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My guest today is Connie Mack Cabala, co-founder of seed stage VC firm Kindred Ventures, which he started with his partner, Steve Giang in 2013 before founding Kindred Ventures COMMU as a general partner at Collaborative Fun. In our conversation, we discuss the parallels between today and the roaring 20s of the last century, the misunderstood risk curve of seed investing and a deep dive into how Carnegie evaluates founders and businesses at the earliest stage of company formation. We also discussed Connies experience teaching the Design Your Life class at Stanford and how some of those principals convinced him to take the leap to start his own fund.
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Country, we started doing a preamble, which I usually do in these recordings, and where you started to say sounded interesting. So I'm just going to record you mentioned some of you're trying to figure out is this concept of the Roaring Twenties. Can you mention what you've been there and what's going on?
Sure. So Peter Thiel said on TV a couple of months ago that we might look back on this as when the twenty first century started this period with covid as chatting with a friend earlier about the state of affairs of the market, because valuations are hyperaggressive rounds or hyperaggressive and almost getting reformatted, I'm seeing companies that are getting a discount to terminal value when they've been alive for six months, the pricing strategy in a way that really just defies the bounds of rationality.
But meanwhile, MRSA and malaria vaccines as a positive externality of all the extra focus on the culprit vaccine. And so I'm trying to make sense of whether if this is, in fact, roaring 20s part do how to think about it. I'm trying to figure out what the roaring 20s might have felt like and trying to figure out what bubbles feel like. And so I'm part of a generation of investors who started investing after the financial crisis. And so everything has been up into the right.
So we don't actually have the kinesthetic muscle memory of what a bubble feels like. And so I'm trying to read about that. I'm trying to read frankly about what the people who sat out the nineteen twenties felt like because can one afford to sit it out? Is the opportunity cost of being out of the market too high when the opportunity available is so once in a generation, like so many signals are suggesting? But on the other hand, is that what they said in nineteen ninety nine.
Is that what they said in the LBO boom. Is that what they said in a moment of irrational exuberance of your choice. And so I'm really wracked by that at the moment. Emotionally, tactically, I have the good fortune of being a seed investor and it's kind of the deep sea. And so what's roiling at the surface takes too long to manifest in some sense.
Say a bit more, just maybe in your specific sandbox in the seed world, describe sort of the craziest end of the spectrum of what you're seeing now in terms of funding types, terms, valuations relative to you. Pick your point.
Three years ago, four years ago, five years ago, when I worked on my first startup, we raised a series of three and a half on 12. This was in two thousand and six today. A series of twenty on ninety is not out of bounds. I've seen specific examples of companies that are literally at one hundred million dollar valuation, and I distinctly remember that a lot of people, when Mark Zuckerberg was walking up and down Sand Hill to raise his series, his first equity financing after the seed round from Peter Thiel were absolutely gobsmacked by the fact that he was asking for one hundred million dollars valuation and it was Facebook.
Meanwhile, it's almost blasé to see numbers that are approaching that today. It is vertigo inducing, to put it mildly. So that's one to the nature of the players and the participants. So the market participants have adjusted in a way that even just two to three years ago represents a clear, stark departure. So I remember when I see around was five hundred to one and a half million dollar around where there were four or five players buying two to six percent.
And all were perfectly happy to do that because they were effectively super angels or micro devices and the cost basis was six million dollars of pocket money. And so that's a very different scenario than a crossover multibillion dollar hedge fund doing a pressie today, which is frankly what we're seeing. It is a reformatting of the players and it's a reformatting also of the implication on pricing and how you think about risk and how do you think about pricing that risk that is even affecting us.
See, now the truth is it doesn't affect us at sea nearly as much as it does downstream investors because we're funding companies who are only going to mature five years from now. So by the time they get to the surface, they'll be getting to the surface in a totally different world. A and then B valuation at SEAD is a little bit of a red herring because you can't do a discounted cash flow and the discount to any future value is a little bit weird when there isn't even a there there because there's so few fundamentals to underwrite to.
So what you're often doing is thinking about their budget, the closest set of milestones that they can get with their budget and what your own funding model is to map to that. So what ownership can you get to help them get to that budget? And are you comfortable with that? That's really the material bounds of it. It is really, really, really vertigo inducing, head spinning. This is a strange time.
Did anything stand out from some of the reading you're doing around the actual Roaring Twenties, the nineteen twenties? Did you learn anything interesting there? It becomes a popular term here, and I love the term because it sounds great. You know, there's a lot of fascinating things happening in the world that are very good, technology related and otherwise. What did you learn from that reading of the last episode of this same optimism and potential? Well, there's two macro things that I learned that are cause for me having bumpers up, the first of which is that it wasn't all up into the right, the entire deck.
There were moments of mini recessions within that period. In a time where you're so emotionally driven by the macro conditions, everything from GameStop to vaccinations and everything in between has a lot of emotional content that is being played out on live television right now for everyone who's watching. And so the emotion as an extra element of intensity and one of the mild parallels that I see, even though it's at a higher order of magnitude, is I was reading about the Securities Act passed in three and then the Securities Act and thirty four.
And there was this point where there were more and more people participating in the economic activity. And the idea of a retail investor at scale was mainstreaming. And you look at Robinov today and you look at so many examples today of retail investors mainstreaming at yet another order of magnitude, maybe two orders of magnitude higher. So that's a parallel that I find to be interesting. Another parallel that I find to be interesting is that telecom infrastructure and transportation infrastructure, well, this is actually a kind of an exciting one and an optimistic one, but also a scary one.
And I think about airplanes, automobiles and radio and the leap that commercial aviation made over the course of that period of time. The leap that consumer auto mass production made over the course of that period of time were both remarkable, but a lot of fortunes were lost. And I can't help but think about air mobility and the rolling set of facts around air mobility today and how we're pulling the future forward for electric aviation. We're pulling the future forward for self driving.
We're pulling the future forward for so many of the things that we've been waiting for for 15 years that we've now jumped forward into. But a lot of forces are going to be lost on the transportation side and then similarly on the Telefónica. And I guess software would be the right way to put it today because we're not really dealing in the radio world. But there's an irony, though, because clubhouse is one of the most of the moments Diski new social platforms today.
And it is the new talk show. It is new terrestrial radio. In some ways, I do find the parallels to be delicious, if terrified. So I'm trying to have bumpers up, though, because, as I said, the recessions did come and there were many recessions over the course of that decade. And when you've got a lot of emotions and we all know how that decade ended, there's a lot of fortunes to be lost.
