Mark Suster: Why Private Equity Will Replace IPOs and M&A as the Exit Path | E1147

1998 99 2000 are nothing compared to the overvaluations of 2021 so we're 2 years into a correction I think it's going to take another five of the 12200 60% were marked by four firms okay SoftBank tiger kichu and insight people invest the most amount of money when the market is just about to hit the peak when markets fall that's when everyone sells ready to go [Music] mark this is so you know I first Interviewed like seven or eight years ago I think it was on like a Skype call I was probably about you know 21

or whatever it was but thank you so much for joining me in person today I'm thrilled to do it thank you for offering I did I have gray hair back then no you looked actually about 20 years younger avent's really taking it out of it's a grueling industry but it's so lovely to do this in person uh before we dive in is there anything that you want To start with yeah I would if it's okay with you um today is actually Passover and Passover is a holy day for Jewish people so you might ask why

I'm here um this is maybe the first year I haven't been home with my family having a Seder I actually came to London to pick up my son who did a study abroad um but for any non-jewish listener I just want to acknowledge what Passover is it was the struggle of the Jews to flee from slavery from the Egyptian people and it's a story from the Bible about the goal of the Jews to return to their Homeland and the homeland of the Jewish people many people don't know all Jews know was actually Israel and so

we originated from uh Judea and Samaria which is modern day Israel and we over time were enslaved and uh oppressed throughout thousands of years we were founded about 4,000 years ago uh for dates and the idea of Passover is that eventually you Will return to your ancestral land so we say every Passover next year in Jerusalem and we've been saying this for thousands of years and so I just want to acknowledge that there's still 130 people being held hostage in Gaza the 130 people for a lot of people who want peace I think everyone wants

peace including Jews but the starting point is to acknowledge that there's 130 people taken hostage held by terrorists of which it's estimated 20 to 40 of them Are already dead and not released so at least on this Passover I want to acknowledge the people who don't have the freedom that I have today I mean for thank you so much for doing it today um and I didn't actually know that in terms of the historical context of Passover so I really appreciate you sharing that it's a tough one to also pivot from to venture I have

to admit but you know what I've done so many of these shows I can just do it seamlessly anyway for Those that don't know Mark how did you make your way into Venture just first setting the scene yeah so I first got into Venture in 2007 and in 2007 I had started two software companies my second company I sold to salesforce.com and I actually love Salesforce it's a great company but after you've been an entrepreneur for 10 years at least for me the idea of working at a larger company and a not Running the company

was not something I wanted to do so I contacted my VC firm and I said I think I might start a third company and they said have you ever thought about being a GP have you ever thought about being an investor and of course I had thought about it I think a lot of people kind of think about would I make a good investor the problem is in 2007 people didn't really want operators a lot of VCS were not operators and so I said to my then Mentor my still Mentor Eve sisteron who's the founder

of upfront um I said I'll do it as long as I'm a Jep as long as I'm actually writing checks and being an investor so in 2007 I started okay so if we just start on that I actually sat down with one of the leading kind of founders of one of the best firms the other day and he said we get operator investors wrong Founders who turn investors are brilliant yeah operators are generally not okay they've run divisions at large Companies it does not mean you understand the 0o to one the granular and it's such

a different element between founder turned investor and operator turn investor and we should delineate between the two have you found that as a difference and how do you think about that I do think one thing that was unique about being a Founder two times is I think I uniquely understood the journey not unique to me but relative to someone who hadn't done It the Journey of 0o to one just how hard it is and uh you know we were talking just before we started about the kicks and The Shins that you really take um as

a Founder even of a venture fund um but but in fact uh I remember raising Capital my mom assuming I was going to IPO sometime soon I'm thinking I have six months cash left in the bank my employees coming to me and asking if they should take out a loan to buy a house and I'm thinking God no like why Would you do that I have no idea if we're going to be in business in seven months and you've got to suppress all of that you got to turn up at the office every day with

enthusiasm and and telling people all the positive things that are going to happen and you sort of learn what that psychological thing is for Founders so that's something I try to bring to the table how do you do that today like there's always hard times and you will Continuously get punched in the face yeah how do you continuously show up to the team and be like no no it's great it's all good and go home to your your family and say no no it's good and it it's sometimes not good it is true it's sometimes

not good I think in order to Be an Effective entrepreneur and in order to Be an Effective Venture investor you have to be able to compartmentalize you've got to be able to put problems Into a box and say I know I'm going to have to deal with that problem I'm going to deal with it some point in time but if that uh encompasses everything I do then nobody else can operate what I learned was that there's a lot of people who can't deal with that they can't I'd say the majority of people can't deal with

the stresses so like in our worst days at my first startup company which was based in London uh a lot of the people who came from bigger companies qu Because they wanted to go back to bigger companies it proved too stressful can I ask you what was your worst days the things that people don't tell you about menure losing money is hard for anybody and nobody wants to lose money and taking writeoffs is is really painful but there's worse than that there's worse than that because like we sort of as an industry we lionize Founders

and we say they're amazing and VCS are of course terrible and evil but there's the Same proportion of good and bad people who are entrepreneurs who are investors who are big company people operators whatever like the human population is the human population so if you're going to fund 120 or 150 people you're going to find some entrepreneurs that are not good and so you know I found myself in a situation of people that I had backed four years um that suddenly turned bad and they threaten you they threaten lawsuits you've got to deal with the

