanan35:34

       not liquidity. It's the contrary of that.

    2. HSHarry Stebbings35:36

       With that extension, we have the ability to sell in secondaries and bluntly sell into much higher priced rounds. How do you think about your responsibility or the importance of selling in secondaries much later on and providing mega returns to LPs in these very highly priced rounds?

    3. GRGili Raanan35:53

       I think about secondaries, first of all, in the context of, uh, retaining, uh, uh, talent. That's, I think, the most important consideration I have in mind when I think about secondary, because it doesn't just take a lot, a lot of cash to build, uh, important, uh, companies and specifically important cybersecurity companies in our case. Uh, it took, it takes longer time. And with the current, uh, uh, market, you typically grant employees, you know, stock for four, maybe five years. And yes, you can do some, uh-A new, um, refill and new allocation. But typically, those are fractions of, of the original allocation, 'cause the company's doing is bigger, there are more employees, it's in a different stage. So, um, you, you, you get to situations where your best employees, your most important employees, your best engineers, your best product managers, your best salespeople are already fully, fully vested, and structurally, you are unable to allocate them equally la-large or equ-equally tempting, uh, grants. Um, and you actually force them out of the company. 'Cause for those employees, assuming they are not, uh, they were not born super wealthy, uh, that, that equity, they are, they are lucky enough, they are happy enough to be part of a company that is doing extremely well. They are fully vested. Now, most of the wealth of their family is actually attached to that one company. So it's actually very, very logical for them to consider diversification, exactly as we, uh, diversify our, our portfolio by going and joining another team and hoping to, to build a diversified portfolio. Now, the antidote for that, eh, market built-in weakness is the secondary. So that's the reason, by the way, that at Cyberstarts, we, we created a vehicle, uh, we called it, uh, Employee Liquidity Fund, which, which is focused not just on a, not on one-off type of secondary deals, but creating a program, a recurring program with a portfolio company there where we provide, uh, liquidity to their employees on e-every year. And, and, a-and, uh, what we do is that we underwrite, uh, uh, a tender offer every year, so the employee of that company know that, knows that they are getting liquidity. Uh, the very same type of liquidity they would get in, in a public market, they would get it in a, in a, in a private company, and that would help our portfolio companies retain talent.

    4. HSHarry Stebbings39:03

       How does the rest of the cap table feel about that? You have ROFRs, obviously right of first refusals. Like-

    5. GRGili Raanan39:08

       Well, I'm happy, you know, d- I'm happy to, to let others participate with me. I, I do not object that. And, and we just, we just announced that we are doing our first, we've done our first, uh, type of secondary program, uh, with Cyera, where I think that we are buying, uh... I would probably not mention the exact number, but it's, it's a, it's a many, many millions of dollars of, of few hundred employees of Cyera.

    6. HSHarry Stebbings39:37

       How do you do the valuation setting on those? Is it like a, a premium to last round, and you just have a kind of blanket valuation mechanism? Is it-

    7. GRGili Raanan39:44

       It's, it's, uh, it's an ongoing process with management. You have to price the round. So, so liquidity is, you know, back to, to, to the topic, uh, I gave you the example just to show how we, we practice this, you know, theoretical argument about, um, it takes more time for companies to, to mature and to get to the public market. If they get to the public market, it becomes, uh, a strain on their talent, uh, pool and how secondaries are actually the solution for that. So I'm, um, this is... The story I just told you is, is, is, or the example I just gave you is, is, is a way to ex- is, is a way to solve it. I'm sure there are other ways to do it. Secondaries can be also a, a, a way for early-stage, uh, firms, uh, like Cyberstarts to, to sh- to, to return capital to limited partners. You know, it adds, it adds, it makes these systems, it make the markets, uh, more sof, you know, more sophisticated. And with that, uh, extra sophistication, uh, you, you, you, you can create better solutions, first of all, for employees, for founders, and for limited partners. And overall, I think that's, [chuckles] that's a highly positive, uh,

14. 41:06 – 42:30

    Did Gili Sell Wiz Too Early & What Did He Learn?

    1. GRGili Raanan41:06

       uh, element in the business.

    2. HSHarry Stebbings41:07

       So you will lean into liquidating some parts of positions and providing cash back in earlier situations?

    3. GRGili Raanan41:15

       Look, it's not, it's not a s- it's not a secret that, you know, we at Cyberstarts, uh, we have, uh, sold secondary shares at, uh, companies like, uh, Wiz early on. By the way, I regret I sold every single share at Wiz. I regret it 'cause, you know, if I sold it right now, I would make, I would make, um, I would show better performance for my limited partners. But at the time, it looks like the right thing and the responsible thing for us to do, and we did it.

