Venture is a bunch of soulless cowards. They’re well-intentioned, soulless, cowards. They have fallen for what everybody else falls for. Which is: “Here’s this gold star, and they choke it really tight and say, ‘I don’t want to lose this gold star.’”
And then what happens? You go risk-off. Then what happens? Your behaviors are about protecting the seat of power that you have, and the social definition that that seat affords you.
So now, instead of being an accelerant of the progressive worldview, you become a retardant to a progressive worldview.
When you’re a critical part of the future, the most important part of capitalism is going to be the folks that are driving the technological change. As a class, that’s what VCs are supposed to do.
Principals as Investors
It is so crucial for more and more principals to invade the investing ranks. It’s so crucial for a more inclusive set of people with a broad and diverse, ethical, worldview not tied to money to be in the investing class. Because those two cohorts will hold the line much better than agents do. Much better than people who need the job, who want the money, who want the perceived fame, who believe they are these clairvoyant pickers. These people are a scourge to a better way in which we should behave, because they tolerate behaviors.
A lot of these companies are started by younger people, and the problem is, what they want more than anything else is guidance. It’s not that they are fundamentally bad! So when you see them veering away, how do you say, “Hey, hold on, I’m checking you right now. Here’s the guardrail, you crossed it, get back on the right side.”
All roads lead back to people with a backbone. People who aren’t so desirous of money and title and stature generally have a much better backbone than people that care about those things.
I’m at war against bad ideas. There are all these fantastically talented engineers that should be working on the substantive ideas of our time. The reality is, they could just as easily be convinced to work on something that some would say is the nth derivative of something.
We have to fight that tendency, even if the nth derivative thing is easier to understand, quicker in terms of feedback. It still is not the right thing for what, broadly speaking, society needs and what we, as a class of individual who control the spigot of capital, should be responsible for.
We should be responsible for creating the future.
I am not afraid. I got immensely lucky, but I grew up on welfare. To go back to that means fucking nothing to me. For me, it’s like, you don’t have to do 50 things, now you can do 10 things. But now, instead of $10 million on 10 things, I’m willing to put up $1 billion on 10 things. Why not? If it’s really working, just keep doing it.
That’s where you see the true best of the best. The Warren Buffetts of the world. The Seth Klarmans of the world. They show you that even as you amplify capital, you have to have the precise mental framework to continue to be concentrated. That is where to emotional and psychological mettle of an investor is tested, and most people fail.
There was never any competition, and now there is. Also, there was never supposed to be a guy like me with a couple billion dollars. That’s just not supposed to happen. Because that’s the last thing they want, is some loudmouthed kid with a lot of money who frankly is gonna build whatever he wants to build and enough, I’m not saying I have a lot, but enough, credibility to get enough critical people to get it past that existential product market-fit phase, which we are.
And then what happens is, all these investors who otherwise, they were not sure I was a cultural fit for, I wasn’t sure they were a cultural fit for, they all capitulate.
What’s the quote? It’s like, it was a Billy Beane quote, like, “We’re not hiring these guys for how they fill out their jeans, we’re hiring them for a bunch of statistical things.” I think now [the gut instinct] is more of a physiological bias of men.
There is just a need to act with bravado, especially when you have power. I think men treat power very differently, frankly, than women do. I think men have a very hierarchical way in which they impose power, so it’s hard power. I think they love the bravado of that idea of, “Oh, my gut told me.”
I do believe that your limbic system is very powerful. But the idea that they just knew it at the time — come on, it sounds cute. Nobody knew.
And I think what we do at the end of the day, the investment decision is a fundamental byproduct of learning, whereas I think investors typically think that they make investment decisions and then they learn. But when you flip it on its head, there are huge ramifications. So one is compensation, because you need to have all these other people, and two is hierarchy. You are now putting engineers and product managers, data scientists, machine learning, at the center of an organization, whereas the McKinsey MBA blah blah blah person is now at the edge.
Romance and Risk
To be very honest with you, I had been kind of like romantically infatuated with being a VC for a really long time. From the outside looking in, it seemed like the thing I wanted to do. I was always fascinated in being able to be around things in the beginning. I love the art of the start. How do you figure out what really makes sense? Experimenting with different ideas.
Taking lots of risk.