One time you and I were talking about blue bottle coffee because I was interested in coffee and it ended up being a conversation about something very different, which was maybe something interesting about that was how good they were at real estate and also how interested you got into the supply chain behind coffee and supply chain, more generally speaking. And all the people that that affected trucks, trains. You've mentioned some of these things in transport Sosebee we talk about much anymore. How do you think about those things going into this potential round two of the roaring 20s, hard physical, yet exciting places of moving atoms around.
We made an investment into a company called Cloud Trucks, which is building a business in a box for independent truckers. I remember writing about the investment on the day that the first set of vaccines was leaving the first facility, and I think it was the Pfizer vaccine. And it was a very, very emotional video and it was just a couple of trucks pulling out of a way station. But, gosh, you felt like the fate of the future was in the hands of those truck drivers.
And there was there was a woman who was actually one of the truck drivers and she'd been an owner operator and had been part of fleet since she was a sixty seven year old woman from the south who was truly one of the heroes carrying us to the future in some sense. But it did put in really, really a tight aperture, this notion that moving atoms and moving bits is actually essential to protecting our future. We're coming out of an administration where we've been thinking a lot about redoing the filing and the impacts of retirement, filing a lot of our infrastructure, where the richest man in the world, depending on what time of day, is laser focused on thinking about redoing the filing.
So much of our infrastructure outside of the stratosphere, so moving atoms and bits and how you're moving them and where you're moving them is as important and heady a topic today as it maybe has ever been. And along those lines, you're seeing that there's digitization of Old World. So you're digitizing rail in a way that's really interesting. We've seen self-driving trains that are looking at switch stations and that are thinking about ways to optimize the safety. We've looked at trucks that are self-driving as well, because it turns out that maybe long haul freight is going to be a faster thing to automate than consumer cars.
We're looking at space ridesharing. So people who are hitchin. Rides on space X rockets, reusable rockets, not just space X's, but the compliments to that, and we're actively investing in these areas. But I think what's more important is these areas have consumer touch points today. These areas matter to the everyday worker. And when you think about essential workers today, you're five or six job titles away from moving bits and atoms. If you ask the average person, which means that there's a lot of cultural currency to them today.
And I think that's actually better because we used to intuitively think of our logistics and our supply chain in the way that the world is moving stuff around as something invisible. That happens in the background and it's certainly happening in the foreground now. And it was a big part of that.
Yeah, it's a fascinating time to study this stuff. You mentioned the Peter Thiel idea, I think earlier that this may be the dawn of the twenty first century. It's fun and exciting to think about it. I'd love to back up a little bit and hear a bit about the soil out of which your investing philosophy has emerged. I'm a big believer that most people and their viewpoint is driven by or influenced by often a couple key episodes or sets of experiences.
And I'd love to hear a bit about that for you. If you had to think about the things that have most influenced what I'll call your current investment philosophy, what have those things been? One of the things that most influenced me was when I was at my firm, we took a moment to look back on all the companies that were driving our portfolio, and we tried to talk about the moment of decision for all of those companies. And we found that in no fewer than half of them, the seed opportunity was a non consensus opportunity.
The seed opportunity was one where non consensus internally at our firm and non consensus to the market, like there weren't a lot of people making a lot of offers. These were hot grounds for at least half. And that got me curious. And so then I started looking at the unicorn list and maybe I should be looking at the technical list these days. But I was looking at the list of companies that have become category defining, and I found that anything from 30 to 50 percent of the companies that go on to be successful, if you unpack what the entry point looked like, it was non consensus.
So the first thing that came to mind for me was that there's a persistent non consensus opening at the beginning of the startup journey that one can conceivably build a framework for and one can conceivably figure out how to pursue consistently equality over time. The second was a theory around risk, which we've talked about a little bit before. But it dawned on me that in so many of the companies that we funded that had gone on to be successful, the founder had something that was immediately apparent.
And the founder, whether that was persuasiveness or some indefatigably or an inevitability to them that you could underwrite emotionally and frankly, you could even probably describe qualitatively within the first twenty five minutes of meeting. Some of these people were pre co-founder. Some of them were pretty product, some of them were protraction, but that was a consistent through line. So as I started thinking about that and then thinking about the risk curve at SEAD, I started to have a working hypothesis that the risk curve at seed was maybe not actually a curve, and that thinking about it in in classical mechanics, where you add an input of force and then you change the acceleration just a little bit more, might actually not be the right way to think about how the risk changes that seed.
So that was the initial gestation of an idea as well.
Just to flesh that concept out a little bit, you just define what you mean by risk curve and then define where you diverge from that concept at the earliest stages of investing. I actually like to use the analogy of actual physics because one of my favorite books is by an author named Thomas Kuhn. And it's a structure of scientific revolutions and he is the scientific philosopher. And what he talks about is paradigm shifts. And one of the paradigm shifts he talked about was how when you start to get to really high speeds, Newtonian mechanics start to look a little bit different because quantum theory starts to get involved.
And when you start to get to very, very, very, very, very small magnitude, similarly, Newtonian mechanics start to look a little bit weird because quantum mechanics start to get involved. What that similarly means that seed and is the risk curve is when you do a certain set of things, the risk changes proportionally or the risk changes in some predictable pattern. When you hire a technical co-founder, the risk should change by some predictable Formula X when you build V1 and get V one launched.
Did you change by some predictable Formula Y when you get your first five users, the six users plus one and so on. And thus that's a basic way of thinking about how you do risk a company over the course of the creation period. But I actually think it's actually much more like quantum states and quantum states as you or your listener. I know you don't move smoothly between them, you jump from one to the next, you literally jump instantaneously, jump.
So I think that there's actually something more like an instantaneous jump that happens in the risk in the earliest stages, at the smallest moments. And that's a better way of thinking about how companies do risk. And so we can we should talk about that a little bit further, because the implications to it is quirky. But here's a good way of expressing it. Paul Davidson and Ron Seth join talk show, join talk show is a very timely and interesting concept, and it's a way to have a talk show online.