Legal side of it I know many G is dealing with this now and they call me and they can't talk about it publicly okay so I'm totally do you think we will see many more frauds come out from the Los already seeing it you know we're reading about it like almost monthly in the Press yes you're going to see a lot more of it do you think they will be exposed so it's one step worse than that which is I know of a company in which the founder embezzled money okay Literally stole millions of dollars

in order to not end up in a big legal battle their VCS ended up settling and they they got all the stock back but none of the money back what he did was illegal it's the same as going down to a a bank and stealing millions of dollars like if you could imagine someone like that not being prosecuted so they got back all the stock he got to keep the cash and they signed legal agreements that they're never able to talk about it And that stuff happens so when these hard moments happen What do you

do today with all the years of experience that you have how do you manage that conflict in your own mind today well I view the job of a CEO and the job of a managing partner at a venture fund so I run our Venture fund is really to Shield people from that that's literally part of your job as a leader is to Shield other people from the stresses and pressures that you face um talk about you know Fundraising like fundraising is not easy for BCS like maybe it's easy if you're Sequoia andri and Horowitz but

for all the rest of us fundraising is hard I know through 30 years of doing startups and Venture that persistence pays off and your ability to work through problems pays off so if I look at Venture Capital going and raising money um I used to tell people about fundraising which is lemons ripe and early and what do I mean By that so if you go ask 30 people for money five or 10 of them are going to tell you no quickly cuz NOS come quickly and the yeses take months so the problem is psychologically you

get in your head oh my God everybody's telling me no and you could easily give up and people do give up and my mindset is I know our returns are good I know our team's good I know the opportunity and the Market's good I'm just going to keep moving ahead and I know we'll get to the finish line But it's my job to not let everyone on my team feel that way so I have to suppress it okay I love so much of your writing by the way we haven't talked about this I mean one

of my favorites is lines not dots but I do just want to fin touch on the lemon's ripen early I find a lot want to keep optionality well let Mark really interesting let's let's stay in touch over the next few months and then when you come back and say Yale and you name your gr institution and they go Oh we'd love to be in yeah and so actually do lemons really ripen early with LPS actually being scared to get off the fence yeah I think they do um there's no doubt about it that and we

know that entrepreneurs get this Behavior too from VCS where they say you know we really like you we just want to see a little a little bit more traction and I tell all founders that we want to see a little more traction is the same thing as saying no well I think it's Saying actually we don't believe in you enough right now cuz if we did you just get over the data stuff we've all done prey we've all done no data investing course so it just means no yeah and if they actually tell you no

they're worried you're not going to come back to them so they don't actually tell you no they grin [ __ ] you they smile at you and they say as soon as you have more traction please come back and see me of course LPS do that too right it's human Behavior but I would say two things one is some actually do tell you no um and they tell you no in the nicest way they'll say listen right now say I'll give you an example the equivalent of we need more traction is hey we have a

full stable of managers right now and we're going to do mostly re-ups it's one in and one out so in order to take you I would have to drop somebody else that just means no right like you have to learn the signs That mean no or they tell you we're you know looking to be 17% in Venture and right now we're 211% in Venture so we have to scale back that just means no sure I find that more agreeable though I'm like I get that that makes sense the ones where I get very angry as

a GP is when they do 60 references 10 meetings with you and your team and then come back and say actually we're still developing our emerging manager program and we don't feel ready for it yeah and You should have known that before you did absolutely like that's appalling in terms of the lines not dots do you still agree with that like you fund raise like we all do kind of continuously I'm shocked by how few LPS do invest without existing relationships how do you think about that lines not dots and whether it really holds true

today so the analogy just for anyone who hasn't seen it is uh on an X axis is time and on a y AIS is performance and I always said to Entrepreneurs when I meet you you're a DOT you might be high on the Y AIS you might be low on the y- AIS but however you performed you performed and I formed an opinion of you if I meet you a second time a third time a fourth time it starts to form a pattern and that's the line and sometimes a pattern is up and to the

right I can't believe you launched your product you hired great people your revenu is going great and then your co-founder quits or sues you Or you got bad press or Google announces they're going to crush you and then it's down but over time you start to see a trend of who you're dealing with and the resilience they have I think the same is true for LPS making commitments to VCS like you know you're you have colleagues that left or you took a write off in Pakistan right and what did you make of that what did

you learn of that how did you respond how resilient are you what did you do when everyone was writing Huge checks at enormous prices in 2021 were you doing the same thing or were you selling were you taking money off the table so they get to see a pattern over time some of my best LP relationships said no to two funds before they finally came in and so I just viewed it the same way I'm like you just haven't yet seen enough of me to make a decision but because I'm persistent I keep going back

