Welcome to Syntax. You want to raise a bunch of money? We got Dan Levine on today and he's a VC. He's invested in... a bazillion different companies. Probably you'll know he's invested in Vercel and Sentry and Mux and Scale AI and a whole bunch of other ones. He's a really cool guy. and i thought let's have him on and talk to him about how to raise money you're listening to this podcast you probably have had ideas for things you want to build and what is navigating that this
whole thing of raising money and what can you do with that money and how does this whole world work? So welcome, Dan. Thanks so much for coming on. Thank you guys so much for having me. I've been a big fan, long time listener, first time caller, I think is the right phrasing here. And I'm up to try and do my best. Although I never promised results. I've been telling my wife I might grow hair for years. I haven't come through.
Don't be alarmed. You want to give us a quick rundown of who you are and what you do? Yeah. So my name's Dan. I work at a place called Excel, which has been around for... 42 years and my background before this was i was actually pretty interested in math and that's what i did most of my undergrad in and then got into software engineering because i worked at this one place they're like you're really good at math but like you have to do something with it so you need to learn how to write software
so that's how i got into programming and then the next summer i did a bunch of web development stuff back in the summer of 08 uh is that right yeah the summer of 08 and then i got my first job ever as like an engineer working on crunchbase which was owned by tech at the time
And then started a company called Chartio, the database analytics and went through Icombinator, then Excel, then Dropbox, then Excel. And in Excel, we're a venture firm. You know, so exactly like you said, I mean, I always tell people we. try and find great people and back them. And we invest primarily at the Seed and Series A. That's where I spend my time. Excel is a pretty big firm and we invest at a bunch of different stages, but we're most notable for things like
Actually, my favorite first investor of ours that I remember is we were the first investors in Macromedia, the creators of Flash back in the day. Yeah, really? Oh, wow. I did miniature golf in seventh and eighth grade during whatever class, but shockwave golf. It was like Lifesavers branded. I don't know if you guys remember this. Oh, I do. Yeah.
Oh, yeah. I was like, why is this Lifesavers branded? It was very unclear to me. So that was an Excel investment in the 90s. And then more recently, in the 2000s, we were the first investors, the Series A investors in Facebook. We were the first investors in Atlassian. We were investors.
linear we were in dropbox slack and then i personally have had the total privilege of getting to work with the teams at scale versell century mox and a bunch of wonderful companies um yeah so that's that's kind of the high level we do and You know, our job is to invest in great companies. So we're always looking for great companies. And one of the things I always think about is it's like a marketplace. So I think there's watching this who are wondering about what it's like to raise money.
But you can almost think in the reverse. I'm like watching podcasts like this to think about how to like raise equity. Right. Like I, you know, you might sell equity and take on capital. And I am actually like looking to take on equity and sell capital. I mean, that's like my whole job. So it really is a marketplace and it's it fascinates me to no end.
Hopefully you get to help invest in some companies that change the world. Yeah. Was your path coming through tech, is that a common path for people who wind up becoming investors in tech? Yeah, I think there's a lot of different archetypes, right? So I think the archetype that everyone hears about that is kind of less ideal for builders, I think. But there's lots of wonderful people. A lot of people come from the world of finance, right? In some sense, venture capital is like...
It's like private equity. In fact, it is a subset of private equity to make it as scary as possible. That's actually what it is. And for them, it's like this really fun job. I always tell people it's the best job on the buy side. What does that mean? Well, you get to go live in the Bay Area.
wear a vest instead of a suit, you know, and like, you know, you invest these companies, but like, you don't actually have to run the company, right? They kind of run themselves. You don't have to do that much work after you invest.
And it could go pretty well. So you feel excited about it. That's one way of thinking about it. And I think you have people from the finance background. And I work with some of those people, and they're wonderful. Sometimes there's a lack of empathy that people can have from that background. But there's a lot of people who are former founders.
I briefly am one, but not a very good one. There are a lot of people who are former operators of companies. So like, you know, if you thought about my partners, like one of my partners found a company called Related IQ, which is all to Salesforce. Another founded company called Mopub. Technically there, and then they sold to, oh, God, Mobup sold to Twitter, actually. Now X, I guess, but then Twitter. And then we have a bunch of founders who are...
team members who are engineers, kind of smaller founders set that I think it's pretty common and becoming more so which I think is really good. That's great. So someone listening to this podcast especially with all the ai stuff going on right now people have ideas and being a developer one of the coolest things is is you can make yours you can make you can build stuff right you can just go ahead and build stuff which is really cool but
a lot of people might not know like what is that next step of i have built this side project and i think i want to make it bigger but it's something that i can't necessarily bootstrap what do you do to As a developer, how do you go out and raise money? What does that even look like? It's really hard. I mean, so it shouldn't be that hard. That's always a bummer. I think the first thing is, and I should say this, and I think every investor should, like email me.
I'm Dan at Excel. I respond to all the emails I get as best I can. I do my best. Probably mentioned that you listened on Syntax and that's how you heard about it. So I think investors are typically... They actually respond to inbound quite a bit because, again, we would like to invest. And one of the cool things about this industry is a lot of the great investments feel like they come out of nowhere.
They feel like they're often from people who are younger than you would want to entrust with millions of dollars or from backgrounds that are more irregular than other investment roles.
yeah we're not like the local bank trying to help out the local restaurant or some capital intensive business that needs to buy like a machine which is wonderful by the way you know our job is to find generally speaking like small teams maybe one person two people teams who are building software which and i love software it's like made my entire life but like it's quite intangible
So you kind of have to believe it can come from everywhere. Like I was actually just talking with Guillermo from Versal and like, you know, he first started working on Mood Tools as like a teenager in Argentina. You know, and David from Century was in the middle of America, like working on WoW stuff, like World of Warcraft add-ons and tools. So Armin, you know, the creator of Flask was working on like PHP for him. So investors, good investors know that.
And as a result, they take quite seriously people who ping them, especially if those people are builders and are like, here's a link to a thing I built, you know, or here's like... a high fidelity mock-up even of how i'm thinking about the world so the first is ping people the second thing would be you know if you know somebody who knows an investor
It always helps. A lot of the companies that I work with are people I've known for a couple of years. It doesn't mean you can't ping me out of nowhere, but you might have to get to know me a little bit because it raises my confidence that I think you're a good founder and could be great. I don't make that many investments.
