Ali Partovi is using these indicators to spot future tech billionaires

Hi, I'm Connie Loizos.

And this is Alex Gove.

And this is Strictly VC Download. Hello, and welcome to another episode of Strictly VC Download. Today, we're talking to Ali Partovi, the co-founder and CEO of NEO, which began life with a scholar program that gives grants to especially talented and typically highly technical young people and evolved to add a venture fund. On the latter front, we discussed how NIO recently raised its largest fund to date, $320 million in committed capital, and why, given NIO's portfolio, Partovi's connections, and his reputation, it probably could have raised much more. Even more interestingly, we dove into Partovi's investment philosophy that focuses on identifying future tech leaders while they're still in college, and the key criteria he looks for in founders, from technical coding ability to that magnetic personality that marks true leadership potential. Plus, you'll hear more about that scholar program, NEO Scholars, that provides $20,000 in equity-free grants to students who take a gap semester, a program that has produced talent for companies like OpenAI and led to NEO writing the first checks into startups now valued in the billions of dollars like Cognition and AnySphere, whose AI coding assistant product Cursor is currently among the fastest-growing products out there. In fact, we asked Partovi what his returns are like on paper. He declined to say, calling a metric that most VCs use called an internal rate of return mostly, quote, bullshit. But he did offer some indicators that do strongly suggest that whatever Neo is doing, it's working. Here's that interview now. We'll see you back here next week. Well, Ali, it's so nice to connect. I'm realizing I don't think that we've really talked, at least live, since you nicely stopped by the Strictly VC event in San Francisco, like, a year and a half ago-ish.

Last time we saw each other, I think you're right, was that event. And certainly the last time we saw each other in person. And I don't think I've spoken on the phone with you since then, Connie.

Well, it's nice to see you. And congratulations, of course, on your new funding.

Thank you. Yes.

Which I imagine did not take you very long at all, unlike everyone else. I just had coffee with a VC who you would know, who was in town from New York, and he was saying that he had co-hosted a dinner with some new fund managers in San Francisco this week. And he said the topic of conversation was fundraising, and it's just gotten so hard for everybody for obvious reasons. How was your experience?

I never take fundraising for granted. And so I guess going into it, I was preparing for it to be harder than ever or take longer than ever. And it actually ended up being the fastest fundraise we've had for Neo. Not only that, we had a hard cap of $300 million. that we then needed to go and get permission to increase it to accommodate people. And we still had to turn away quite a bit of money. But I think the environment is harder. It's just that we are now— we're just crushing it. And so at least at this moment, we're enjoying the fruits of 8 years of work behind us. And seeds we've planted are now finally bearing fruit, making it a little easier for us right now.

You have some A-listers in your cap table. And these people are so well-heeled, so to speak, that I wonder if there's even room for institutions, although you're a Harvard grad. So I imagine you room for Harvard. Can you talk a little bit about your LP base?

We definitely have institutions. We actually do not have Harvard. There's a bunch of universities that have gained a name for investing in VC firms. I don't know if any of the ones who are like the most well-heeled decades-long VC investors are the ones who've backed us. That's less to do with us and more because the market correction of 2022 caused a lot of these firms to end up overweight where they're public equities shrank, but they didn't mark down or they didn't know how to mark down their private equities. And they ended up saying, oh, we have too much in VC and not enough in other categories. And so a lot of them are still trying to kind of catch up to where it does balance again. But there are wonderful, wonderful institutions just beginning to do VC investing and like trying to build up their portfolio for the first time. And I'd say those are the ones That not only for us, but for other new fund managers, probably make more sense. We have a number of really amazing tech leaders, some of whom are famous, but also dozens and dozens of people who may not be famous yet are accomplished each in their own right. And then we also have a number of endowments as well as some fund-to-fund investors. I have to say, Connie, what I'm most excited about is not just the fundraise, it's that this year, really for the first time, I can conclusively and confidently say that we are discovering the future superstars before anyone else. else. Last year, for example, every one of OpenAI's new grad hires was a Neo Scholar.

Wow.

And they've started many of the top companies in AI, billion-dollar companies like Cognition. One of the co-founders was a Neo Scholar. Chai Discovery, Pika Labs. Probably the one that's most relevant for us is Cursor, because we were also the first investor in that as well.