I always tell this story about Morgan Stanley so Morgan Stanley I had gone to see Jamie sparen six times and six times he politely said not yet and uh this is a true story as I was camping with my family um in Los Angeles intense and in case you don't know I mean another thing about Jews is um Jews don't camp like we don't do DIY and we don't Camp so this was like a big deal for me and I'm in the middle of a tent with my family and I get a message from Jamie

who says can you be in West Kona West Kona hawen um On Monday I left my family in a tent I got in my car I raced to the airport and I caught a red eye to Philadelphia to go see him and it was the seventh visit I had no idea if I was going to get him but I already told you I'm persistent we were raising $195 million fund and I was stuck at 110 and I hadn't got a breakthrough and the reason we were stuck is I had just become managing partner and people

said your first fun is managing partner I don't know how That's going to go so I showed up for this seventh meeting and two weeks later he called and he said we're in and I couldn't believe it and he said you didn't even ask me the most important question and I said what is the most important question he said how much and I said I'll take anything $22.5 million from that $22.5 million commit the whole fund came together and all the people who knew Jamie were willing to commit and then my next fund that took

me 13 Months to raise okay 201122 my next fund uh took five months to raise because all the people who passed on that fund came into the next fund that 2012 fund for us I think is going to be a phenomenal success um by any measure it'll it's should return north of 5x Capital uh cash on cash and I'm just thrilled that Morgan Stanley is getting paid back I I I love this in terms of just natural discussions if we think about lessons from the Fundraisings how do you advise Founders on when to do a

first close I get so many Founders that say like say 30% 60% how do you advise them in lessons that when you say first clo are you talking about founder of a startup company or founder of a fund founder of a fund okay so I have unconventional views on most things okay that's why you're the best C so I'm going to tell you my unconventional view they always I mean the industry People You Meet will tell You you want to be one and done because it's a sign of strength right to show that you could

close all your money at once I always tell people raise the minimum amount you can to get closed so let's say you're raising $100 million okay if you can close on 20 if someone's willing to write that check and close on 20 close and then you need to create a narrative on why you close closed on 20 and the nice thing about closing on 20 let's say you're on fund two if for Whatever reason the rest of the money doesn't come you're still in business and all you need to do is get through the next

two to three years when you're raising your next fund now you've got three more years experience when you have the 20 you'll start deploying checks now you have three four five deals for future people to evaluate usually in a fund you have up to one year to raise the additional amount of money so I always say to people no Matter what just be in business business so my current fundraising and I can't really talk about fundraising but let's imagine I was fundraising you go out to raise $300 million let's say um if you can get

200 in the bag and just put it away and be done even though you're not writing check why wouldn't you but you've got to explain to people why are you committing before other people because no one wants to commit first people always want to be the last check In what's a good narrative for closing on say 20 of 100 because that's not even a minimum viable fund size I think it is you can do a $20 million fund sure but if you were raising 100 and say doing a we lead serious the problem with closing

only 20 out of 100 is it looks like failure so the first advice I give to people is put the smallest number on the front of your pitch deck that you're possibly raising so if you want 100 you're raising 50 to 60 and then end up Over subscribed if you close 20 of 50 that's still failure but that's not as bad as 20 on 100 and you've just got to have a positive n when you close to 20 you say to people I think we will get to 50 I think we will get to 60

and you have to believe that right sure but but you might not get there if they really negotiate hard give them something like I don't know can you give them a little extra economic incentive for being the first 20 to commit would you do that I Haven't done it but would I do it of course I would if I had to sure so what would that be that would be as carry that would be maybe you get a discount on your fees maybe you have a slight discount on carry maybe there's some other incentive you

can give to someone to committing the first 20 million okay we know funder funds uh I'm not singling them out but they are the ones who normally have a problem with this Mark you said 50 doing 100 is a different Fund size and so there's a challenge where if you say too small a number and it turns out being double you've got a problem how do you think about that and is that not really the case would my strategy fundamentally change if I had a $50 million fund or $100 million fund of course it wouldn't

what it means is I probably will instead of having 25 Investments I'll probably have 35 36 Investments instead of writing $1.2 million checks I might write $1.5 Million checks instead of investing over a two-year horizon or a two a half year Horizon maybe I'll invest of three and a half year Horizon but it's not the same as going from 50 to 500 50 to 500 fundamentally changes your strategy 50 to 100 you're still playing in the same ballpark okay should you go after the institutions or the big names first or should you go after your

friends and your family get The Local Coral around you which one's the better one well First of all money's money okay so you could have Harvard Yale Princeton Stamford but their money doesn't come with anything additional right so money's money then the hard job is yours like you have to deploy it you have to get Founders to want to work with you and then you have to make returns right so it helps a little bit to have the brand than to raise other LP money but money is money and do I think people should go

for institutional money Absolutely yes why because institutional money is way more likely to be in fund two and fund three and fund four whereas friends and family money is not as likely to repeat so just like with CEOs who I might say look if you can't raise institutional money raise friends and family money it's the backup probably not your leading plan same is true for funds like the funds if you can raise from institutional investors you should and the thing is there are institutional Investors that want to write $3 million checks so if you're raising

a $50 million fund like that's a good size for them yeah I get you totally are LPS sheep around brand names do you notice that big brand names your Harvard's your mits of the world do convert people who could be on the sidelines all investors are sheep end of story like I don't want to pick on LP like LPS are no different than VCS they're no different than Retail investors I took my first investment course in 1997 and one of the things I learned from my professor at University of Chicago is that people invest the

most amount of money when the market is just about to hit the peak why because if you've been seeing three solid years of every time you write a check next quarter and the quarter after and the quarter after it's worth more then at some point the whole Market comes in and Wants to write checks when markets fall that's when everyone sells and they sell because you start looking at I'm taking losses I can't absorb these losses so you sell and of course psychologically that's the opposite of what you should be doing like when markets see