    4. HSHarry Stebbings41:45

       What did you get wrong? I mean, obviously, you made millions and millions. Incredible. But, like, when you sort of do a postmortem on that, what did you not see that you would like to have seen?

    5. GRGili Raanan41:54

       It were the early days for Cyberstarts and, you know, we talk about s-startups, you know, Cyberstarts or, eh, you know, 20VC and, and, and, you know, those are startups. Those are businesses with, with business plan, with teams, with, you know, uh, eh, clients. Early on, I thought that it's, it's, it's a good thing for us to show our limited partners that not all... You know, we had an incredible super high paper, uh, value of portfolio, and I wanted to sh- to demonstrate to them that we can actually show some,

15. 42:30 – 44:21

    GP/LP Misalignment: The Hidden Problem Nobody Talks About

    1. GRGili Raanan42:31

       drive some liquidity to them.

    2. HSHarry Stebbings42:32

       Do you think there are core misalignments between GP and LP? And so, uh, we can take that as an example where I say an early GP will want to dist- distribute, show great DPI because they wanna go and raise, and I'm not saying you here at all, but in most cases 'cause they wanna go and raise a bigger fund sooner, and actually if I'm in a holding LP, I want you to retain that position, and I, I, I don't want you to do that. There's a misalignment there. Do you think there are other misalignments that we don't talk about?

    3. GRGili Raanan42:59

       Potentially, but e-e-even for that, the mis, you know, quote unquote, "misalignment," you know, it's, it's always, uh, easier to look at it, uh, you know, over time. But back in the early days, um, when I made a mistake and, and, and, and sold, uh, Wiz stock that, you know, if I knew where it's going, I, I would, I would hold, uh, hold onto that. Um, the reaction from, from my limited partners, and I had, I have still a very sophisticated, smart set of investors, was overwhelmingly, uh, positive. They were cheering for that 'cause for them it was, you know, it's a new GP, uh, and, and that was a, a, a positive event. I had only one or two s- super smart, uh, LPs. I remember one guy, you know, one of them called me and say, "Hey, uh, I'm not, uh, I'm not investing here to diversify or to, to hedge my risks. I actually like to take more risks." And, and I appreciated that. And I, and I, and, and by the way, I still believe it's, it was for Cyberstarts

16. 44:21 – 51:09

    How Gili Has Changed as an Investor

    1. GRGili Raanan44:21

       back then, it was the right decision.

    2. HSHarry Stebbings44:23

       When you look back at the investor that you were and that you are today, have you changed much?

    3. GRGili Raanan44:28

       I think I changed a lot. You know, I probably went zero to one, meaning no business, seed investment, no idea, to a real business, probably close to 50 times. That's a lot. And I hope that, you know, if you do, you know, that type of journey 50 times, uh, you learn something. So, and, and, and I think I'm learning every day. I think that, you know, what's the only constant in our business is the diversity and the change of the people I, I, I meet and, and partner with, and I, I think that, that's what makes this, this profession, you know, in may, in many ways it's a terrible profession. You know, it's a, it's a profession where you, you don't know if you're good in what you're doing for five or six years. You know? Show me another profession where you show up to work every day for five years, you have no idea if you're doing any good. Uh, so in that sense, it's a terrible profession, but I, I really think it's a, it's a, it's a, it's one of the most exciting professions in the world, um, just because it gives you the opportunity to, to share your life with so many amazing individuals, and you can gain just a little bit from, from every team you partner with and, but, but cumulatively I think that we are gaining a lot and we become, we, we have to listen better. We, we have to become better listeners over time. We, we... A-and, and that by itself makes us, you know, better people, better parents, uh, better partners. Uh, so it's, uh, you're going through a change and, and, and, and that... A-and it's not like one time change. It's a gradual change, and the more you do that, the more teams you go with, uh, to the journey, the more, um, um, ups and downs you experience in, in the business, you, you, you change, and I think you become a better version of yourself.

    4. HSHarry Stebbings47:00

       What would you say to me and to many people in the industry who are looking at frameworks that we used to use and they're kind of out the window, whether it's your rule of 40s or your triple triple double doubles or your focus on margins in the early days or whatever these are, and the world seems to be less secure or obvious than it was in a prior generation. What would you say to that younger generation of investor feeling insecure about their skills in this new world?

    5. GRGili Raanan47:26

       Learn, uh, as much as you can from, uh, old farts like myself.

    6. HSHarry Stebbings47:31

       [laughs]

    7. GRGili Raanan47:32

       Uh, but at the end of the day, use your guts to make decisions. We don't, you know, nobody knows better than you do.

