How AI Is Rewriting Seed Stage Investing with Kevin Hartz & Bennett Siegel | Ep. 49

1. 0:00 – 0:25

   Intro

   1. BSBennett Siegel0:00

      I don't know the last time we've heard a founder pitching a traditional software business.

   2. JAJack Altman0:04

      Yeah.

   3. BSBennett Siegel0:04

      Now, part of that is the meme that everyone's just an A... Everything's an AI company now.

   4. JAJack Altman0:07

      Yes.

   5. BSBennett Siegel0:07

      Everyone puts AI in their deck. I think the issue, as we all know, is if you can vibe code an app in a matter of minutes, and why do you need so many engineers? What's the value of the workflows that you've built? But we're seeing on the application layers, people are going after systems of intelligence. They're going after systems of action. It's new types of spend, and we're gonna continue to back those.

2. 0:25 – 1:16

   The A* Capital story

   1. JAJack Altman0:25

      [upbeat music] All right. I'm really excited to be here with Kevin and Bennett from A*. You guys, thanks for doing this with me.

   2. BSBennett Siegel0:30

      Thanks for having us.

   3. KHKevin Hartz0:30

      Thank you.

   4. JAJack Altman0:31

      I wanna start with just the quick history on A*, how the firm came to be, how you guys started working together, and then I wanna kinda go into seed investing. But can you give us sorta like the quick backstory on A*?

   5. KHKevin Hartz0:40

      Well, we first met through Ramp, uh, and, and that was at, at the seed stage. Eric and the team were out raising, and I participated as an A-angel. This is pre-A*. And, uh, Bennett was at Coatue, uh, and that's where we first interacted.

   6. BSBennett Siegel0:57

      And we started A* five years ago now with our third partner, Gotham, and, um, the idea was to build a new kind of venture capital firm that could focus on partnership with founders at the earliest stages and work closely with them as they continue to grow and mature. Five years in now, we just closed our third fund. We're at a billion of AUM, and the idea is to, you know, bring something different to the early-stage

3. 1:16 – 7:50

   Why big funds went into seed

   1. BSBennett Siegel1:16

      market.

   2. JAJack Altman1:16

      So a, a year ago, I started this podcast basically a year ago, and one of my first guests was Josh Kopelman, and obviously, you know, he's founder of First Round, amazing seed stage firm. One of the things he was talking about was the venture arrogance score. That really stuck. And basically, what he was saying was, you know, bigger funds are super arrogant to think that they can have big returns, directionally speaking, because, you know, you own X percent of a company, how big can the companies be, what return are you getting, and so on. That argument really resonated. It's funny now to me looking back, you know, 10, 11 months later or whatev-whatever it is. Like, a lot has kind of happened. There are more of these, like, five to $15 billion funds than ever. The rounds are more expensive than ever. There's these, like, three plus huge looming IPOs, which kind of gives credence to the big fund. You know, some of these big funds are doing really well, actually. So anyway, there's this whole situation. I'd be curious your guys' take on sort of, like, the landscape and being a smallish seed-focused firm relative to sort of, you know, this market moment.

   3. KHKevin Hartz2:12

      Well, look, you always have to play the hand you're dealt, and we live in this world of giants. Yes, it's true about Anthropic, SpaceX, and, um, OpenAI, and these massive returning large capital n-uh, necessity companies. But at the same time, you know, big funds, uh, you know, the thing that is right is big funds, big fees for those partnerships. And you know, we, we stayed small, so we can be agile. It's kind of like the equivalent of when you're the CEO of a new startup and you don't take a salary.

   4. JAJack Altman2:44

      Do you think if the fees were, like, instead of two and 20, if it was, like, capped and it couldn't go past a certain amount, like, let's say, like, after a billion, there were no more fees, you think VCs would behave way differently?

   5. KHKevin Hartz2:55

      Absolutely.

   6. BSBennett Siegel2:56

      I think-

   7. KHKevin Hartz2:56

      Without a doubt. I've, I've-

   8. JAJack Altman2:57

      Yes

   9. KHKevin Hartz2:57

      ... seen funds go from small to large, and the behavior, um, absolutely change. N-no names, no name-

   10. JAJack Altman3:05

       Yeah

   11. KHKevin Hartz3:05

       ... drops here, but it-

   12. JAJack Altman3:07

       The incentive happens too strong

   13. KHKevin Hartz3:08

       ... happens that way. And then, you know, there's so much in this really exciting upswing of the market. Uh, LPs want to get in, and they're not gonna be... They're not able to negotiate those fees down.

   14. BSBennett Siegel3:19

       If you think about it, the, the fees haven't changed as the asset class has changed. Look at long-only oriented funds in the public markets. They charge 1%. They charge 10% carryover or hurdle.

   15. JAJack Altman3:29

       Yeah.

   16. BSBennett Siegel3:29

       At this point, these growth funds that are raising five, six, seven, eight, $9 billion, they're investing in what would've been public companies a decade ago, and they're essentially indexing the asset class. Why should you make two and 20 for that?

   17. JAJack Altman3:40

       Yeah.

   18. BSBennett Siegel3:40

       We built A* to be aligned with founders, which is that we wanna partner early, we wanna take risks, we wanna work hand in hand with them.

   19. JAJack Altman3:46

       Yeah.

   20. BSBennett Siegel3:46

       It's a different craft, but our incentives are aligned. We only win as they win.