But the second way is you can bootstrap that confidence by having somebody who knows me say incredible things about you. I think that goes a long way. And then lastly, I work in Excel, and those are the two first things that... I recommend those first two ideas. But the other thing you can do is there's wonderful things like Y Combinator out there where they have like a more strict application process. You know, I went through YC. We back lots of YC companies.
And it's not for everyone to be clear, but I think it's for a lot of people. And one of the advantages is you can kind of think of them as like having productized this process in a way that is built for. the this constituency this audience um you know i think a long time ago venture capitalists probably wildly underestimated builders much to their detriment traditional venture capitalists then things like yc came along and it was like you know drew from dropbox who just built
a tool like on the bus to, like the Chinatown bus between New York and Boston, I think, because the original Dropbox story is like, it works. You know, and I've seen the original Dropbox post on Acro News, I'm sure, where everyone's like, this is just arson, I can do this myself. But it turns out, no, you've got a great company.
So, you know, I think there are places like that where you can apply and get more of a transactional feedback approach. And the YC has versus somebody like me is, you know, they'll accept, I haven't talked to Gary this recently, but I think they probably accept. a little over 600 companies a year. So they have a much wider net, which in some way translates to they can go a little, they can conceptually take more risk, which might mean earlier, might more mean on people who are less well-known.
then i can take where i'll do three investments a year personally excel will do more than that but but still commensurately fewer okay and then someone who's got like an idea of like chat gpt for dogs they come to you and say I've got this idea. Do you have to have like a business plan in place or is it just a conversation? And on that, like how much money should somebody like that be raising for their initial, I guess, like a seed?
This is why I'm a bad interviewer. I'm going to give you the answer I would give you, which is going to get maybe a little weird. So feel free to raise a hand and be like, you're going too deep. So they come to me, and should they have a business plan, you asked. I personally think...
Almost certainly not. I'll tell you the criteria I think about when I invest in a company at any stage really. I say two and a half things, and the half is mostly because it just matters a lot less. The half is basically if you've been working on this for like 10 years and you've spent $100 million.
And I don't like the first two things. I've probably messed something up. I'm on the take. You might be my drug dealer or something. So don't worry about the half so much. That's basically given time and money. Like, why haven't you accomplished more? The first two things overwhelmingly are the team.
And I'm a venture capitalist. We love to hear ourselves talk. We love to be on podcasts. So we have something in the team. And we don't think we'll be replaced by AI, which I'm skeptical. But so there's the team. And within the team, there's four things. The first piece is, do I like this person?
You know, a lot of my job is hopefully I'm going to be working closely with them. I'm going to want them to succeed. And I also want to be telling people, like, you should work for this person. And I think that's like a really sacred, important thing. I really want to like the person. You know, I'm not going to get it right every time, but.
Life's too short for me to invest in people I don't like. Yeah. So I like them. The second two things are, are you capable of hard work and are you capable of intelligence? My overwhelming preference is you could be dumb and lazy and it would go well. But I really like having the option just in case. It's like really useful just in case we need it. Yeah. The last thing on the team is can you recruit other people? Typically...
The greatest companies of all time require some, no matter how shallow the exponential curve is, some curve where you grow the team. It could be slowly, it could be small, but you're still growing the team. And, you know, it's not not easy.
to grow a team. And you often can have unfair advantages there. So the team is the first piece, and those are the four dimensions. And then the market is the other big thing I look at. And I think about the market as two things. The first is, can this be really big? And I actually don't expect most founders to have any sense of it can be really big. I kind of think that's on me. I have to be able to tell some story. I have the luxury of a non-real job. I don't do everything all day.
You're like, I'm not actually writing code or dealing with HR issues in my company. It's easy to have, like, vision. You know what I'm saying? It's easy to be like, I have ideas. So, you know, I hold myself liable for how big can this be and why.
I think it's great if a founder can do it too, but it's not required. And the second thing, which I think is really valuable for your audience, and this is like a largely learned from something like Y Combinator, is I really care about your initial insertion or wedge. I think... The company that survives towards like the T1 or T2 moment had like a pretty good T0.
Right. And they iterate. That's like the reality of how companies kind of develop. And especially for people who build things like the greatest thing you have is you can build it. So. You don't have to have it done. It doesn't have to be perfect. It doesn't even have to have a lot of users. But I think having more resolution on your wedge, your initial insertion into the market is really valuable. And it's something that I think...
builders tend to like they've for their own purposes like do i want to commit my life to this they i think like knowing what the ledge is um but it can be a really small innocuous wedge and that's okay but i like to have a good wedge where you can kind of
You can learn a little bit about how they take feedback, how they think about the market, how they think about their first customers at a very like loose level, but it's all benefited by here's a wedge. That's great. And how do you decide how much money you would need for your thing? So this is the weirder part of the answer that I foreshadow, which is, again, it's a marketplace.
So in my seat in Silicon Valley, I think if you're just getting started, I think there's three high-level types of rounds that are 95% of the finance that gets done. So the first one, which I'll put aside pretty quickly because I think it's less relevant to this audience, is maybe you're a repeat founder. You're the builder of a very popular open source project. You know the investors really well, that you're an executive company.
Maybe in some of those rare instances, you could raise kind of a traditional Series A, and this is all changing, but you could raise maybe $6 to $15 million with just an idea. And that actually does happen. Our first investment in a company called Heptio, which was from the creators of Kubernetes, was that.
and so there's a few and you're like well you built kubernetes like yeah you kind of know the people you know they have a track record that's right and that's even even amongst people you know in the tracker because that's that's more rare for a variety of reasons but it does happen the second one which is maybe like
The second and third are the more common ones. One is what's now called a seed round. We would think about this as our check is something like $1 to $4 million. We're typically buying 10% to 15%. You won't have a board seat. We often use something called a YC safe that YC worked on and honestly consulted with us on, which is wonderful, but they get the lion's share of the credit. You kind of are like, that is a very typical round. So those companies, I think you still probably are like.
a relatively well-known founder, you've gotten pretty far with your initial prototype or your wedge. There's some variable that makes you a little bit a cut above for just getting started with a project, and you can do that.
