EVERY SPOKEN WORD
60 min read · 11,749 words- 0:00 – 0:27
Introduction
- MCMartín Casado
It's dangerous to do non-consensus investing. Like, that's a dangerous idea. If you're alone in your view, you may just be missing something.
- LPLeo Polovets
Eventually you have to get to consensus. If you're dependent on capital markets, it's very hard to, to keep the company alive if nobody wants to fund it.
- ETErik Torenberg
Peter Thiel once had a line which was like, the faster the, and higher the up round, the more you should invest because it's like, you know, working.
- MCMartín Casado
Most companies fail from indigestion, not starvation.
- 0:27 – 3:14
Consensus vs. Non-Consensus: Investor Perspectives
- ETErik Torenberg
So Martín, it looks like, uh, you've helped, uh, spark a little bit of an existential crisis on venture Twitter, um-
- MCMartín Casado
Yeah
- ETErik Torenberg
... on VC, and I thought we'd, uh, we'd all come here to, to talk about it.
- MCMartín Casado
Great. Super. How's it going? Excited to be here.
- ETErik Torenberg
What, what, why don't we, uh, recap, Martín, from y- from your perspective. Um, what, what, what were you saying in that tweet? What, what were you trying to say in that tweet? And then we can get into the great back and forth that you, you and Leo had, and get into the conversation.
- MCMartín Casado
So let me paraphrase the t- the tweet. The paraphrased version of the tweet is, um, it's dangerous to do non-consensus investing. Like, that's a dangerous idea. The impetus of the tweet, which by the way wasn't well thought out, which, uh, I think a lot of the viral tweets happen to be not well thought out, is, you know, I've this... I've been an investor for 10 years, I've done almost 200 investments, you know, uh, either as like, you know, running the fund or being directly involved. Um, and it seems being blinkered to how VCs view companies is, is actually quite dangerous because you're so dependent on follow-on capital. And actually, it reminds me a lot of being an academic. You know, I used to write a lot of papers. And like, you do all of this great research, but when you wrote the paper, if you didn't actually think about how the program committee would view it, like, it wouldn't get accepted, right? It felt very similar to that. And so, so that was the origins. But I wanna be very clear, I did not say and I would never say consensus investing is a good idea. I'm just saying not [chuckles] being aware of consensus is a bad idea. And I think the underlying... The last thing I'll say on this, I think the, my underlying belief is early markets are actually pretty darn efficient, a lot more efficient than, than people realize. And so if you're alone in your view, you may just be missing something.
- ETErik Torenberg
Leo, we're stoked to ha-have you join us as a, as a friend and fellow venture nerd. Um, what, what was your, your, your reaction?
- LPLeo Polovets
Yeah. I mean, I actually agree with a lot of what Martín just said, which is eventually you have to get to consensus, whether it's when you're investing or later, 'cause otherwise, you know, if you're dependent on capital markets, it's very hard to, to, you know, to keep the company alive if nobody wants to fund it. Um, but I, I would say like for me, and maybe we invest like a tick earlier, uh, more like towards pre-seed and seed, but for me, a lot of my best investments have been more on the non-consensus side. Um, not in terms of I had some crazy good insight and nobody else had it, and like I'm just brilliant, but more like, you know, these companies often struggled in the early days 'cause before there's proof points, it's not obvious that it, it'll be a good idea. Um, and then once they get good, the, the valuations skyrocket so fast that, like, you could still get good multiples, but they're just much lower than at,
- 3:14 – 6:06
Market Efficiency and Company Valuations
- LPLeo Polovets
you know, early stages.
- ETErik Torenberg
Yeah. And a-a-and then there was sort of broader commentary on looking at a list of, you know, big winners over the last, you know, 15, 20 years and saying, "Hey, what was consensus? What, what, you know, which were consensus? Which were non-consensus?" Um, and, and then Martín, what were kinda your, your reactions to, to, to that sort of broader commentary?
- MCMartín Casado
Well, listen. I mean, cons-- A-again, it wasn't meant to be a, a technical tweet where, like, the wording was exact. And so like, like, on the face of it, it-it's almost like, um, an ill-defined statement because we don't know what consensus means, right? And so then everybody picks apart the, the, uh, consensus. But, but here, here's my reaction to the list of like the Airbnbs and this and that, which is I think we need to be very careful not to conflate a company having a hard round with market consensus, right? Like, if you look at the list like, you know, Keith Rabois put out, which is, which is great, and I love Keith. I mean, these are like MIT founders, known spaces. Like, I'll bet if you took like the, the, the median value of their raises, I'll... over the life cycle of the company, I'll bet they're way above market. Um, many of the, the companies were YC companies. And so I just think it's so easy to like come up with these anecdotal, "Oh, this one company had a tough raise," when that's definitely not within the spirit of what I was trying to say, which is markets are actually quite efficient. If the market's efficient and it's a good company, the price is gonna be high. And if you don't recognize that, then you're probably beating yourself as opposed to the market, right? And so, like, it really comes down to don't... You shouldn't be looking for good deals with respect to other investors. You should be looking for good companies, and price shouldn't sway you from that. I mean, that's really at the heart of this. And so I just don't think that list, unless you actually run the numbers, which we haven't done, I just don't think it demonstrates that the idea that consensus is important is wrong at all.
- ETErik Torenberg
Yeah, and I, I think a f- there are a few quibbles I had with some of the names on that li- Like some people put Anduril, and it certainly was a controversial investment, but, you know, Palmer Luckey, you know, having found-
- MCMartín Casado
I mean, second time founder, billion-dollar exit. Trey, who's phenomenal. You know, Elon, this is in the shadow of Elon, who shows that you can already create these defense tech companies. I mean, if that's our definition of non-consensus, it just shows how insular we are as a community. I mean, it's almost an indictment of us-
- ETErik Torenberg
Right
- MCMartín Casado
... that we even make this list.
- ETErik Torenberg
And wasn't the seed round at like 100 or something? Like, it was a very s- expensive ear-early round.
- MCMartín Casado
Every rou- every round was super expensive. [laughs]
- ETErik Torenberg
Yeah.