    8. HSHarry Stebbings47:42

       Do you have a monopoly on the Israeli cyber market?

    9. GRGili Raanan47:45

       I don't know. I don't know, and I don't think about it.

    10. HSHarry Stebbings47:48

        Do you ever have a company, though, and I don't mean this arrogantly at all, and you don't sound arrogant 'cause I'm asking you, do you ever have a cyber company in Israel where their seed round is announced and you're like, "Hmm, I didn't see that"?

    11. GRGili Raanan48:00

        Maybe once or twice over the past, uh, eight years, but there are deals that I'm telling myself, "Okay, I should have done it. That was a mistake."

    12. HSHarry Stebbings48:10

        Which one most resonates?

    13. GRGili Raanan48:12

        It really doesn't matter, and I, uh, and I probably regret, I, I, I probably don't regret the right one and I regret the wrong ones. Uh, but, uh, you know, one thing I learned about the business is that, you know, I focus on my, on the deals I've done and the teams I've partnered with. Uh, that's where I, uh-Put my focus and energy. Um, you know, you, you, you can't cover everything, and you can't get everything. You are not going to win every battle, and if you are stressed about winning every battle, you know, I need to be in every important AI company. I can predict that you are not going to be in every important AI company. I need to be in every important cybersecurity company. I'm not going to be in ev... You know, over time, in every cybersecurity company. So I focus on my, my portfolio companies, and I try to do the best with the teams that put their faith in, in Cyberstarts and work with us.

    14. HSHarry Stebbings49:14

        So funny, I remember speaking to Pat Grady about the great companies that Sequoia invest in, and I was saying about, "Oh God, you're such great pickers," and I was kind of, you know, uh, being very kind, um, as, as is deserved. And he said, "You don't understand, dude. Every single public company that doesn't have Sequoia as an investor is a miss."

    15. GRGili Raanan49:35

        Yeah.

    16. HSHarry Stebbings49:35

        "This is not okay. You understand that?" And I really hit home on, like, market share for them as being a core driver, and it is for Andreessen. Have you lost a deal in the last five years?

    17. GRGili Raanan49:48

        Yes.

    18. HSHarry Stebbings49:48

        You have?

    19. GRGili Raanan49:49

        Yeah.

    20. HSHarry Stebbings49:52

        Who did you lose to?

    21. GRGili Raanan49:53

        Some amazing, other amazing investors.

    22. HSHarry Stebbings49:56

        Is there anything else you could have done? Like, I always think, like, I never wanna leave anything on the field. It's what I say to the team. We could have done more. I could have done another customer call, sent them another intro, hired someone else for them, uh, paid more. Um, is there anything else you could have done to win it?

    23. GRGili Raanan50:15

        Absolutely. There are, there are always things you can... You know, if I look at the, the Cyberstarts, uh, business, uh, we are improving it all the time. And, and we are always, uh... I'm telling our, my partners all the time, we are always as good as our next investment. You know why it really doesn't matter? 'Cause if, if all our investments would be amazing, and we've lost one or two companies, that's doesn't matter. So again, everything leads me to the, the conclusion that, um, let's focus on our own thing. Um, we typically get what we want to get. Uh, we can always improve. I'm very, very happy

17. 51:09 – 53:39

    How to Build a Great Venture Partnership

    1. GRGili Raanan51:09

       with, uh, with the progress.

    2. HSHarry Stebbings51:11

       Can we do a quick fire? As we think about building teams, you have an amazing partnership, and you have great people in your team. What would you advise me on how to build a great venture partnership with incredible dynamics, relationships between partners? What should I know that you've learned?

    3. GRGili Raanan51:30

       Lots of lessons. Uh, I'll, I'll pick one, one example which might be non, non-trivial. I learned that, um, people are very different, and they bring different talents with them. So as a, as a manager, as an executive, as a managing partner, very easy mistake you can make is to try and, and create some sort of guardrails and textbook and, and, and bring everyone into the same, uh, mode of operation. You do that typically 'cause you think, "Okay, this is what worked for me. Now here's a new partner. Let's map the gaps between the way he or she performs and that recipe, and let's bridge the gap." My view on that is that I would let each team member play on their relative strengths and, and would not require them to focus on improving their weaknesses, but actually play more, more often and stronger on their relative, uh, advantages. 'Cause on their weaknesses, at the best case, they can be as good as the market. But on the things that are exceptional, they are creating real, uh, advantage, real better, you know, some real greatness. And that leaves Cyberstarts with, with a team of people that really enjoy working with each other, but each of us is operating in a different way, and we respect that.