   21. JAJack Altman3:50

       Right.

   22. BSBennett Siegel3:51

       Which is different than I think the prevailing view is of the, the bigger, the bigger firms.

   23. JAJack Altman3:55

       Yeah, I mean, you do need to do well enough as a big firm. Like, you need to, like, cross some, some threshold that you can, like, keep raising your funds.

   24. BSBennett Siegel4:02

       Yes.

   25. JAJack Altman4:02

       But you think about, like, a five or $10 billion fund, and you think about them playing at seed. You know, I was joking with you before we started that, like, you know, your guys' fund is, like, 450 or, or whatever, and, you know, some of these funds, if they raised 8.3 versus 8.8, like, none of us would kind of clock it, but that's, like, a whole extra A*. And then they can use that going into seed rounds, and their incentives there are different. So I'm curious, like, you know, well, maybe could you walk out, like, what is their strategy? Like, what is a $10 billion fund doing at seed, and why are they doing it?

   26. KHKevin Hartz4:31

       I like any unit of measurement that is an A*, you know, unit of measurement.

   27. JAJack Altman4:35

       Yeah. That-- Well, yeah.

   28. KHKevin Hartz4:35

       And maybe that could be adopted as a practice.

   29. JAJack Altman4:37

       We should all talk about A*s going forward. [laughs]

   30. BSBennett Siegel4:38

       There, I think there's two facets. We used to joke at Coatue, there was, like, two ways to make a billion dollars, and the one way was, like, the benchmark way. Like, you find incredible series A, you lead it, you partner, you have a generational public outcome, and you earn, you know, your percentage of the company. That's hard and takes a long time. Or you put a-
4. 7:50 – 10:46

   The mother of all bubbles

   1. BSBennett Siegel7:50

      about.

   2. JAJack Altman7:50

      You guys invest, like... You know, I know you all, you start at seed, but you seed A and B, and so you're, like, very in tune with all of those market stages. What have you seen over the last six or 12 months in terms of, like, how these rounds are happening in succession, where valuations are going, how dilution's happening across them? Like, what, what, what are the trends along those rounds?

   3. KHKevin Hartz8:10

      Well, I, I'd like to think that we're headed... We're, we're not top ticking. We're not there yet, but we're headed to the mother of all bubbles.

   4. JAJack Altman8:18

      [laughs]

   5. KHKevin Hartz8:18

      Uh, eh, you know, like a historic, you know, precedence and, you know, if you think of the '80s and the personal computer and what came out of that era, or the '90s and, and the internet, and the 2000s and mobile, well, AI and the platform and the boom that we're seeing right now is immensely exciting. We have such a global audience to, to reach, and I think we're gonna have a, a few years of this-

   6. JAJack Altman8:42

      Mm

   7. KHKevin Hartz8:42

      ... uh, continuing, uh, to grow. But unfortunately, you know, as in capitalism, it always ends badly. [laughs] You know? Like, uh, a- and I don't mean end. I mean we all know that after 2000, you know, Amazon and Google and so on-

   8. JAJack Altman8:55

      Yeah

   9. KHKevin Hartz8:56

      ... came out of the, the internet bubble, and now they're multi-trillion dollar companies, Netflix and-

   10. JAJack Altman9:01

       Yeah

   11. KHKevin Hartz9:01

       ... PayPal and so on. It's an exciting time but yes, capitalism is like a pendulum.

   12. JAJack Altman9:05

       Yeah.

   13. KHKevin Hartz9:05

       It's either too far one direction or too far the other.

   14. JAJack Altman9:08

       It's funny. On the bubble topic, I have a, a friend at a, at a growth stage firm, and he and I kind of keep track of, like, all of the signs that we might be in a bubble, and it's things like how quickly are the rounds, you know, coming in rapid succession? Like, what are sort of the, like, degenerate gambling behaviors we're seeing from people in and out of venture? You know, what's happening with SPVs? Like, and you kind of go through this list, and you're like, "A lot of the signs are there." The counter and, you know, which is a strong counter, is there's, like, a lot of extremely interesting companies, and there's a lot of companies getting to 100 million of revenue with, like, happy customers and crazy new technology faster than ever. I'm guessing that you're probably feeling a mix of like, "Whoa, this looks like a bubble," but these companies look so interesting. And so-

   15. BSBennett Siegel9:46

       I mean, look, we're optimists by nature. That's why we, we're, we're venture capitalists, and I think, like in any platform shift, you're gonna have some incredible companies that come out of this vintage, and in fact, they're probably gonna be larger than anything we've ever seen, but you're also gonna have a lot of companies that aren't going to go the distance. And I think we all see it in our portfolios who's building durable revenue streams, who's building moats around their business versus what the labs are offering, and if we're doing our jobs correctly, we're gonna find these handful of companies that matter and that have relevance. But there's gonna be carnage in their wake, and not every company is going to, to make it, and that's, I think, true in every prior cycle. I think the other thing I would say is what's changed since we started A*? Seeds used to be 20 to 30 posts. They're now 40 to 50. A great Series A used to be 100 posts. Now they're happening at 250. Series Bs used to happen with real traction at a few hundred million dollar valuation. They're 500 million, a billion. Everything has changed, particularly as large funds have gone earlier, and this will end absolutely fine for the best companies that will continue to grow and mature. But it will also be more challenging for founders that struggle to raise above their pref stack

5. 10:46 – 13:00

   Why founders are getting younger

   1. BSBennett Siegel10:46

      and don't go the distance.