And then the last thing that's becoming more common, and there's like inflation of these rounds. Like I always tell people when Excel started in 1983, we were a series A firm. And the reason we called them series A's was I swear to God, it was the first letter of the alphabet.
And then somehow we kept screwing this up on a recursive process. The last thing is pre-seed or friends and family. This would be like where your lead check might be less than a million dollars. You're just trying to get going. Maybe you have some friends you worked with at a company.
your friends literally and or family broadly are willing to believe in you because you believe in it so much. And on the one hand, it's a very scary thing to raise money for those people for a new idea. And you should be careful and take it seriously. But I don't think it could be this great opportunity for them. So those are the three different amounts.
The second two, the seed, the $1 to $4 million from a lead investor versus $500K to a million or something for a lead investor, those are probably the two we see the most commonly. And it's really what the market will bear, which is the annoying part about it. and even worse you kind of have to have a sense in advance of which one you want to go for because they're kind of like um they're kind of like both local maximas and there's like a little bit of a challenge in between
But typically when people talk to us at Excel because we're a larger firm, and this is much to my chagrin, they think of us more at least in the seed, the $1 to $4 million. Okay. If you want to just raise $300K, we're probably not. The market clearing you'd probably rather talk to smaller people individuals angels and things like that, but yeah Yeah, and and our people going like like say they come to you for four million bucks Are they also hitting up other investors for for that?
Yeah. Yeah, typically. I mean, I always tell people, and this is something I learned having gone through YC and the deal on the other side, you know, investors are interestingly their own worst enemy frequently. I think it's a healthy thing as a founder to create a market. right? You really want to have multiple options. And there's actually a lot of good reasons for this. A lot of investors think they want...
you'd have no market. And that can be nice if you know what you want. But investors tend to take too much time and be slow. And I think in particular, builders are kind of like, why is this person? There's not much here to evaluate. What are we doing here? And so it works against the investors. Sometimes the investors do things like, oh, well, I can offer really bad terms. And what I always tell people is, no, these people probably know somebody else.
And they'll ask, and now you just look like a jerk. So you should, even as an investor, if you think you have a proprietary advantage, you really want to treat it like there's a liquid market and you have competition. And I think the best way to mimic that is a founder should do that.
Now, I also think a founder should say, is there a person I prefer? Are there good enough terms? It stands to reason the best terms aren't always from the best investor, much less the best investor for your company.
So you want to be mindful of that. And if everyone behaves accordingly, I think a good investor offering great terms can offer them first. And a founder can take them. And that's wonderful. I have no issues with that. But everyone should kind of be on best behavior. And the reason that this all works in my industry is...
And, you know, this isn't always what you hear on things like Hacker News or something. And there's definitely challenges with venture capital sometimes. But we do well. It's very positive some when we do well. Like we are not a form of finance that makes its money. On like the terms we use, you know, like price obviously at a high level matters, but like
We're really trying to build these huge companies. And in fact, that's a good example of the kind of company that really shouldn't spend time with venture capitalists. They're wonderful businesses. My father started a small, successful law firm that did tens of millions of revenue. But of course,
For one, it didn't grow that much. And two, you pay out all the revenue law firm to the lawyers. It's a partnership. So it doesn't have equity value. And that's still a wonderful company. But it shouldn't raise money from venture capitalists. There's all kinds of wonderful businesses, including in the software space, that shouldn't raise your venture capitalists. And I think, one, venture capitalists should know that and should make sure to inform people of that.
And two, I think founders and traders should be like, do I really want to go for it? Because definitely our model is most focused on these big outcomes. Yeah. Who doesn't need VC? Sorry, Scott. I keep jumping in here. I have so many questions. You're too fast.
Yeah. There's a lot of things that don't need VC. Like I do think one way to think about it is the good news about venture capitalists compared to other forms of financing is it's equity. And we don't believe it or not. Venture capitalists have very few. We mostly have what are called defensive rights, which is we kind of have the right to stop a company from the worst case scenarios doing things that would basically harm us unilaterally. So an example would be.
You know, you can't necessarily, as the CEO of the company, like pay yourself a massively exorbitant salary because we could give you four million dollars. You can decide your salary should be two million dollars a year. And that was.
on my list of questions yeah you know your lawyers and we would tell you should probably check with us and we should sign off because otherwise you create kind of some some litigation risk for yourself another example would be you can't necessarily issue yourself a ton of shares
Right. You could issue a lot of new equity, which would dilute our shareholdings. And then you could give it to yourself or your friends or even your employees, which could be really well intentioned. But, you know, we need to have a. a say to an extent, and we should never have a say in a penalizing way. We should be reasonable about it.
But we should have a say to make sure that it's not egregious for the most part and that there's a discussion about it. I mean, that's an agreement you make when you raise venture capital, right? The same is true for selling the company. We typically have the ability to stop a sale of the company. And again, this is usually a bad place to be.
I've never exercised a block on selling a company. I'm sure it could happen, though, and I've seen it through. It's good. But you mostly just want to be in a situation where the founder talks to you about that moment. But it's important. You are agreeing to this partnership.
where while we can't make you do anything, we can stop certain things and you should be careful. So in that sense, but what do we not have? We're not debt holders. I can't like, you can't breach covenants and I can't foreclose on your business, which is really valuable. But basically what I can do is become a passive investor over long periods of time for the most part. And that's much better than debt and better than other forms of finance that exist. Yeah.
And so in that sense, it's cheap to the downside. If things don't go as planned, it's very cheap. If things go really well, you sold equity. And that means we get a lot of the upside. And so it's very expensive. if in hindsight it's gone very well you know we can invest relatively small amounts of money and make prodigious sums
because we own equity, because we're so focused on the upside. So I think those are the two parameters of like our place in the financial world. And so if you're a founder who, for instance, you can build a software company that doesn't require outside capital.
That's a great place to be. I mean, that was Atlassian. GitHub did this for a while. Braintree, Qualtrics is an incredible company. ServiceNow was started, was bootstrapped largely until they ever raised capital. And these companies built... 1Password, incredibly valuable companies and businesses without ever raising outside capital. I think everyone should at least strongly consider that, especially in software. But we would agree, sometimes in software, you need to hire a lot of people.
upfront, there's a cost. Maybe you are more of a sales driven business, an enterprise sales driven business. And it tends to be the case where you hire salespeople, you start paying them, you have to ramp and train them. They sell.