- LPLeo Polovets
I'm, I'm not sure an ex-unicorn founder would ever be non-consensus really. [laughs]
- ETErik Torenberg
Yeah, it is interesting 'cause there's also
- 6:06 – 11:10
Anecdotes and Data: Hot Rounds and Outcomes
- ETErik Torenberg
sort of-You know, there, there are rounds that are maybe, you know, non-consensus at 10 million or something, but then become, you know, super hot rounds at 50 or, or 100, and then become $10 billion companies or $100 billion companies. And even if you invested at that, you know, consensus round, you 10X'd or could or 100X'd. And so it sort of, uh, you know, in the face of, hey, if it's a hot deal, that must mean it's no- it's not good. P-Peter Thiel once had a line which was like, "The faster the... and higher the up round, the more you should invest because it's like a, you know, working."
- MCMartín Casado
Yeah. I would love to do a correlation analysis. Actually, Le- Leo and I had, I thought, a, a, a very interesting discussion on trying to figure out how you'd actually measure this, how you'd actually throw some data at it. We're actually, you know, we actually have an analyst working on it now. Like, the data isn't ready yet. So I, I have a new one. Actually, I wanna, I wanna test this with you, Leo, on a, on a good thing to test. So I'll, I'll bet the best prediction of a, um... the, the best correlate of a high up round outside of the business is the fact that the previous round was hot.
- LPLeo Polovets
I think that's probably true.
- MCMartín Casado
And if that's the case, it would suggest that the market's actually pretty efficient because it's almost inductive that, like, the previous round knew that the next round was gonna be hot.
- LPLeo Polovets
Well, I, I guess... So I do agree with that. I think the question for me is like, where is there more opportunity, right? 'Cause if there's, you know, like the five hot companies keep having great rounds and then there's like 10,000 not hot companies, but 100 of them will become hot over time, even though the odds of becoming hot are low, most of the, like, most of the hot companies end up coming from the not hot batch, right? Um-
- MCMartín Casado
Right. It says, so, so the question comes down to, is it easier to spot the company nobody sees or get into the company that's obviously good? And, and, and, and, and maybe even further than that, which is, um, to what extent do even high price rounds underprice hot deals? Because if I'm right, if the view is correct that hot deals are hot because they're, they're good companies, not, you know, like actually the market is very efficient, then... and that drives the most of returns, then I think the next obvious question is, is, well, if that's the case, then the market isn't that efficient because it's underpriced the company, right? If the, the majority of returns are in high price rounds and the market has underpriced it, um, uh, but I think risk-adjusted, that's not necessarily true, which is... it, it, it, it, it could be still priced right because there's still chances it goes to zero. So I guess my, I guess my sense is, is until we run the numbers, we're not gonna quite know, um, the answer, but I think a lot of these theories prove out pretty anecdotally. And I think maybe that's the problem. There's kind of an anecdote for every theory.
- LPLeo Polovets
Yeah. I, I, I think the, I think the basket analysis is probably the most interesting one, right, of like not, not how did this one company do, but how did this-
- MCMartín Casado
Yeah
- LPLeo Polovets
... you know, portfolio of companies that raised a really quick follow-on or had like 10 term sheets at the Series A, like how do those end up doing over time?
- MCMartín Casado
There, there are even cases in, in my portfolio where a super hot company from a, an investor standpoint, so many term sheets, the business didn't work out, you know, at, at, at the level that you would kind of expect, but the outcome was still really good. And so in some level, even independent of the productive asset, like human opinion about it matters. So there's almost two ways you can slice this conversation. One of them is like the asset is what's productive and produces the value, right? And the market will determine if that's valuable or not, right? So that's kind of this productive asset view, and that's kind of the one that I hold, which I think that actually investors are very smart. I think that they know which companies are good, and then they pay for those. That, that's kind of my view, but that's a productive asset view. But there's another view which is independent of whether the company is good or not, there are things that, that people think are good, and so you're almost like playing to like the human perception of the company independent of the underlying business. And I would say, again, anecdotally, until we run the numbers, we won't know. That also seems to be a bit true.
- LPLeo Polovets
Yeah. I, I think, uh, so I've been in venture for like 12, 13 years now. I've definitely seen this in sectors where like sectors fall in and out of favor, right? Where you have like e-commerce was hot and then it was dead, and then like Dollar Shave got... Club got acquired and it was hot again. And it's like e-commerce didn't... I think the fundamentals didn't change that much year to year, but like the valuations and the like appetite for investing and maybe starting companies changed a lot year to year. Um, and so that to me is sort of an indicator, like it's not just the fundamentals. There are all these other like forces as you mentioned.
- MCMartín Casado
Yeah, totally.
- ETErik Torenberg
One other part to your tweet, Martín, that I, I think was underappreciated
- 11:10 – 15:21
The Role of Founders and Fundraising Dynamics
- ETErik Torenberg
was sort of the risk to founders of being seen as, as, as non-consensus in the same way that... because founders need to raise money [chuckles] and they need to raise follow-on funding wi- you know, within 18 to 24 months, you know, some-sometimes even sooner. And so if, uh, if everyone's passing on you or, or people are bragging about how, you know, ev- other investors don't wanna do your deal, that, that's, you know, [chuckles] that, that's not gonna be super helpful to you in your next round.
- MCMartín Casado
I actually think the most interesting aspect of the tweet was like the, the sociological study that followed of like how different people interpret it, right? Like the tweet itself was pretty banal, right?
- ETErik Torenberg
Yeah.
- MCMartín Casado
It's just this kind of non-statement. It's almost tautological. Um, but like, like different constituencies viewed it very differently. So like I would say relatively inexperienced investors kind of used it as an opportunity to be like, "Oh, Andreessen Horowitz consensus invests," which anybody that knows anything about our investment knows that's just totally not true. I mean, [chuckles] like, um, even my own portfolio, many of the top deals I've done, nobody else was in the deal, you know, et cetera, right? So like this is a statement about consensus investing. So that, that was one cohort. There was another cohort like Leo and Keith who have a lot of data and they've had a lot of really interesting to... things to say, and that, that ended up in great discussion. I think there's still a lot more to do there.But most of the founders, and I got a bazillion DMs were like, "You're totally right." [laughs] So the founders clearly view or feel this tension that it's, that it's dangerous to be non-consensus because, you know, they have to cater to VCs and they know it, and they see the, the pattern match responses. They deal with this all of the time. And so from a fou- from a founder perspective, it's like you almost have to be non-consensus to have alpha in an actual, like the actual product market, but you have to be cons- look consensus when you're, when you're raising. Um, and, and I, I, I think that's probably, that's actually probably right.