These are experienced founders. They've been spending a lot of time thinking about new social audio formats and then totally exoticness forced strikes, almost impossible to predict. And everyone goes into global lockdowns and is sitting at home and wants to do something that gives them just a little bit of multitasking and just a little bit of social that just happens to be right when they play with it in the clubhouse. So you could have known everything about their hiring co-founders, building view on getting a couple of customers to use it and have no sense whatsoever as to whether or not it was going to be a clubhouse in a way, because an element of randomness to that.
And then almost the moment that they did it and of course, they took a series of really brilliant tactics from that point forward, all of a sudden the risk just changed and it changed pretty fundamentally, pretty immediately. So I do think there's an element of like there's something sarcastic and there's some randomness and some chaos or something like that involved in how you make those jumps, which is misunderstood. What a lot of people evaluate early stage startups. So they look at it in classical mechanics and they think, oh, well, now that you've hired a co-founder and now that you've built the one, you're modestly less risky than you were before.
But the truth is to go back to the point about founders. When I underwrite a founder, I can tell, can you find someone brilliant to partner with you? I can tell that pretty darn quickly. You have a feeling for that. You can tell that most people can tell that and you convince anybody to use the product once you've built it. I can tell that right away. Now, what I can't tell is, are there a series of events that are impossible apriori for anyone to predict that are going to suddenly result in your risk changing?
Because nobody can tell that that's the unknowable. And so I actually think that the risk just jumps from state to state as you go from the very early gestation of seed to product market fit. What does that suggest about the way in which seed investing should be conducted as a discipline that's different from something like almost you can go a little further into the future, say like Series B or something like this, where growth investing or private equity investing, where there kind of is a risk curve, there's a lot less uncertainty and a lot more risk that can be quantified or underwritten.
It seems like two sides of a line cross the line. Things have to change a lot. So as you cross down into seed, what does that suggest about what to look for, how to underwrite, how to construct a portfolio?
That means a couple of things. The first thing is the extent to which the founder impacts the outcome. Among the factors that you can actually underwrite for is probably still forever underrated. I think it's so underrated. Founders are so, so important. There's this old trope around whether it's team idea or market. And the joke is that nobody says idea because it's always T'mar market. And my view is that it's team and market because really good teams find big markets, really good teams grow markets, really good teams pull markets forward.
So I actually think it's eminently both. But I think there's a relationship between the two and at the very early stage, whether you're operating an existing big market or you're trying to be at the pioneering front edge of a new market that's going to grow. A really great team is the one that has the nose and the pacing, the sensation to manifest on that, or if they get lucky, to not waste that luck. That's the first observation, is the team quality.
Second observation is that the hardest place to invest is when there's a lot of stuff that's been built in the company, but there's not that product market fit. The risk curve there would imply or you're just about to get the product market fit. So I should pay just a little bit less in the product market fit price. And my instinct on that is you're either at product market fit or you are not. So that's the highest price. But the risk is the same as if I had met you six months ago.
The only thing that's happened since then is you've done things that I already could have underwritten then. So let's get back to the list. So you mentioned this moment of realizing the uncertainty or the controversial nature of the bet, this kind of insight on founders. Anything else that you would add to that list about your major experiences that have impacted your investment philosophy? Yes, a venture investor. I very much admire that. Oh, that company works despite our best efforts.
He said it in passing. And I said, excuse me, I think you made a typo in your thinking there. You said despite your best efforts, you said, oh, yeah, absolutely. And he said for once, we didn't add that negative value to the company and they continue to proceed ahead. And so then I pushed them a little bit further and I said, well, when companies are going really well, how much of. Do you think is attributable to venture capitalists involvement, he says, in the vast majority of cases, not that much.
He says venture capitalists job is to help companies that aren't going well more gracefully and help companies that are doing terribly quickly. The companies that go well, they go well for a whole bunch of other factors. That's why we're minority investors. And and so I thought instead I started asking more people about that and I started thinking about that a little bit more deeply. I even got to the point where the platform, which is a very, very hot topic in venture capital today, since it's the only asset where the asset chooses the manager and how the platform is used to persuade a founder to partner with a given firm, I asked a couple of the managers who have a really great platform, is really well regarded platforms how they think about their platforms.
And a few of them said, oh, our platform is what we use to win deals. We don't use it to help companies. The companies that succeed don't really need our help. And I thought once again, two profound considerations.
A very experienced venture capitalist back to that.
Humbling, very humbling. We're going to have to think about this. So then what I thought a little bit further about was, OK, if the so-called value added service is typically deployed to win deals, if the idea of help is a lucky side benefit of the value added service, but not the point, is it possible that a value added service can have genuine intent? Can you actually add value? Is it possible that you can have a platform that actually serves to do some manner of drinking?
Can you actually do value added service that actually does meaningfully change the trajectory of a company up when it's already a company that's likely to succeed? And I became obsessed with that idea and I became obsessed with that idea because I kept on hearing the other side of that, especially from people who were really expert and experienced. So when I got to know Steve Giang, that was when it kind of fit together for me, because what I had started looking for, almost without realizing it until I spent time with Steve, was I wanted a partner who had extreme operational distance traveled, who was sort of like a Marco Polo of startups, because that person could really stress test for me a lot of these observations that I was starting to develop a point of view around.
Theoretically, if that person also believed some of the hypotheses that I had around how risk works and how startups work, then maybe that would be a good partner for me. And it turned out that it wasn't only that, but Steve shared the same view, which is, oh, you actually can help companies at the early stage. It's very hard. It's very specific. And we should talk about how. But you actually can. And I said, OK, let's dive in.
Let's see what this looks like. Of course, you have to tell me now, how is that possible? What does that sort of assistance that actually bends that trajectory look like in your experience so far?
There's a couple of answers to that. The first answer is a venture capitalist can do two things that no other business person can do for a founder. The first of those is to give them a mirror. As a venture capitalist, it should be our job in the market. Venture capitalist delivering great service just to honestly reflect back to the founder their strengths and weaknesses, because the shape of a company, especially at this early stage, is so closely manifesting the strengths and weaknesses of the founder that just being an honest broker and telling you exactly what you're good at and exactly what you're bad at and keeping it completely real with you is really valuable because otherwise you're walking through a funhouse mirror because your co-founders are going to not tell you the truth.
Your employed, obviously, aren't you and your customers want without even knowing that they aren't and then nobody else cares enough. And so having somebody who can be a mirror is really, really, really important. A fair number of venture capitalists actually still allow you to go through the fun house there. So you think you're eight feet tall when you get out of it, when it turns out you're not or you think you're three feet wide or whatever. So that's a little bit of a psychological one, but there's tactical implications to it.