I did read the Forbes story on your new fundraise, and they noted that at the time, Michael Truel was an 18-year-old MIT student interning at Google. You got yourself in front of him, and based on a handwritten coding test, you flagged him as someone you wanted to bring into NEO. Walk us through what happened. Did somebody at Google say, hey, check out this kid?

Not someone at Google. Even before we had our first fund, I started this— I'd say it's a sort of nationwide talent search to find the top computer science students in North America. It's called NEO Scholars. The origin of NEO and the identity of NEO is not just a fund, it's a mentorship community. And the idea being that You can identify people with extremely high potential and help them maximize their potential by mentoring them. In year 1, I traveled around the country and spent thousands of hours giving coding tests and interviewing college students to find the ones that I thought would be tomorrow's changemakers. Each year, it's been more students applying to become Neo Scholars. Michael was one of the people that another MIT student referred to us saying, this is like a freshman who's incredibly strong, and kind of encouraged him to apply to be a Neo Scholar. Now, I do want to clarify, and I did I did give Michael a coding test out of the like 1-hour meeting. I think he breezed through it in like 12 or 15 minutes. I wouldn't want you to glean that that's how I choose investments. It's part of the dialogue and it's really more a substrate on which to have a broader conversation and try to get to know the person and find out what's special about them. But it does provide a way to also just assess how smart are they, how do they think, how do they approach problem solving, and where are they in their journey of learning computer science? Because our goal is to forecast their future, to forecast their potential. So the coding test is one part of it, but I will say we don't have like a predefined template that they must match these 5 criteria and then they're going to be the winner.

What are some of the other qualities that you look for? For example, Steve Jobs wasn't a coder, but he had incredible charisma, an incredible ability to recruit other people. He had grit. Talk about some of the other characteristics you look for.

There's probably too many to list, but to keep things simple, I'd say the 3 that I would really narrow down is one is technical ability or coding ability. 2 is entrepreneurial inclination and past entrepreneurial experience. And 3, willingness to challenge the status quo. So if I go into each of those, when I talk about coding or computer science, this is not because this individual will be coding all day long. Jeff Bezos studied computer science. Reed Hastings and Larry Ellison studied computer science. Those are not individuals that you think of necessarily as sitting around coding at their companies. But knowing computer It just helps you think, and I think it helps you think in ways that are pretty relevant for business. Although Steve Jobs, you're correct, isn't known for the coding being his strongest skill, he was technical. I'd say he was probably amongst the few people who did know some computer science and had technical skills compared to his peers back in the 1970s. Number 2, past entrepreneurial experience. If someone's in college, very likely they have not had any. But once in a while, there are people who have. They started a business when they were in middle school or Even younger or in high school, or they're doing some startup effort while in college. Even if those things are stupid and fail, or they're not fully serious, they imprint a young person. So I just try to assess how much of a risk-taker is this person? How likely are they to take the path less traveled? And in particular, if they've done some sort of entrepreneurial thing, do they have this kind of hunger and zeal for making money? I don't mean making money by trading crypto. I mean, making money by like building a product that other people love and that other people tell their friends to buy. And with Michael, for sure, he had had one or two— I think he had had 2 startup efforts when he was in high school and had definitely tasted that and very clearly intended to start his own company at some point. And then the third part, challenging the status quo— there's different people who might use slightly different language, people who are rule breakers or so on. For me, it's— I mean, I respect laws and I wouldn't want anyone to break laws, but it's worth having someone who's willing to try to question laws or question the status quo, question rules and say, well, why is this this way? What if the world could be different? And look at things from first principles rather than taking the world as it's handed to you and accepting that it'll never change. People who are static thinkers who think things will never change, it limits their imagination a little bit versus people who are willing to take all sorts of assumptions and say, well, what if you broke that rule? What if that wasn't a rule?

What's your hit rate? Are there instances where it didn't work out? And what did you learn from that experience?