a runup you should be selling when markets are falling uh you should be buying now I'll give you a real world example 2008 uh fourth quarter of 2008 I had sold my company I had a bit of cash I said to my Wife I think the stock market's a little bit beat up post Leman Brothers I'm going to put money into the market and I said to her please don't log into Charles Schwab because by definition the checks that I write are going to be worth less two weeks later two weeks later two weeks later

it's really hard to do and so I put a little bit of money and I dollar average down between about November of 2008 until about March of 2009 and for anyone who doesn't know March of 09 was like the ner of the global financial crisis I'm logging on every day saying what have I done done psychologically it was really stressful and hard and you keep doing it if you're dollar averaging down and that's what I did and I kept writing checks and I kept taking losses and I said to her fundamentally I believe in these

company she got goosebumps but listen I'll tell you the names I bought Verizon I bought Altria I bought Dupont so I bought some Safe names I bought Microsoft I bought Google I bought Amazon I bought Morgan Stanley I bought um Goldman Sachs like I bought City group and then all of a sudden people are saying City group's going to go bankrupt I'm like what have I done right and then the market of course had a huge rebound starting in April and it it was unabated until 2021 but I sold as soon as I made a

profit I just like I couldn't handle the stresses of it but let me tell you now on my Professional career Harry I um in 2018 we had seen this booming market right I started selling so we sold in 2018 19 20 and 21 and I've been public about this we sold $1.2 billion worth of positions in 202 one when everyone was writing crazy checks I sold $600 million that year why public stock markets in November of 2021 uh software was trading at 24.6 times NTM next 12-month Revenue 24.6 if you look at the 10-e average

the 10year average public market 9.6 the 20-year average 6.2 so I call that football field uh one side of the pitch is like the low Watermark 6.2 to the other side the high pitch uh high water mark is 9.6 and we're trading at 24.6 in the public markets in the private Market it was 50 times NTM to 100 times NTM it just made no sense right so we became a seller and part of that was you know some companies just exited but part of it was a conscious effort to do Secondaries okay so I learned

psychologically people are buying I'm selling now in 2023 everyone was [ __ ] themselves because they had so many losses from 2021 we did not so we did not just because we dialed back our pace of Investments I don't want to say like I'm perfectly smart and I timed the market perfectly but we just had a sense valuation said gotten crazy so in 23 I started buying secondaries at discounts We deployed almost $50 million into secondaries in 23 at deep discounts at a time where other people were like scared about the market and I'm like

I'm an investor do you sell all of your positions you sell part of your position I know it's dependent but how do you usually in a runup I'll usually sell 33 to 40% maximum maximum at a time or just generally generally because I'm a venture capitalist I believe in long position so if I have a company that Went from in one case z to 600 million in net revenue okay like it's hard to get to scale so you don't want to have your gems sold when you get to 600 million net revenue but at the

same point in time it was about 3x overvalued for the public market comps so I took 150 million off the table I kept 200 long so I had some LP say why would you do that and I'm like I don't know if I was a public investor I would imagine I would do that why wouldn't a private Investor do that 70% of my LPS were gracious and appreciative and thoughtful and kind but a couple were very vocal and it was hard that I mean that's astonishing one thing that I really worry about today Mark is

like you mentioned kind of liquidity and you know blly getting cash back IPO markets are not open and the spigot is turned off and lenina KH is crushing m&a yeah I'm like [ __ ] vure doesn't work when we don't have the other end of the spectrum Open it's funny you say this um I I told you already I have unconventional thoughts let me tell you this um so when I first got into technology there was one goal of every founder there was one goal of every VC IPO the problem with IPO even if you

can IPO there's no liquidity so it's like a dirty secret like you take a company public it's worth a billion dollars you hold 180 million of that billion dollars but there's no float there's no one trading The stock until you become enormous so you're sitting on $180 million congratulations you can't get out so that market is shut but even if it was open it's not Nirvana right so you that's one channel the second Channel strategic acquisition so we all aspired to exit to Google and Facebook and Amazon or whatever Microsoft but that market as you've

already noted is largely shut so where where are returns going to come from they're going to come From private Equity so private Equity firms are going to step in and buy assets from Venture Capital funds they will either buy a company or they will buy secondaries so secondary is the fastest growing part of the market right now um but here's the thing they're going to pay rational prices because there are professional investors who have to make money they have to make a return if you're selling at rational prices how can you pay irrational entry Prices

so I've always said like entry price matters you have to have discipline right so our median uh valuation on entries between 11 to 12 pre at a time where people are paying 25 30 40 pre it got crazy like in 2021 people were paying 60 70 80 pre for pre-revenue companies sorry Mark they still are yeah in Europe we had 32s on 100 in a week really yeah for nothing no Revenue no product no nothing so in 2021 and 2022 there were 1,200 companies valued for the first time ever at a billion dollars or more

in the private markets 1,200 okay but let's give you some historical context where did the term unicorn come from I assume you know I didn't yeah so she wrote an article in 2013 okay if you look at 2012 guess how many how many unicorns there were uh in 2012 M 35 one oh W that's why she called it a unicorn in 2013 there were three by 2015 there had been like 25 or 30 by 2018 these are net new per year there were something like 50 or 60 and then fast forward to 2021 it was

more than 700 it was like 749 in that one year Okay so why the explosion they were valued at a billion dollars they weren't worth a billion dollars how many public market companies do you think are worth a billion dollars in the US I would have no idea so if I take all of software and all internet companies there are 343 that's it that's the whole universe That includes Facebook Google that includes Amazon all of them 343 and yet there's 15 or 1,600 in the private markets how could that be so how many if you