Even when I was in college, I was really infatuated with what I romantically thought being a VC was like. So much so, I remember trying to get a summer internship at a VC firms. I mailed letters to every single top VC and every single partner, describing who I was: I have this undergrad in double E [electrical engineering], I’ve done all this cool stuff in telecommunications, I’m a relatively good programmer. Is there an interesting opportunity for me to help you? Apprentice you? I don’t want to get paid.
Everyone said no. Meaning, they didn’t even respond to my mail, except two people. They probably don’t even know this to this day.
I got a really nice, thoughtful, letter from Vinod Khosla, and a really nice, thoughtful, letter from John Doerr. The only thing I regret is not having kept those letters.
The rude awakening is going to be the following, which is that when you look across the venture landscape you have a bunch of people who are, frankly, ill-suited to do what they’re doing. As a result they feed off historical bias, they focus on the things that they know the best, which will result ultimately in a bunch of marginal investments. Most of which will go nowhere.
At the same time, what happens is the public markets provides the investor, in this case the LP, a very reasonable way of actually getting almost the same return, if not in many cases an equivalent and better return. And so now, the LP in these funds have to ask the following question: Well, I can lock up my money for what is effectively 10, 12, years now because these companies take longer to gestate, and get basically the same return I can for being in a highly liquid public market security. So from any sort of logical risk-based assessment for a limited partner, I think what happens is there will be a culling. And any of these folks that can’t have differentiated returns, you are not going to take on the risk of being illiquid, especially if you think about in a world that is probably going to become more complex, more dynamic, less stable, you want to have massive amounts of liquidity because you don’t know when the dislocation is going to happen. In a world like that, I think all of these middling, also-ran, firms go away.
No, I think it’s irrespective of AUM, it’s just folks whose approach is just sort of dated and not current.
You know, we’re nine people, we’re gonna try to raise the next fund, we’re gonna chop it up amongst ourselves, it’s about us and we make the best decisions we can. Which again is okay, but again I think LPs really start to push back. Separately what happens is you’re going to have different folks who have different approaches.
I suspect the most disruptive entrant into the venture landscape could probably be Google, Microsoft, and Amazon. Why? Because most of the businesses are built on top of them. It doesn’t take much logic to view a world where Amazon says, “Well, I’m renting you the computer, I’m renting you the storage, I’m renting you the algorithms, I’m renting you all of this stuff — I might as well give you some money along the way as well.” They do that with credits, but they don’t take it to the next level. This would be a function of AWS, it should be a thing in a marketplace.”
I want the fucking money. I will play the goddamn game and I will win. Because I want the money. Because I want to extend my influence.
They want the return. It’s fine. I so deeply want to win.
The Venture Capital Barbell
Venture, specifically, is at this point in time where one of two things has to happen if you’re a venture firm. You have to get really big, and know what the hell you’re doing with deep sophistication, or stay really small and really, really, precise.
Over here you have Benchmark: five, six guys who are unbelievable practitioners of their craft, building a hugely successful, impactful business, but $200–$500 million dollars at a time.
Then there’s what we’re doing: multi-asset class, everything from seed to eventually private equity, credit, public hedge fund — but the overlay is tech. You can take down tens of billions of dollars of capital. Then you have market pricing power and the ability to help really shape outcomes. That’s going to be necessary in some of these really hard markets where you can’t just write $5 million cheques and help these companies.
You have to go and sit down with Ford and say, “Let’s create a program together to solve autonomy.” You have to sit down with the big HMO’s and say, “You want to do something in precision medicine? Let’s reinvent the entire stack together.”
In a business, you would measure success by saying, “Well, can you consistently win?”
Some VC firms will create the bravado of consistently winning. Let’s look at the last 15 years. We’ve had Google, Facebook, and Uber. What’s interesting about that is that there has been no consistency of winning. Sequoia and Kleiner were in Google. Accel and Greylock were in Facebook. Benchmark is in Uber.
To me what it says, is that the reason there’s such a divergence, and no consistency and repeatability, is that the investor class and entrepreneurial class continually gets out of whack. The more and more it gets out of whack, the more and more these outcomes become more randomly distributed.
As a smart business person, I think the challenge is to close the gap.
I think it’s ridiculous to want the entrepreneurial class to look more like the investor class. It should be the exact opposite. We just set about understanding that quantitatively, and then you can solve it.
Most people in the investor class don’t want to solve it. They look like a very old, dated representation of what success looked like.
It’s a lot of ego-driven bravado.
I do a better job of representing Silicon Valley than my peer group. My peer group’s full of losers, mostly. And they’re morons. And they’re old. They’re just dated.