- LPLeo Polovets
I, I think this is probably one area where I differ a bit. I think, I think there's benefits to being non-consensus, um, because from the company side, I think when the money's hard to raise, you tend to be more frugal with it. And then also if the next round is less certain, like I think there's less of a sort of like it could crumble at any moment, uh, aspect, right? 'Cause I think when it is hot and you're raising subsequent rounds very quickly on the assumption that things will go perfectly, if anything slows down, it's like, hey, now everything... Like now you can't raise any more capital all of a sudden, right? And I think if you're in the mentality of, you know, growing quickly and spending, I think that's pretty hard. Um, on the flip side, if you're not consensus, it tends to be like you tend to be more cash efficient, you tend to be more frugal out of necessity. I think the other side is it depends on the form of like consensusness, but sometimes there's also like much softer diligence. Um, like I think the kinda the worst form of consensus I've seen is like, "Oh, Sequoia Andreessen did this round, like let me just do a two X markup in two weeks 'cause I wanna be in the same company."
- MCMartín Casado
Yeah.
- LPLeo Polovets
And then like there's no diligence there, right? It's just like, "Oh, this is hot. Let me do it." Um, but I think then like maybe you're overlooking like is it actually a good business? Like, you know, Sequoia and Andreessen and Humba, like we all make good investments and bad investments and, you know, so it's like maybe this is one of the bad ones and you're just marking it up because you wanna be in the hot deal, and like that ends up not being good for anyone.
- MCMartín Casado
I think this is a tremendously important and good point. Um, I, I, I, I, I tend to, to believe now that most, um, most companies fail from indigestion, not starvation, which is they just raise too much money too easily. They don't listen to the actual market, which is, you know, the customer base, and as a result, they just have a bunch of bad practices and end up running out of money. And I think that there's a lot to... That I actually think in 2021, if you look at, if you just did a study of that cohort, the companies that had these mil- you know, these billion-dollar Bs, if you remember that time, it was totally crazy. I'll bet that's probably one of the biggest wipeouts of capital. Um, so I definitely think like consensus investing is, is, is, is definitely very dangerous, and only leaning into this from a founder is definitely dangerous. But I also think the flip side is true, which is you're totally blinkered to it. I think your life is
- 15:21 – 17:50
Risks and Rewards: Indigestion vs. Starvation
- MCMartín Casado
pretty tough.
- ETErik Torenberg
And, and so there's a broad question as to like, you know, o- of the companies that do win, um, you know, how, how many of them are sort of competitive rounds versus not competitive rounds, um, and sort of what is the duration between them being non-competitive f- rounds and then becoming not non-competitive and, and what percentage are really able to sort of... 'Cause if, and one question I have is like, is the market getting more efficient over time? A lot more investors, you know, we should be getting smarter as an asset class on how to evaluate these companies. A lot more capital. Um, are we just, are we getting better? Um, and if so, w- what does that mean? Um-
- MCMartín Casado
Oh, I'd love to hear Leo's view on this.
- LPLeo Polovets
So I, I, you know, it's something I've been thinking about for a while. My take would be that for non-consensus companies, it's getting more efficient because the more investors there are, the more likely you are to find at least one or two that like what you're doing. I think for the consensus companies, it's getting, like it's starting to get more inefficient, right? Which is like when you have 10 term sheets, you get, you know, five X the market, like what the, maybe the pri- the fair va- value should be. Um, and then like it's great for the founder a- and, and may- maybe again, it's a little bit more of a house of cards if things go south at all. Uh, but it's also like it's not necessarily great for investors, right? Because you might have to pay two, three, four X over like the actual intrinsic value of a company, uh, or, or like the future, like the likely future value of a company in order to get in. Um, and-
- MCMartín Casado
But that would be actually, but that would be actually efficient, right? It's just, it's the price is actually approaching the, the return profile. From a market standpoint, that'd be efficient. I mean, it sucks from an investor standpoint 'cause prices go up.
- LPLeo Polovets
Yeah. That, that, that's what I'm saying, right? Like for-
- MCMartín Casado
Yeah
- LPLeo Polovets
... for, for founders, it's getting like hyper-efficient or maybe like, you know, like th- there's, there's such an imbalance for like the really hot companies that, you know, maybe your price gets bid up way past where it should be.
- MCMartín Casado
Right.
- LPLeo Polovets
Um, j- yeah, and similar like for non-consensus companies, it's the opposite, right? Where like there's not enough investors, so your price is lower than it should be perhaps, right? Um, but I, I think there's like the, like there's, for me, like those two are kind of opposites end, opposite ends of the spectrum.
- MCMartín Casado
Yeah. This is a great, yeah, this is a great que- I, I, I totally agree. This is a great question. So I think we can all acknowledge that there's a failure mode where the consensus gets bubbly, and then companies raise too much capital, and then there's a bunch of wipeouts, right? So that, that has always happened. That will always happen. So that's, that's just, um, part of the market. We, I think can also all agree that there's
- 17:50 – 19:54
Market Cycles, Efficiency, and the AI Craze
- MCMartín Casado
parts of the market where there's probably unnecessary pessimism. Like, so for example, right now during this AI craze, like, you know, in, in my area of, of traditional infra or of infra, a lot of the traditional companies that, you know, two years ago would be great, like can't even raise right now just 'cause they're not in the sweet spot. And so I think that will always be, uh, an aspect of the market too. But in general, for the mean investment, I do feel like the market over time has gotten a lot more efficient, meaning, you know-We can deploy more dollars with more regularity and the price is converging on what will ultimately be a fair price. Um, you know, this is acknowledging both of these failure modes on either side of this.
- SPSpeaker
Yeah.
- MCMartín Casado
I mean, we're seeing one right now. I mean, it's the reality. I mean, AI, you know, there's, there's AI companies that clearly are raising, you know, speculative money where nobody even really understands the business model, and there's great companies that can't get invested. So we're seeing this right now. But I will still say the reality is, is OpenAI has grown tremendously and Anthropic has grown tremendously and Cursor's grown tremendously. And so, like there is some underlying market signals to, to, to, to fuel the chaos.
