Scott Kupor Discusses Technology Startups

and the tech side. He's really a triple threat, and he discusses the things that any entrepreneur or theoretically anybody who wants to be a limited partner in a venture capital firm should know. If you are all interested in technology startups VC funding, you're going to find this conversation to be absolutely delightful. So, with no further ado, my convert station with Andrews and Harrowitz is Scott Cooper. This is Masters in Business with Barry Ridholtz on Bloomberg Radio.

My special guest today is Scott Cooper. He graduated from Stanford undergrad and law school. He was employee number one at Andrews and Horowitz, the famed venture capital firm where he is currently managing partner. The fund runs seven billion dollars and has been early investors in such startups as Facebook, Group on Twitter, Airbnb, Slack, Stripe, Skype, and many others. His new book is The Secrets of sand Hill Road. Scott Cooper, Welcome to Bloomberg. Thank you for having me.

So I've been looking forward to having this conversation. You are the third um Andrewson Harowitz, veteran willing to uh suffer my sons and Arrows. Um. Well, it says that you're pretty hip. You get podcasts and you understand having people ask you interesting questions and coming up with interesting answers. So let's start with a little bit about your background professionally.

You were kind of born right into the bubble. That's how you describe yourself in the book You lead the I p O for opswere and oh one, what was it like going public right in the middle of the collapse? It was? It was. It was an amazing, amazing time. So you're right. I was actually an investment banker before I went to opsware and by the way, ops wars actually it was loud Cloud at that time, which was

the predecessor in two thousand one. So just a little background, loud Cloud was set up to be the original cloud earlier and then at a certain point that pivoted to you. You have developed your own software, operational software, and that's said that the other companies are gonna need this. So you took an in house technology similar to Amazon is doing with loud Cloud with uh a WS, and you spun it out as a separate, full, fully separate entity.

That's exactly right. So Loudcloud started in so it was you know, as perfect perfect timing, right, We raised a ton of money, we hired a bunch of people, uh and then of course the market turned in a different direction. So we took it public in two thousand one, actually for the very honest reason, which was that was the best source of capital at the time. So there was no other, you know, viable source or attractive source of capital.

And I think we were one of actually two I p o s that happened that year, you know, one, yeah, not, what was that five hundred and two thousand, So there was about seven hundred and fifty years so between the two years and then basically I think there were two in two thousand one US in a company called Storage Networks I think was the other one that went out that year. So eventually, um, the company gets bought by LTD Packer and what was that? So the people who

are still there as employees, what was that transition? Like? What was your role? You're an attorney, what was your role in the acquisition? It was fun? So, um, my main role was actually to run the integration between the two companies. So we kind of had I had there was an executive on our side who was me, and then there was an executive on the HP side, And basically our job was, Okay, we're doing this deal. What is this gonna look like as a combined entity. You know,

who's gonna have jobs in what places? How do we get everything from my T systems integrated? How do we talk to customers? And it was fun, It was actually really fun opportunity and uh, you know, it was just a different It was just different from anything I'd ever been through, right, So, you know, I'd always been in the startup community and then we go into this behemoth HP and you know, they've got these playbooks basically about

how you do this integration. Uh, and you know what we tried to help them understand was like, all that stuff is important. The most important thing, though, is what are you going to tell the employees about who has jobs, what those jobs are going to be, you know, where they're gonna show up on day one to go to work. And so there was kind of a human element of it that was, you know, a little bit underserved in the HP side. Not was saying the fact that they

were really good at the systems integration piece. So, but the assumption is the opsware employees who may have seen their jobs cut, they still have pretty nice stock options. So it wasn't okay, I'm I'm cut loose. Now I could go do my next gig. That's right. And for most people, most people had a job opportunity to go to HP because HP was really buying this as a growth opportunity. It wasn't like an acquisition where you know, they're like, look, let's just chop fifty percent of the

people and and you know and create some cash. So most people, you know, maybe there were probably some people in like organizations like finance, where obviously it's hard sometimes to have roles they are duplicate between organizations, but anybody who was in a product or engineering or sales facing role, all those people had the opportunity to stay, and most of them did. So you come from a legal background, you're running operations at a technology company. How did the

transition to venture capital come about? Was it just lucky coincidence? Who were working with two guys name Andres and Harowitz? Well, there were certainly there was certainly an element of that for sure. So I've been working, you know with these guys now for almost ten years when we started the firm, because this year actually will be my year working with them really, which is you know, it probably just makes me a glutton for punishment. I'm not quite sure what

to make of that. I've been to your office and I have to say that looks like a fun place to work. It is a fun place to work. Yet now it's been a great place, and uh, you know, we've grown it from literally there were literally three of us when we started ten years ago. We've now got a hundred and seventy employees. So it's been a fun place.

But yeah, look, I think the answer to your questions, yeah, it was a little bit of Mark and Ben and I had always just as I had career discussions with them when we were at loud Cloud Nos where I'd always said, Hey, looks doing something like this someday would be fun. I I didn't think about us starting a firm, but I said, Gee, that's a kind of business that I think could be fun. And what happened was after we sold the business, the two of them started doing

angel investing with their own money. So they were just investing out of their own checkbooks, meanings they there's a windfall when the company is sold. They weren't billionaires, but they certainly made you know, tons of money. Yeah, they were. And so the idea of taking I'm gonna pull fifty million dollars aside and find you know, a hundred companies that could use half a million dollars each. Yeah, it

was Actually it was even smaller than that though. It was literally they were running fifty thousand, excuse me, a hundred thousand dollar checks um. So it was very it was very kind of small stuff. And you would, by the way, you as a lawyer and an operations guy, I could see you looking at this and gnashing your teeth and saying, where the capital controls how is the structured? Where's the paperwork? Like? I barely know you and I could tell that set up made you crazy. I feel

like you're unfairly typecasting me. But am I right? Uh? A little bit, a little bit. They did the truth be told. Look, they did the angel investing on their own, you know. I I kind of came into the picture later as we started talking about the fund in the firm itself. But you know, I inherited a lot of that paperwork. Of course, why did you write this book and who is it for? Yeah, so as we talked about I've been doing tech stuff for about twenty five

years now, I was a banker. Actually we never got to that, but I was a bank stuff. Is that a technical time? Exactly? Tech things in the tech industry? Sorry, maybe I can I can be more eloquent mu um and uh. But you know, now, having been in this business for ten years, I continue to get a series of questions from entrepreneurs all the time, same question, Yeah, most of which I thought were answered, you know kind of you know, stuff like look should I even a

venture capital? Like how does the how does the business work? And a lot of them have this undertone of you know to a certain set, how do I avoid getting screwed by the caps? I mean, I hate to say it that way, but that's kind of that's kind of the way it was, as you implying your breath or no rapacious out there is that? Is that the implication? No, I think the implication is there's just not a level playing field from an information perspective, right, So deformation a

symmetry is a problem, that's right. So look, we'll do you know what, We've been doing this for ten years. You know, we've done thousands of deals, you know, and repeat entrepreneur maybe does this five, six, seven times over the course their life. And so there's just stuff that we know and we see because we see it an

everyday basis. And so the purpose of the book in my mind was, look, if we could demystify that and hopefully level of playing field, then maybe it helps have a better relationship between entrepreneurs and vcs and and maybe it even helps people who wouldn't have otherwise thought about entrepreneurship coming to the business. Interesting, and I have to ask for the uninitiated, what is santill road. I've I've

been there. I understand it as a concept. Yeah, the concept is the concept at a high level is like you know what Wall Street is to financial services or what you know Music Road is to Nashville country music. Right. Uh, it's basically it literally is a road. It is a street. Uh. It is very unexciting as you've probably seen what you've been there as a bunch of kind of you know,

fairly drabbed two story buildings. You have a very nice waterfall that we do have that we are building, so we are lucky to have kind of water effect outside our building. But but you know, it just happens to be the locust where all the venture capitalists have have you know, established themselves. And I think it's really the really the answer for that is because of its proximity

of Stanford. So the more important part of sand Hill Road is when you go down Sandhill Road east, you know about a mile and a half you end up on the Stanford campus. And it really does, I think illustrate the kind of tight connectedness that's always happened between Stanford and the venture in the startup communities. Right. You see it in Boston between M I T. And you got a kind of square and Cambridge the same kind of thing, right, A really interesting concept. So one of

your chapters is titled the Art of the Pitch. Explain what that is? Yeah, so we see lots of pitches, as you can imagine, probably about two year Yeah, it's a lot. Yeah. So the art of the pitch is really about kind of making sure the pitch resonates, is going to resonate with the audience. And I think key to that is to understanding what is it that venture capitalists care about? What is it that they are incentive to do, and therefore, how are they going to evaluate you?