were to make an assessment how many do you think are legitimate unicorns of the 1,00 in21 and 22 that were funded my guess is a thousand of them will never achieve an exit value of a billion dollars or more but look at it of the 1,200 60% were marked by four firms okay SoftBank tiger kichu and insight and I'm Not saying they're not smart investors they are but there was this Euphoria of people just paying prices but the the average soft Bank deal and SoftBank the the whole team is gone now right like I don't

know if anyone's left like all their investors mass is still then ofth American Mass sitting in his office now and I'm not saying they're bad people either like I mean he made money on arm he's you know he's certainly a smart guy but they wrote a Typical $300 million check into a company at a$ billion valuation of course I'm making these up but that's roughly about where they were founder took 20 to 50 million off the table and they know they're never going to be worth $4 billion so that it's a zombie company so then

the employees eventually going to figure that out and they're going to leave so it becomes even more of a zombie company there's no even cleaning it up and so they've just Walked away from those Investments so how many seed funds are there that are held at 7x 9x 12x tvpi zero DPI on the basis of these irrational fake markups okay so the question for you is all bad for our ecosystem as you said they will help a load of seed managers raise new funds uh they will give confidence to LPS rightly or wrongly are they

good or bad I don't I don't ever ascribe good or bad like markets um will be markets and there's not good actors in Bad markets There's markets and so if you look at the over capitalization for example of the telecommunication industry in the 1990s in the US a lot of people lost money there were a few winners but a lot lot of people lost money but out of that out of the ashes um Rose the Broadband industry because all that money fueled laying down Broadband fiber to the home there's going to be some good there's

going to be some bad but here's the thing you should know 1998 okay if you Look at Venture Capital it took two years for the top quartile to go from 1X to 3.3x okay two years think about what that means I have to deploy my whole fund and my whole fund has to be marked up 3.3x in 2 years the only thing that could deliver that kind of returns for an early stage fund is momentum it's like not based on fundamentals you can barely even finish your code in two years and it fell from 3.3

down to 1.4 okay but but it took five years to be marked down from 3.3 to 1.4 and this is top cortile this is not the whole industry and by the time tvpi turned to DPI at the end it was 1.7 it never there was no dead cat bounce it was flat so five years 1998 99 2000 are nothing compared to the overvaluations of 2021 so we're two years into a correction I think it's going to take another five okay uh are managers accurately reflecting their Books today do you think I'm in LP in lots

of funds I'm sure you are too the numbers still look pretty high Sequoia axel people like that who don't ever have to think about fundraising they immediately take markdowns y managers who didn't have so we had zero SoftBank deals we had zero tiger deals we had one CO2 deal one Insight deal um I'm not saying good or bad of any of those deals but like we didn't have irrational markups in our portfolio So you either are a fund that never asked to think about fundraising you just take the markdown or you're a fund that never

subscribed to all the hype in the first place you don't have as far to fall but for a lot of people I think they're not taking the markdowns they need to take I mean look at um what is it called lace works or whatever it was valued at 8.5 billion dollar and it's reported in the Press getting sold for 300 million That's just one of 1,200 companies that's going to go through that or at least a thousand think about funds who said I'm only going to hold it at 6 billion instead of 8 and a

half billion I'm only going to hold it at 5 billion instead of 8 and half billion okay but Mark have we actually learn anything I am seeing the most astoundingly ridiculous pricing deal activity on AI companies customer support tools for so the answer is no we don't learn anything We're doomed to repeat history so let's also go to the D but will we even have a correction because it seems like here Venture was about to and then it's like boom AI of course of course you will have a correction so let's look at AI if

you take generative AI companies at the seed stage um they are I mean you know any seed deal is overvalued any any startup is overvalued because you're talking about a company that has no customers no Revenue no nothing but if You want to do generative AI in 2023 2024 you're paying 44% premium to do a generative AI deal remember entry price matters exit price matters um at the B round it's like 200% premium to an Enterprise software company so let me say this to you Harry and this is the hard thing about investing to make

money as any inv you have to believe something that other people don't believe and you have to be right so if you're betting on generative AI for the first time in 23 24 25 good luck making returns because even if you get into reasonable companies and chances are you won't but even if you get into reasonable companies you're paying a premium because the market has already moved there the Arbitrage is gone if you were in crypto in 2013 2015 2017 you made a lot of money right you pushed all your chips and 2021 God help

your returns so this is the weird thing you go to see LPS LPS want to talk about the trend of the day because they're hearing about generative AI in the Press they're hearing about it from every VC we don't right right now upfront is not doing a lot of generative AI what are we doing I'm doing things that LPS are not hearing from other people I may turn out to be right I may turn out to be wrong but let me give you some examples of it's okay we're putting way more dollars into space right

now now why if you look At 2005 2005 was a seminal moment in our industry that's when AWS was launched okay by 2009 the cost of launching a startup went from $5 million for infrastructure for sun servers for Unix for Oracle databases for web hosting it went from $5 million down to 500,000 so you had a Cambrian explosion of startups starting around 2009 it wasn't like VC suddenly woke up one day and said you know what instead of giving $5 million to Founders Let's give $1 million and let's create a category and we'll call it