   2. JAJack Altman10:47

      So you guys are investing at, like, the earliest stages where, like, you're basically just looking at teams. I mean-

   3. BSBennett Siegel10:52

      Yeah

   4. JAJack Altman10:52

      ... there's, like, an idea, but there's probably not much of a product. The idea is probably squishy, and you've got this backdrop where you're like, "This is both, like, the most exciting time ever, and it's kind of, like, a scary time in, in certain ways as an investor." So what are, like, the founder attributes that you look for right now, and maybe if there's any contrast to what you looked at in, like, the pre-AI cycle. I'd be interested in hearing that, too.

   5. KHKevin Hartz11:12

      There's a curious movement around age, as in founders are getting younger. Um, I guess they're not aging in reverse, but they're-

   6. JAJack Altman11:21

      No, it's wild

   7. KHKevin Hartz11:21

      ... like, they're getting into-

   8. JAJack Altman11:22

      I mean, you just look at, like, a YC batch. There's ton-

   9. KHKevin Hartz11:24

      Yeah

   10. JAJack Altman11:24

       ... of people in their teens and early-

   11. KHKevin Hartz11:25

       I, I bet they have great data on-

   12. JAJack Altman11:27

       Yeah

   13. KHKevin Hartz11:27

       ... on, like, the-

   14. JAJack Altman11:28

       It's going young.

   15. KHKevin Hartz11:28

       Yeah.

   16. JAJack Altman11:29

       For sure.

   17. KHKevin Hartz11:29

       It's, it's going young.

   18. JAJack Altman11:30

       Very young.

   19. KHKevin Hartz11:30

       And it's interesting 'cause I see it as, like in the, I guess, in the '70s when, late '70s when Steve Jobs founded Apple and Bill Gates founded Microsoft. They were 19. Uh, and, and then you kind of fast-forward, and there's some other examples along the way. Then you had Zuck, and then you really had this accelerate. You had Peter ThielAnd Luke Nosek devised Thiel Fellows- Thiel Fellows-

   20. JAJack Altman11:56

       Yeah

   21. KHKevin Hartz11:56

       ... in 2010. That was very prescient.

   22. JAJack Altman11:58

       Which has been incredibly successful.

   23. KHKevin Hartz11:59

       Yeah.

   24. JAJack Altman12:00

       I mean, look at the results-

   25. KHKevin Hartz12:00

       And it's a nonprofit

   26. JAJack Altman12:01

       ... of Thiel Fellows. It's unbelievable, yeah.

   27. KHKevin Hartz12:02

       He was very prescient of what was coming, and that is, like, this lowering of the age-

   28. JAJack Altman12:07

       Yeah

   29. KHKevin Hartz12:07

       ... and dropping out.

   30. JAJack Altman12:08

       But it wasn't quite like this right before AI, I would think.
6. 13:00 – 16:31

   Mapping talent, not markets

   1. JAJack Altman13:00

      Yeah, that's good. What else besides age? You know, you're, we're talking about durability, and the world is changing. What other attributes, aside from just young founders, have certain advantages now?

   2. BSBennett Siegel13:09

      We generally map talent, not markets. I think to be a seed stage investor, you have to be founder centric, but also you have to be, recognize what's happening around you. The labs are not just infrastructure companies now. They are legitimate competitors at the application layer, which happens to be where most seed stage companies are building, 'cause that's where you raise a traditional round and you launch a business. And obviously, there's CodeGen, which is, like, the central battleground, but it's going to proliferate to every part of knowledge work and every part of the enterprise. We do try to think about where is there white space to build or where can you have enough of a runway to finally build differentiation?

   3. JAJack Altman13:39

      Yeah.

   4. BSBennett Siegel13:39

      Nobody is differentiated at seed. I think this whole idea is like, "What makes this different? Why couldn't your competitor do this?" Every seed stage company could obviously be dis- d- disrupt- disrupted or-

   5. JAJack Altman13:48

      Yeah

   6. BSBennett Siegel13:48

      ... built by an incumbent.

   7. JAJack Altman13:49

      Yeah, there's no moat.

   8. BSBennett Siegel13:50

      But we need to figure out where there's at least enough white space, enough of a runway you can start to achieve liftoff.

   9. JAJack Altman13:56

      When you say you map talent, what does that look like in practice? Like, what does, like, a day look like? You know, is it just sort of reaching out to interesting people in certain networks? Are you tracking people that you've already known? Like, what does it actually tactically mean to map talent?

   10. KHKevin Hartz14:09

       You know, it's a lot like a, a, you know, mining, uh, you know, where you are in a vein of, like, gold, and you've found, you know, an area, but that exhausts, and you've gotta find new talent and new areas. I don't know if that's a good analogy, mining, but, you know, like, things are, are constantly switching. But, you know, the founders are always the same. They're always, you know, those that have had to overcome some kind of obstacles and still achieve at a very young age and be able to recognize-

   11. JAJack Altman14:39

       Mm

   12. KHKevin Hartz14:40

       ... uh, the signs, y- you know, and, and the talents. You know, we've gone through this big phase of IOI and all the coding competitions and things of that nature as a, you know, as a measurement for, you know, like, teens that are achieving on that side.

   13. JAJack Altman14:56

       Yeah.