And so I think the first thing to think about is the most important thing to think about in this business is we are wrong more often than they're we're right, which I know is a terrible thing to say. And if your kids came home and got you know, on their test, you'd be pretty unhappy. If you're doing that in venture capital, you're you're still in the game at least. And as as long as you bring up um that batting average, why does the hit miss ratio not matter

as much in venture capital as it does elsewhere? Because if we do it right, then the reason doesn't matter is because ten to twenty percent of the companies. Hopefully if we do it right, you're gonna earn hundred times your money. And so basically think of it as you know, the the significant winners will basically make up for you know, kind of that fifty percent of things where you won't get your money back and then probably where you get a little bit of money back but not enough to

make the math work. And so if you think about that, then what that means is, if I'm going to invest in a company today, I've got to at least believe it has a chance to be one of those ten

or winners. Now, you know, we wish we were smart enough to know exactly which ones they were, and of course we were just invest in those companies, but we have to at least believe that the kind of the ground rules and the opportunity exists and if and so that really kind of leads into the art of the pitch about how to frame the pitch in that context.

So from your perspective, what becomes more important to cast a wide net or to be able to do a deeper dive into a narrower niche where you feel like you have some expertise and some ability to separate the good from the great. Yeah, I think it's it's probably somewhere in between, which is, you've got to have some number of deals just because you're building a portfolio. So unless you think you're, you know, gonna bet that bat a much higher batting average, you can at least have

needs some diversification. But that diversigation needs to be in domains that you understand. So the way we run our business is we've got vertical domains. So we've got kind of consumer enterprise, financial services, life sciences. We've got a bunch of domains, and we staff them with people who are super deep in those domains and so within those areas, you know they will go very deep. But then collectively, as part of a portfolio, you get the diversification associated

with uh, you know, the multidimensions. So here's a data point from the book that blew my mind. Quote, venture capital is not an especially good investment. As of seventeen ten year returns pro vincial capital as an in the aggregate, not specific funds, but in the aggregate was a hundred and sixty basis points below the NASDAC. So for eight bucks, I could have gone out and bought the q q q s and outperformed the average event vcs. That's amazing.

It is amazing, and it's it's a weird asset class in that regard, which is the variance between good performance and bad performance is really high, like sometimes as much as you know, almost thirty five four thousand basis points right, thirty five to forty return difference. And I think it's a function of the fact that most of this business is largely a zero sum game. In each round of financing.

And what I mean by that is if we do the A round, which is kind of the first institution of around for a deal, generally, that means, you know, we're the only ones who do that. There might be some other people, but usually one venture firm will be the major, major investor there, and once that opportunity is done, there will never be another A round in Facebook, for example, right, so you know, Excel, who's you know, very good firm

invest in the A round of Facebook. The next opportunity that somebody had to invest was that some multiple evaluations to hired in that. So those still turned out to be obviously very good investments. But there is this kind of nature that you know when a round happens. It often accrues to one individual or one firm, and then you know kind of things. You know, fundraise every eighteen or twenty four months, and so the next investor obviously

always comes in at a higher price. So when I look at the world of stocks for mutual funds, it's a sort of Gaussian Bell curve distribution where you know the extremes on either and get rid of them, there's a big distribution in the middle. What you're describing doesn't sound like that, that's exactly right. So you know, the term that you may hear people use is kind of called a power lock cerve, right, And what a power lock cerve is is you've got a very small number

of that headlong that's exactly right. You've got a few things that drive all the return that You've got this long tail of a bunch of stuff that quite frankly doesn't amount to much from a returns perspective. And we see the same thing in private equity and hedge funds as well. It is funny though, actually, you know, you mentioned kind of the public markets. It's actually interesting. There's been a bunch of studies though, have laid on the public markets, which is it turns out they actually are

more power law than I think people understand. I think the number is four percent of stocks drive pretty much. I think that's exactly the returns out there. It's so good luck picking those four if you have a time machine, it's really exactly right. Yeah, let's talk a little bit about some of the changes that you've witnessed in the industry. In the book, you talk about why Combinator and why that was so influential and really changed the game for um the VC world. Explain into the lay person what

why combinator is and why why did it matter so much? Yeah, So, why combinator is what we call an incubator, which means they basically kind of take usually a cohort of companies that can be anywhere from thirty fifty sometimes as big as a hundred companies, and they kind of they basically start their business inside of y combinator. They go that's

where they go to the work. They work on a project, they build, they build a product, they get tutorials and kind of you know, kind of tutelage from other people, and then they kind of pop out the other end and hopefully they're ready to go raise you know, money as a result of that. So it's kind of, you know, almost a finishing school to a certain extent to kind of get this startups ready to kind of be into

the regular financing world now. Now, and Reeson was an investor in White Combinator, or an investor in White Combinator's funds in White Commaters companies directly. Actually, so a couple of years ago when we first started kind of I think from two thousand ten to two thousand twelve, when companies would go into Y Combinator, they would get some money. We were one of a few firms that used to

give them some money. So we would invest small amounts dollars, but in lots of out we just gotta we didn't have discretion at that point in time. It's like, look, everybody who comes in, you're entitled to take this money if you want it. And then obviously, look if we you know, if we really were interested in the company, we could put more money in later in a normal financing round. So so why did they change the entire

what did that set of you mentioned earlier? There's an information asymmetry between the seasoned vcs and the young kids running these startups. How did this level the playing field? They just kind of learned the ropes. It's really interesting what happened. So I think the way to think about VC is the first thirty five forty years a VC called it kind of early nineteen seventies to about two

thousand five, which is when YE kinda started. You know, you can think about it as capital was a scarce resource. The vcs had it, and there therefore, if you looked at the power dynamic, kind of the VC has had the power and the entrepreneur's had less. With the gatekeeper if the money, you had to go to Sandhill Road and you had to go get the money, right, And two big things happened. One is y C, which will

come back. Sorry, that's short for Ye Combinator. Uh. And then the second is the amount of money that it required to start a business continue to fall pretty precipitously, starting in kind of late nineties, and you know, still continuing to today. Right. So, so fiber optics, cloud all that stuff meant with storage, you didn't need a whole team and a joint server farm. You needed two guys

in a laptop pretty much. And you can go to now you can go to Amazon Web Services, of course, and get stuff that used to cost you five or ten million dollars of capital expenditures years ago. I mean when we were in Loudcloud. That's basically what we did. We raised money from the venture capitalists and we basically then handed it over to companies that nobody remembers any more. Sun Microsystems, we misovers from you know, Oracle Databases. Uh,

you know all that stuff. Now you basically get in a box on demand from Amazon for you know, ten dollars like yig or whatever the price. So what happened was right, that started to happen, which meant you could now start companies for a lot less money. And therefore a lot of these seed firms that we're now seeing kind of came into the mix. So we've seen a

lot of new seeds. In fact, something like five hundred new firms over the last ten years have come into the seed market as companies seating startups exactly right, Yes, so kind of firms like US firms like Entries and Horrowits, but just kind of smaller versions of it. Right, So a hundred million dollar funds instead of seven hundred billion dollar funds. So you have kind of that phenomenon, right,

which is the amount of capital goes down. And then you have the second phenomenon, which is why Combinator comes along and says, hey, we're gonna try to actually really quite frankly educate a lot of entrepreneurs about the whole startup process. And so take a little bit what was a very black box process and hopefully, you know, open the kimono a little bit and uh, and that changed

that information and start to change that information symmetry. And so that really changed the competitive dynamics in this business because it used to be that if you were a traditional two D and fifty million dollar venture capital firm in this business, you were the first money in, right, so you kind of controlled access to that. Now you're living in an environment where capital is plentiful. You know,

you're no longer the gatekeeper capital. And oh, by the way, there's these five hundred new firms that are being started that are kind of upstream of you, right, they're building a relationship with the entrepreneur before you. And then there's this kind of behemoth called Why Combinator that's also kind of effectively now becoming a gatekeeper, right, because they are kind of a funnel through which a lot of these

companies flow. And so the net of both of those is it really just started to dramatically change the environment for venture capital. And that was the opportunity that we saw when we started Injurasing Horowitz in two thousand nine, was to take advantage of that kind of changing of the guard. So are are these seed funds and and and y c. Is this changing the quantity of new startups? Is it impacting the quality? Are we deluding the talent or is it just Nope, it's a fire hose and

the more the merrier. Yeah, it's so I think for right now it's a fire hose and the more the merrier. So what it does mean is you can have a lot of experimentation happening for very little amounts of money. And look, I think that's a great thing. It's a great thing for entrepreneurship, it's a great thing for the industry.