And then you get a paycheck for your customers. And so that tends to be – that has a working capital problem, which can be covered by venture capital. So there are a lot of businesses that I think don't necessarily need venture capital. But I think – that's where the market bears is there's enough businesses where it's worth it because of the characteristics of the financing like honestly and i you know different people have different views of this
I think if you create a liquid market, venture capital as an asset class doesn't perform that well, in my opinion. So it's not like venture capitalists broadly are getting some great deal, right? If they were, you'd see these massive outperformances of the asset class.
So it's kind of a market clearing thing. And I think some founders do bootstrap companies, which is wonderful. And that's a great thing. And that should always exist. And frankly, I think there should be more of that personally. But I think there are some founders who then raise capital and maybe have some regrets about how much they've sold.
You know, I tend to feel like those founders have done pretty well for themselves. I get why that happens and there can be some buyers and worse, but mostly it's been okay. And so I think it's kind of an economic clearing act and it works out pretty well. There's definitely...
things on the edge that aren't perfect. And you hear about those more, right? Of course, those painful moments. But yeah, I think it works itself out. And I don't think many people where it goes well have regrets. Even people where it doesn't go well They probably have fewer regrets than they maybe realized at that time, you know, versus the debt provider or something. Yeah. I mean, you hear the cliche often that like, oh, this this company had to pivot or they had to.
drastically alter their business in a negative way because they took venture capital now they're they're beholden to that like how much influence is there really and i guess do multiple investors then complicate that anymore and and yeah yeah how does that all go
It's a good question. I mean, I think one of the reasons founders are such an interesting group of people is it's like a crazy thing to do. I mean, you guys did this, right? Like, it feels insane to kind of start working on this project and try to monetize and spend less time on more obvious ways you can make money. And to keep doing that is quite intense.
I think when you raise venture capital, I think most people know the deal they're walking into, but it doesn't mean you won't change your mind later. So that's one thing. The other thing is that I think all things are challenging. Venture capital probably corrupts incidentally. And I don't mean that in some evil way. It's kind of like you're the average of your friends from what you care about and whatever.
Are you well-read or not? Well, if your friends are a smart group of friends, you might do more of it. If your friends are JavaScript developers, you probably spend more time in JavaScript. If you're venture capitalists and venture-backed companies, you might all of a sudden raise your view of what you need to do. And I do think venture capitalists...
often can put too much pressure on companies at the worst moments. You know, starting a company is kind of an emotional roller coaster. I think venture capitalists could do a lot to be more empathetic. I mean, there's a huge crisis there. But for the most part, venture firms don't make companies do things. Now, they can in certain circumstances, older circumstances. If you have enough investment that you've raised from outsiders, they can.
if the group of investors agrees on something, cause problems. But no, I think it's usually more subtle reasons that venture capital causes problems for companies. So, I mean, I'll give you two examples that are like – or three. I'll give you three examples, two that are very funny and personal and people can check because these are public with me. And then I'll give you like a more generic example. So, famously, like Sentry changed its license, right? And this is a thing people know about.
And Hacker News and the change of license, which originally was to the BSL, I think. They, like I said, the investors made them do it. And I replied on the Hacker News comment. I was like, I think I'm the relevant investor. And I wasn't even insulted on the change. And by the way, I think that's...
I think that's wonderful. I probably would have disagreed, and David and I have tried this a lot, but it's his company. It's the people who run Senshi. They're running the company, and my job is to support them. I'm not some expert on license changing or the community management stuff. That I think is relevant there. And when I invest in a company, it's because I believe in them.
It's because I, it's like one of the most important things. And my job is to help and be supportive, but it's not really to tell them what to do. So that was one good example. The second one that's funnier and lighter weight was when Zeit rebranded to Vercel. Yeah. Packard is common here. And somebody was like, they did it because the Excel, their investor Excel made them do it. And I was like, no way. Yeah. You know, it's for totally different reasons. There's a rebrand. And again, even.
And then, like we did the libretto, Guillermo was running it by me. And he was like, what do you think? What do you think? It doesn't matter what I think. Like, you know, I think it's a privilege that hopefully I earned the right that founders asked me for advice and they may or may not take it. But it's a privilege.
It's not a right, in my opinion. That's not how our investments are structured. But more subtly, I'll give you examples of things that happen with venture capital that are subtle and complicated and might be the fault of venture capital.
And they all stem from the same thing, which is intrinsically at some level, software companies are remarkably efficient businesses. Yeah. It's kind of a baffling thing that like a SaaS company, you can expect it to have like 80% margins where people pay you annually up front.
I mean, this is a wild business model. We've never seen anything quite like it in the world. It's better than drilling for oil. Anything you think is a good business, this is basically better. And so interestingly, when you raise venture capital, you're basically saying, There's an upfront investment that we want to make.
to try and, over long periods of time, make that compound at a faster rate. That's kind of the implicit agreement you're making. But there's a lot of places you can invest that are very inefficient. It turns out it's hard to invest millions of dollars appropriately in building a business, right? It's really hard.
sure you guys have thought about in the early days of syntax before the acquisition, like, okay, what would we invest in for it to grow faster? And you obviously were right a lot, but I'm sure there are things you tried that didn't work out. And that's totally normal. So venture capital-backed companies can make... more investments in parallel, and that's the point, but oftentimes they don't hold themselves accountable to those investments enough.
And it's because they don't have to, right? Like a bootstrap founder kind of has to, there's no choice. And sometimes that stress can be too much. You might want to have some buffer, but you can imagine if you have too much buffer, then you might like kind of... a little bit lose what i call the fitness function like the feedback cycle with your customers yeah
And so that's like the subtle, nefarious way that I think venture capital really hurts companies. That's not usually what you hear people complain about. People usually complain about more aggressive versions that were a little more obvious. But I actually think in general... bad investing on the margin because you can is where venture capital really causes distortions and problems, right? And it's easier to lose sight of like your customers and your audience, your community.
when you have more cushion. But I'd also say, and you guys have done this, like, it's scary to be bootstrapped sometimes. It's hard. It's so stressful. And you're competing with companies with all this capital and stuff. And you're like, oh, God, like, if I just had a little cushion, that could make a difference. And it does. That was Century.