And then the second is conviction in a company doesn't end. When you say yes, it starts when you say yes. And I think that the most important yes for a founder is the first one. But I think an underrated and maybe equally important. Yes. Is the second one from the person who gave you the first one when the market has deemed your progress not obvious and your insider says, I still believe that is an unusually powerful signal that your existing investor can only do for you.
And I've seen companies saved by that. I've seen companies that have pivoted into success, started off as a long haul, hitch a ride and turned into short term ride sharing and gone on to become public companies. So I think that structuring your relationship with the founder such that you can be the honest broker and such that you can be the best when they need that. Yes. Is the work that we have to do as Steve and I. Spend time with company is one of the things that we do is we think about the law and order mode where you sit across from the accused and you say, tell me everything.
No, no, no, everything's OK. If they're telling us bad news first, then we're in a position whereby we can be an honest broker and we're in a position whereby when they need us to dig deep and make a call, we can make a call.
What do you think it is that you think or do the most differently from traditional United States based venture capital investor at the seed?
The one thing we do the most differently, which is structural because we invested about half of the number of companies at entry that many other seed investors do. So most seed investors are investing in thirty five to forty five companies per fund. We're investing twenty to twenty five. Part of that is predicated on my belief around how risk works, a view that if you go earlier, that doesn't perfectly correlate with your need to do that many more. But rather you really need to have a clear understanding of risk.
You need to have a very strong relationship with your founders. The second thing that we do is we like to be reactive with our themes rather than proactive with our themes. I think it was Ross Perot who said who was a great venture capitalist, as a side note, is not just a presidential spoiler, but he said that venture capital is like eagle hunting and eagles don't flock.
And so along those lines. I'm looking for eagles. I'm looking for that founder at the top of the mountain who I think is going to carry us to the future wherever the future is. I want to go behind that person. And so as a result, one of the things that Steve and I have really tried to do is not wet ourselves to a normative view of how the future should look and only get ourselves to a normative view about how our process for evaluating founders should run.
And then when things happen, we embrace those themes and we welcome those themes with open arms. But we don't start the theme and then founders into it. We start with the founders and the themes will agglomerate around them. Steve had been an investor in Coinbase and we were investing in Coinbase alumni working on the weirdest, craziest stuff and the highest referenced founders coming out of that group that we could find. Three years ago we were investing in SFD and three weeks ago it feels like there was some level of clairvoyance.
We did have a point of view about that, but it was really that we had this system whereby we had a learning mode and we were listening for the really great founders and we were trying our hearts to follow them into the future. And that's, I think, part of what allows us to maintain non consensus and not get swept up in trends and not get in the wrong side of data in a place where there's a ton of capital. A lot of things that you've mentioned are flavors of what I'll call mispricing is commonly called mispriced things and say the public markets and this idea of the founder, certain qualities of the founder and a process for underwriting them in this uncertain stage of a company you've mentioned several times is central.
How do you think about non consensus ways of evaluating a founder? Because I think some of the things you hear as important grit, persistence, intelligence, these are sort of common ideas that everyone's looking for. And therefore, you might be tempted to think that the best founders are accurately priced because everyone's looking for the same qualities or equally difficult to access when it comes to the actual process of evaluating founders. What do you think you do the most uniquely there have a different view there.
There are a couple of tropes around what makes a company or a team fundable that we question. One of those tropes is around risk tolerance. I don't think that risk tolerance is inherently good. If I had to choose between it being inherently good and inherently bad, I would say it's inherently bad. I think that there's a lot of people who take huge amounts of risk and are punished by it. And I think that risk in the mindset and in the example of a founder is make sure you don't have any risk of personal ruin.
And if there's somebody who has no risk of personal ruin, then that's a minimum logical step that we have to get agreed upon. And then the next one is only modest risk of personal financial ruin at most. And it depends on what your externalities are there, too. I actually want somebody who doesn't love risk, and I also want somebody who feels confident that they can risk things quickly. That's actually what we're looking for when we talk about risk tolerance.
I think people who hate risk and want to get rid of it as quickly and efficiently as possible is a lot better than people who take lots of risk. That's something that I think has been misunderstood in the tropes and in the essays. Another one is this idea that founder market fit is really interesting question for me. I'm of the personal belief that momentum begets momentum. I think Scott Belsky might have said something like that on one of your prior chats with some.
B, we work closely with an adviser, but along those lines, I think that passion can be an output of success rather than an input to it. I think that people like it when things work. I think that there's a lot of people who are naturally polymathic. If something works, then they'll bring their curiosity and their enthusiasm and their energy to bear on it. So as a result, I've been thinking about this space for 10 years and I'm obsessive about it, in my view is a little bit overrated as an input on somebody being apriori fundable.
I'm extremely curious. I have a great knack for when there's momentum building on it. I think it's terrific. That's another trope that's been somewhat misunderstood and as a result is something that people wrongly look for. The third one that I think about is domain experience. If I had to choose between somebody who has domain experience and somebody who does not. I choose the latter. And the reason I would choose the latter is I'm actually looking for something on an orthogonal plan.
I'm looking for domain insights. And I think domain insights is something that is distributed very differently than experience. And if anything, somewhat anti correlates with experience.
What does that look like? What is the main insight look like? The heuristic that I use for it is if somebody says something to me in a pitch and I write it down because I'm going to want to steal it and tweak it later. That's an example of domain insight. Another example of domain insight is if somebody describes the structure of the market the way that I've never heard it described before, that strikes me as an example of domain insight. I remember.
The first time that we heard an articulation of the taxi market in the ridesharing market and this idea of packets being moved across the world in a programatic central nervous system that's automatically managed, it's something that we know in software, but we don't know it in person. Imagine if we could build a system whereby you knew that in person, how would cities move? You hear that? And you think that is insight. That is something that I'm going to immediately want to share because I'm not thinking about the way we move as a stigma.
This idea of like swarm intelligence. And I do think about that natively, naturally in software, but I forget to think about it as humans, despite it being something originating in then and some termites in high density environments. And so domain inside is, you know, it when you see it. But those are some of the hallmarks of it are when somebody describes a market structure in a way that's totally fresh and when somebody says something that you want to repeat, because sometimes it's just a simpler articulation of a very old problem, sometimes it's a more elegant articulation of the real problem.