    4. HSHarry Stebbings53:26

       I think you, you, you do th- you learn that through mistakes. I think I've put guardrails on people before where I, like, constrain them to my way of thinking, and then actually I realize that that's a net negative for them, where it was a positive

18. 53:39 – 58:14

    Quick-Fire Round

    1. HSHarry Stebbings53:39

       for me.

    2. GRGili Raanan53:40

       Exactly.

    3. HSHarry Stebbings53:41

       Okay. Quick fire round, my friend. What have you changed your mind on most in the last 12 months?

    4. GRGili Raanan53:46

       Founders' chemistry, how important that is. You know, I always thought that, you know, chemistry with the founder is important, but, you know, founders are brought to life in all shapes and forms. You know, focus on the teams that you have the most chemistry with.

    5. HSHarry Stebbings54:04

       Are the best founding teams not often broken up eventually? You, uh, we always say like, "Ah, the CEO's amazing, but the CTO, pfft." And I was like, "Don't worry, just focus on the spikiest element being the CEO. The CTO will probably fall away. They might leave, they might be a head of eng, whatever that is. Just focus on the spikiest person." Does the founding relationship matter?

    6. GRGili Raanan54:28

       Extremely. Extremely matter, yes.

    7. HSHarry Stebbings54:31

       How do you test it?

    8. GRGili Raanan54:33

       Yeah, simple testsYou know, if, do they know each other? Were they, uh, I don't know, roommates for a long period of time? Did they, uh, work together and went through some challenges? Um, and sometimes you don't know.

    9. HSHarry Stebbings54:50

       Who do you learn the most from as an investor? Like, i-if I'm fortunate to have people like you or Neil Fletcher or Pat Grady as my mentors, who, who, who are yours?

    10. GRGili Raanan55:00

        The decade I spent with, uh, Sequoia Capital was formation, uh, you know, period for me, and it wasn't easy, period. I couldn't do what I'm doing today without, uh, learning from, from, uh, Doug Leone and Michael Moritz and, and, and Jim Goetz and, and, and, and, and Pat Grady. It, it wasn't easy, you know. You, as I told you, it's, it, it took me a long time to mature as investor, and it's hard. It's hard to, to really, you know... [laughs] It's crazy how you, you sh- you know, you show up, uh, to the office every day. You're surrounded by super achievers and who are building amazing companies, and you look yourself in a mirror and say, "Okay, I'm the shittiest investor in this room." You know, there are, I don't know, 10 guys around me. I'm the worst. And the next day, I'm still the shittiest investor, and you go like that every day. It's really hard. It's really hard. You have really bad days sometimes. It takes a lot of, uh, greed and determination to keep, to keep going and, and believe that you're going to, to figure it out.

    11. HSHarry Stebbings56:18

        What was your hardest day as an investor? Like, I can pinpoint one for me.

    12. GRGili Raanan56:23

        When the first company I invested in, uh, shut down. I had to, to shut it down. That was super hard. That was... 'cause it's a very public, uh, failure. It's a failure that you cannot cover. It's a failure that you, you know, you, you, you have to deal with.

    13. HSHarry Stebbings56:41

        What motivates you more, the thrill of winning or the fear of losing?

    14. GRGili Raanan56:47

        Thrill of winning.

    15. HSHarry Stebbings56:49

        What's the most memorable founder meeting, first founder meeting that you think of when I say that? It's not the best founder. It's not... but just, like, the most memorable first founder meeting.

    16. GRGili Raanan56:59

        Really fun first meeting with a founder, uh, I would not mention the name, where, uh, during the, the meeting, the founder start to, to shout, "I'm the best. I'm the best, motherfucker. I'm the best." And it's like, okay. And he's like... it goes on and on, like, 10 minutes with this, like, praising himself and, and, and, and it was his way, I don't know, his crazy way to, to demonstrate, uh, self-confidence.

    17. HSHarry Stebbings57:32

        Did you invest?

    18. GRGili Raanan57:33

        No. [laughs]

    19. HSHarry Stebbings57:34

        [laughs] Did it turn out to be an interesting company?

    20. GRGili Raanan57:38

        Public company.

    21. HSHarry Stebbings57:39

        Wow. That's amazing. Um, okay, final one. What are you most excited about when you look forward to the next 10 years?

    22. GRGili Raanan57:47

        Working with my team and, um, growing, uh, you know, amazing investors that can keep on, um, making impact on, on cybersecurity.

    23. HSHarry Stebbings58:03

        Gidi, I so appreciate you. I so appreciate the friendship. I so appreciate the honesty. You've been fantastic.

    24. GRGili Raanan58:09

        Really enjoyed it. And Harry, thank you so much. You should, uh, invite me more often.

Episode duration: 58:25