   14. KHKevin Hartz14:56

       So you're looking for, you know, these types of, you know, these types of attributes. But the reality is-

   15. JAJack Altman15:03

       People who worked at, like, Jane Street, I feel like has been, like-

   16. KHKevin Hartz15:05

       Yes

   17. JAJack Altman15:05

       ... another good one recently.

   18. KHKevin Hartz15:06

       Yeah.

   19. JAJack Altman15:06

       There's been more interest from ex-Jane Street people to be in startups, and obviously it's a very talented group.

   20. BSBennett Siegel15:10

       And this is in, like, some unique insight, but high-quality people wanna hang out with high-quality people. So when you go to the top universities, when you go to the accelerator programs, when you go to companies, like, the m- the most talent-dense nodes work very closely together. So as you start to work with founders in those nodes, you naturally meet their friends who go on to start great companies. I also think as you see people leave companies, you see certain patterns. Certain companies breed better founders than others. Airbnb, Stripe, there's so many of these companies are magical businesses. They worked. And not to say there wasn't hardship in the early days. When they took off, they really took off, so it doesn't necessarily breed as many founders that, like, run through walls to start companies. Palantir is an example. Everyone's a mini CEO.

   21. JAJack Altman15:47

       Yeah.

   22. BSBennett Siegel15:47

       Everyone had to build and launch a product and find product market fit. It's why I think Palantir has the highest, like, per capita rate of unicorn founders of any company, and part of what we need to do is continue to find those areas where the next founders come out of.

   23. KHKevin Hartz15:59

       Yeah, I mean, we love those Palantir founders. I mean-

   24. JAJack Altman16:01

       They're, they're fantastic

   25. KHKevin Hartz16:01

       ... like, you can't get enough. Like, they're so good.

   26. JAJack Altman16:03

       Yeah.

   27. KHKevin Hartz16:03

       Like, whatever, um-

   28. BSBennett Siegel16:05

       Whatever they feed them over there works [laughs]

   29. KHKevin Hartz16:06

       ... you know, whatever they feed them over there is, like, really working.

   30. JAJack Altman16:08

       I also think probably with Palantir, there's, um, there's a certain non-consensus mindset-
7. 16:31 – 19:16

   The rise of AI researcher founders

   1. BSBennett Siegel16:31

      One thing we didn't talk about, there's a whole new crop of founders that never existed, at least in my time of doing venture. It's the researchers. It's folks that are leaving labs or PhD programs that are raising massive quantums of capital.

   2. JAJack Altman16:41

      Which, by the way, used to be a big anti-pattern of, like-

   3. BSBennett Siegel16:43

      Absolutely

   4. JAJack Altman16:43

      ... researchers. You know?

   5. KHKevin Hartz16:44

      Yeah, that's hard. You're totally right. Researchers tend to be, to have high intellect, but-

   6. JAJack Altman16:49

      Academic, not commercial

   7. KHKevin Hartz16:50

      ... not as commercial. But-

   8. JAJack Altman16:51

      But now, obviously, there's all these counter examples for, like, maybe the first time. I mean, I'm sure there were examples in the past, but-

   9. KHKevin Hartz16:56

      Yeah

   10. JAJack Altman16:56

       ... that's a whole new thing that people have to grapple with. It's very hard.

   11. KHKevin Hartz16:59

       It is. Um, y- you know, I, I, I think that's where when you're spending time with a founder and getting to know them, w- if they can really articulate what they're doing, you know, you have to listen so carefully 'cause every word, like, a great founder will have every word very much meaning, you know, have great meaning and-

   12. JAJack Altman17:17

       Right

   13. KHKevin Hartz17:17

       ... and intention about what they're gonna build.

   14. JAJack Altman17:19

       Right. You're saying, like, there can be cues with the language someone's-

   15. KHKevin Hartz17:22

       Yes

   16. JAJack Altman17:23

       ... using of, like, where their head's at.

   17. KHKevin Hartz17:24

       Yes, and, and how they prepare and how they're thinking about the business, and, um, that is much. Um, Sequoia had backed my previous two companies, and they were always sticklers on, you know, your presenta- how you presented-

   18. JAJack Altman17:40

       Mm-hmm

   19. KHKevin Hartz17:41

       ... and how you showed up at the same time.

   20. JAJack Altman17:43

       Do you guys find that meeting founders in a round versus getting to know them before their fundraising is some huge difference? Do you have good examples of success with each? Do you prefer one of, over the other?

   21. BSBennett Siegel17:53

       So I think, uh, the Decagon team's a great example. I mean, you know, Kevin, why don't you talk about the history with, with Ashwin, but I think the prior history informed how we thought about this company.

   22. KHKevin Hartz18:02

       I had been an angel in a, a company that Ashwin had founded called Helia. Russell Kaplan and Daniel Berrios were in that, too. Russell's now the president of Cognition, and Daniel's over at Meta.

   23. BSBennett Siegel18:15

       Yeah.

   24. KHKevin Hartz18:16

       But, you know, that company didn't make it, but stayed close and was always a big fan of that trio, and when Ashwin went off to, and met up with Jesse to start, uh, Decagon, um, it was a kind of a no-brainer to get involved-

   25. BSBennett Siegel18:32

       Yeah

   26. KHKevin Hartz18:32

       ... in the seed round there.

   27. BSBennett Siegel18:33

       The funny thing about Decagon, there, there wasn't really an idea.

   28. KHKevin Hartz18:36

       Mm.