Oh, any investor has investments that don't succeed. For me, though, it's less about succeed or not and more about did they take a good swing at something big? And a lot of the mentorship I give to young people is do the tasks that only people of your caliber could do. Don't do some small thing that a mediocre person could also do, because if you don't do it, who's going to do it? And so I try to encourage people towards try the things that are harder and that might fail, or even that probably will fail. But if you succeed, it will have been worth trying. As a result, almost by intention, there are things that don't succeed and that fail. But I think that that still is, first of all, it's a better path for high performers to aim higher and to attempt the impossible and do stuff that could really move the needle.

Ali, you have had a lot of great bets, certainly over your career. But again, as you said, in 8 years of Neo, your portfolio right now is outstanding. The crown jewel at the moment being AnySphere, which is the parent company of Cursor. You mentioned what you look for a founder. How do you surface that last bit, the part where you're interested in people who are not willing necessarily to break rules, but to think differently? How do you surface that quality?

First of all, I should clarify, Cursor is awesome. We have a, a really deep portfolio of great companies. We were also the first investor in Bluesky, which is doing incredibly well. And then from further back from our first fund, Kalshi and Vanta.

You were?

Yes.

I didn't know you were involved in Bluesky. Well, I told you I love Kalshi.

We led their first round. Wait,

Jack Dorsey was leading it or involved.

To be clear, the first source of cash to Bluesky was Twitter as a putative corporate customer, but it was not investing in them. It was giving them a cash advance. Twitter was potentially going to be their first customer. And then that relationship changed. I don't know the details actually, but Twitter changed hands and Bluesky could no longer count on them as an ongoing partner. So it was quite a bit into their progress that they decided to raise VC funding for the first time. And we were their first VC and led their initial round. But yeah, Kalshi That's awesome. And I saw you had Tariq as your speaker at that event. So you asked about how do you—

Yeah, how you surface a quality. I was kind of wondering what you asked Michael specifically or how you surface that ability in him, acknowledging, as we are right now, that he's one of many interesting people that you've backed.

I don't know if I have a single specific— this is the go-to question for assessing it. And by the way, not everyone needs to exhibit all of these qualities. In fact, if you had to ask me, like, I wouldn't say that Michael is the world's top rule breaker or, you know, with respect to Michael Truel, the thing that just stood out, and I mean, to this day, I remember from that first meeting, was he has this really quiet confidence about him. Different people have different things that make them charismatic. Some people are flamboyant and loud and have showmanship, whereas Michael is almost shy, but has just this very comforting confidence about himself that you just feel like you're in the presence of somebody who is comfortable in their own skin and knows what they're doing, and it makes you feel better.

Right.

And he had that as a— he was a— I think, 18-year-old coming out of his freshman year at MIT. And I remember just thinking, this guy is a leader. Really, this should be a 4th, and really perhaps at the top is how magnetic are they? If they started something, how likely would their smartest friends be to join them? And that was the thing that really stood out about Michael, that I could just easily see that whatever this person does, there'll be a few of his not just average MIT friends, but his smartest MIT friends would be taking note and consider joining them. Because of this aspect he had of confidence without arrogance, and in a very kind of laid-back, quiet kind of way. But the general thing, though, is that we don't invest based on an industry or a thesis. We invest based on people. If I look back at my angel investing successes, include companies like Facebook. My missus, one of my smartest friends from Harvard, was the CTO of Google. And I knew about it when it was just— he was their first employee. And I thought it was stupid to try to start a new search engine when there were already 10 of them.

Right.

The reason to invest in Google was because they had an unbelievable team. And so what I'm looking for when I identify Neo Scholars in college is, is this the type of person where not only he or she personally has the skills, but when they start something, how many of their smartest friends would also join them and form the caliber of team like those tech giants?

Tariq of Kalshi absolutely has that confidence. And I think really blew off everyone's socks at the Strictly VC event. And as I was telling you, Ethan Thornton of Mach Industries, same thing, young MIT dropout who was very easy to see how he attracted Sequoia's attention early on. I did want to ask, so last question about Cursor, I swear, but this preeminent company that's fueling AI coding assistance, with the rise of AI coding assistance, what do technical founders need to demonstrate to be competitive for investment? Has that changed?