- SPSpeaker
Yeah.
- LPLeo Polovets
I think part of it's like if you ever look at vintage year data for venture funds, it's probably a good way to see if, you know, how consensus and non-consensus do over time. 'Cause when you look at like the dot-com bubble years, like I think the, the median fund was terrible. And I think it's just like, hey, everyone overpaid and then the companies weren't worth that. And so like, you know, even though everything was hot, like it didn't do well and then a lot of the funds didn't do well. And if you look at like the Airbnb, you know, Uber like 2010-ish era, it's kind of the opposite area where like I think the, the top quartile funds like crush it. Uh, and it's because the market was pessimistic, and so if you're willing to invest and like you had a different opinion, you did really well. Um, and now it's probably kind of somewhere in the middle.
- 19:54 – 32:46
Personal Startup Stories & Lessons Learned
- MCMartín Casado
I mean, I mean maybe, maybe I'll just go through like kind of my own startup just as kind of a, a, a single anecdote to frame the conversation a little bit, right? So, you know, I did my PhD at Stanford. I was a classic, you know, take the research, do a startup. Um, you know, we had so many term sheets before we had any idea what we were doing, you know, and it was like the hottest thing ever and, um, and, and it was great. And so we did a seed fund. Actually, Andy Radcliffe, you know, Benchmark Andy Radcliffe joined my board and, you know, we, we rose, uh, at the time, which would've been a super, super high price kind of seed round, which is 10 million post. This is in 2007. Um, you know, then, then the market tanked in 2008, and we still didn't know what we were doing. And, you know, it was just a bunch of, you know, researchers, and so we couldn't raise any money, uh, at all. I mean, Sequoia very famously, you know, gave us a black eye and, you know, we couldn't raise. Um, and then, you know, as we started to come out of the, um, uh, uh, of the recession, Andreessen Horowitz, uh, NEA, Lightspeed, a few got very interested, and then we had a pretty hot round again. Uh, we went, uh, Andreessen was actually over the market price, even though the business wasn't quite working, but it was showing signs of life. Then we had an incredibly hot round 'cause things started working, and then when we actually sold the company, I mean, it, you know, it returned a fund. You know, it was I th- one of the highest acquisitions on multiples of revenue at the time in enterprise software. And so you kind of ask the question, was the initial flurry of interest warranted or not? Because it turns out, like we were probably a month from going bankrupt, and we actually didn't know what we were doing. Uh, and the company definitely wasn't working. And then, and then actually what we had pitched at that time didn't make any sense. Like, we were like, "We're gonna change," you know, um, you know, switch hardware, which didn't make any sense. And so there's one view that's like the, the market was, uh, overexuberant, you were lucky. There's another view that says actually the initial conditions were there to do it. I just feel like if you run the data, it just seems that the companies that have good outcomes did have sufficient interest along the way because there are enough signals to do it.
- LPLeo Polovets
I, I think at least on my side, for a lot of the pre-seeds and seeds I've done, I, I went back, I think over my top like 10 investments, maybe six or seven or eight took them months to raise a seed round. And, um, you know, and like a lot of times, like a lot of passes, like they were all, you know, down to the wire. But then they ended up doing better over time. I think that transition from like non-consensus to consensus ended up being really important because if you never transition, it's really hard, right? And if you're always, you know, if you're always consensus, that's great for you. Um, but like one thing I noticed that was interesting is a lot of the companies that struggled, obviously some of them just go to zero, right? Because they struggled because the business isn't that great and people recognize it. Um, but the ones that did well, a lot of times the gap between like the pr- the seed and A or the A and B was literally like 20X or 50X, right? And so I think part of it's like as an investor, you can still get good returns at like the series A or B in those companies, but it's just, I think it's so different to invest at the seed where there's like 1,000X versus like the A at a billion, where now may- n- maybe there's still like a 10X or 20X, but just very different.
- MCMartín Casado
So I've got a question for you, you, Leo, 'cause I, I think that you play a bit of a different game than we do, which is, so if you have a seed, which is, let's call it non-consensus, and again, we're using this very vague definition of a consensus. But like, you know, they're having a tough time raising. You're, you're the only person putting money in. Do you have a theory on how it will be consensus, or is your belief that the underlying productive asset is going to do very well and that by definition is consensus? Do, do you see the question? So the question is, is it, this is just true belief in the underlying business like, like do- do-- like the ultimate, I mean, the ultimate sign of, of success is just the business is really working. So are you like, for the next raise, the business will definitely be working, or do you have some other theory on what will attract the investors?
- LPLeo Polovets
I'd say it's often the latter. I, I would say, uh, and especially true these days 'cause I'm investing more in deep tech companies. And so at seed it's very rare to see like, oh, there's an asset that's gonna be working here at the Series A 'cause-
- MCMartín Casado
Totally
- LPLeo Polovets
... usually the asset's still gonna be like being developed at the Series A or maybe Series B. Um, I think what I'm looking for is like, there's m- maybe not enough here for somebody to write a 5 or 10 or $20 million check.But the company has milestones that I think if they hit them, then it would become, you know, sort of consensus enough to, to merit a check of that size. Uh, and then I'm basically trying to evaluate like, okay, the company has these milestones, do I think they could hit them or not? Um, and also if they hit them, are they compelling enough? Uh, but I think that's sort of the big, you know, investment wager.
- MCMartín Casado
Yeah. Yeah, so in th... I mean, so in this case, you do think about like what the follow-on thing is gonna wanna see. You, you, you have reached a conclusion for the current round that is non-consensus.
- LPLeo Polovets
Yeah. And, and I would say like the consensus piece is part of it in that I definitely meet companies where they're like, "We're raising three right now. It'll help us do these milestones, and then we think we can raise 10." And then there's other ones where, you know, it's like, "We're raising three now, we're gonna hit these milestones, and then we wanna raise like a $50 to $100 million Series A."
- MCMartín Casado
Yeah.