a seed fund all of it was driven by Amazon all driven by AWS and it changed the way our whole industry works because you could launch things for 500,000 the same thing is happening in space today Falcon 9 the SpaceX Rockets which are now relable so you don't need new materials uh to you just need to refurbish it has decreased the cost per kilogram uh to launch into space by more than 90% so what's Happening you have an increased Cadence of things going into space and you have an increase in startups trying to take advantage

of that so there's been more than a 100 spin outs now from SpaceX more than a 100 they've raised more than10 billion and the vast majority of them are in Los Angeles so that's why we're Super Active there we both believe in the market and we have a bit of a home field advantage do you not think everyone though sees that like given the Cadence of spin outs from space and the amount of funding that's going in it's not really a contrarian thesis is it first of all let me say I should say of all

the companies um that are spinning out of SpaceX something like 30% of them are going into space there's people going into energy there's people going into clean tech um there's people who are doing other things like you know other types of infrastructure but what it's doing is it's leading to a moment In Los Angeles where there's a lot of hard tech Founders working on things that wouldn't have been funded five or 10 years ago um of course there are other V there's great VCS focused on it you have Founders fund focused on it you have

Lux focused on it you have andrees and Horowitz focused on it but the overwhelming majority of the industry is not focused on it okay no listen I get you there totally do not worry that we have a generation of formerly software Investors now moving into hard tech infrastructure energy these are fundamentally different games I do not play this game because I don't get it like I don't do biotech I think we're going to see a huge amount of people like we did in 05 with clean tech lose a lot of money because they don't get

it of course you have to have skills so as I look at my practice we don't um have generalist investors we have specialist investors um so I actually don't believe That much in a concentrated fund around one theme um we are what I've started calling multi-thematic fund we have themes but we have five or six themes and so we have part Partners who just stay in their swim Lane of their themes so I have a team just looking at space and National Defense I have a separate team just looking at Healthcare when we started doing

Healthcare investments in like 2014 2015 2016 most people in Venture Capital were saying don't invest In healthcare it's a regulated industry it's hard to make money some of our best returns are now coming from that sector so we try to stay focused on what we know I get you do you also worry about bluntly accent environments for those companies they are not traditional there's not like 20 space companies in the public market it's like there is consumer Enterprise first of all if I define space as Rocket launching yes there's not a lot of exits but

what is Actually happening in Space the vast majority of what's happening in space is satellites and it's communication so it's either Earth observation or Media or telecoms new use cases are emerging and they will emerge like uh extracting minerals or zero gravity Manufacturing are new use cases that will be created but do I worry about exit environment I worry about exit environment for all Aventure you're a software company if you become big who's going to buy you Like who's going to buy all these 13 billion do companies M what happens to the m&a environments like

you know we have the cmma in London that blocked figma right I mean London blocked figma I think you will have like the biggest buyers will struggle to buy the biggest companies so that's why I think a lot of those may end up well either you get big enough IPO and there will be plenty of those um or you end up getting bought out by private Equity who ultimately Probably combine you with other businesses until you're big enough for an IPO um but it's probably easier to get exits at the $250 million to a billion

dollar level because the universe of buyers is much greater back to this idea of capital efficiency back to this idea of Entry price mattering I get you do you think Founders have realized that message so I think it matters what teams are you back there will always be Founders who are going to be the biggest players in the industry and those companies if they're successful will drive great returns so Andel uh but amazing company like God bless everyone who backed that company it's really important for National Defense for for the United States and for the

Western world and they have really big Ambitions and I think it's going to be a public company one day do you agree with the thesis of like uh Founders fund who kind of go instead of trying to be in the category around it regardless of stage just be in the company which is why they're like plowing into open AI which is why they plow into Andel just being the number one at whatever price or you like ah there's ancillaries around the edges I don't know as the answer I know it's not my strategy I know

that I don't have the skills to do it but look at their history like they've been incredibly Successful with that strategy it's kind of hard to bet against Founders fund they returns have been phenomenal their team's been phenomenal no listen I I totally agree with you do you think do you outcome scenario plan when you invest not really but we do generally think about what we think the exit environment's like and we care a lot about valuation and discipline because for us I can't plan that Founders fund world I'm not Brian singerman or Peter Teal

or you know any of these guys who have been able to plow $15 $200 million into a single company and be right consistent stly so it matters to us you said 1112 for entry price and I love your honesty around price discipline because everyone normally says well it just matters that you're in the best companies question on 11 12 respectfully anyone who comes out of a great company now raises five on 25 from Andre how do you do 11 or 12 and does That mean that you're getting different Founders I so your question actually is

is there a selection bias are you picking companies that are not going to be as good I don't agree with the premise I don't believe that everyone raises five on 25 from Andre I think Andre's great for some people not good for other people um and also our median uh investment pre money is 11 or 12 but we pay 20 we pay 25 it depends on the founder it depends on how much progress They've made it depends on what we see as the opportunity and how competitive it is um but do I think that there's

selection bias no there are great people who leave companies you have to make make an earlier bet I might have been able to wait 6 months 9 months 12 months to make a bet we have to know the founder before they create the company how often when you break the rules are you right or are you wrong I don't think I can really put a number on that I Think um post talk we rationalize everything so we just want to back the most talented Founders working in the industries that we're focused on um and we