What's interesting, though, is the funnel does narrow, which is if you look at kind of seed deals, right we're talking about there's been there's a lot of those the moneys, you know, there's a lot of money there the number of deals has grown a lot. I don't know what the exact numbers are, if something something like four or five times over the last you know, ten years, in terms of kind of you looked at it from point A to point B. So there's this vision of VCS

is kind of a glamorous lifestyle. Uh, you know when when we watch movies like The Social Network or my favorite show on HBO, Silicon Valley, which full disclosure, one of your partners was consulting with them early on. Um, there's a certain degree of glamour, wealth riches and just cutting edge technology and making decisions that affects how technology develops. I get the sense from your book it's a little

grittier than that. It's a little more hard work and long days and late nights and not all fun and games. Well look, I think like any job, it's not all fun and games. And and let me make sure it'll be very clear though, which is nobody should take out their little violence for the venture capitalists. Okay, right, I mean you know all their kids, you know, have shoes, they all go to school, they all get fed, right,

they do have shoes, you know. It is I certainly even if it's not as glamorous has depicted on TV. We should be very it's still it's still a pretty good place to be. I mean, look, the reality is the real heavy lifting gets done on the entrepreneur side, right, So we shouldn't kid ourselves in our business, and we certainly try not to, which is as much as we want to be you know, kind of finance partners and then hopefully add value in other ways to these companies.

The heavy lifting is all being done by the entrepreneurs. I think the part maybe that you're talking about, that's, you know, the less glamor part is look like any other job, it's competitive, right, and you've got to go

work hard. It's a question of the real question at the end of the day is why is an entrepreneur gonna pick you versus any of the other firms that they can pick And and that's a big sea change in the in the business that just didn't exist in the same way in the first thirty thirty five years. You know, when the vcs had all the capital, they had a lot more control and a lot more power. And you know, now we're dealing with you know what I think is a very healthy kind of you know,

changing of the garden some respects. But you know, vcs don't control boards anymore like they used to, which you know, we've you still get a seat on the board if you're if you're gonna do an a round and make a special investment, I would imagine you want some input into the management and some ability to watch how the

money is being spent. That's exactly right. So yeah, typically we will have a board seat, um, and then typically we will have kind of a set of rights that go along with our stock that says, hey, if you're going to raise money, you have to let us vote to say yea or a. Or if you're gonna sell the company, we have some ability to kind of have a say. Uh in the you know, in the old

days and I was doing air quotes there. Um, you know, the venture capitalists in addition to that, used to kind of control the board, meaning that there used to be more venture capital board seats on the board than there were founder seats. And you know that's in some ways why I think, you know, some of the reputation that the industry had was, hey, some of these guys can get trigger happy sometimes on kicking CEOs out of the

business and kicking founders out. That dynamic has really dramatically changed over the last ten years, and we see more and more boards where the founders kind of control them in the sense that they have more board seats, and it does change the dynamic of the working relationship between them. So you mentioned that pital used to be scarce and now it seems pretty plentiful. So I wanna explore that and try and figure out how that has impacted UM

markets and and startups. What are there now about five hundred unicorns private companies that are a billion dollar valuation? Is that reflecting plentiful capital. Some people have called it a bubble. I'm not sure that's the right description. We have not, by the way, So we've been we've been, you know, on record at this that I do think if you're talking about this compared to the bubble, it's very different. You know, you and I were talking about

this before we started, So give you a perspective. Right, seven hundred plus I p o s in the tech industry in those two years. The median revenue, which I didn't realize until I looked this up to confirm it, seventeen million dollars, right, you're talking about companies going public seventeen million dollars of revenue right now, you know we

haven't We haven't done seven hundred. We haven't even done four hundred I p o s over the last ten years in the last decade, right, I mean, we been doing about thirty maybe fifty a year, so we had a long way to go. And we look look at the revenue it we Works or Uber, it's pretty media number. I think the last I look for the last ten years is about a hundred and seventy million. But X, yeah, it's sent X right. But I think that even really

understates it, right. I mean you've got companies right like Lift and Uber and others right that are you know, they're going public with billions of dollars of revenue. So it's a very very different world. Um. But to your question though about kind of you know, how much capitals out there? Uh, it is true. There's a lot of capital. Uh. And it's kind of a little bit of a tail of two cities, which is you have a lot of capital at the seed stage, right, And we talked about

that a little bit. Now it's it's not a lot in the total scheme of things in the sense that it's about six five six percent of capital total in the venture capital world of seeds. So it's grown a lot over the years, but it's not you know, we're not talking of the capital. And then you have kind of the A and the B rounds have kind of not moved that much. They've moved a little bit, but

there's a little bit more capital. And then you have this big influx of capital in the kind of call at the C plus rounds like late stage pre I p O rounds that maybe twenty years ago would have been public instead of a private That's exactly right. So the best way to see this is it used to be the case that from founding of a company to I PO it was about six six and a half years is typically what it used to be. Today that's

about ten to twelve years. So you've pretty much basically doubled in the last decade the time it's taking for

companies go public. And you're exactly right. So what's happening is you've got all this capital that used to be in the public markets that's now saying, hey, we want some of that growth, right, we want these growth companies because we're not getting in the public markets, and that capital now is coming into the private markets, and that's what's driving these very very large rounds you see in the private markets. So here's another interesting stat from the book.

I thought it was fascinating. Fifteen of the biggest twenty five I p o s in we're from companies that had no profits. So how should we be thinking about young companies that basically, you know, are are losing a little money. The joke is Uber Ludes loses a little money on each ride, but they make it up in right, So how do we think about these companies that are growing rapidly and have nice revenue but are far away

from profitability. So I think the way you have to think about it and look the way you have if you're if you're getting comfortable investing in them. The way you have to think about it is you have to look at kind of what we call the unit economics, right, So in other words, show me kind of at a at a unit level, so at a geographic market level or at kind of a per ride level, does the

business work and are we losing money? And aggregate because we are now focused on growth in other markets, and when those markets are at a level maturity, you know, you will see profitability. So, you know, we're a shareholder and left right and so competitive competitive move right. So and if you look at left right, you know, my impression is when they went out on the road, what they probably did is they said, hey, look at our mature markets. Look at San Francisco or look at you know,

Boston or whatever that might be. These are markets that are mature, and we can demonstibly show you kind of the profits that we actually make in those mature markets. And oh, by the way, we've got a bunch of these immature markets. But if you believe the story right, then those immature markets over time will get to the same levels of profitability, and then therefore the companies themselves are profitable. I think that's the way to think about it,

and that's what the investors are trying to do. You know, it will be incoming obviously upon these companies to actually prove that and demonstrate that, you know, kind of the story actually matches reality. Here's the question. So we have these big, fast, growing, well funded companies that aren't profitable.