You know, when I invested in Century, it didn't need capital. But David and Chris and I, we felt like you guys could do a great job with more capital on some kind of what we felt was straightforward stuff. And thankfully, we were right. you know, that goes wrong sometimes. So that's a good example where I think venture capital was helpful, but it's not a panacea. It's not perfect in every instance.
But the subtle ones are the harder ones. The venture capitalists may just do it. Typically, what happens there is venture capitalists might offer advice. I think many venture capitalists, I give a lot of disclaimers before I offer my advice. I always tell people, my favorite thing I tell people is, if I had...
such good ideas with such high confidence, I'd start companies myself, you know, and I would make way more money. Like I can acknowledge that I don't have high confidence in my advice, right? But as a result, it's also, it's lonelier for a founder.
I think sometimes when you're a founder and you're stressed out and it's difficult, you kind of want to have somebody else tell you what to do so that it's less lonely and it's not all on you. And I think my view of the world is double-edged, double-edged, two-sided. Which is, I think founders are the most important thing. I think they get to make the decisions. But I also think in some sense, and I feel bad about this, I make it more stressful. It's not because I'm...
You know, I'm not doing anything actively. It's just that I'm not providing, you know, this veneer, this fake thing of like, oh, we made a decision. Yeah. No, like you made the decision and I think you're great at it and I believe in you. But yeah. And if you want to see all of the errors in your application, you'll want to check out Sentry at sentry.io forward slash syntax. You don't want a production application out there that, well, you have no visibility into in case.
something is blowing up and you might not even know it. So head on over to century.io forward slash syntax. Again, we've been using this tool for a long time and it totally rules. All right. Yeah, that was what I was going to ask next is how involved it actually is. Obviously, you bring money to the table. There's probably a lot of connections that you can introduce people as well.
But like, what does it look like if someone were to raise money? How is their weekly calls or whatever? You're obviously not working in the business. And often people come to you for advice. You just said, like, sometimes you'll have a bit of buffer room.
It's really different. It's very bespoke. Different founders need different things. I mean, if I use just, I'll just use Century Scale and Vercel with some examples. So Century was the first investment I led at Excel. I don't know. I think I helped with a little bit of early hiring, but honestly.
David and Chris already knew a bunch of the great early people, you know, Armin, and, like, they're folks that they knew well and hired, so I didn't have to help too much there. I think maybe the most valuable thing I – I don't know. We should ask David. It would be a good response. But I mostly like –
encouraged him to believe in himself more. And I think the mistakes I made with Sentry were sometimes not encouraging him enough to be a true believer. And I think there were moments where I could have done better there.
But you kind of help with the early team, a little bit on hiring, maybe some customer instructions. But Sentry, I probably did. God, I should really ask David this because Sentry, I feel like I don't have a great answer for. I probably didn't do that much beyond the capital early on. And then over time, there was this. I think early on, it was like really helping them believe in their vision for investing in particular in product engineering, the brand and being themselves.
And then I probably went through a period where I feel like I did less well. I don't think I ever discouraged them from doing that, but I think there were other voices around the table who wanted to try different things. And I probably could have done more to... counterbalance that and encourage David and the team to be more authentic. So I think about that as like a regret I have for scale, which was my next investment where I took a board seat, you know, the first engineer there.
Nate Herman, who's amazing. I knew a little bit from Dropbox. We had mutual friends, and I referred him to the company. The first business leader there, a guy named Matt Park, who's incredible, who became the COO at scale and ran all the operations for the business, was a really good friend who I convinced to move back from New York.
His wife was doing her residency one year early to come back to the Bay Area and join this really small company. I helped them with some customer instructions and helped them close some sales. And I even would test out the tool and play around with it. So scale, I did quite a bit in the early days.
But again, it pales in comparison to the founders who do way more. I can't stress enough. I don't want people to walk away from this thinking I do a lot. I think I do a very small amount and mostly I try not to screw things up. But slowly granting these things your reputation and who you are. And that becomes more impactful. And then with Vercel, I think a lot of it was just being like a person to build a building relationship with Guillermo.
And I pride myself on this for good and bad. Like I'm willing to – if people ask me for my advice, I always tell them you don't have to take it. But I push back. If I disagree, I disagree. I can't really be fired so much in my job, which is a crazy thing. And I take it really seriously. But it also means it's easier for an investor and a board member than almost anyone else to try to be honest.
It's not that fun, by the way. I don't think all the founders I work with always appreciate it, but I am just trying my best on behalf of the company. So I take that seriously. And I think over time, if you do well, you really build a trust and relationship that can be really valuable in critical times. So I think that was a big part of it.
Vercel went through this period of, again, a lot of it is like belief. Like Next.js had been going for a couple of years before I invested and Zite was going, but they were kind of two separate things-ish. One was like Docker and Lambda, and then there was Next.js.
You know, people were doing pretty simple stuff with Next.js, but I think I helped give Guillermo the confidence to make the call to be like, we're going to become more and more of the Next.js company and we'll do static hosting and then grow. Yeah. So it was really his vision and everything he did, but I actually think I...
I helped give him the confidence to do that. And then the same thing, hiring and stuff. Like even now with Vercel, they just hired a wonderful COO, Gene DeWitt, who'd worked at Stripe and Google before then. And I have to know Gene personally and can help. And their previous CRO, Tomer, who's now at Cursor, is an old friend of mine. And I got to be able to be helpful there.
So yeah, you help on hiring and stuff, but it does change. When I was younger, it was more sweat equity, like helping and grinding and being positive and trying my best and believing it before others did. And now... I probably have the luxury, although it makes me feel more useless of a little more closing executive candidates and convincing people like this is a great company. I believe in it. So should you. Yeah. So like you're watching a company and there's an.
early-ish indicator that the company is going to fail. At what point are you really making more... firm suggestions and like also i guess what are some of those early indications that like it's not going well
First of all, it's really hard to tell when it's not going well. I know that sounds like a weird thing to say, but I'm like a big student of the history of technology companies. And like, you know, Airbnb famously had a difficult couple of years. And, you know, again, like the I think Vercel is an incredible company, but the early on period of. Zeit like it took longer than what people think of like you know even like Cursor which is everyone's darling now
was a CAD tool for a while and then kind of pivoted. Figma took a while to do well. Airtable took a while to do well. Notion, I think they have a famous blog post where they describe going to Kyoto and coding in their underwear or something. I can't remember what it was. So I think companies frequently take...
longer than people think. So I'm like very patient. And the founders of Mux, John, one of the founders of Mux, he basically, I guess he described him to somebody else as Dan really believes in exponential curves and compounding. And like, that's like the only thing he believes.