- LPLeo Polovets
And that's actually a much harder bet, right? 'Cause you're say- like you have to assume they're gonna be consensus, um, by the time the next... they raise the next round, and it's gonna be like a top 5% Series A. Uh, and that, that's a hard bet to take. Uh, for the companies where the capital needs are more modest or they have like a more tranched roadmap planned, um, I think it's a little bit easier to, you know, to predict like, hey, would these milestones be enough to raise 10? Like a lot of times, I, I don't know if it'll be enough to raise 100. It's like probably not, but 10 feels like pretty feasible if you do the things you think you're gonna do with this three.
- MCMartín Casado
Ha- has your, has your kind of view on this shifted in the last... Like, do you feel, find this AI wave to be different than previous waves or, or fairly similar?
- LPLeo Polovets
I'm probably a bad person to ask. I actually haven't invested much in AI 'cause of the deep tech angle. So-
- MCMartín Casado
I see.
- LPLeo Polovets
Maybe like 10, 15% of my companies are pure AI. Um, others obviously use it in some way, but that's not the product. I, I'm sure-
- MCMartín Casado
Well, how about, how about deep tech then? Because I think that's also, you know, like pretty different than what we were all investing in five years ago.
- LPLeo Polovets
Um, so maybe on the AI side, and I'll, I'll touch deep tech next. I think AI is interesting to me because on the one hand, I've never seen faster growth, right? Like people talked about the like triple, triple, double, double, double thing for a while of getting from a million ARR to 100 in five years, and that seems so antiquated now, right?
- MCMartín Casado
Yeah, totally.
- LPLeo Polovets
Like the best companies are doing like one or two years.
- MCMartín Casado
Yeah.
- LPLeo Polovets
I, I think on the flip side, the kind of the endurance or like the, like how, how long those companies endure and last and grow feels like much more of a question mark, because in the triple, triple, double, double, double era, like if you hit 100 million ARR and there was no one close to you, you probably just keep growing.
- MCMartín Casado
Yeah.
- LPLeo Polovets
And now it feels like you could hit 100, and then you drop to 50 'cause someone else came out with a better product.
- MCMartín Casado
Yep.
- LPLeo Polovets
So, you know, I think there's like the growth is amazing, and then the moats are weaker, and so I think there's a counterbalance there, and I, I'm not sure I'd evaluate it 'cause I haven't invested that much of that stuff.
- MCMartín Casado
I, I agree, yeah.
- LPLeo Polovets
Um, on the deep tech side, I definitely see areas with a lot of hype from time to time. Uh, like we, for example, we, we invest in defense a lot three, four years ago, and then we, we kept looking. We basically paused for a year and a half or two because after Ukraine and Israel, thing, you know, prices just went up like two, three, four times.
- MCMartín Casado
Yeah.
- LPLeo Polovets
But the company fundamentals didn't change. Um, and then it started being an opportunity cost of like, should I invest in this defense company at 40 when there's this really great, you know, energy company at 15? Um, and so I think defense was kind of like that. I think bio has had a lot of ups and downs. I think in robotics, like humanoids are probably like one of the most hyped areas where the valuations just get crazy before there's any, any revenue. Um, so I think the... A- actually, I, I feel like I kinda lost the thread in the original question, but, um-
- MCMartín Casado
No, this is great. I mean, I al- was honestly just wondering like how you thought about this current wave, and you did a great survey of the set of the waves. I, I actually, I actually agree.
- LPLeo Polovets
I, I would say like for the consensus areas like humanoids, like we end up not explicitly, but implicitly avoiding them, because once you have a few companies that have raised like hundreds of millions, whether they end up being great outcomes or not, I think it's pretty hard for someone to start something new with like, you know, near zero resources and team.
- 32:46 – 38:50
Fund Size, Ownership, and Mega Outcomes
- MCMartín Casado
Yeah.
- ETErik Torenberg
Uh, uh, when I look at my portfolio, I, I, I see both, uh, there were some, you know, of the winners, um, you know, Pave and Scale were non-consensus, non-competitive, un- you know, un-unproven, but very talented founders. And then, and then on the c- more consensus competitive, Jack Altman, uh, and, and Cassar were-
- MCMartín Casado
Wait, how is, how is Scale non-consensus?
- ETErik Torenberg
At, at seed, at seed, um, you know, Alexander Wang was 18. [chuckles]
- MCMartín Casado
It's a total known space. He's phenomenal. The A was done by Volpe, who's amazing. I mean, I just feel like this is a very narrow definition of non-consensus.
- ETErik Torenberg
Sure. For m- nearly most of the rounds it, it was, uh, it was competitive. So, so, so yeah, I can, I can, um, I can agree that, I mean-
- MCMartín Casado
Dan Levine, Dan Levine was-
- ETErik Torenberg
Yeah, yeah
- MCMartín Casado
... I mean, come on. These are like the best investors in the world.
- ETErik Torenberg
I, but I, I just mean to say that... I, I brought the example to say, like, Cassar's round was almost an order of magnitude more expensive. And I think what, what people have been late to really internalize, and what a16z was super early to internalize, was just the outcomes are, are order of magnitude bigger, um, maybe, maybe two orders of magnitude bigger. And so you can get seed-like returns at o- you know, order of magnitude or even two orders of magnitude more, more expensive. I mean, remember YouTube, Instagram were considered, you know, very expensive acquisitions at, at, uh, you know, just a few billion dollars and, you know, in a few years we're gonna have more trillion-dollar companies. And so, um, o- once we truly internalize sort of the outcome, uh, e-expansion on the order of magnitude, I, I think it makes sense to Leo's earlier point that then it would beg the argument of like, okay, but can you have, you know, 1000X-like returns at, at not just what we used to consider seed-like pricing, but maybe at Series A or maybe even Series B, right?