But when you're meeting with a company for the first time, or even when you're seeing their materials just from the very first moment, you're gaining an impression of them. Walk me through as many of the things that you're looking for or looking to avoid as you can. What does a good investment mean? Not in terms of outcome, obviously, but in terms of original process and underwriting of the company. What does that mean to you?
The most important thing, in my view, is internal consistency. So what that means is if you deviate, know that you are and have a point of view as to why come up with a plan in the first place, design a system. And so one of the things that when you're inside the startup world, you somewhat take for granted, but when you're outside of it is overwhelming because you have to figure out how to create a plan and how to create a set of steps that are chronological.
And each one is sequence to build strength on top of the other from infinite possibility. That's actually really, really hard. There's a lot of people who sit down with a blank canvas and find that it actually can be hard to create a plan and to create a plan that they can stick to and deviate from intentionally and with style. And so the first thing I actually look for is do you have a good sense for system design around how you're going to attack your problem?
The number one thing I care about is do you have a good idea for system design? Because if you don't, then you'll be chasing the most interesting thing and you'll be chasing it in a way that doesn't actually create a narrative and that doesn't actually sequence a journey to build strength. Really, really, really important. How do you assess that skill set, especially at the earliest stages? How do you assess whether or not a team may be good at that?
There's a couple of things that I try and do, one of which is I try and test their altitude switching capacity. So how quickly can you go from one foot in front of the other to ten thousand foot vision? And how naturally can you do those and do you have equal comfort with those? I actually think that's an interesting input for whether or not somebody is thinking about the system. Another one is how well are you able to articulate the shape of your problem and the shape of your market shape means the urgency of it and why it bothers the people who have that problem the way that it does.
And then in terms of the shape of the market, the safety of the market today and the shape of the market with you in it, what's going to happen when all of a sudden you introduce do you use the Coinbase example, a hosted wallet to be able to hold cryptocurrency? What's going to happen to cryptocurrency is what's going to happen to wallets, what's going to happen to money? What's going to happen to consumers? Is that persuasive and is it?
Well, articulate, because I actually think if you have a sense for the shape of the market, then you're thinking in systems. And then the other is, as you think about team design, do you have a good sense of your own strengths and weaknesses? Do you have a good sense of your co-founders? Have you thought about complementary skills? And are those skills going to be applied in a way that's strategic to the problems in the order that you're going to be tackling them?
Those things are actually really important to me. And so I think about those things and they're applicable across all types of industries. And so that's not germane to specifically software specifically asked specifically A, B or C, it's actually a way of thinking about how do you take infinite possibility and create a plan out of it. And so that's the thing I focus on most urgently when I get started. So the first two systems design and whether or not you're a systems thinker, the second is the extent to which you seem to be a missionary rather than a mercenary, or if you are a mercenary, the extent to which you are movement building.
And not all movement builders are movement builders from the front. A lot of movement builders are movement builders from the middle, but they have a keen sense that their movement builders, which means are you building something that feels more important than you as an individual than your team and in some cases than your company? And can you articulate why it's important? And that's also a shape of the market question in some ways. But are you a movement builder? And do I get the sense that you have a keen awareness of that and that you have a good instinct for that and that you're going to be playing offense when you start to build your company and leading that movement?
Because Ultima. We're looking for category defining companies, we're looking for market leaders, we're looking for companies that are so much more impactful than their market cap on society, you need to find somebody who can be an appropriate steward for that. What questions specifically do you most enjoy asking people? The two questions I most enjoy asking are what are the risks with this business that I'm underrating or that most investors underrate? This doesn't appear on many slide decks, but I inevitably love it.
Finding it in a pinch is when a founder tells me the objections that I already have and then frames a few new objections for me. If I want a founder who understands the risks and is more comfortable with framing them and sharing them, that I that's the what could go wrong or how to think about the downside and how to think about the problem from all angles. Question that I try and look for. And the other question that I'm interested in, I think this is Bruce Donlevy from Benchmark who said that venture isn't the wrong business as to what could go right business.
I ask them to paint a universe where everything goes well, every single thing goes well through the life of your company. What happens? And some founders stumble. Some founders can't put themselves into that space. Other founders say, oh, they paint a picture that feels a little bit like a Jetsons in their little corner of the world. And you know that they have that vision in their heart. So I love somebody who really has a what could go right and has a wild and crazy and ambitious one that sounds a little bit like sci fi that they're just waiting to tell you.
If only you'd ask, what have you learned about what makes for a good problem space? What makes for a good problem space? I think there's a couple different types of problems, faces that are equally interesting. One of them is nascent market problem spaces, the nascent market problem spaces. Our friend Chris Dixon characterizes it as, what are the smartest people you do tinkering with on nights and weekends? The nascent market problem space is the one where I actually like the example analogized to music of Serverless and the ANZAAS, who was reviewing Serverless when she was still an up and comer.
I went to one of her early shows and hadn't heard much about her, but got to the show and found that it was packed and it was packed with a very, very specific demographic of people who had driven from very, very, very far away. So it was in New York City, but they had driven from Ohio, from Northern Virginia, from all over just to go see Sarah Barillas because there was a small group of people who were intensely passionate about it.
So small groups with intense passion are way more interesting than big groups with modest interest, especially in nascent markets, because that's indicative of who is going to have the initial substrate to create the spark that may light that fire. And then in big markets, what I often try and do is when I talk to a customer, I don't ask the customer about anything relating to the solution. I ask them to walk through their workflows and you can hear it in their voice.
You can hear it in their description of their experience, the intensity and the nature of pain. So in both cases, it's the intensity of the pain or it's the passion of the novelty of the solution that I'm looking for an order of magnitude calculational. So in the intensity of the pain, when somebody says, well, gosh, you hear that big sigh, you think, well, I have to go through a spreadsheet or I have to call this person and I'm thinking about this experience, then I just think to myself, aha, there's so much low hanging fruit here that if you can just build something that automates one piece of this pathway, then you can have some velocity here because this person is hurting and they don't even know it.
So I look for the intensity of pain and the intensity of passion.
I love that framing is so cool and it's so hard to do. I've heard versions of this from Chris originally. It sounds so smart. And then you go in actually, for those of us that have tried building stuff to actually focus in the way that you just described and not get tempted by the adjacent people that have some interest in what you're doing, but not enough is just freaking hard to do in practice. You mentioned that you funded some of the top talent coming out of the crypto ecosystem, maybe in a period of time when crypto is a little less popular.