But the hard part about them is they're very shallow sometimes, right? They look really shallow for a while. But if it starts to work, it really works. So the first is I really believe in that. And I try to be honest but also supportive and make sure people know that. I'm also, to this point, honest. Just like I think a company is always trying to seek out what's really going on with this fitness function with its customers, I think you as an investor, you want to...
Again, you want to be like a trusted source of feedback. People don't have to take your feedback. But you want to have a small set of beliefs and be consistent about them. And so I don't tend to tell my companies. I can tell them it might go well soon, but I don't tell them it's going really well when it's not going really well.
In fact, this is like I mentioned, you want to be supportive in downtimes. My feedback when I was at Dropbox from my HR performance reviews, and even now, I think I'm really bad at celebrating the upside. I just take this very long view of building companies and building things. And it actually worked well with my job, but I would do it anyways. But the downside of that is like a company, it's just getting started. They have a great year.
And like, I sometimes lack a pulse and I, you know, I have to get better. I have to be like, you know, cheering for you. It's a big deal. It's really hard. And I'm worse at that. But so when it's going bad, like, or badly, I think I'm pretty upfront. I'm like, you know, I think we probably would have expected at some level to go better or, you know, you're starting to run low on money and we have to start thinking about what we need to do if we're going to run out of capital.
I try and keep it tangible. But I think most companies that I work with, even if they're not going well, they would say, you know, he's pretty supportive and he's pretty positive. you know, we kind of get to an honest place about how the company is going. And this is really important. And from then on, especially I've been very privileged. Like I have some companies that are doing extremely well. The companies where they're doing less well, I want the best thing for.
excel in my investors and i want the best thing for the investors of the company and obviously one of the largest investors in the company is the founder so i i think i do a pretty good job of being like i'm trying to give you honest feedback that's best for you
And I think for the most part, it's interesting. I think in the cases where it's not going as well as having a dream, I think those founders probably feel that I'm very honest and supportive with them for the most part. And I think the key is that I just want to preserve that.
that honesty, but there's not, you mentioned like firm pushes. Founders are really smart. I think one of the big mistakes that investors make, and I'm sure I've made, is they can be kind of unintentionally or intentionally infantilizing.
It's a crazy thing to start a company. It's an incredible thing to build software that lots of people use. It's really hard. If I don't think you're smart enough to do this largely on your own, I really should probably not be investing in you. I'm investing millions of dollars. And if I do... I should never forget that I thought you were worth it. You know, you're really talented. You can do it. So my job isn't to tell you what to do. My job might be, you know, you're in the thick of it.
And I can provide like I kind of rotate the problem a little bit. But I'm like very heartened. I think founders, I really think that the world of founders, they're like the I think there are many ways that the sun that our world revolves around. And I think they figured out more often than not. And I'm usually just kind of very lightly giving like in the scientific sense, like little stimulus, like make sure they're thinking. Going back to the, like the money.
part like what piece of a company do you typically get for let's say you put up five million bucks for a company what what percentage of or how does it even work It's a great question. And this is like one of those weird things. So I mentioned like at the seed stage, we typically do $1 to $4 million. And we at Excel try and buy 10% to 15%. Okay.
And I probably at this point in my career would like to own like 12.5% to 50%. And one reason I don't typically own more is some of those companies that I work with at the seed stage will go on and raise capital from other people. And they might raise enough capital that, and I haven't taken a board seat.
if we if we own 25 the seed stage then we might be the largest shareholder and that creates like a marginally complicated dynamic for a variety of kind of like reasons i won't go into unless you guys really wanted it And so I think that's the appropriate amount for a seed stage investor to own, a lead seed investor to own is 10% to 15% or so. At the Series A, it used to be the case that you could get into the mid-20s. Nowadays, more and more, it's anything from 10% to maybe 25% or 10% to 20%.
20% more realistically is a typical Series A dilution, I would think. And I might be wrong on this. I haven't looked at the official stats, but that's kind of my gut sense. And then I think there's a cap on how much ownership you eventually want in a business. You know, if we own so much of a business, a couple things are true. The first is if the business needs capital, they're kind of stuck coming to us.
But you probably as a business want flexibility. It's a good thing for the company to be able to go to new investors and existing investors, right? So we don't need to own too much in that sense. And then also someday, you know, this is a luxury problem if we go public or something like that, having heavy concentration of ownership in a business can be a little complicated. So, you know, the upper bound of ownership in a company in traditional VC is probably in the 30s somewhere.
And you don't want to get too far beyond that. You can't own more than that, but it gets complicated. Along the lines of going public, is that the eventual ideal end goal? What's the exit strategy for these companies? Is it just to make money? Is it to be acquired? Is it to go public?
So one of the things I think my partners would probably vouch for is, it sounds weird to say this, I think if you do our job really well, honestly, the money really takes care of itself. That really is how I think about it. But tactically, in hindsight,
The two ways that you get liquidity or two high-level ways are an M&A and a merger acquisition, so you get bought, or the company goes public. Within the M&A process, I mean, first of all, there's different types of IPOs selling different amounts. And some public companies have more trading volume than others or more public or more liquid seller. But in the M&A world, you're either selling to what's called like a strategic acquirer. And this is somebody who typically like, you know.
This is usually like a Microsoft or Google or a Facebook meta is where they're paying. more money than others might pay because they've used strategic value in the asset they're buying. It might be an adjacency to them. It could be vertical integration. It could be a new category that they can cross sell. So that's typical. And then there's also M&A by like, you know, private equity owned businesses where like.