- MCMartín Casado
Well, this is a s- this is a very interesting question because you actually do run into fund mechanics as, uh, as an actual, you know, price modulator in, in this discussion, right? So you're exactly right. So again, I'll go back to my company. So my company was acquired for $1.2 billion. We had, let's call it, you know, less than $10 million in ARR, right? So does that make any sense? No. And then a lot of people are like, "This is totally crazy. This makes no sense." Except for when I left, you know, the run rate of the... Three and a half years later, like the run rate was, you know, $600 million within VMware, who acquired the company, and then right now it's, you know, let's call it $2 billion, right? It was actually, at one point in time, it was, I think it was 40% of the growth of VMware, like the business unit that I ran that was part of the acquisition. So clearly it made sense to, to VMware. So as a result, you should say all the check sizes should be high for the winners because the outcome was so good, and this is, you know, this actually returned a lot of money to a lot of investors. The, the, the problem with that is I just think that that would mean fund sizes would be too large, and you'd have to unlock different pools of, of, of capital. Which, which by the way, did start to happen during the SoftBank and the Tiger and the Code 2 era. Um, so you could argue that all of their thesises were correct, right? Like SoftBank was actually right, and Tiger was right, and it was actually a macro issue that caused all the pullback, and that's gonna come back again. I mean, that's I think a very legitimate thesis. Um, but I really feel the reason that prices don't continue to go up is more just access to LP capital. So L-Leo, Leo, I just, I, let me, let me just try to, to make this a bit more concrete, which is, uh, I think what Eric said is correct, which is the outcomes are so big it suggests that, that high prices, like the, like the prices are too low that we actually pay. I think the prices, you know, the fact that we get the returns we do suggests the prices are too low. So the question is, is why are the prices too low? And I, I think the answer is, is like we just don't have the dollars to place all of those bets. And a number of people have actually questioned exactly this very famously. SoftBank questioned this. Tiger questioned this. And so they rose these, you know, raised these, you know, insight questions. They raised these huge funds, and they deploy a lot of capital. And those experiments had very mixed success. But I'm, I'm not... It's not obvious to me that the reason they had mixed success... is because the prices were too high. I mean, there, there's a lot of reasons why those could not have worked, including kind of macro cycles and also the fact that none of them were Silicon Valley insiders, none of them were, you know, traditional early-stage investors, et cetera. So there's a very reasonable question, which is, you know, maybe someone should just go run the Tiger strategy again, but as a, as a Silicon Valley insider.
- ETErik Torenberg
Well, in, in some ways, you know, those are the, the failure cases to, to some degree. But, but in some way, you know... I mean, Thrive raised bigger funds, Founders Fund raised bigger funds, we raised bigger funds. Uh, you know, the winners are all, have also, you know, multi-stage have raised bigger funds.
- MCMartín Casado
It just could be that this is just the market being efficient. Like, like actually the reason that more money is going into this and the funds are getting larger is because the opportunity set is larger, and this is just the market working its way out. But Leo, you're very quiet, and [chuckles] this is actually a pretty controversial statement, so I wanna make sure that like-
- LPLeo Polovets
Well, I, I, I guess, uh, I, I'm not sure what you mean by we should be paying more. Do you mean that like you think the current prices are still like well below where they should be? And, and I guess if so, but like-
- MCMartín Casado
I'm riffing off of Eric's statement, which I thought was right. Which is, which is venture capital has been a top returning asset class, and you can look at individual investments. If you just take the top 10 percentile of, of funds, you know, th- they return so much money. So there is an argument that even with these high prices, they're still underpriced.
- ETErik Torenberg
And, and put it d-differently, Le-Leo, it's like, um, a seed fund may say, "Oh, I'm not gonna invest in something at 50 post or 100 post because I don't think there's 1000X, you know, potential. I don't think Anthropic is gonna be a $100 billion company or, or, or, or, you know, OpenAI is gonna be a $100 billion company or, or whatever it is." But it turns out it is. It [chuckles] like it turns... You know, what we used to think-
- LPLeo Polovets
I think you're contrarian now to say OpenAI is gonna be a $100 billion company, right?
- ETErik Torenberg
Right, exactly.
- LPLeo Polovets
It's pretty much. [laughs]
- ETErik Torenberg
Yeah, exactly. I, I mean, I mean, a few years ago, you know. Um, and so it, it doesn't seem
- 38:50 – 43:39
What's the New Norm?
- ETErik Torenberg
like we've sort of truly internalized that this is the norm, that there's gonna continuously be $100 billion, you know, o-outcomes. If, if not, you know-
- MCMartín Casado
Or that the market just continues to grow, and therefore-
- ETErik Torenberg
Yeah
- MCMartín Casado
... it necessitates larger fund sizes. I mean, I, I would say the, probably the venture market was what? 100th the size 20 years ago?
- LPLeo Polovets
Yeah, probably something like that. It's kinda wild to think about.
- ETErik Torenberg
Yeah. And, and yeah, we did, and we did think a few years ago that there'd be a great con-contraction in, in, in the, in the asset... That 2021 was a blip and that, you know, it, it would sort of right size back to where it used to be, and it, it doesn't seem to, to, to be the case that it's going to, to 2010 levels. Um, I'm, I'm not sure if you guys have the, the data on you, but when, when I talk to the... our, our team, when I talk to Thrive, um, et cetera, it seems that people think no more capital is, is just gonna keep entering.
- LPLeo Polovets
I, I think that's just 'cause companies stay private longer too, right?
- ETErik Torenberg
Like, yeah.
- LPLeo Polovets
Uh, but, but I, I think the, the actual number of $100 billion plus companies in the last 20 years is pretty small. Like I, I don't know the exact number, but I bet it's like 10 or 15 or maybe 20 or something. So it's like you're really betting you can get like the one every year or two that gets there. Um, if you're, you know... Let's say you're doing a Series A at like a billion post or something, right, and you want 100X, uh, even ignoring dilution.
- ETErik Torenberg
We... You'd have to bet that there's more of them and that, uh, more of them go-going to happen and that there are also more ways of getting liquidity fr-fr-from, from them, um, as well. Martin, you were gonna-
- MCMartín Casado
But, but also just... But that also kinda suggests purely by the numbers that the most important thing is just being in one of those and not... If, if you can, the most important thing is being in one of those independent of price.
- ETErik Torenberg
Mm.
- MCMartín Casado
And that's the higher order bit.