That's a really interesting idea, right? If there's a long term trend and there's an inevitable drop offs in the trend, that's an interesting time to to do that sort of investing. I say a bit about that period and not just what you saw in people, but maybe what you considered or were excited about in the idea or the problem space. And obviously, I'd like to zoom that forward to today because I just think what's happening in this world is fascinating and that you guys are on the ground floor of it.
Two thousand and fourteen thousand and sixteen was one moment where investing in crypto was a little bit of a head scratcher. And then second half of 2016 through 2017, it felt like the thing everyone was doing, two thousand and eight to about midway through twenty twenty crypto was not something that was that popular the first. It was marked by the theos that it started to happen, I think the first isco was in twenty thirteen and then there's a little bit of curiosity around there being a new funding mechanism.
And was that a way to exit companies thinking that could do is going to be a vehicle for exiting companies and then maybe it was a vehicle for funding companies up front and there was a lot of energy there. Steve and I, both prior to partnering, were very excited about it. I remember investing in a company that failed, that was doing nothing to do digital rights management in the crypto era. And so they were trying to build a way that you could create a system of record that would follow the ownership custardy chain of a given digital object as it traversed the Internet.
I said, oh, that sounds pretty cool. That sounds like it. Solve the photography problem online or the or the three problem online. What then turned out was that it was both very wrong and very right. It was going to manifest later as the non-financial concept, but we were substantively too early. And my partner Steve had also made an investment in a company where you were trying to figure out how to do margin lending and build a short position against a cryptocurrency.
Then they went through an immediate period of extreme enthusiasm and then it got a little quiet and it got a little quiet because people were like, we don't need to short Bitcoin. It's going to short itself. I think one of the things that being a founder driven in looking for early markets allows us is we don't have to necessarily assess the strength of the market that one is building. And we just have to assess the strength of your conviction, the tactics that you plan to employ and how well those things fit together and then believe that it manifest from there.
I think this is, for me, the most exciting time in the crypto world probably ever for me. Honestly, I was very excited in twenty seventeen, but my conclusion was, OK, lots of potential, not a lot of there, there some core protocols that are fascinating. Let's watch this carefully and then watch and watch and watch and watch and watch. And then recently you have this incredibly novel new concept in NFTE that at the surface level is eye catching because the dollar amounts attached to some of these things and people's interest and whatever.
But I think you mentioned you're both very wrong and very right. We're now witnessing something that could, again, kind of like in twenty seventeen. The original rules could have a huge impact on the way the world actually works, not just people in the crypto ecosystem talking to each other, trading with each other. In what ways do you think that might start to manifest? So what is your sort of view on how this might start to all spill over from Crypto Street to Main Street?
I guess I would frame it well, one way is on the street.
We saw a concept for an NFC as a marker, as a pointer, as a way to represent a fractionalized real estate offering. And we saw this a year and a half ago and we thought, oh, that's interesting. As fractional as real estate is an exciting concept and creating more ways for this retail revolution that we're seeing to participate in the different nooks and crannies of the economy makes a lot of sense. But how do we make sure that the chain of custody is carefully managed and how do we make sure that it's done in a way that's trustworthy and that doesn't necessarily need a centralized actor?
And what does it look like to build infrastructure for that? That's one example. The other example is just in the structure of entities themselves, the fact that they are sitting on top of smart contracts, which are programmable agreements that can persist wherever they're transacted. One of the hard things about DRM is keeping track of when a song gets listened to or when a piece of digital content gets interacted with. How do you figure out who sent it to whom and who's the original owner and how do you create, again, that chain of custody?
So the idea of a programmable contract that gives the original creator a permanent royalty stream, wherever that piece of digital content propagates into the future, is something incredibly relevant, not just for digital artists, as we're seeing today really profoundly with people and everyone in that community, but also for physical artists that are trying to figure out what a digital print looks like. And then also for photographers and then also for musicians, also for the MP itself. And so almost every artifact that went from being super scarce until extraordinarily, extraordinarily abundant from nineteen ninety nine until now now has an opportunity to have some scarcity attached to it again.
And that scarcity though, and what's key is something that can empower original creators. So the original creator. And how do you empower them and how do you create a line of earning potential back to them is a through line that I'm seeing not just in crypto, which is one of the pioneers in this conversation today, but in fintech, more broadly, in social, more broadly and frankly, it's one of the most important trends that I've seen manifest across some of our strongest portfolio founders, period.
What are the trends, let's say crypto for now are the most interesting to you in the present. So I like your description earlier about how you're not proactive or reactive. You're not trying to. Necessarily predict the future, but are still interested in it. What are those seeds today that most have your attention maybe from the bottom up based on the teams and companies that you're spending time with?
The conversation that happened relatively recently on clubhouse between the founders of Spotify, Shopify and Facebook. And on its face, those don't look like companies that are sufficiently close enough universe to have a coherent conversation. They were all talking about creators and they were all talking about how the primacy of the creator, how creator is becoming the central narrative. And I thought there was something really profound about that that has actually been a through line in a lot of the investments that we've been looking at.
So creator is an old word, but it's a new concept, which is a more constructive and optimistic and creative way of framing the individual proprietor. The reason why it's not a small business owner or a single LLC member or an entrepreneur is because it has a different elements to it. It's somebody who's as likely to be informal and just making videos on one platform. Call it tech talk, just making dance videos and yet generating a revenue stream, just building ROBLOX infrastructure and earning Roebuck's just being a digital art designer who is running a studio for NFTE producers as it is to be a cornershop grocer.
The infrastructure for it though, is going to need to look more like a cornershop grocer because ultimately that's what they are. They're a sole proprietor, they're a business person, they're an LLC. They're the coral reef of the American economy. All net new jobs in the US are created by small business, small businesses, the engine, the economic engine that powers our growth. And that's what they are doing. And that's where there's a ton of value currently being created.
But there currently is an infrastructure for it at scale. And in these new form factors and in these new modalities that we're seeing is one of our investments into a company called Catch is predicated on this thesis that the future of work and how work gets created and propagated is going to look so far different from the manufacturing assembly line of the nineteen fifties that the social safety net attached to that is going to have to be totally rewritten because I'm not going to work at one company for 50 years.