Private equity firms have bought up companies and they've rolled them together already. And they can also be acquirers of companies. And that's becoming more common. But those are both still acquisitions. That is the end goal. I mean, I'm always very sober about this. We represent a bunch of wonderful people who give us money. And so we do have a commitment to them to get liquidity.
on a certain timeline. I think the venture capital investment timeline is one of the longer investment timelines like in the world, but it's still not forever. I mean, Berkshire Hathaway owns businesses longer than we do, right? I mean, and certain family businesses and family whatever are longer shareholders than venture firms, but.
That's the range. And the right outcome, though, is the one that makes the most sense for the company. You know, this is a good example of like, we do care about the appropriate liquidity at the appropriate time. I think a way investors can make a lot of mistakes is over-rotating towards like we have to IPO or we have to be sold. You know, especially in being sold, like somebody has to want to buy it.
And the same issue with the IPO market, by the way. The IPO market right now is a little more idiosyncratic in some sense than it's been over the last 20, 30, 40 years. So it's a little different, which makes things maybe a little more challenging. Although I think I'm optimistic that'll change. But those are the two large outcomes.
I don't think about it too much. I think about building a great business. And then I will say, and this is important, if I think there's a great business, and in the M&A market, you have to have a buyer. You can try to sell and work.
uh on a process for that but it's hard to sell a whole large company for like you know billions of dollars there's very few buyers for that but there are some going public at large scale tends to be a little easier because there's many many investors basically and so i think if a company intrinsically can go public and should go public, then I do think it's my job to encourage that on behalf of not just Excel, but also like...
all the other shareholders. I think for employees, ex-employees and things like that, that's kind of the agreement everyone came to when they joined the company and took options and stuff. I think it's funny. My job is Excel. Obviously, I represent Excel. But I do. I'm on the board of these companies. And I think it's important that I try and be mindful of all the shareholders. People, they have gotten equity and they value it.
Hopefully, because they believe it will someday be worth something. Yeah. And what about the aqua hire where... You see this a lot where a business purchases a company and then they shut it down and the founders go work at that company. What's happening there and do you get your money back in that case?
Not always. I'd say not most of the time. I mean, it's interesting. A typical acquirer, they don't really care about giving investors their money back, right? Especially in an acquihire situation, their alternative is just to hire the people. Yeah. And the partners could just go join. So as an investor, the rest of the cap table doesn't have a whole lot of- They just walk away from the business. They can just walk away and then take a job. So that's always one downside. I do think-
Many founders, and it depends how you think about this, but they feel an obligation. They say, we've raised money. We want to try and get you money back. So we'd like to do it.
And I've been on both sides of these kinds of transactions. I think it's like a great thing to do. I really appreciate it. I don't always, you know, demand. I don't demand it really at all. I basically ask nicely if possible. If I'm the investor, I say it'd be great. Like, you know, we believe in you. We'd love to work with you. Got a lot of good stuff. But like.
We would love it if you could try. I have some good stories about that, but maybe I haven't checked if I can share them. And then the other side where the buyer... A lot of times my companies come to me and say, we'd like to acquire this company, but we do want to, the founders come to them and say, the founder of the target company says, we'd like to get some money for our cap table.
And then the company, this is a good example, how to make the decisions. The company will come to the board and say, you know, we'd like to give some compensation to the company, to the investors.
And I typically say two things. The first thing I say is, you know, we don't really care about that. But then I say, but if you really want to do it, it's fine as long as it's within reason. And then one of the funnier things that happens is every once in a while we do that, then the investors are like, we're not going to do the deal.
And then the next thing I say to the company, that's the acquirer, the company I work with is then just hire them. I don't understand. Like this was like a nice, like it's all like subtle. You're trying to figure out the right balance of being kind to those people and not.
And I love when founders of companies selling to one of my businesses want to return capital to their investors. I think that's wonderful. I really do appreciate that. I think it's a nice thing to do. I think it's good for the world. And I think the same is true of their employees and all that stuff.
But, you know, there's some balance there, right? Of like, what's going on? And it's not the job of the acquiring company to be like, the business isn't going particularly well. It's also not on them to say, we have to pay for your business that isn't going well. And most of you want to hire you and we think you want to work here. I got a couple more questions just about like the space right now, you know, like what.
uh what you're investing in obviously ai space is is absolutely wild right now you know you see cursors worth nine billion dollars and windsurf is getting acquired for three billion dollars what's your thought on on the space right now is it is it really worth all this money or people getting all hyped up? It's hard to tell. I have a lot of unsatisfying academic answers. So what I'm saying is that, so first of all, people, I think.
At a high level over long periods of time, I think AI is likely to lead to increases in productivity for people. But I think it's like very nonlinear. And I actually think there's a lot of like, you know, asleep at the wheel problems. I mean, I always joke like Century gets to experience some of this. There's probably lower quality code going into code bases at a higher velocity, right? So. You have to be monitoring what's going on a little bit, and it's not as...
naively obvious people think but but i do long-term believe the world will get more productive because of things like ai if for no other reason i'm a huge believer in software people ask what i invest and i say software and networks and what i mean is like literally
the stuff that allows us to control chips that are like the that are approaching the limits of physics like chip technology blows my mind and like networking technology blows on it like we can transmit information around the globe almost instantly yeah
That's like mind blowing. So those are the two things that I really invest in. And some categories don't make use of that for one reason or another. Like one example is like there are some businesses that are just more physical. Right. Like it's like really the business is like it's real estate. So like.
I bought land and the land is still like that doesn't need to be software that so much to like improve what I'm holding or whatever. There's certain types of realistic benefit, but some though are limited by, by like human reasoning.
There are certain categories that I think humanity gets in the way of it maybe being approaching software. Basically, if you imagine software like this vortex that spins, sucking everything in. And so I think AI will bring certain categories that right now are bottlenecked on.
human reasoning or more human reasoning than we have in the state of the art into software, actually. So that's how I tend to think about it. So I'm very bullish on overall. In the short term, I think the interesting things going on are, so one, The thing that's most surprising to me as an investor is the proclivity of people to pay for AI tools.
So I would proffer, and this is not meant to be negative about anything. I think there's a lot of wonderful tools. I would say the frontier models are more and more similar in terms of their capabilities and quality. But on the consumer side, I think ChatGPT has a very large lead from a revenue traction perspective. And for a satisfying way of thinking about that, that's unsatisfying to some, but I think it's realistic. It's like, why do people prefer Coca-Cola above other sugar waters?