- LPLeo Polovets
So, so I, I think, I think that's, uh... I mean, I generally agree, right? Like, if you're in like the best company of the year, I don't think it... Like I, I don't think ownership matters that much. I don't think like the price matters that much if it's gonna be the best company like 10 years forward. Um, I, I guess to your earlier point where, you know, if venture funds had more money, they'd like do higher valuations. I mean, I mean, it sounds like then you could do the higher valuation today too though, right? 'Cause you could just be like, "Hey, if we just wanna get in this one, we'll pay twice the price and get half the ownership or something," right? Because-
- ETErik Torenberg
But you also need a diversified portfolio. You need enough companies to get-
- MCMartín Casado
No, I, you, you need the fund size to run that strategy. This is why I think a lot of this comes back to fund size. I mean, even in the Andreessen portfolio, I mean just to think off the top of my head, we have three companies that are at the 100, or four companies at the $100 billion mark, right? I mean, there's Stripe, Databricks, Coinbase, OpenAI, and so they're not that rare.
- LPLeo Polovets
You guys have awesome coverage. Uh, I mean, like-
- MCMartín Casado
Well... [chuckles]
- LPLeo Polovets
Like, like I, I, I think, I guess the question is like how many more could you name though from the last like, you know, 15 years? Um, my guess is under 15.
- MCMartín Casado
Well, well-
- LPLeo Polovets
Probably not like 100, right? Like... [chuckles]
- MCMartín Casado
Yeah, yeah, yeah. I mean, 20, 20, 20 billion plus, there's a lot, and that used to be so ra... In enterprise software, it used to be an adage that nobody ever broke, you know, 20 billion or 10 billion, right? And, and Palo Alto Networks was at 15, and we were like, "This is crazy." And now there's so many of them that have. And so maybe with 100 billion, you're right. But in the world that I live in, the amount of like decacorns is or probably an order of magnitude more than what it was 10 years ago. And, and, and on the face of it, that would argue for an order of magnitude higher fund size if you wanna play the strategy of being in the winner. I mean, there's clearly multiple strategies. But if you wanna... I, again, I don't know the, the, uh, the, the... For me, the key question, I don't know the answer, I wanna run the numbers, is if you take a dollar of earnings, like a dollar of earnings for a venture capitalist, did that come from, uh, a company that raised at high prices or not? And I, I would guess the answer is yes, just because the winners are so outsized.
- LPLeo Polovets
I mean, I, I will say there's like multiple ways to play it, right? Which is if the outcomes are 10X bigger, you can have a 10X bigger fund and basically run the same playbook, keep the same ownership, and the, like a big outcome still returns the same amount of the fund. You could also do like more investments at like, you know, a fraction of the ownership and thenEach investment maybe moves the needle less, but you have a higher chance of hitting like, you know, the Stripe of the year, the Uber of the year.
- MCMartín Casado
Totally. Yeah, yeah. That's fair. Yeah.
- LPLeo Polovets
Um, yeah. So I, I think, I think there's definitely different models that could work here.
- MCMartín Casado
Yeah. That's a good point. Yeah. No, you're right.
- ETErik Torenberg
I wanna make a few, few related points here. So one is, I remember someone quote tweeted Martín's tweet and said, "This is a sign that the asset class is, uh, is, is, is, is dead," or some... The, the, the idea of an eff... Of, of a more efficient market. Um, and I, I think what that really means is more, um, that that individual's firm is, is, is... If, if an individual c- firm can't compete and win deals in an efficient market, they're, they're going to lose. [chuckles] Um, and so I, I... It relates to my second point, which is I think there's a lot of venture capital, uh, venture capitalist identity is
- 43:39 – 45:00
Venture Identity vs. Market Reality
- ETErik Torenberg
tied in being non-consensus, uh, in, in being able to, to see things that others can't see because, uh, they're cons... I- it's hard to win against all, all these other much bigger, much more well, well-funded, uh, players. And, and for that reason, the... I, I, I less wanna use the terms consensus, non-consensus 'cause it's so core to people's identity, and, and more wanna use the term like either it's a hot round or it's not a hot... You know, it was competitive round or, or not competitive. And I, I think another way of framing that that's not perfect is, is the company working or is the company n- not working at, at the point, point of, uh, at the point of investment? And let me re- re- re- add some nuance to it, which is if it's, um, if, if something is working, then it's okay. It's like, you know, what is the price and what, you know, what is the sort of the, you know, potential return multiple, and how, how does that work with your threshold, et cetera? There's some things that are competitive and, and, and not working, um, but have a incredible founder or, or people, you know, whatever. It's early enough that people believe the, the vision, and so you're still paying that price based on what, what you think. And, and then there's, there's lots of things that are, that are not working or, or, um, are not obviously working. Um, but w- w- and w- we, we, we've chosen to do less, I, I believe, consumer, um, things that are pre, pre-traction. So it's basically, it's like, do you wanna invest in things that have traction or, or, or n- or no traction? And there's failure modes with, with both, but it's a... It's... And not every hype thing, not every competitive thing has, has traction, of course. But it's, it's
- 45:00 – 54:00
The Future of Venture: Efficiency, Competition, and Growth
- ETErik Torenberg
just another way of framing this debate. I'm curious if... Feel free to quibble with my framing.
- LPLeo Polovets
I think I saw the same quote tweet. Um, I'm probably somewhere in between. Uh, like I don't think venture is dead. I think it gets a lot more fun if it's purely consensus. The reason is I think in a purely consensus world, like it all just comes down to the cost of capital, right? And so if my LPs want 5X and yours want 2X, you could pay two and a half times higher prices, and the company's not better. It's just like, oh, like your cost of capital is lower, so you're gonna win all the time. But also it's, it's like we all see the same value, everyone sees the same value. It's just like, who wants the smallest return that could still grow the business? And that just feels, feels less exciting to me. Um, yeah. [chuckles]
- MCMartín Casado
I, I mean-
- ETErik Torenberg
That's exactly right.
- MCMartín Casado
I'm gonna, I'm gonna... I'll get a little bit philosophical on this, but like the thing that I've always... that's always bugged me about PE investing and public market investing is it just doesn't care about productivity, really. I mean, it do- it does to some degree, but I just like, you know, if you're in a large public company, uh, like I was, you realize that the public markets really care about predictability over innovation, for sure. I mean, and so innovation is stifled so much, and in fact, it, it kind of, it kind of causes large companies to protect themselves through kind of incumbency and monopolistic practices and everything else just 'cause they're not allowed to be aggressive on growth, right? So I feel like it's almost this negative force on progress and innovation. And I don't wanna be too dramatic about it, but I just feel like I'll bet if you draw a dollar at random that gets invested, you know, 90 cents of those, of that dollar goes into like keeping incumbents alive and/or, you know, predictability and not to growth. And I'm, I'm a huge believer in creative destruction, man. I'm like, "Fuck, man. Get 'em out of the way. Let's invest in growth." And so I love the idea of venture as an asset class getting more efficient, and I love the idea of more money going into it 'cause the entire thesis is grow. You never invest on... At least I don't. I mean, I'm sure you don't, Lei. I never invest on, on, on downside loss. I don't care, right? You only invest on upside. And so to me, more dollars going into venture is only a positive for humanity. And again, I, I don't mean this to sound too grandiose, but I, I, I, I do feel it's just a net positive.