What what happens in the next down cycle? Yeah, well, look, I think that's a real question, and I think this is why Actually you see in the I p O market right now that the I p O s of companies are trading differently, I think based upon kind of whether they are profitable and or how much cash ultimately

they are consuming. So if you look at kind of the companies that are performed the best, they tend to be enterprise software companies like a Zoom for example, or you know, we saw lots of sale, right, so they've got you know, they're growing fast. They're also profitable businesses, and so look in a downturn, you can say, look,

maybe they don't grow as fast, but they're not. They're just not an essential threat to that business, right, so people are if you're a CrowdStrike investor, look, people are gonna buy security software at some point in time, even on turn and so if it slows a little bit or if they lose a little bit of money, that's okay,

not a big deal. And then you know, you do see like the Ubers of the world where people say, hey, look, you know you're telling us profitability in two thousand twenty three, which means you know, you may be reliant on the capital markets to raise more capital over that time period. I think that's why you tend to see more volatility in those kinds of stocks that have this big cash consumption. So so we keep I keep coming back to the issue of how much capital is slashing around. Let's talk

a little bit about the Vision funds. What's the Vision funds and how is this impacting the landscape out there? Yeah, so the Vision Fund is a fund that was raised by soft Bank, which is obviously a big Japanese conglomerate, and it's huge. It's huge. It's a hundred billion dollars, right, and it's it's as far as I know, at least, it's certainly the biggest fund that I've heard of that's, you know, effectively a fund structure investing in you know,

private equity and adventure backed companies. Now, I know you probably don't want to bash a competitor in your space, but I imagine that much money in the hands of humans and they're just dolling it out willy nilly and over paying for stuff and saying, hey, I got a hundred billion dollars to deploy, go out and find some more companies. I'm exaggerating a little bit, but is there any truth to that. Well, it's interesting. So a couple of years ago, SoftBank was kind of a class of one,

right they were. They were the eight hundred pound guerrilla, right. There was nobody else of that scale. And look they had they had. You know, look, people people do what their incentives are, right, which is so if you worked at the SoftBank Vision Fund, clearly your your incentive was to go invest money. Now, whether they were overpaying or to only an outlook, I mean, time will tell, obviously,

and you know they did. They do have a different kind of cost of capital, right, In other words, they're not trying to necessarily get a three x or a five x return on a company. Uh, they have a lower kind of return hurdle. So in theory, they could afford to pay more than maybe somebody like us could pay for the same business. Because we have to deliver a higher rate of return. You have to be more efficient. They have the luxury of not I'm not caring about that.

It's not that we have to be more efficient, it's that we are. Our investors say, look for you to stay in business, we want to see three times our money being returned in every fun cycle basis for ten years right, So give us three times your money, you know, which probably means somewhere between twenty five and three, you know, kind of I r R S right annualized returns. Uh. Yeah, if you do that, look we'll keep giving the money. You get to play the game again. I mentioned earlier

you are my third victim from Andrews and Horowitz. Um. Not only did I have a nice time talking to um Bennett Evans, who has a wonderful newsletter that comes out of your shop as well as is it one or two podcasts? I think it's probably too at this point time. Um, but I had a great time speaking with Mark and Reason in your in the Pitch conference room,

which was fun. And if you listen to that interview, you could hear me bang the table and it's pretty hilarious because, uh, it was just one of those like surreal locations to have do a podcast. And I had a number of people email me and say, you know, I normally listen at two times regular speed, but this guy's talk so fast I couldn't keep up with it. I'm like, have you not heard Mark Andreason speak before?

He just he's like a New Yorker, He's like he is a fast speak, right, and a lot of interesting, dense stuff. So I take that as a compliment when someone says I had to listen at regular at regular speed, you want to miss a word, that's good. We mentioned earlier you were employee number one, after Andreason and Horowitz. What is your role today? You were you're managing partner. What does that mean? What's your day job? Like? Uh so,

it's a lot of things. Actually, my uh my nickname inside the firm is actually called slash like kind of the like the cut the class right. Well, no, actually not slash like cut cost slash as in, I have a lot of jobs, right, So so some days it's exactly right. So some days it's go raise money. So we just you know, finished a fundraise not too long ago. So how much did you guys? We just ray just about three billion dollars? Actually, so wait, I've been quoting

I know seven actually believe it or not? Is even is out of date as of you know, literally about three days ago. I apologize her. No, not at all. It's in the book and it's you know, yeah, yeah, we go fix Wikipedia. It's wrong, right, go figure who who would have ever guessed something on Wikipedia? Is. Um, so yeah, we're over We're just about over ten now, ye know, it's been a lot of fun. So yeah, so what most of my job. But by the way, how how many people get to say, yeah, raised three

billion dollars. It's been a lot of fun. It's uh, you must really love your job. I do love my job. It's great. I mean, I love I love the capital raising part of it. We have a great limited partner base and so it's a lot of fun to do and a lot of pensions and endowments, pensions, universities. Um, we do have some sommer wealth funds too, so we talked about that. It's kind of been one of our segments. Um,

you know, some family office is not that many. Um. And then we've got we're starting to build up more of international base now, so kind of most of it was North America really basically US, and we're thinking now we've kind of suspanded into Europe and then you know, some parts of the Middle East and some parts of Asia. So it's been a fun opportunity just to kind of learn that side of the business. Canna a VC scale

significantly above where you are. I mean, if you were a software company we need to talk about how software I hear is eating the world. But but if you were, you know, if your software company, you could scale up infinitely. You know, Google Docs. Nothing's going to prevent every person in the world from having a hundred sheets and docks on Google Docs. It just scales infinitely. You literally have partners who have to sign off on stuff, associates who

have to do some of the grunt work. There's a lot of decisions to be made. Where where do you top out? Yeah, this is this is the real conundrum with this business is so that the limitter in scale is basically the number of board seats that a general partner can sit on, right, and it varies. You know, some people top out at ten. We've got some of our folks who are doing like fifteen and sixteen who think they can go to five. You know, we'll see,

we'll see if they get there. But but you're right, So the kind of limitters are at some point in time you tap out your board seats, and then some point in time the room gets so big where you just have too many people, you know, trying to express an opinion. So the way we're trying to solve that is we do a little bit more kind of verticalization basically,

so I mentioned earlier than creates different sleeves. And so we've got a consumer team, right, and so we can grow that team more because you know, right now there are probably what four people on our consumer team, and so you could probably continue to grow that as long as the deal opportunity set is there and you don't have too many people in the room to make a decision. Right, our our financial services team is too strong today, you

could certainly grow that more. So we're trying to say, look, let's push the decision making down at the vertical level to the teams that have the right domain expertise and then above a certain dollar threshold, Hey, if someone wants to write a fifty million dollar a hundred million dollar check, let's kind of get everybody in the room and make sure that nobody's gonna blow a hole in the you know,

in the side of the ship. Right. So a hundred and seventy employees, how many partners out of that group? So we have fifteen partners today. Relationship like a law firm or similar right, some of the big firms, it was seven and one sort of ratio. The other big difference though, with our firm, right is a hundred of those hundreds, so many people actually work with our company's post investment. So we're kind of an odd, odd beast in the venture, meaning that they're not going to your

office each day, they're going to the entrepreneurs. No, no, so they actually they're at our office. They work for us, but they do things like, hey, can we help you get introduced to Bloomberg, to the ce IO or so more of what I would traditionally imagine is a partner's job description. You're pushing that down to the level of staff. That's exactly right. So the whole idea behind the firm was kind of this concept of, look, can we disaggregate the general partner job and say what are the things

that we really need the general partners to do? Right? So, so good, you're gonna disaggregate, right, how about that? But you know what, that's an accurate description. So, yeah, we want a general partner to look for great deals, build relationships, make investment decisions, and sit on boards and be valuable to those companies. Right, But we don't necessarily need a general partner who's not an expert in recruiting CFOs to

know how to do that. So instead we have a whole talent team and that's their job is, let's know all the top CFOs in the business, let's build relationships with them, and then we're appropriate, let's connect them into our portfolio companies. Right, And so we do that on talent, on both executives as well as engineers. We do that

on sales and business development prospects. So you know, we cover companies like Bloomberg and others and say, who are the decision makers that might buy software here or that might you know, buy ad time for some of our ad based companies, and we ought to know all those people and then figure out when can we connect them into our companies to help them accelerate their sales. Really intriguing, So what are your vertical um specialties? What are the

different groups? Yeah, so right now there's a couple. So basically kind of consumer is one, and think of that as you know, that's a Facebook and instat cart, anything that the end us essentially exactly that's exactly right. Yeah,

that's a good way to think about it. Uh, financial services, so fintech is one and that kind of has some b two C and some B two B elements of it, right, So it could be we have a company called a firm, which basically is kind of point of sale lending enough, you know this, but so if you by a Casper mattress, you know financing, right, So that's a the ability to make a fairly instantaneous that's exactly right credit that's exactly right, credit card, or somewhere between a credit card and a

bank loan. Right. And then on you know, completely other end of the spectrum. We've got a company called Branch which basically does lending to sub Saharan African countries. Basically a people in those countries, so literally think of it as a taxi driver or a local store owner micro lending, right, So who doesn't have credit? Right? Basically in a lot of these countries, you know, we have these credit bureaus, right, so you have kind of you get your credit score

and then you take that to the lender. In a lot of these other countries there is no concept of a credit bureau So a company like Branch literally is building people's individual credit files by giving them small micro loans and that as they pay it back. Obviously they started to get higher credit limit. That's fintech. Uh, enterprise.

