Twelve companies generated over 95% of Founders Fund's returns

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 17:28

   What is the biggest kind of like culture shock that you have relative to being an operator? I think I come in, again, not knowing anything about venture. I come in thinking there are probably like hundreds of startups and we're going to spend a bunch of time like learning about these companies. And we're going to sit around a table and we're going to make really hard decisions about which companies we're going to deploy capital into.

2. 17:46

   That was totally wrong. It turns out there are thousands of companies. As I said before, you generally know pretty quickly whether or not it's going to be one that you're going to back. And it wasn't really about the decision making. It was really more about like having an understanding and an opinion on what was likely to work and what wasn't likely to work. And so, you know, in the first couple of weeks, Brian Singerman, who was one of the GP at that time, he's now running his own fund.

3. 18:15

   He sat me down and he said, your only goal for the first year, your goal is not to make investments. Your goal is to take as many pitch meetings as you can. And he was like, I'm going to challenge you to take 500 pitch meetings in your first year, which is a lot. A lot. Without making any investments, that's just. Right, right. And I didn't really understand why he wanted me to do this. But after like 200 pitch meetings, I was like, oh, man, he's trying to show me this critically important lesson about investing, which is that almost all these companies are completely uninvestable.

4. 18:48

   And you only get to get that knowledge if you lower your bar and you have a lot less discrimination, which you can do when it's your first year in venture capital. I can't do this today. This would be an incredibly poor use of my time. But it was really important for me to see everything in the market so that I was able to tighten it up so that I could make much more efficient use of, you know, what a good intro looks like, what a good founding team looks like, what, you know, types of companies have the potential to return the fund rather than just be like good acquisition targets, which for a billion plus dollar venture fund doesn't move the needle.

5. 19:28

   Yeah. But you said something earlier, which is interesting, which is that you said that it's, you expected venture capital to be surveying the landscape and then kind of making decisions, but instead it was about coming to a shared understanding of what good looks like. So is it, is that what you were trying to, like, is, do you think that one of the key aspects of Founders Fund's success is that as a partnership, you have a very strong point of view, a shared point of view on what great looks like?

6. 19:54

   Yeah, yeah. So a great example of this, and my chief of staff, Ellie, is somewhere over here. Ellie does a lot of this work for me now, which is great. But as the GP of the venture fund, if someone on our team says, I believe this is an investment that we should make and I need to get Trey to meet with the company, there's like a 90% chance that I will agree. Because our bar is really high and we generally understand what it means to create fund returning opportunities, what concentration means, what is the fund strategy for deploying capital, how we're thinking about average interest.

7. 20:30

   price like we're kind of like pretty aligned on this and so when someone brings something to the GP it's going to be pretty bait like it's not just an exploratory meeting at that point and I think you just need a lot of reps to get there like a brilliant person like you know 160 IQ person can't walk in and be good at this just because they like understand science like you need to have thousands of reps before you truly are able to understand what a good opportunity looks like. So maybe this is too much inside baseball and venture, but I'm curious, when does that 10% occur? Where is often the source of disagreement? Is it in priors on market shape, product shape?

8. 21:12

   Is there just a different read on founder characteristics? Are there common sources of misalignment or disagreement? Founders Fund is 20 years old. I've been around for 13 of those. or just a little over half, you know, you could make an argument about if it's the best venture fund of all time or if there's two or three other firms that have similar return profiles, but we've done really well. And I can't take a ton of credit for that. 13 years is actually not that long to like see the upside that's been generated. In those 20 years for one of the best performing venture funds of all time, I can genuinely say that like 12 companies have returned 95 plus percent of all the returns to the fund. It's like Facebook, we did seed in Series A, SpaceX, Airbnb, Spotify, Stripe. There's only 12. And so when you're meeting with

9. 22:00

   companies, your question needs to be, is this a $10 billion success story? Is it a $50 billion success story? Is it a $100 billion success story? Is it a trillion dollar success story? Now, if you have a company that comes in, and I'm not going to target anything that I've seen, but let's say it's like a manufacturing autonomy for welding tubes. I don't know. It could be anything. You could meet that and be like, that's a cool idea. Somebody should do that. It's likely to work. There's a lot of customers for that. Is this a $100 billion company? It is not. And so if you have a billion dollar venture fund and I own 10% of a $1 billion success story, That's $100 million.

10. 22:41

    I have now, in the success profile, I have returned one-tenth of my fund. It just economically doesn't matter. And so you start attuning to that. It's like, I need to believe this is going to be a $60 to $100 billion company. And there's just not that many companies that have the potential to grow to that scale.