   29. BSBennett Siegel18:36

       You know, they had this insight that like-

   30. KHKevin Hartz18:37

       But you knew the team was great.
8. 19:16 – 22:54

   Why seed investing is so hard

   1. KHKevin Hartz19:16

      Especially in a market like right now that can, you know, sometimes you meet them, you have three days or something like that, or less.

   2. BSBennett Siegel19:20

      Three days. So, you know, I would say at A* more than half of our seeds have been pseudo proprietary in nature, and I... that doesn't mean no other funds are around it. That doesn't mean they're not meeting other folks.

   3. KHKevin Hartz19:29

      It just means you didn't start cold during the process.

   4. BSBennett Siegel19:31

      Exactly.

   5. KHKevin Hartz19:31

      Yeah.

   6. BSBennett Siegel19:31

      We may be w- first to reach out to them. We had some informed knowledge. We had a dinner with them in the past. There was some relationship of relevance and some insight we had going in around their, you know, who they were as a founder, what they wanted to do.

   7. KHKevin Hartz19:43

      Is it obvious to you off the cuff which half of your investments are better?

   8. BSBennett Siegel19:47

      Yes. The, the half that we had some prior relationship or were somewhat proprietary have disproportionately generated returns, though we have done well as- with some of these-

   9. KHKevin Hartz19:55

      Yeah

   10. BSBennett Siegel19:56

       ... shotgun marriages, but there's a l- I would say higher volatility.

   11. KHKevin Hartz19:59

       One of the things that I think is sort of interesting in seed is there aren't that many firms that stick around seed for a long time and are very successful. You know, I gave the example of First Round. You guys are obviously doing great. There's a couple others, um, that have been around for long periods of time, but a lot of times people either leave seed or, you know, they kind of stop doing what they're doing entirely or something else happens. Why is it that it's a less persistent sort of part of the market than multi-stage in your guys' view? Well, I mean, seed is just incredibly hard.

   12. BSBennett Siegel20:31

       [laughs]

   13. KHKevin Hartz20:31

       It's so challenging. It's investing in, you know, just pe- people, uh, and no product, and no ro- you know, hardly even a roadmap or anything else. And so you just have a great deal of uncertainty day in and day out, and then compound that with the current environment where we've had, you know, the multi-stages come in-

   14. BSBennett Siegel20:51

       Yeah

   15. KHKevin Hartz20:51

       ... and want to get a toehold in, in seed and so-

   16. BSBennett Siegel20:55

       Do you mean-

   17. KHKevin Hartz20:56

       ... you know, spray money in.

   18. BSBennett Siegel20:57

       When you say seed is hard, do you mean hard in the sense of high effort or hard in the sense of difficult to get a good result? Both. You work incredibly hard to build relationships with founders and earn the right to invest two, three, four, $5 million in a company that by all odds will likely not work, 'cause most companies do not become billion-dollar-plus companies, and if it's not a billion-dollar-plus company, it has almost no relevance to the perfo- uh, performance of your fund. It is genuinely hard to find these founders. It is genuinely a lot of work to convince them to partner with you, and it's even more work afterwards to support them in building a company. So I think what you have is two facets of this. You have h- historically seed firms that have been successful. They maybe do not continue to adapt to the environment. They don't refresh their networks. They don't continue to be aggressive as new types of founders and new technologies emerge, and they tend to fall by the wayside, and that's a crop of seed-type funds. And others that have been successful, that have found that one or two or three amazing companies with yours, they grow up, they graduate.

   19. KHKevin Hartz21:53

       Yeah.

   20. BSBennett Siegel21:53

       They raise opportunity funds-

   21. KHKevin Hartz21:54

       Right

   22. BSBennett Siegel21:54

       ... and growth funds, and what's left is a relatively small group of firms that still specialize in seed and look to work with the best founders and don't try and find value deals or diamonds in the rough, but compete to be the partner for the next generation of winners. And if you can't do that, seed is a bad asset class.

   23. KHKevin Hartz22:12

       Just to emphasize, venture capitalists should be much better managers of people too.

   24. BSBennett Siegel22:17

       [laughs]

   25. KHKevin Hartz22:17

       You know, the generational change, handing things off.

   26. BSBennett Siegel22:20

       Yeah.

   27. KHKevin Hartz22:20

       Um, you know, very, very few firms kinda make it-

   28. BSBennett Siegel22:24

       Yes

   29. KHKevin Hartz22:24

       ... make it on from there. They usually, like, die with their original GP.

   30. BSBennett Siegel22:27

       What do you think is, like, the big source of, um, difficulty in generational transition? Do you think it's finding talent? Is it older partners letting go? Like, where do you think most people get it wrong?
9. 22:54 – 27:34

   Concentration and venture returns

   1. BSBennett Siegel22:54

      It's also interesting 'cause as funds grow and you start, you know, you guys could very easily make a lot of investments in your seed companies that are performing well and start putting huge amounts of capital behind them, and then one day you could wake up and your growth fund was bigger than your seed fund, and now the incentives are to make, right, buy as many of your dollars as possible. I think that sort of explains where the focus goes.

   2. KHKevin Hartz23:15

      Are you inviting us into the-

   3. BSBennett Siegel23:16

      [laughs]

   4. KHKevin Hartz23:17

      ... to do Series As now? [laughs]

   5. BSBennett Siegel23:18

      A hundred percent.

   6. KHKevin Hartz23:19

      Okay.