- LPLeo Polovets
Well, so maybe on that front, like I think it's a really interesting perspective. I feel like a lot of the... More from a company perspective than investor perspective, I feel like a lot of the most disruptive products were maybe non-consensus at the time.
- MCMartín Casado
Totally.
- LPLeo Polovets
Right? Where you start with, you know, like no buttons on the iPhone or you got like Uber instead of taxi. It's a stranger driving. And those are the ones where I think if you were like, "I'm gonna build a taxi company, but it's like 20% more efficient," like probably can be a big business, but not quite the same level of disruption and growth as like, you know, you take a big bet and you might... Very high chance you're wrong, but if you're right, like you're gonna be, you know, in a really good position.
- MCMartín Casado
Yeah. And this is so critical. I'm glad you brought, you brought it out. Uh, I really believe the best companies themselves are non-consensus to customers. I just think that the investing market is, is, is, is different than that. Like they kind of understand that, and therefore a, a comment on investors being consensus is very different than a product or m- being consensus. Does that make sense? Like investor sentiment I think is actually much smarter than people think. Like I think like the, the adage is VCs are dumb. Like, um, you know, they just, you know, uh, chase trends, and all of that is true. But the reality is, is as a group, we have identified a cohort of companies that are quite disruptive and invested in them and, and, and priced them and, and those, the companies themselves tend to be actually quite non-consensus f- to the actual consumer or to the market.
- ETErik Torenberg
I, I do want to build, Martín, Martín, on your, on your point 'cause I think it's so interesting just to comment on how not everyone's incentives are totally aligned here, especially bet-between sort of the what's good for the individual and what's good for the ecosystem. And so in the sense that, yeah, you know, if you're an individual VC, you d- you don't want more capital, or if you're a founder, you don't want more founders in your space. But to your point, like competition is... And some people are saying competition is bad, you don't want competition, but competition is what fuel-fuels incredible product. It's like the Darwinian process, like this is how, you know, we get, you know, a bigger, you know, s- uh, m-more, a, a bigger startup outcomes, a startup ecosystem having more, more value, incredible products for, for customers and users.
- MCMartín Casado
This is how we solve cancer, man.
- ETErik Torenberg
[laughs]
- MCMartín Casado
More money goes into VC-
- ETErik Torenberg
Yeah. [laughs]
- MCMartín Casado
... and we invest in companies and in-
- ETErik Torenberg
Yeah
- MCMartín Casado
... as opposed to investing in dying companies' ability to retain their place.
- ETErik Torenberg
Right.
- MCMartín Casado
Hundred percent.
- ETErik Torenberg
Yeah.
- MCMartín Casado
Like all of finance needs to change.
- ETErik Torenberg
And I think VCs are trying to straddle sort of, you know, LP incentives, foun-founder incentives, their, their own incentives and, and there is some overlap and, and, and there's magic there, but it's also just worth acknowledging that not every individual person i-is aligned, and that's okay. I also do still b- very much believe in the, in the barbell, that there will be, you know, these big, these big, you know, sort of, um, ma-massive funds that continue to, to, to, to win and invest in compound value and also these, uh, uh, you know, uh, smaller, focused, concentrated e-
- MCMartín Casado
The boutiques
- ETErik Torenberg
... expert. Yeah.
- MCMartín Casado
Yeah.
- ETErik Torenberg
The boutiques who-
- MCMartín Casado
Yeah. Got it
- ETErik Torenberg
... who absolutely crush it, and we all work together.
- MCMartín Casado
So, so Leo, uh, we're, we're gonna run, we're gonna run the numbers. I was trying to get it done by now, but there's a lot to do. The, the, the numbers are fuzzy. Um, I just wanna walk through what we're, we're gonna be, um, uh, looking at, and then maybe we'll schedule another podcast once the numbers are out to actually discuss it. So-
- LPLeo Polovets
Cool
- 54:00 – 55:24
Seed vs. Multi-Stage Funds: Who Wins?
- ETErik Torenberg
or, or not? That's... Ramshrn's argument is they had a multi-stage Seed, and that's why he co-invests with multi-stage as his whole strategy, and then just, you know, past isn't, you know, isn't the future necessarily. What, what do we think about the future?
- LPLeo Polovets
So I mean, I haven't looked at, I haven't rigorously analyzed like the $10 billion, $50 billion outcomes. For o-over, over the, the course of Susah, I think we've invested in like 10 or 12 unicorns roughly. Maybe like a third of those or a quarter of those had a Series A investor at Seed. Um, and I'm, I'm not really counting, like sometimes it was like, oh, the Series A investor did a $50K check in the YC round or something. I like, I, I, I mean, like actually like took half the round or more. Um, so most of them still were Seed only or like, where like Seed funds dominated the, the early round, and then they went to multi-stage very quickly after that. Um, but so in my experience, like I think there's a subset of Seed where, I don't know if I'd say multi-stage funds won, but they have like a very strong advantage, right? Where if it is a founder that previously built a business that exited for $100 million, and they're like in the space that they know super well, that's gonna get done at like 40 instead of 20 or 80 instead of 20, uh, post, and chances are it's gonna be a multi-stage and not like a boutique Seed firm. Um, so I, I think for that segment, like multi-stage hasn't won, but I think it's probably like the predominant... Like the majority of the time they have a big leg up. I think for the other ones where it's less obvious, it tends to be much more Seed dominated or Seed fund dominated.
- 55:24 – 55:41
Closing Thoughts
- ETErik Torenberg
Yeah. M-Martín, Leo, this has been a great conversation. [upbeat music]
Episode duration: 55:51
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