Well, it's funny you say this because I don't know if there are any other investors who pay as much attention to this as I do. When I started Neo, The idea that a VC is going around the country administering coding tests to college students probably came across as really stupid. It's not because, oh, if you answer the test right, you're going to be a successful founder. It's the background for a conversation to get to know them. Now, having said that, I firmly believe computer science is one of the best ways to learn how to think. It's not because building a startup entails you're going to be coding all day long for the rest of your company. You will be thinking. And for the same reason that I think it's still good to teach people how to write, even though AI can write for you. Writing forces you to think. It forces you to learn how to think better. And I don't think we would ever say, oh, discourage students from learning how to write because AI can do that. For the same reason, I would say it's good to learn how to code and seeing how strong someone is at computer science. It's a measure of how well they can think. And I like to believe that that'll remain important for the long run for the human species. So I'd say that's how we look at it. And specifically, I'd say computer science teaches the type of thinking that's very relevant for business. And it's not just how to build technology, but it's how to divide tasks amongst an organization, how to figure out what part of the customer problem to try to attack first. There's all sorts of things that the practice of computer science and coding also prepares you for that type of question.

Ali, you described Neo once as occupying the same space that YC once did. How do you keep NEO from becoming Y Combinator?

Interesting question. First of all, Y Combinator is one of the greatest ideas of the 21st century. It would be a great honor for anyone to become as great as them. I think more broadly, it's not just Y Combinator. There's other programs like the Thiel Fellowship and others that are incredible and inspired what we set out to build with NEO. Silicon Valley has had these incredible legacy programs of the past decade that have also focused on backing first-time founders or also focused on focused on identifying smart college students. I think today we are the best at these programs. What's really clear is that we're discovering superstars earlier than anybody else. Some of the things in terms of how we're setting our North Star, it's an explicit decision for us to remain small and selective and focus on quality rather than quantity. If you look at our programs, the number of people applying to our programs have grown substantially. The 2 programs I'm talking about, by the way, the Neo Scholars Program is for college students. have a company. They're staying in college. We're not encouraging them to drop out. We just offer them mentorship. We offer them the option of a $20,000 grant to take a gap semester and to build whatever they want, but then go back to school. And it's an equity-free grant. The other program, Neo Accelerator, is for startups who have incorporated and they're raising equity from us and fully committing to building a company. Both of these programs, the number of people applying to them has grown tremendously. Our accelerator is now 3 years old, and each year the number of applicants has doubled. So we had a choice. We could have made the class size double each year as well and stay at the same selectivity rate. But what we did is we held the class size small and constant at only 20, which means our selectivity has become more and more selective. We've become basically twice as selective each year. So that's an explicit decision. Hand in hand with that, we've made an explicit decision not to let our fund size grow too high. In fact, when we first set out to raise raise this current fund, our target was to make it exactly the same size as our last fund and not grow it at all. We ended up growing it a little bit, but not very much. We grew it by like a little more than 20%. And our intent is certainly not to grow it on an ongoing basis. The incentive for most VC funds is raise an ever larger and larger fund. And that's really the path to make more money if your focus is—

Management fees.

Management fees. So we also made an explicit decision that we want to bet on our own returns rather than fees and make money from volume. I don't think I shared this in the Forbes article, but what has grown for us is the amount of our own partners' money that we're putting into the fund ourselves. So we're betting more on our own returns. I've invested more of my own cash in this fund than all 3 of our previous funds combined.

So just to drill into that last part, it's typical that VCs will invest 2% of the capital from their own accounts and will have like a 2 and 20 structure. Is that similar to The way that your fund is structured?

Our fees and carry structure is 2 and 20, which is standard, but the amount of the capital coming from us is 4% and that has crept up with each fund. I think it started out at 2 and then 3 and then 4. And also since the fund size has grown over that same period of time, really substantially has increased the actual dollar amounts. There's another subtle but very significant factoid, which is that until to date it has been entirely new cash, meaning actual cash commitments. Because, you know, a lot of VCs use that fee to pay for their own investment in the fund. And until now, all the money that I've put into these funds, into our previous funds, has been new cash from my own pocket. While we do take fees, none of those fees have come to my pocket, and none of them have been how I've funded my commitment into the funds. The only way I'll make money from NEO is from the returns on the funds, not from anything else. And so my incentives are incredibly aligned to having the best returns possible. the highest performing fund rather than bloating our total assets.