   7. BSBennett Siegel23:19

      A, B, C, whatever, do it all.

   8. KHKevin Hartz23:21

      Do, do it all.

   9. BSBennett Siegel23:21

      I do think, and we're a little different than a traditional seed fund, we do have a reserve heavy model. We do have more capital available for follow-ons than seed. I think if you, all you're writing is the first check in seed, it's exceptionally hard to drive returns. I mean, for our best companies, we've piled in every single round. And out of a portfolio of40 seed investments, we might have three, four, five companies that have the lion's share of our capital. It's concentration, but different than the way that a traditional growth fund would talk about it.

   10. JAJack Altman23:48

       Yes. You're saying seeds hit so infrequently that if you don't double down on the few that work, it's very hard to get good returns as a basket?

   11. BSBennett Siegel23:54

       I think that's absolutely true, and I, I don't think your fund is gonna return the multiples. And we look at other of our peers who look at pro rata and say, "What's peanut butter pro rata?"

   12. JAJack Altman24:02

       Right, right.

   13. BSBennett Siegel24:02

       Everywhere. We, we... You always wanna support your founders, but as you look at the Series A, the B, the C, the D, that those fall line decisions are actually, in many cases, more important than your initial investment decisions.

   14. JAJack Altman24:11

       Well, what's interesting is I would argue that, you know, f- from a basket of seeds, I would guess that most of the time it's actually very difficult to tell by the Series A where you should be concentrating. But a lot of funds just do their pro rata in the next round, and that's that. But that really looks kind of just like, you know, a peanut butter across all of it. I would think it's much easier to know where to put huge amounts of money, like a stage or two even later than that.

   15. KHKevin Hartz24:33

       Agree. I, I, I think in our case, we, we do agree to support our companies in the A.

   16. JAJack Altman24:40

       Yes.

   17. KHKevin Hartz24:40

       And so we'll always do the pro rata in that round-

   18. JAJack Altman24:42

       Yeah

   19. KHKevin Hartz24:43

       ... and then watch, but you're right, like that inflection-

   20. JAJack Altman24:46

       But there's a different pool of concentration. Like let's say-

   21. KHKevin Hartz24:48

       Yes

   22. JAJack Altman24:49

       ... you had, you know, a fund that was $100 and 40 of it's going into initial seeds, and then there's 20 for those pro ratas. I would think for the last chunk, that's probably like a f- y- I would, I would guess, done right, you're probably doing just, you know, 10% of the fund into a few companies each kind of thing. Is it that concentrated or?

   23. KHKevin Hartz25:05

       You know, this is interesting because Brian Singerman is, is creating-

   24. JAJack Altman25:08

       Yeah

   25. KHKevin Hartz25:08

       ... this, uh, LP fund to find new managers to be able to concentrate and help them, like, go all in. And, and that's, I, you know, I think since 2005, that's what Founders Fund kind of pioneered, was like breaking the old venture rules-

   26. JAJack Altman25:23

       Right

   27. KHKevin Hartz25:23

       ... and putting this inordinate amount of money, like when they sold, uh, all their Spotify off at a nine billion valuation and rolled it into Airbnb.

   28. JAJack Altman25:32

       Right.

   29. KHKevin Hartz25:33

       That, that was pretty monumental, um-

   30. JAJack Altman25:35

       Which is interesting 'cause that's more of a trader mindset, which you don't-
10. 27:34 – 31:15

    The AI rollup craze

    1. JAJack Altman27:34

       stomach for it. I'm curious about some of your guys' opinions on AI. Ob- obviously, I know you spend most of your time trafficking in founders and talent, but I also know you guys have strong opinions about the market and where it's going, and I'd be curious to hear some of those. Bennett, maybe starting with you. We, we had, um, we had talked a little bit about, like, you know, roll-ups and sort of buying businesses that are sort of, you know, older established companies and applying AI to them. I know you've, you know, got a background doing growth as well, so you kind of have some more familiarity with this. Like, what, what's your view here?

    2. BSBennett Siegel28:01

       There are a few things that are gonna be worse than for incumbent businesses and the venture capitalists that are participating in these than work buying and transforming and dealing with the culture and the process changes. Like, everyone thinks it's as easy as buying a business, deploying AI, improving free cash flow margins, and earning a return. I mean, private equity firms have been doing roll-ups forever. It's incredibly, incredibly challenging to turn around an existing business. I think this is actually a great business for founders. It used to be that you have to raise capital, you have to buy an asset, and you have to improve the asset, and you would keep 20% of the profits. Now, a founder can go and raise venture capital dollars, dilute 20%, so keep 80% of the profits, and go buy a business. It is phenomenal for them. I think it's an exceptionally tough asset class that allows venture capitalists to raise lots of money, but I think it will be very hard to achieve real profits doing.

    3. JAJack Altman28:48

       By the way, on that point, as the venture capitalist, don't you need the thing to, like, appreciate a lot just to get back to even?

    4. BSBennett Siegel28:55

       Yes.

    5. JAJack Altman28:55

       If you gave somebody a billion dollars, and then they went and they bought an asset for a billion dollars, and you only own 20% of that thing, don't you now kind of have $200 million?

    6. BSBennett Siegel29:04

       So that's, that may-

    7. JAJack Altman29:05

       Am I not thinking right?