want to stay disciplined since 2009 if you take every one of our funds they've been median between 3.2 to $3.5 million first checkin and they've been median between 18 to 21% ownership that's what we do that's our strategy and we're disciplined about that strategy we haven't diverted from that How do you think about reserves so we invest 40% of our fund usually 42% of our fund and we reserve 58% in the next subsequent round or in the subsequent 2 three round how do you think about that distribution the 58% is reserved for all subsequent rounds

okay and and you know the job of every VC is like let's create three buckets after we write the check bucket one are the companies that just clearly aren't going to work and then you try to minimize the amount of Capital you put into those bucket two are the ones that are clearly working and you really want to back up the truck as much as you can but bucket 3 also matters these are companies that you really believe have a prospect of building something big and the market just hasn't accepted that yet and getting them

over the hurdle matters or bucket three is also H I don't know it's kind of just a bit in the messy middle and you don't even maybe have the belief That you once did it's just it's slower it's harder whatever but my question to you is like I don't think the rocket ships are sustainable value generators and I think we overestimate our ability to pick our winners early especially between seed and a with that in mind I question the effectiveness of reserves so um especially if you get ownership like you do I'll just disagree so

first of all I disagree with the premise about the third bucket which you kind of say Oh those companies I don't know how you characterize it but aren't likely to work some of our best returns have come from companies nobody else wanted to fund but they were doing something fundamental and it just took longer on average of our companies that take longer and that we had reserves for on average it took six years to raise a growth round okay but those companies by definition are more Capital efficient because they didn't have access to it I

Have six deals that fit this category that returned $1.4 billion dollar of returns in companies that other people didn't want to fund we're agreeing I'm saying that I don't like putting money into the rocket ships because they've got huge huge traction early I don't think they're sustainable value generat yeah I got it so look we we have three things we look at for your next round do I still believe in the market sometimes you write a check and a year and a half Later you're like I was wrong about that market right the second thing

is do I still believe in the team so sometimes you're like God I got the right Market but I got the wrong founder and you can tell the founder is not going to get to the next level or the founding team sometimes you have the right Market the right team but you don't believe in the valuation and we have been disciplined about that like one of our best performing companies they went from 15 million valuation to $90 million valuation to $500 million valuation and it's going to be worth billions I'm very confident of that but

when it hit 500 it didn't have the traction to support it at the time and we just didn't write a check that comes a time when it's not effective use of reserves like dollar averaging in at that price There's an opportunity to cost dollars it didn't make sense for us given the traction of the business but I Still really believe in the team and the market and it's just the price I didn't I get you totally people always say with this business a Founders Founders Founders Founders first when you mentioned that kind of the three

criteria for reinvesting for investing how do you think about Market product people in terms of focus look you can have great people like amazing people but if they're focused on the wrong Market the returns aren't going to be There so it's a combination of the right people on the right market and I know that's kind of a hedge but it really is that we're kind of 70% founder driven because I think great Founders if they're pointing at the wrong opportunity will start to Pivot towards a better opportunity so we're probably 70% founder driven when you've

got it wrong on Founders what have you not seen that you wish you had seen well if you get it wrong on Founders uh it can be Someone who wants to take a quick exit and they want to make a little bit of money and none of the investors are really going to achieve what we wanted to achieve it's the short-termism you know we're really trying to bet on people who want to do this for 12 to 15 years years like that's extraordinary for someone to want to do it for that long um so that's

something that we get wrong sometimes M what's been your biggest investing mistake I think we Learn a lot from mistakes early on in my career it's exactly what you said when I had winners I wanted to pile money into winners and it worked for me for the first two times I did it and so I just thought that's the thing you do and then I had one big company that was incredibly fast growing is the fastest growing company I had ever seen and so I piled money into it and it ended up being a zero

we we had an offer to sell the company for $350 million founder Didn't want to sell Market changed and it eventually sold for zero yeah it was hard how did you change as a result of that so we started getting more disciplined about reserves and I started doing better planning and realizing that what drove me to make the mistake in the first place was ego I was driven by like I'm not going to have a new investor come in and own more than I own because I've done all the hard work for the last three

or four Years or this is my winner like okay I know I have $6 million into this but why wouldn't I have $15 million into this so I think really ego got in the way and I made that mistake really early in my career and then I started advising the rest of my partners I'm like don't let ego get in the way like we can love the founder we can love the market and just not love the valuation yeah that's tough I have a thing where I don't think actually I Think it's quite dangerous for

younger investors deploying Capital if they've never raised money it's so easy to come into Venture and be like oh amazing founder 5 million 5 million 5 million me and you know it's [ __ ] hard to raise money if you don't have the perspective of how difficult it is I think it changes how you think about deployment not just raising money is hard driving returns is hard right it's easy to write checks like writing checks is the easy Part making returns is the hard part and so I always tell people like when you're new inventure

if you look at seven deals and you have great networks and you look at seven deals you're going to find three that look good and you're going to want to write those three checks if you look at 70 deals you're still going to find probably three maybe four that you really like to do if you look at 700 deals okay it's not going to be a three or four you might want to do seven to 10 Deals but the chances that those first three are going to be the deals that you do is almost zero

it really is a numbers game you really need to see lots of deals and over time you start to realize this is something special so I tell people just be patient when you first join Venture don't deploy Capital too quickly do you think richer investors make better investors they're not scared of downside they don't kind of worry so incessantly it's like ah you know what I Believe and they have that upside maximization mindset I don't know but I think like deeply analytical people who are self-confident enough to believe something that other people don't believe when

everybody tells you you're wrong and you're still making the investment that's what matters you know and believe me I've done for the last 12 or 13 years I've been doing Hardware Investments you know we did an investment in ring we were the seed Investor in ring everybody on Shark Tank passed on it we wrote a check uh I wrote a check into n at a baby camera company it produces Hardware to this day people still tell me like why would you invest in a hardware company but Apple's a hardware company SpaceX is a hardware company