I'm going to work maybe at seven things all at once, and they're going to all going to be side hustles that bubble up into an income stream, do some of it on social platforms. That's one theme that we're certainly seeing. I can't help but think that one of the things about the Roaring Twenties that I find to be so neat is this is the first time in 30, maybe 40 years that there's been a stimulus directly to the poor. And what the impact of that is going to have on something like a creator economy.
We've seen that the retail investor landscape has completely blown up, but I think there's going to be a layer of retail financial advisors and retail experts and people building a creative class on top of that energy that's currently explosive in the market. Think that we're going to have a whole new set of people that are going to feel empowered and able to work on side projects because they have a little bit of runway. One of the things that Marc Andreessen said that was so powerful about Obamacare was that health insurance was the reason so many people stayed at their jobs when they otherwise would have taken a shot.
So this idea of giving somebody a little bit of runway and giving them a chance to bet on themselves may just have had the doors of it blown wide open in a way that we haven't seen.
And I really like this idea of trying to identify all the frictions to small business entrepreneurship, to sole proprietorship, and that some of them are technology. And I think you're talking about some of those the rails, the tools, the infrastructure to make it easier to do this stuff. But a lot of it is the support structure is handling of the risk, whether it's health care or whatever else. I never thought about it in that way. Do you think that this all adds up to more upward mobility being possible in America in the next 10 years relative to the last 10?
I think it has to. I am optimistic that it will. One of the things that the last 10 years I note we saw and you look at Nasdaq and you just see the distribution and the weighting of the market caps in Nasdaq, there's been unprecedented extreme consolidation that's happening at many, many, many levels. The largest companies, market caps are going crossing a trillion here and they're crossing a trillion, crossing a trillion, crossing a trillion. And you look at the health of the stock market and it's great.
But if you take away those companies and it looks like a starkly different picture, which just speaks to the intensity of that consolidation, and then you even look at who owns stocks and the huge percentage of the stock ownership in the United States is pensions. But the pension is on the decline. The retail investor has not picked that up by being an LP in hedge funds. There's more and more people who aren't even participating in the stock market growth. Then meanwhile, the small.
Business has been underfunded and under supported for the last 30 years, as of four or five years ago, Kauffman Foundation said that we were at the lowest rate of entrepreneurship in twenty five years in the United States and almost cost Azeez. Making health insurance and health care more and more expensive is actually constraining us and has been constraining us historically for the last decade, maybe even two. So I do think a lot of those things are going to have to and are starting to be reversed as you look forward.
And I think that for all the very extreme tragedy that we just had to go through over the course of this pandemic, it's also opened up opportunity there because of the stimulus and also opened up opportunity there because of the digitization wave that's resulted in so many new startups.
And so I am optimistic a year, a whole line of thinking that reminds me of Toby's concept. Why is this the case? Like, why are you working so hard to build entrepreneurship? And he said, well, it used to be you can move to a town and just start the same version of a storefront or somebody you knew worked in another town. But increasingly because of the Internet, those things tend to centralized, like some scale winner wins the whole thing and now each town doesn't need it.
There's more potential for enormous scale, which we've seen. But now what's exciting about what you've laid out before is maybe all of this stuff is opening up many pathways for how people design their lives. And I know that used to help teach a class literally called Design Your Life. I'd love to hear what that was, how you got involved with it, and then what you remember from it, because obviously everyone's thinking about how am I going to design my life?
And it's kind of a powerful concept.
In a powerful course, designing life is a course that's done at Stanford by a gentleman named Bill Burnett named Dave Evans. Dave was part of the team that designed the mouse and was one of the co-founders of EA and Bill, that is a celebrated industrial designer. So they're very much a Silicon Valley as Silicon Valley gets. But one of the things that they were thinking was how to apply design thinking processes to things other than industrial design. So the design thinking process in its most simple form is you first empathize, then you define, then you hypothesize or idea, and then you prototype and then you test.
And each one of those is a really, really, really important step. And you can't miss a step. But if you go through that with the right sort of guardrails on it, the theory is that you can come up with an innovative path for so many different things in life. So they thought, well, what does it look like to apply the design thinking methodology to your life into designing your life? What does that look like? The empathize define an idea or the three that require a little bit of translation.
So they empathize. One was, well, how do you listen to yourself, the whole point of design thinking when you're trying to figure out how to solve some of these problem, you don't ask them. They need to observe. You identify the places where they frown or you identify the places where they hesitate because that's where you build the empathy with them and you figure out that might be the problem. So how do you do that for yourself? That includes everything from journaling and it's actually something that's, I think, really powerful and influential in investing, too.
If you write down in the moment of your thought why you think something, then three months later, three years later, three generations later, when you say, Oh, this is why I made Decision X, you actually have some accountability with your prior self. Journaling is a really important way to just create empathy with yourself. So we have an exercise whereby you do that and then define is how do you come up with a thesis statement around what the problems are that are sufficiently punchy?
That to the point of the domain insight, you could put it on a Post-it and put it on a wall, in a whiteboard somewhere in an office, and they'd say, oh, that's interesting, that's cool. So how do you define in a way that demonstrates insight about what you've observed? And then most important part is come up with a definition of the problem and ideally it's one that is tweet length. Then you hypothesize, this is my favorite part.
The hypothesis isn't optimized for utility, it isn't optimized for function, it's optimized for deLites and optimized for wires and giggles. And you want to optimize for wires and giggles because this is part of the what could go right exercise. What if I quit my job? We move across the country and I start that company. No, no, no, no, no. That's not a well, look, give me the wow. OK, what if I don't quit my job?
We move across the company and I start my company. Well, how about, OK, we're getting closer. It's getting weirder. Thereby it's actually getting closer to the hypothesis that you're going to want to test. So the key is how do you come up with an idea of sufficient delightful quality that the prototype and the test are going to result in an insight, then rinse and repeat. And so how I did that with my own life was trying to figure out how to become a venture capitalist and realizing that the moral of the story is realizing that I was a better coach than a player.
And then B, I wanted a partner and I wanted to be in a partnership where I was constantly learning and constantly self improving around a set of hypotheses that I thought were reasonably non consensus. All of this stuff came from maybe I shouldn't join. Maybe I should start one. Maybe I should have the audacity to start a firm when there are a thousand new seed firms have been created in the last 10 years. Let me start the A thousand. And once again, there's some level of audacity and almost silliness to thinking about it that way.