    8. BSBennett Siegel29:06

       No. It's, the, the ironic element of this is, like, the founder can't lose. The founder has literally bought into a business with embedded asset value that they now owe a, own a large percentage of. But unless these companies appreciate dramatically in value, the venture capitalist owns a relatively small percentage. Now, people are doing convoluted structures where there's then a hold co and an op co, and there's carry and there's waterfalls, but no one has actually proven a way that you can monetize this in any way that resembles venture-like returns.

    9. JAJack Altman29:32

       Yeah.

    10. KHKevin Hartz29:32

        The other dimension of it, you know, in this, like, private venture capital, private equity play is simply that, like, venture capitalists are very good at watching the top line. Like, they want things to, like, blast off, and they're not so precise inYou know, this is all about the top line, but the bottom line, uh, more importantly, and, you know, venture capitalists don't pay as much attention to that, you know, with, with their companies. So I, I, it just doesn't feel like the, the, the right culture fit for this sort of stuff.

    11. JAJack Altman30:02

        Are there any forms of rollups or structures that you are bullish on? Like, when you look around the different types that are happening, is there any form where you're like, "All right, if I had to buy one, that's the one I'd buy"?

    12. BSBennett Siegel30:11

        I think there is something to be said for looking at his- services-oriented professions that have largely recurring, if not truly recurring, revenue sources, and looking at how you could replace people with technology, because if AI's been very good at one thing, it's looking at traditional pockets of labor spend and automating it. So I think there's a reason why I think accounting rollups are interesting-

    13. JAJack Altman30:31

        Yeah

    14. BSBennett Siegel30:31

        ... for people. There's a reason why HOA rollups are interesting for people. I think ITSM as well for that reason. It all deals with tickets and deflection, replacing call center people. That feels like a very interesting area, but I would argue 90% of the value created is gonna be buying the asset for the right multiple, which once again, venture capitalists are historically very bad at.

    15. JAJack Altman30:50

        So you're not gonna be doing any rollups.

    16. BSBennett Siegel30:51

        We will not be doing any rollups at A*.

    17. KHKevin Hartz30:53

        I mean, the other side, there are always great teams where they're exceptional teams in using tech, technology, and, um, Bending Spoons comes to mind-

    18. JAJack Altman31:02

        Yeah

    19. KHKevin Hartz31:02

        ... as we, uh, just sold Eventbrite to, to Bending Spoons, and that's an incredible operation of how they integrate all these assets, and what they're doing in Milan is, is remarkable.

11. 31:15 – 33:15

    AI vs traditional software

    1. JAJack Altman31:15

       What about within AI? What are you guys most excited about? Where are you anxious? You know, like may- maybe to, like, frame up sort of like a, a common meme right now that, like, software is extremely difficult because the labs are sort of just expanding and everything's being... You know, workflows are being replaced by agents, and the workflows I need that are important, the labs are gonna own, and so, you know-

    2. KHKevin Hartz31:34

       We can't take that position. I mean, we have to, um, you know, we wanna back these independent companies, and the labs, like, they need to, um, you know, they need to have a very audacious appetite and, and keep the growth up. But, you know, we'll still keep, you know, backing the application layer all around, uh, where we see the right barriers, the right teams-

    3. JAJack Altman31:58

       Yeah

    4. KHKevin Hartz31:58

       ... and so on.

    5. BSBennett Siegel31:58

       And there's a distinction obviously between application layer AI companies and more traditional incumbent, you know, software. I don't know the last time we've heard a founder pitching a traditional software business.

    6. JAJack Altman32:08

       Yeah.

    7. BSBennett Siegel32:08

       Now, part of that is the meme that everyone's just an A- everything's an AI company now.

    8. JAJack Altman32:11

       Yes.

    9. BSBennett Siegel32:11

       Everyone puts AI in their deck. But, you know, I think systems of records are still very sticky for, for a reason. Um, I think the issue, as we all know, is if you can vibe code an app in a matter of minutes, and h- why do you need so many engineers? What's the value of the workflows that you've built? But what we're seeing on the application layer is people are, are going after systems of intelligence. They're going after systems of action. It's new types of spend, and we're gonna continue to back those. I would say in terms of the public markets, I mean, there is a reason software is having significant drawdowns.

    10. JAJack Altman32:39

        Yeah.

    11. BSBennett Siegel32:39

        But the best companies should be able to navigate this. Kevin mentioned early on that, like, we were investors in Ramp. I would say they are a great example of an incumbent pre-ChatGPT company that has now become an AI business, and agents are driving top line and margins. The best teams are going to adapt. So I think you're fine if you're an incumbent software business as long as you have a team-

    12. JAJack Altman32:59

        Yeah

    13. BSBennett Siegel32:59

        ... that is gonna re-architect everything from the ground up.

    14. JAJack Altman33:01

        What about hardware and hard tech? I know you've, you know, been incubating a company that is sort of like software-enabled hardware, I think.

    15. BSBennett Siegel33:07

        Mm-hmm.

    16. JAJack Altman33:07

        And I assume you guys have been investing. But how do you guys think about, like, non-software, potentially even non-AI, but at least sort of like hard tech, hardware

12. 33:15 – 35:39

    Robotics and the future of AI

    1. JAJack Altman33:15

       companies?