Tesla's a hardware company Hardware software is incredibly valuable so the hardware actually provides you with a differentiated return if you also have a Services business so for me it's Hardware plus software and believe me a lot of people don't agree with that does that not just show you how hard Venture is it if you think about Ring it's like a billion exit you have 12 15% on the exit you're like 120 million back on a 300 million fund it's like 40% of the fund I wish he didn't sell yeah I understand why he sold I

think it was right for him and maybe it was right for the market but I mean Amazon Sells billions of rings now billions of dollars worth of rings like I look at what could this have been yeah on our door yeah yeah they're everywhere now Jamie would argue and he's probably not wrong that Amazon wanted to own this Market anyway and Google really wanted to be in this market anyway and it was going to get too competitive yep I get that um is there anything that you're not asked that you wish you were asked before

do a quick fire Mark that I'm not Asked um are you worried about Trump I'm in London and so we see the external right yes I am yeah is the honest truth um I'm I I fundamentally don't believe that he cares about democracy and so that worries me and I know that a lot of people that I'm friends with don't share that you um but would you prefer Biden in this state look I'm like everybody else I prefer third you know I'd prefer somebody else but these are the choices That we have and it's it's

a not a great choice you know what worries me um of course the extreme right worries me it always has but the extreme left worries me too and they've become so radicalized and they really become radicalized against my people they become radicalized against Jews if I could say it to you this way there's I don't know about two billion um Christian people in the world there's about 1.3 billion Muslims in the World there's a little over a billion Chinese people in the world there's a little over a billion 1.3 1.4 Indian people in the world

right like this is the world's populations there are 15 million Jewish people in the world 15 million so let's take world population that's not 1% that's .5% of world population we have historically for thousands of years been amongst the most most persecuted people there are we were forced out of North Africa we were forced out of Iran and Iraq we were forced out of these places we returned to our ancestral Homeland the land that we acquired we acquired by purchasing it we purchased it in the late 1800s um up until 1947 it was all purchased

Zionism was a movement to aggregate money and convince people to return to their ancestral Homeland it was not a state there was it was a British mandate it was own occupied by the Ottoman Empire for hundreds of years And then by the Brits the Brits took the land and they said in 1917 the Baler declaration said we're going to give a land to the Jews the Jews are going to have an ancestral Homeland and there were roughly the same siiz population of Muslims as there were Jews at the time and they were granted a Homeland

and to see the far-left now villainize the most oppressed people in history um that we somehow are the oppressors is beyond absurd but it happened in the UK Jeremy Corbin allowed anti-Semitism to rise in the farle in the UK and it's happening in the US and we need to put a stop to it can ask when you look at the rise of anti-Semitism we mentioned you know what we're seeing at Colombia right now do you think that's always been there deep-seated anti-Semitism Within These people who we haven't seen before or is it just anti-Semitism has

existed for thousands of years right it's not the topic dour of middle class white people Who just want something let give you a historical context let's look at Russia so Russia there was something called pgms which are the Russians have been killing Jews for hundreds of years in 1917 you had the Bolshevik Revolution and they said out with the leadership who's the autocracy like the Common Man the common people are going to take control of the company socialist movement right the Jews were incredibly supportive of that why were they Supportive of that because they'd been

oppressed for 100 years like wait we all get to be equal and you know what the bulvik did they turned around and said yes we're all equal except for the Jews right so the Jews don't have a seat at the table so they started to oppress the Jews the Russians have been some of the most oppressive people killing Jews for hundreds of years so anyway like do I think it's new like uh I would tell you that anti-Semitism so you believe all These like white middle class students who are suddenly anti-semites have suddenly but have

always been anti-is I'm almost just I think it's topic toour I'm going to join that Brigade for today for you to be willing to deny that more than 1,00 people were killed on October 7th for you to say that people weren't really raped that babies weren't really killed for you to believe that Jewish people who I mean something like uh 20% of the population of Israel is Muslim Today they have elected officials in the Israeli government on Israeli courts and Senior positions and for you to call something like that genocide is beyond absurd and is

it a perfect democracy of course not like and do I believe in every one of their policies of course not but it's a democracy right it's democracy that welcomes minorities that welcomes women in leadership roles and now suddenly for the farle to try and villainize that it's like a it's a crazy Ideology what do you do if you're a university we've seen universities struggle to manage it in any effective way well thank goodness you have activists especially the donor base and the parent base that are starting to revolt against Harvard against pen soon against Colombia

and they're forcing change and I hope that forced change continues where you know education should be a place where all ideas can be explored but where no single group is Targeted like the way that Jews are being targeted now at Colombia can you imagine any other oppressed group black people or Latino people or Chinese people or LGBT people being marginalized the way Jews are right now it's beyond absurd listen I I do I do agree you call an imagine it blondly I need to wrap yeah but it's been lovely to see you I really appreciate

you hosting me honestly mark thank you so much for doing this I so am glad that we thrilled To do it in person uh and I'm so glad that you know you're in Europe thank you thanks for having me