It's a brand. And I love Stripe. I'm a huge fan of Stripe. I really am. And I don't think it's strictly a commodity. But Stripe is an incredible business. that has lots of component parts coming together to form something greater than the whole, but it's also an incredible brand that people love. And that's a lot of the value of it, and they should never forget it. So, but Coca-Cola being an obvious brand, so I think ChatGP has some brand value.
and that's worth something even if there isn't necessarily sustainable differentiation right it's just like why do you like that why do you like coke because it's coke that self-referential nature can be sometimes annoying but realistic um So the revenue footprint of these companies is actually high and they grow very fast. So that's good. Two downsides, I would say. The first is, in line with this brand differentiation, people seem to switch between the providers.
more often than they do other like consumer services or developer tools. You can't just switch between Sentry and our competitors. There's a whole install process for now. Maybe someday with AI that'll change. But in a lot of the cases of these tools, you can and people do.
So there's more churn, there's more movement. And you would think, so the demand is a good thing. The excess demand is a good thing. The ability for people to move around makes that revenue a little bit less valuable. And then the last thing that I think is really interesting that we're still not yet at is...
I mentioned software has these like 80 plus percent margins in SaaS. And there's not a good reason why. Like you could argue it should be competed away, but it is the current thing and it's kind of settled there and it's great. In AI, people presume there'll be high margins.
But there's not an obvious reason why that's the case. And right now, at least frequently in these categories, the margin structure is much lower. And if the margin ends up being endemically lower, then the equity value multiple you'd apply to revenue should be lower.
So I'll give you my favorite example of this. And I think this is going to work out for everyone. But like a one use case is like automating tier three, like customer support. Like you might outsource things to a faraway country where you have lower cost of labor, but the support quality is lower.
I would say it's very likely that that gets taken over by AI. And I think we already see something happening. And importantly, like all of the quality scores for some parts of that are going up. So not tier one, not like... I'm calling my bank. It's an emergency. I want somebody in my time zone right now who speaks my language natively. That I don't necessarily know will be automated in the short term, long term maybe. But I do think that tier three, far away, whatever, will get automated.
A lot of people naively say they'll automate that and then all this labor cost that you save, the customer will get half of it and the supplier of AI would get half of it. And then we can have like a 99% gross margin business with tons of revenue.
And I'm like, but what if somebody competes with you and offers a lower price? So it's a good example where I actually think that business will clear at some margin. I don't think it'll be 99%. I think that's crazy. And I think it's much more variable than people think. So I think, again, the demand side looks surprisingly good, I would say, although demand can be flighty. There's a lot of churn and commodity-like behavior switching between models. And then also the margin structure is...
I think, higher risk than in prior categories. And so those things lead me to believe, over long periods of time, I'm still optimistic, but in the short to medium term, I think it will be challenging. And for some nuanced reasons, because I do think a lot of, I think venture capitalists broadly are quite bad at their job.
Many of them, because there's a few small ones who are quite good to make lots of money, and then most of them are quite bad. And I think they are looking for an excuse to invest in a cool thing. And so that, unfortunately, combined with these other variables means... I'm willing to just believe the gross margin will get to normal software. Or I'm willing to overlook the churn. And I think you see that in some of the market activity. And again, that could work.
I think there's more risk than usual in the ecosystem right now. Beautiful. Awesome. Well, that was super informative. I could talk to you all day long. I'm sorry I'm so bored. No, man. I've got all kinds of questions and whatnot. It's really interesting to me. I'm glad we had you on. The last part of the show we have is sick pics and shameless plugs. I don't know if you came prepared with either of those.
I didn't. Wait, you've got to tell me about it, and I'll do it really quick, though. All right. A sick pick is a product, a service, a chocolate bar, literally anything in your life, doesn't have to be tech-related, that you just absolutely love and you'd like to... to recommend to someone else. And then a shameless plug is just whatever you'd like to plug to the audience. Can I have multiple sick pics?
as sure i think the record is nine so yes the dirty has uh the most yeah um okay so so sick so i i'll go non-tech i like love craft things where people care like too much for the details. And one of my favorite things, and I'm a personal investor, so I'm really using company time poorly. I love dandelion chocolate. I love gifting dandelion chocolate. It's just, Todd, the founder is incredible and he just cares too much about chocolate in a way that is, I think,
amazing and magical. And if you guys are ever in San Francisco, come on by, we'll go get some chocolate, but I loved it. And then the other one I would say, that's a personal one is there's a new pizza place opening in the lower hate called jewel in San Francisco called Jules pizza. It's awesome. Their soft opening, I think is May 20th is the opening. So I've just been open when this airs and the pizza there is amazing. So those would be high on my list for sick picks that I think are fun.
And then shameless plugs. For this audience, I mean, I think you mentioned, but like Vercel, Century, Mux, Linear, I should say my wonderful partner is at Linear. So it's especially biased. Excel's an investor. She's there. Linear's great. But honestly, the other thing I would say that's like weird is like, I just am a big believer in...
people being nice and being optimistic. So like, dude, go do something nice for somebody around you, you know, go, go make their day. It's one of the reasons I love the chocolate and pizza is like, people are delighted. So go delight somebody and, and pay it for. Yeah. You know what? I actually had... This dandelion chocolate sent to me, I believe, by the MUX folks. I believe. I think it sounds right. That's Dan's money. Yeah. And it's nice, right? Like the paper quality is great and the wrap.
is nice and yeah it was great yeah they sent it to me for specifically something that uh i mean we were celebrating something my my wife had done at some point it was a couple years ago so forgive me i forget why but it just arrived and it was like from the mux folks congratulations to to your wife courtney i was just like wow this is the darn nicest thing this is the best thing yeah
We love the chocolates. More nice things. And yeah, chocolate's great. And also, enjoy life like a kid. Have some chocolate. Have some pizza. Go watch a movie. It's the best. I'm a big fan of the world. There's a lot of problems and a lot of things that go wrong, but overwhelmingly it's pretty great. And people should remember that and you should try and make somebody else's day great so they feel that way too.
Totally. Sick. Beautiful. Well, I think that's a great way to end it. Thanks so much for coming on. I appreciate it, and have a good one. Thank you guys so much. I think I'll invite you back someday. Oh, yeah, absolutely.