So enterprise could be anything from like an application company like a slack for example, it would be in that to something more s terek, like a security company or a company that's doing you know, a database or things of that sort. Um, we do crypto, which is an interesting area which we can talk about. Sure, let's talk a little bit about crypto. So, uh, this crazy Facebook libra then, so I walked right into that one. Right,

Let's let's just talk about this. So Facebook, who has helped um undermine democracy as they as they worked hand in hand with the Russians to spread fake news, decided that they want to replace money. So how could that ever go wrong? Yeah, so they're not They don't want to replace money. They want to create Internet money, right right, So that's the way you think about That's at least how we think. So not a h not credit, not venmo,

which um I use venmo as a verb inappropriately. The young guys in my office tell me, so, I when I when I owed someone money they bought tickets for something, I said, just venmo me And he's like, dude, that's just And I'm like, just venmo. I think that's pretty forward. So he said, no, no venoment. He goes, I'm gonna invoice you. You're gonna vendomo me? Do I really? Okay, I'll be more formal, so send me your request and I will pay you. Is that better? But anyway, a

really interesting concept, right. So the concept is again we we've been using this term Internet money, right, So if you think about it, there are things like, of course there are things like PayPal and stuff like that today, but they all depend on your right, They depend on

other stuff right there, and it's expensive. Not everybody has access to that, and particularly in countries like you know, Venezuela for example, right where you know you've got these hyper inflation countries, people want, you know, a stable currency that they actually don't have to worry about, you know,

putting in wheelbarrels every day. And so what basically the Facebook consortium that they put together is you know, intending to do, is to say, look, could we create this concept of Internet money so that you can procure things on the Internet. You can even do like micro payments, which is very hard to do because of trains action costs. So you know, if you wanted to charge people ten

cents an episode to listen to your podcast. Maybe that's a good way to monetize the podcast instead of advertising for example. You know, I don't know, I don't know if that's the right math. Where do we sign up? Right, you've converted me to liberate, But you couldn't You couldn't do that today, right because you know, by time you took transaction fees and stuff, you would be losing. It would be basically paying the credit card company to to

charge somebody ten cents. So that's the that's the kind of big idea of what they're trying to do. Now, look, it's you know, uh, it's brand new, it's a consortium. It's going to be developed in a crypto framework, which means it will be decentralized and governed by all these different kind of groups that are being part of it. So it's not going to be Facebook actually central centralizing it and owning it. And uh, you know, it'll be an interesting experiment to see if they can make it work.

So let me let me ask you a disclosure question. So, you guys famously were an early early investor in Facebook. It worked out fabulously for for that investment, are you still a Facebook holder or is that long since been worked out? So as a fund we we don't hold Facebook shares anymore. A lot of us into visually do, and I will personally disclose I do have. I do home Facebook shares, and I don't know if Mark or other people still do. I assume Mark does because he's

on the board. So imagine he gets, you know, some kind of granted every every quarter or every year. But but in general, kind of the way our business works is, you know, our LPs pay us to manage private assets, right, and so it's public. Look, you guys, so here's the question here. You sell their Facebook shares or do you dole that out to the LPs and let them sell. Usually what we do is we distribute the shares, and

then you know, different LPs do different things. Some of them actually say, look, every time I get a distribution from a venture capitalist, I'm just gonna automatically sell a lot. I'm not gonna make an independent judgment. Some of them are who are particularly the ones who are more sophisticated, say wait a second, you know I like Facebook stock and oh, by the way, my one of my public managers has it. But I want an overweight position in

Facebook stocks. So you know what, I'm just gonna hold onto this and this has such a low cost basis. That's exactly to it for this Although they're really there there, they're saying most of them are pretty right, right, they have the luxury. If not, I immediately think of cost basis and makes a big difference, you know. And then there's a whole there's where you're going to locate the assets.

You these guys, they're all completely taxed. It shouldn't make any but that's basically how we think about the business. So look in general. Yeah, like if they want to buy Facebook stock, they can buy Facebook stock. They don't need to pay us to do that. That that makes perfect sense. Um, I didn't ask you during our broadcast portion the venture capital life cycle, which you talk about in the book. Um, let's let's let's get a little wonky and talk about life cycles. And then I want

to talk about persistency and underfitting. So we're really gonna walk out. So what's the VC life cycle? Yeah, So basically, we raise funds and those funds typically have a tenure life. Now if you've talked to any LP but ten years I'm gonna interrupt you. Is ten years standard. I kind of remember being a little shorter years ago, seven eight years.

Since I've been in the business, it's been ten. It's actually and the opposite is actually true, which is but any LP will tell you there's no such thing as a ten year fund. These funds go twelve, fifteen years. You're always left with stubs that haven't done anything and hope the bulk of it. The assumption is, hey, if it's not done by ten years, just write it down to zero and whatever comes out later that is a bonus. So I don't know if stub is the right technical term.

I think it is a technical term. But but I'm under the impression that after a certain point, it either works or it doesn't, and it's not going to catch fire on the eleventh year, so we just need to make it one more year. But remember right, it's taking ten, eleven, twelve years where companies go public now, so it's possible that it could catch fire. So it depends on whether

it's on that path or not, I guess. And at that point it's certainly easy enough to find somebody who's gonna that's come in and take it off your hands. So anyways, you've got ten years. Basically, you do most of your investing typically in the first three or four years is what's more typical, and then kind of in those later years you're doing what's called follow on investing, right, you're kind of maybe adding to positions that second round, the second round or third round or stuff. How does

the capital calls work? Is it like a hedge fund where all the money shows up or is it like private equity where you make a commitment, give a small amount of money up front, and then they call it as needed. Yeah, it's the latter. So basically, when an LP invest in our fund, what they're doing is they're saying, okay, like, I'm committing to ten million dollars over the life your fund, and you know, we'll call it kind of we typically call quarterly because you know, we kind of generally know

what the cadence is. So yeah, I think about it as probably seventy percent of your money gets called in that first three or four years when you're doing primary investing, and then the remainder gets called over years four through eight or nine or something, you know, for that follow

up investing. That that's that's pretty interesting. And so that's the life cycle over of a typical fund, that's right, And then you know, we'll go raise a new fund hopefully so hopefully after three or four years, if we've you know, exhausted that fund, if we're doing well enough, then our LPs will say great, like, we'll give you another shot at it, and you go raise a new fund. And each new fund is a new legal entidy with

with uh. I want to call it a sixteen Z. You can, but people are not gonna understand what that is. So I have this great blue hat that sits in my car, um, and it literally says A six team Z dot com and there are sixteen letters between the A and injuries and the Z. You got it. I mean, it wasn't hey, I cracked that code. It wasn't too difficult. Um. But it's really a very interesting idea. And it allows you, guys to come up with a almost random web you

r l you're going to get a website. They're all taken. It's it's kind of crazy, and it allows people to actually find it because if you had to spell in recent Horwitz dot I always get exactly. I always get that wrong. So um, persistence was what you mentioned. We didn't talk about you are so sure. Let's just let's talk about so each of these are separate fund You're the fun firm is the GP, and it may or may not be the same LPs in it. And so

you just did FUN six, that's right. If you're just raising money for fund six and that was put to bed, Fund seven is a couple of years down, that's probably right. Yeah, we tell our LPs kind of think about it as two and a half three or three and a half your cycles is probably the right right think about. So let's let's talk about assistance, which is kind of interesting.