Right. As a result, though, when I was able to partner with Steve, when we were able to raise kindred ventures, one first vehicle, it was something that felt fresh almost because of how unlikely it should have been given where we were in the cycle. This was twenty eighteen. We were in some ways late to the party with that fund, but I think it was a delightful choice and thereby a choice that I'm so proud that we made.
What advice would you give people maybe at the earlier part of this design process, especially those interested in investing? You mentioned player versus coach. There's this perennial like do I build something to invest in stuff? And it seems these days is more and more overlap between those two things. A lot of because of this new tooling that makes it easier for people to be investors as they're also operators. You've just so thoughtfully considered the different versions of all of this.
What advice would you give?
The first advice I would give is make bets because bets hit different. The biggest difference between working in venture capital and being a venture capitalist is that you have to make bets. Making a bet means putting skin in the game, putting your reputation at stake. It means investing your emotion behind your conviction and then investing your dollars behind both of those and then seeing the results. So make bets, make as many as you can, make calculated bets, learn how to make bets, learn where you are, persuading yourself that you're smarter than you are, and learn where you are, persuading yourself that you are worse than you are.
So one of the things that I was taught early on was that we have a very, very good ability to persuade ourselves, ex post facto around all the decisions that we've made and why we made them. And that's why almost every one of the best pictures that I've had the benefit of being mentored under has been pretty meticulous in describing why they picked something and having not taking in the moment of decision so they can always refer back to it so that they don't persuade themselves of something later.
So along those lines, get into the habit of making bets and figuring out what your own decision making and bet driven proclivities are and strengths and weaknesses are. You can do that at a macro scale with your career. You can do it at a micro scale with this is one of the smartest people I know. I'm going to help them with everything they need over the course of the next 10 years. So once you get used to making bets, then you start to have a point of view about your own ability to make them.
And then you can build the architecture of a fund on top of that. But it's too often that people don't get the opportunity or don't get the position to make bets early enough. And so they don't develop those instincts. And I think that's really important.
It's an absolutely awesome piece of advice. I couldn't agree more where to try to do it myself. Wholeheartedly endorse if you were God in our industry and could snap your fingers and change. One major thing about how the investing industry works. What would you change? Can I change to blame God? So yes. Yeah, I would wish for more wishes.
The first thing I would change is, I think limited partners, overweight GP references in their evaluation of managers. I think they do it for very logical reasons and I think they do it because it's the only asset class with the assets as the manager. They do it because getting access to great deal flow is the only way that you can invest and said great deal flow and that access is not evenly distributed. And so figuring out how those distributions flow is important.
But and this is because of the second point, I think that as a society, a global society, we are not nearly entrepreneurial enough. I think as a global society, we're not starting nearly enough companies. We're not taking nearly enough bets. We're not taking nearly enough risk on building the future as we can be given the amount of infrastructure that we now have built in place for. So I think that when we say, oh, there's way too many funds, there's a lot of entrepreneurs in strange corners of the universe whose eyes roll so far back into their heads, they're blind.
I think what we do have is too many investors that think the same way, too many investors that approach the market the same way. So as a result, you end up with feast or famine and we have total indigestion in the feast section. But you still have default, famine. And I think that that's just a waste of time. That's a waste of resources. We've built such an amazingly fault tolerant industry whereby I can invest in twenty five companies.
Twelve of them can be goose eggs and I can deliver three X and get invited to do it again. That is one of the most remarkable genius bits of fault tolerant infrastructure that's maybe ever been built. I think a lot about risk at sea and the old insurance risk where they would go out and figure out how to assess the risk of sharks and of hurricanes and typhoons and everything and how to build the models whereby there's a risk that they could actually get their cargo and the debt, their.
Is everywhere they need to get them back, which is actually, incidentally, where a lot of the early infrastructure and the philosophy of venture capital came from. I think we need to do way more. We need to go to further corners of the sea. And I think that that can only happen if we break out of some of the silos for how venture capital itself should look. And that's part of what we're trying to do. The second one that I would change, and I think it's changing already, but my partner, Steve Beautifully says Silicon Valley is a mindset.
I think that that is something that we finally maybe for the first time across China in the history of software driven innovation have fully embraced as a culture is amazing culture defining massive companies can be built anywhere. I would as an LP if I were an LP, try and fund more VC firms in Brazil and Nigeria. I would try and fund more in Tanzania. Dar es Salaam is going to have one hundred million people pretty darn soon. Nigeria is going to have one hundred million person city pretty darn soon.
Demographics are destiny. We saw what happened in China. We see what's happening in India. And so I would I would be taking more geographic risk. I have one more question for you. I know that you're proud, especially proud of the work you did in Obama's presidential campaign. What one lesson do you take from that? There's, I'm sure, a million things you learned as part of that process. It was a watershed, kind of interesting moment in American history, too.
If you look back now, it's actually got quite a bit of nice perspective looking back a number of years, what stands out from memory as a lesson that changed the way you think or behave?
The Silicon Valley trope for it is when you find a rocket ship, don't ask which seat, just get off. I think there's something about the rocket ship analogy there which holds some insight, which is when there's something that's much bigger than you, that you have a chance to be a part of, especially when you're young. Just do it. Love it.
Simple kindness. This is just always a master class talking to you. I have so much fun just learning in a million different directions. I think, you know, my traditional closing question that I ask everyone, which is what is the kindest thing that anyone's ever done for you?
The kind of thing that anyone's ever done for me was actually done for my parents. But I was there and so I'm borrowing it. The US ambassador to Botswana in nineteen eighty six sent his child to a boarding school in Cuba, only in Botswana, where my dad was a chemistry teacher and we were in exile at the time from apartheid South Africa. And we're looking to get on asylum lists in places very far from South Africa. And the United States was very, very hard to get into.
As a South African. It was hard because the political relationship between apartheid South Africa and the Reagan administration was one that didn't particularly lend itself to a lot of refugees. The US ambassador to Botswana got us on a list and he got us on the list. The set us up with the Hebrew International Aid Society, which had obviously built its legacy, repatriating and also saving Holocaust refugees. But they were expanding their purview a bit. And so we got set up with them via this list and got to arrive in New York City at JFK with a thousand dollars zero interest loan and a chance at building a life in America.
Really nice. Fantastic. This has been an absolute blast. I have a great time every time we talk. Appreciate your time and all the insight.
Always good to see if you enjoyed this episode.
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