    2. KHKevin Hartz33:15

       It's again, like we wanna go where the talent is, and we're being drawn, uh, to these, you know, various hardware companies for the reason of, you know, there being, you know, really, really impressive people. It's happening kind of across the board. Um, there's a revolution there. Um, you know, we certainly don't want to get caught in the same traps that have been difficult for hardware in the past. But yeah, hardware gives you, you know, it puts you out in the real world. Like before, in software, um, you know, we were like kind of trapped like a brain inside of a jar and, and hardware and robotics and so on, um, is an exciting new world for us.

    3. JAJack Altman33:56

       There is some good defense if you have some, like, sensors and things out in the world at least. Someone can't just come along and vibe code that.

    4. BSBennett Siegel34:01

       I think that's exactly true. I think we just haven't hit the ChatGPT moment for robotics.

    5. JAJack Altman34:05

       Yeah.

    6. BSBennett Siegel34:05

       So I think... I mean, ph- AI for the physical world should be as large, if not larger, than what we've seen for the knowledge world. The challenge is right now we haven't seen as much of the commercial applications. We don't care, as seed investors. We're backing robotics companies. We're backing companies working on sensors and edge AI. But we do think about a number of robotics companies have raised at huge valuations-

    7. JAJack Altman34:23

       Yeah. Mm-hmm

    8. BSBennett Siegel34:23

       ... with very little commercial promise. So we think a lot of this is still to come.

    9. JAJack Altman34:27

       Are there types of companies that you are excited about, but given your fund size, you just, like, can't engage in? You know, I'm thinking of, like, Neo Labs or, you know, heavy robotics projects or things like that, that don't, you know, start with a $5 to $10 million seed round.

    10. KHKevin Hartz34:41

        Y- you know, alas, those are tough, you know, to see and, and have them go by us. But, you know, with that said, I mean, we're in... we've been able to invest in a lot of, um, scrappy verticalized robots. So we're in a, in a company, Watney Robotics, it's data ce- data center cabling in, in robotics that, um, is a very specific task that's very high value.

    11. JAJack Altman35:06

        Mm-hmm.

    12. KHKevin Hartz35:07

        And, and that differs from, you know, going after a full horizontal market. Um-

    13. BSBennett Siegel35:12

        Or we backed a research team out of Stanford, uh, called Simule, which is focused on market research, which went on to raise 100 million after the seed round, but at the time only needed a little bit of money to prove out and commercialize their research. Those are the rare exceptions, as you know.

    14. JAJack Altman35:25

        Right.

    15. BSBennett Siegel35:25

        The normal [chuckles] cases-

    16. JAJack Altman35:26

        Is they skip that little seed round

    17. BSBennett Siegel35:27

        ... they skip the little seed round-

    18. JAJack Altman35:28

        Yeah

    19. BSBennett Siegel35:28

        ... despite of how hard we try to convince them of the value of it.

    20. JAJack Altman35:30

        Yeah.

    21. BSBennett Siegel35:30

        And they raise $10, $50, $100 million. And by the way, that is where a lot of the multi-stage dollars are going.

    22. JAJack Altman35:36

        Definitely.

    23. BSBennett Siegel35:36

        It's seed, and that, we can't really do those rounds.

    24. JAJack Altman35:38

        Yeah.

13. 35:39 – 36:58

    What’s next for A* Capital

    1. JAJack Altman35:39

       Makes sense. So you guys have this new fund now. Any changes coming for A* overall, or it's just more of the same, bigger, better, faster?

    2. BSBennett Siegel35:46

       I think it's more of the same. I mean, there's, as you know, so there's inflation around size. There's a larger volume of founders that are flocking to start companies than ever, and I think we just need to be playing the game in the field. We need to be meeting founders where they are, moving quickly, and leading seed rounds. And hopefully, we can be a bigger and better partner over time as our fund size has grown modestly. But we started A* with a $300 million fund five years ago. Our new fund is not that much larger. Like, I think we look to a, you know, a lot of our peers who've stayed focused, who've become experts at their craft, and that's what we look to, to emulate and, and what we'll continue to do.

    3. KHKevin Hartz36:18

       And we can also, uh, I- I- I mean, extend out. I mean, we've shown to be very patient, and we're not just trying to put capital to work, and we kind of wait patiently for those right companies, um, even if it takes a little longer to deploy.

    4. JAJack Altman36:34

       And you guys are moving into this building, right?

    5. BSBennett Siegel36:35

       We are.

    6. KHKevin Hartz36:36

       We are.

    7. BSBennett Siegel36:36

       We want our founders to keep moving up a floor-

    8. JAJack Altman36:38

       That's right. Yeah

    9. BSBennett Siegel36:38

       ... when they, when they raise their future rounds.

    10. JAJack Altman36:39

        You guys fund them, send them over here. It's beautiful. Yeah.

    11. KHKevin Hartz36:42

        We, we, we could put a fire pole, like you can do.

    12. JAJack Altman36:44

        I love that. We, I think we dig a little hole somewhere.

    13. KHKevin Hartz36:46

        Yeah.

    14. JAJack Altman36:46

        I don't know if you're above or below, but a little staircase.

    15. KHKevin Hartz36:48

        We're, we're of course below.

    16. JAJack Altman36:49

        Okay. [laughs] Doesn't have to.

    17. KHKevin Hartz36:50

        It's a seed thing.

    18. JAJack Altman36:51

        Yeah, exactly. That's right. All right. Well, thank you guys. This was super fun. I appreciate you both making time for it.

    19. KHKevin Hartz36:55

        Thank you, Jeff.

    20. BSBennett Siegel36:55

        Thank you. [outro music]

Episode duration: 36:59