And again, at risk of of I don't want to put words in your mouth and slag a competitor, but let me just talk about some of the talk of the town. So Kleina Perkins, one of the most storied John Door and that whole collection of folks. Um incredible, trans Cisco and Apple and Mike Microsoft, I mean, go down the list. It was insane intel Um they did fabulously in the eighties and the nineties. The latter farm funds seem to have not had the same UM track records.

So the question is, was it luck, or did the environment change so much that they failed to adapt? Did that whole sex discrimination case throw them off their game? These are my words, not yours. I don't want to put you have to see these people, and I don't want anybody saying, Hey, Scott, what the hell man? So this is I apologize to John Doran everybody. I'm repeating what I read. I don't know this for a fact.

I've never met these folks. You certainly have never said any of this, So I'm giving you giving you some plausible deniability. Um. So, first of all, you're upset. Kliner is, you know, an icon in the industry, there's no question. And their early track record was just yeah. And then you know they also had a whole life sciences part of their business. You know, people like Brook Briers write one of the name partners there have done great things.

Um And and actually right now they have a they have a whole new set of a whole new teams. So they've kind of brought on some some new people to kind of build out re kind of build out their software business. And look, they've successfully raised new funds and stuff. So you know, I wouldn't I certainly wouldn't count anybody out of this business. I mean, they're they're an iconic name with an iconic brand, and but that

brings us back to the issue of persistency. So the whole concept of fat headlong tail is there's a handful of winners, let's a winner take all distribution, and those

winners tend to stay winners. So so it's it's really interesting, right, So if you look at the if you look at all the academic literature around VC, basically, uh, you have a firm that is performed in the top quartile of returns in one cycle, is likely to then continue to be in the top quartile in the next cycle, right in the next fun And I think the theory behind it goes back to a little bit of this kind of idea that we talked about earlier about kind of

zero sum and signaling, which is, you know, if you're a firm like Climber Perkins, let's just use them an example. You have a brand and you've you know, you've invested some of these fantastic companies like Cisco and Apple, and so you know, I'm an entrepreneur who is you know, looking to kind of get that brand affiliation to help me with my business. Right, So I want your money because you know you've invested in smart people before, and

therefore you must think I'm smart. Their money is more than just money, that's right, right, It goes with the brand and with the success they built over time. Right. And so if I'm trying to recruit employees, you know, I say, hey, well, you know I've got money from these Climber Perkins folks in this case, you know they're smart. Therefore you know you should come work for me, right, do something crazy like quit your job and tell your spouse that you're going to take a fifty cut and

pay and come work for me. Or if you're a customer, you know you have kind of the customer kind of gets the brand connotation of Klin of Perkins. They may not know you, but they've heard of John Door, they've heard of you know, that organization. So you get that kind of brand affiliation. So I think that's why there is this persistence. And then therefore, also as we talked about, because these deals are often zero sum, if you've got the brand that gives you an unfair advantage in competing

for the new deals. Uh. And when you win that a round the deal. That means nobody else in the industry got to win that deal either, Right, so you you kind of allow that persistence to kind of, you know, take effect and give you competitive advantage. Now, this is the same thing we see in where do you want to go with this hedge fund Ivy League schools? Is Harvard really Harvard? Or are they just coasting on their reputation? Yeah, Look, we we use signaling all the time, right, and it's

you're you're right, it's not it's not necessary fair. Look, there's plenty of smart students at other places that don't go to Stanford to Harvard. But you know, an employer looks at that and they say, hey, like, you know, it's probably the case that they've they've screened the student, they've done something, and so you know, I accept that as kind of you know, brand affiliation for that students. But you're absolutely right, it's not fair. But it is, unfortunately,

you know, part of the way the world works. So we're not talking about fair. We're talking about if you're a pension funds or if you're an allocator and you have to decide, hey, I'm gonna budget five percent of my my assets to venture capital UM. In the world of hedge funds, if you're not in the top ten percent, you're paying a lot for not great performance. It sounds like the VC world is very, very sick. It's similar.

If you're not in the top firms, well then you really, as you pointed out and on aggregate, gonna underperform the public mark. Yeah, this is where I think a lot of the LPs sometimes have kind of made mistakes in their venture portfolio. Is you know they diversify, Yeah, they diverseify.

I right, Diversification turns out to be a bad strategy in venture, right, which is if you've got you know, you know, if you are with a great firm who's in the top quarter tril you know, obviously things change and of course maybe all the partners leave or you know, something catastrophic happens, but in general, you want to probably double down your money on those folks as as to actually,

you know, kind of diverse buying. So the names I know like Flat Iron Ventures or Benchmark in addition to Climate Prokin's injuries, and I know there are dozens and dozens of others. The well known top tier firms really are well known and top tier for a reason. That's right, yeah, and they're look, those are those are great firms, and so what happens, right is the LPs want to allocate

to those firms. And then what what often happens, I think where sometimes the LPs make mistakes as they say, look, I can't get access because you know, benchmarks, right, benchmarks, you know, you know, it's very hard to be a new LP and get access to a benchmark from they're they're so good that right, they haven't really added to their LP base, And so then people sometimes say, okay, well let me go down to the next year or

the next year. And then unfortunately, and a lot of times in this business, you know, that means that you now start to get those returns we talked about, which converged to the media as opposed to the top returns. Mean reversion is exactly right, is quite a mean cruel, a cruel mistress. So I I made a reference, but we really didn't get into UM and Reason's piece, software is eating the world? That was two thousand eleven, and

that turned out to be a fabulous call. So really the question is um is software still eating the world? And and when does this, you know, get replaced by whatever is going to replace software, or does that just never end it just keeps going. Yeah, I think so. I think software is still eating the world at least where we sit. We think it will continue to eat the world for I don't know what the time period is, but I don't I don't know what fun exactly right. I don't see an end to it at this point

in time. And actually, what's interesting now is it's starting to touch a lot of industries that historically it never got to. So now we're starting to see software eating a little bit of education, a little bit of healthcare, government services, um, you know, oil and gas markets, energy markets. So there's these you know, very very markets that for a long time kind of we're you know, largely untouched. And I think we're still at the very very beating

phass of it. So it's been our investment thesis for a long time. I think it's gonna be our investment thesis for the foreseable future. So I'm gonna throw a curve booll at you only because you brought it up. So health care. Healthcare is such a fascinating area. You guys have looked at biological science is not not where where you really focus. We we do actually have a bio fund, right, but but the whole there's a huge amount of um genomics and go down the whole list

of stuff. You're really more hardcore tech, not not life sciences. But you do as you said, you do that. But when you brought it up, I immediately thought of the Berkshire Hathaway, Amazon, JP, Morgan Chase, the concept of Hey, healthcare in the United States is broken and we want to explore fixing it. When you see something like that, that does your vc um Pavlovian response start to go off and say, yes, it's broken and technology can fix it. In here's a billion dollars, Like, how do you hear?

Like when I heard that story, I'm like, damn, that's some serious firepower. Yeah. How is this perceived at a shop where you're looking for the next great disruptive technology? Yeah? Yeah, Um, Look, we all take notice when things like that happened, obviously, particularly with those companies because they're obviously all kind of

companies that have tremendous resources. In general, though funding something like that is not really that's just not really our m O. Right, So are are you know, we we may like that idea and we say great, Now, is there a set of you know, entrepreneurs who are starting from scratch with a completely blank slate, and we can you know, invest to three five million dollars in them to go try to build something that could be you know, equivalent in terms of the results that those three companies

might deliver, but can do it where it's a tech first company and is really driven kind of bottoms up from the tech side. So it certainly kind of you know, piques our interest, but it's not it's just not in the scope of what we tend to do from funding perspective. And really the last I have a couple of more questions try I don't want to I don't wanna torch you with this um. One is debt versus equity and

the other is valuations. You write about, Uh, debt versus equity is a question and that old entrepreneurs should think about, what explain why that's significant and how they should contextualize. So I think there's a couple of issues to think about on debt versus equity. So one is and let's assume we're talking about real debt here, not convertible debt. Right,

so debt that actually is going to stay there. The problem with debt is at some point you have to pay it back, right and uh, you know it's not that we want to with equity, you have to pay. But you know, so if you think about it from a starter perspective, right, for you to take debt and then say, okay, three years from now, when hopefully my business is finally starting to hum, now I gotta take money out of you know that I could be plowing into R and D or other stuff, and I gotta

go pay it back. Like it's it's what we call it's not permanent capital, right, So it can serve a purpose, but you know, I think for a startup business, it's a dangerous kind of you know, path to get on because you want the permanency of capital that allows you to kind of make the investments into the company that

you hopefully want to invest in. So, you know, a lot of our companies do what's called convertible debt sometimes where you know, kind of that debt will start off his debt, but then it turns into equity at some point in time. Uh. And you know, people, what why do that? As opposed to straight equity. Look personally, you know, from our perspective, and we've been public on this, we

would rather people do straight equity convertible. That started largely, I think because people said it's cheaper, it's just faster. You don't have to have, you know, hours and hours of lawyers doing this stuff. Uh, and it kind of punts the valuation question, right. We don't have to decide on the valuation today. We say, hey, look in the future, when there's equity round, we'll just convert it at that price or some discount. But we don't need to go

fight about evaluation. Um. It's it's grown a lot um. It's problematic for a lot of reasons. I think the most The most place we see problems is founders will kind of do many debt rounds and then they don't really realize until they finally go to raise an equity round. When all that debt converts into equity, they realize, oh, my gosh, I've sold a lot more of the company than realized. Right, because you don't have that tangible Hey, you know, I got five million dollars and I gave

up in my company or something like that. The math is easy to try it. And then the last question I have to ask you about is valuation. And I still have in my head marks comment that, Hey, look at all the companies that blew up in two thousand, two thousand two. They've all since The ideas were fine, they were just a little ahead of themselves. The perfect example back then it was pets dot com, and now Chili is just web band, web band and Instacart mirror

images of one another. Basic. So and his take was, when we're looking for fifty or a hundred beggars, stop and think about it. If he overeaes. The example he used is I think he was in Facebook at like a twenty million dollar valuation, because well, when what happens if I paid a hundred million doesn't make any difference when it's fifty billion or a hundred billions, Like, it's almost irrelevant at that point. And for an equity for a public equity guy, I'm a guest at that. But

intellectually his math makes sense. So it's funny. I'll give you a little bit inside baseball. So this is the number one thing that Mark and I fight about all the time inside the firm. Really, yeah, so I think I think his principle is right. And I've told him this before, so hopefully he won't fire me when he hears this. Um, his principle is, his principle is absolutely right, which is like, you're right if you're going to invest in Facebook, Look the difference between a thirty million or

forty million or pigti million valuation? Who cares? Right, it's a hundred billion, you know, went to five. That's one winner. Look at it an aggregate against maybe the companies that weren't. I think that's right. I think I think the problem is, Um, it's very it's it's it's very hard then to know what is the price that which you wouldn't actually make that investment. In other words, so if I would make it at fifty or a hundred, would you pay five

hundred for Facebook at that point in time? And look in retrospect it was Facebook, So again you would pay anything. But back at the hindsight bias, a company that we don't know X y Z, we don't know what it's going to be. Where do you draw a line. So what we try to do, right is we try to say, okay, let's assume everything works out. Okay, so what could this company be at scale? Right? So how big can it get?

What's the market size? All those things? And then we say, okay, look if you you know, believe that it can actually get to a ten twenty billion dollar company, and you're right, you're trying to optimize for times your money. There's at least a range of prices, and it's it's you're right. If you loved it at thirty million, you probably are still loving it at forty million. But maybe the answer is, look,

you don't love it a hundred million. The other piece to think about it is it's not just the entry valuation that matters for that purpose. That's the next round. That's exactly That's what I say, which is you know, at some point in time, leave yourself a little up. So that's exactly right. And so that's the other risk I think that you can get into if you don't

at least think critically about valuation. Is you may be happy, but then look, these guys are gonna go raise you know, another two, three, four rounds and if every round every investor feels like they're getting pushed, it doesn't work. Now, there are examples where that works, you know, Uh, we famously you know, didn't invest in Square, which, um, that's to be great. And you know, at every round, you know, it always felt like you were paying ahead of what

the what the actual intrinsic value the business was. But you know the reality is that's the way a lot of these things look. So I think his principle is right, and but I think you just have to say, okay, Look there is some limited which we say, okay, the risk of next round financing and you know, kind of the the real upside opportunity. He is somewhat constrained by valuation. So let's take an example, Uber, a giant by any measures,

successful startup company. I think if you were, if you were a private investor, of the private investors are underwater based on where the training today. Right, Yeah, that may be right, but you know most of the look there are also people like Benchmark and lots of other firms who are certainly not right. Yeah exactly. Yeah, Look, I mean I would say, I guess a couple of things

were left investors. So you know, you can take this with a big grain of salt um you need there you always I disagree with my friends got Galloway and then Stern who thinks Lift is toast is only gonna be one winner here. Hey, what name of field where there isn't a PEPSI to the code? I think that's what. Yeah, I don't think. I don't think that's the game. I mean, obviously, look, we we bet that way and we believe that. Um,

you know. The the only other thing I'd say about Uber and I'd say it's about Lift two, which is, look, yes, they're underwater today. Judging these companies though, I think based on three, four or five weeks of stock price for it's a little bit unfair. That's totally look face book right, Facebook, you know went to fourteen dollars. They had a crappy

I p O before. And so look, at some point in time, yes, these companies will all trade on some like multiple of cash flow at some point in time, and then we'll real be able to judge, quite frankly, you know, whether they're overvalued or not. And my last question before I get to my favorite uh speed round questions, we work seems to be just off the charts where a floor in a WE works building is worth more than the building itself. Does any of this make any sense? Yeah?

So we're not investors, and we worked, Um, so you can tell us the straight well, look, and I so I don't know the numbers, but I do think there is this big question which is fundamentally, is it a technology company or is it a you know, a very successful real estate business? Right? And look, if it's the latter, we know that those things will trade on some cap right at some point in time. Uh, And all about I are are relative to the clost I think that's

a question. Look, And I don't know since I'm an investor. Look, maybe they have some story which is look, maybe there's technology or something else which means they should trade at a premium to a to read basically because of you know, better margins or something like that. I don't know, but I think, look, that is the fundamental question them And and I think that's what you know, if if they go public, as at least it's rumored that they might go soon, I think, you know, we'll have the public

markets ability to weigh in on that pretty soon. So I only have you here for a finite time, they're telling me. So let's jump to our favorite questions that I ask all my guests. Feel free to go as longer short with these as you like. Um, your first car make earin model. My first car was actually a Pugio five oh five s time it was. It was an old one and actual I'll tell you though, I loved it for the time it wasn't in the shop based it was literally you know, in the shop and

every other day. But boy, when it wasn't, it was a fun car to drive, to say the least, that is fun car. What's the most important thing that people don't know about Scott Cooper? Uh? Well, I tell a little bit of the book, but I am well, maybe the most important thing is. Look, I'm a I'm the most introverted person probably you will ever meet, which I know sounds funny. I can, I can? I right, I

play I play an extrovert on TV. But you are not the only uson who What I like to do is I like to go home and read a book and sit on my couch and watch Netflix. And right, I am right there with you. Who are some of your early mentors. I was actually mentored by a family friend, a guy named Armand Weinberg is his name, and Houston uh and he ran um at the MD Anderson Hospital, which is a very famous kind of you know, cancer hospital.

He ran a bunch of studies around you know, kind of early cancer prevention, and so we did some research on you know, how do you detect and prevent breast cancer or prostate cancer? Thinks that sort, and it kind of got me into My initial love was kind of health policy and things of that sort. And uh, you know, he gave me jobs over the summer and did all kinds of stuff that helped me kind of get into that field. There's a lot of fun. Uh, let's talk

about your favorite books. What are some of your favorite books, be they fiction, non fiction, um, investing related whatever you enjoy reading? You mentioned, but yeah, I love Uh I only read non fiction now. Uh isn't that terrible? I'm the same way and I miss fiction from my child too. You know, it's funny. I never was a big fiction reader growing up. I never, yeah, never got into that, not really. I mean, I you know, I read a few of them here and there, but into nothing, no,

I I you know, look, truth be told. This is terrible to say, uh publicly, but I was I was not a reader growing up at all. I hated reading and in fact, I'll never forget this. Um, hopefully my college, Uh teachers aren't listening. But when I was applying to college, you know, after my junior year of high school, I got the applications and I was applying. Actually, Harvard was one of the schools I applied to. I did not

get in, by the way. Um. And you know it said, tell us about the last three books you've read, And you know that's one of the questions. Well, no, it wasn't. I said, Oh my god, I've got to go read three books. I read three books that summer. It was the only three books I read, and I really, oh god, between Vonnegut and books were great and high school and then college. The problem with colleges they want you to read books that for a purpose as opposed for pleasures.

So so I love I love nonfiction stuff. So like one of my favorite books is Master of the Senate, which is, you know, the book about Lennon Johnson. I think that's really cool. He's got that whole series. I think I've I've read all that. Apparently apparently he's got one more coming out about how he does his work, prices.

It's it's supposed to be fabulous, But I was gonna say it's gonna nine our pages and you know, and uh, you know, obviously he's you know, he's not a young chicken anymore, and so he's got to get it done before. But his work is quite brilliant. He's great. Yeah, I'm reading a book right now. I'm gonna blank on the title about financial bubbles and speculation, which is really interesting. It's called it's called Devil Take the hindmost is. Yeah,

it's an older book. It's actually I hadn't I couldn't believe I hadn't read it, and I ran across it somewhere. Um, and that's interesting. Um. And I'll, you know, I'll pick up some you know, lighter stuff every now and then, but I generally tend to try Edward Chancellor. Yes, yeah, this is a pretty pretty famous book. Yeah, it's a good book. It's very good. Give us one more, one more? That is exciting. Right now? What am I reading? Um? The guy who runs the AI Institute, I'm forgetting his name.

He has a book out. It's actually called Love or Love Yourself or something like that. It's a very interesting book about kind of you know, it's a it's a book about modern politics, and about how, you know, kind of bifurcated. Obviously we've all become and this concept of you know, his general view is, look, you know, it's a lot of this his breakdown of human relationships. So

I got a copy of that. Have you read it yet or I'm kind of I'm kind of like alright, So I got a review copy of it, and I recognize his name and the pitches we need to love each other more and we need to be more involved. And I'm thinking, wait a second, AI, you're the guys who said the poors cord of the crisis, this was all the fault of you know, first we did anti redlining and that and this whole thing about it was the black and brown people's fault. Wait, now you're pivoting

to maybe this is his swan song. So the story I know, right is he's quitting AI after that. I didn't know. So, yeah, he's he's been there ten years. It's terrible. I can't remember his name. I apologize, I'll find you. Probably, so he is leaving AI after ten years. In fact, he had really interesting Arthur Brooks. Arthur Brooks. So, so when I got this from my editors, here I said, you don't mind if I, you know, remove these guys this guy's intestines and jump rope with it, because that's

after after how divisive. So there's a whole another thing that in the old days, think tanks used to be think tanks, and now they've become these partisan idea shops and policy shops. So like, wait, after two decades of sheer partisan rancor, you're gonna tell me you now want everybody to hold hands and seeing kumbaya? Right, And I can't say what I want to say in the radio. But so I have not read it. But if you read it, I want and you like it, I want to.

So I'm glad somebody I'll give you the review because, to be told, the reason I have it is because it was it was a free b at a conference I was at, so I might not have seen it otherwise, but that's saw him spec See, I'm more concerned about the than the cost of the book than my time commitment to read it, because it's ten or twelve hours that you'll like. And I've learned my my, I'm gonna share one thing with you. I've learned that when you start a book and you don't like it. You know,

I was just gonna say that. That is somebody actually took a long time tots and one of my partners told me that, and boy, that's the most liberating thing I've ever heard. I agree. I never would do that. I would I would do the fourth March through the Baton Death March through the last hand. It is so liberating to say, Okay, look like I think I got it, and I think I understand the point, and you know, or you know, let me skip a couple of pages

here and there. Nobody nobody should skip my book. Of course, I gotta go eat every word from start to finish. You gotta plow you a way right through it. Um. So what VC influenced your approach to venture investing? Yeah, so we've had UM. Probably one of the most interesting ones was a guy named Andy Ratcliffe, who was actually

one of the founders of Benchmark. You know, I don't know him, And he was at a firm called Merrill Pickard actually, which is where a bunch to the Benchmark team spun out and and he was a little bit more on the enterprise side, so he did a bunch of their enterprise investing. But he was actually, um, he was the original investor in loud Cloud and opswere and so I just got to know him through that process.

And uh and I have a few references to him in the book in the book there, but uh, you know he's he's his His famous thing that he talked about it Benchmark was this concept of markets versus teams, and uh, you know, basically he's got you know, his views. Look, which I think is true is you know, good markets always beat good teams, or I should say bad markets. Sorry,

bad markets always be good teams. But you know, obviously you know, good teams can you know they can survive in a bad market, but will never likely you know, never likely kind of get there. All right, now we're gonna do the speed round because they need to take you to where of you going next. Tell us about the time you failed and what you learned from the experience. Yeah, Probably my most high profile failure was actually when I

was applying to schools. I desperately wanted to go to Stanford, uh, coming out of school and was flatly rejected as I was at Harvard, as I mentioned, but you ended up going. I did end up going, So I went to pen actually for one year out here on the East Coast transferred. Yeah, but it was a you know, this little persistence persistence. Um. What do you do for fun when you're not in the office or home reading books? Yeah? I like to run.

I've always liked to run. I used to be a marathoner, but kind of had to hang up, hang up that those shoes before. But STIPs, uncles, what is it? You name it? All those things? You know? Uh? And then I I like guitar, playing guitar. I'm not very good at it, but I'm always I've been a country music fan for a long time. So interesting, um our final two questions. A young millennial comes to you and says they're interested in a career in either venture capital or technology.

What sort of advice would you give them? Yeah, my best advice is go into a startup company. You don't have to start your own company, but learn the company building process. Don't don't go to venture you know you will be a much venture better venture capitalist having understood the company building process. And my final question, what is it that you know about the world of investing today that you wish you new twenty plus years ago? Yeah?

The biggest thing for me is I always I would have thought that most of the failure cases would be product or market failures, and and look that happens sometimes. Look sometimes the product just doesn't take or the market changes. The biggest thing that I found over the years we've been doing this is it's all about the team. And I know that sounds almost you know, kind of you know, comical to say, but I thought you're gonna say execution.

I mean also embedded in that is execution, right, you know, are you hiring people at the right time, are you thinking about your go to market the right way? Do you have the right cultural dynamic in the company. Those are the things, you know, when we look at the companies that go awry in a good market, it's almost always something like that. Huh, quite quite fascinating. We have been speaking with Scott Cooper. He is the managing partner

at Andres and Horowitz, now running ten billion dollars. If you enjoy this conversation, we'll be sure and come back and check out all our previous such conversations. You can look up an inch or down an inch on Apple, iTunes or wherever your finder podcasts are sold and see any of our previous two hundred and fifty such conversations. We love your comments, feedback and suggestions. Be sure to write to us at m IB podcast at Bloomberg dot net.

Uh leave a review for us on Apple iTunes. You can check out my daily column on Bloomberg dot com slash Opinion or follow me on Twitter at Rid Halts. I would be remiss if I did not thank the crack staff that helps put this together each week. Michael Boyle is my producer, slash booker. Attica val Brand is our project manager. Michael bat Nick is my head of research. I'm Barry Ri Halts. You've been listening to Masters in Business on Bloomberg Radio