Can you talk a little bit about returns, whether it's unrealized IRR or cash-on-cash returns? Any metrics you can give us?

I have no issue talking about it, but I'm cautious because it's really a fool's errand to talk about returns when they're not yet realized because until there's an exit event and something's liquid, it's a little hard to know what it's worth. Having said that, I'll say our first 2 funds clearly are going to really big winners. Our first fund still has a lot of growth left in it, but even at its current stage, and the winners including Kalshi and Vanta have a lot of room to grow. At its current stage, net of all fees, it looks like it's between 3 and 4x in its value today. And I think there's potential room for it to double or triple again before its duration is up. Second fund is a younger fund. A lot of the investments in it are just not mature enough to even place a value for sure yet. But if we had only one investment being Cursor, that investment alone has more than doubled the fund. And we have many other investments in our second fund that we're very proud of. Cobot is an amazing company that we were also the first investor in and quite a few others. I hope that's enough information. I am shy to say things like IRR because candidly, for an early-stage private portfolio, talking about IRR is a little bit bullshit. It's, you know, it's basically coming up with a number that no one has really precise confidence in.

We've talked about this when you were thinking about developing Neo. You and I had lunch at Kokkari and we were talking a little bit about Y Combinator and What a revolutionary model that's proven to be. I feel like we had also talked about the fact that the good news and bad news is when somebody who's very young, their company takes off, it really takes off. And that means it can take over their whole life. I think Paul Graham had said something at some point about, you know, the upside and downside of starting a company too young, meaning if it succeeds, that's it for you. How do you think about that when you are talking to these 18-year-olds? I mean, you've of course started companies from a young age with your own brother. I do sometimes wonder if you have any reservations about getting people on that path at such an early age.

So if I was encouraging people to drop out of college, I would have reservations about that, but I don't do that. And if I was encouraging them to start a company straight out of college, I probably would also have some reservations. I don't really encourage that either. What I try to do is help people find the path that makes sense for them. But I also try to coax them towards take a bit more risk, go a little outside your comfort zone, aim a little higher than whatever you're aiming for right Now, that means different things for different people. If the person was thinking of joining a Wall Street firm, I might encourage them to join a tech firm. If they were thinking of joining big tech, I might encourage them to join a smaller tech company. If they were thinking of joining Stripe, I might encourage them to join Ramp, for example. And then if you keep following that, the end of that road is start your own company. And some people are ready to do that straight out of college. Once in a while, they're ready to drop out of college to do that. But I almost would never see myself coaxing someone into that decision. It's more identifying that person who has that already in their heart and giving them maybe the encouragement that they were seeking. In particular, dropping out of college is one that I would almost feel guilty if someone dropped out because of my encouragement. So I really leave room for them to make that decision. I would not want a situation where our funding was providing an incentive for someone to make a decision like that.

Just because Alex had brought up Y Combinator, how do you think about companies and where they should be located? That program has gone through numerous iterations where they really wanted people in the Bay Area or to move here. Then it was more open to having teams distributed throughout the entire world. Now, under Gary Tan, it's kind of pulled people back into the Bay Area, which, as a person who lives in the Bay Area, I'm happy about. But I'm wondering how you are thinking about that.

I love the Bay Area. I love Gary, and I love that he's doing that. Gary's done an amazing job as well, just generally with the changes he's made at Y Combinator. In general, for a question of where a company should be headquartered, on other things I might be very opinionated, but on that one, I don't feel like it's my place to put my finger on the scale and tell somebody what's right for them. I guess the framework I encourage is to tell people, where can you hire the best people for whatever you're building? If you're setting out to build hopefully a generational company, it's not going to be just you or you and 2 or 3 friends. It's going to be a team that you recruit over time and to put them ahead of yourself, meaning that your future employees are the ones that are going to help build a billion-dollar company. For a lot of reasons, the Bay Area remains the top choice because it's a magnet for talent. There's existing talent. smart person leaving Stripe or OpenAI or Google could join your startup. But I would say for sure, New York is extremely compelling, especially for young people. It's also a magnet for talent. Certainly after COVID, I would say to me, those 2 are almost equivalent in terms of being great places for headquarters for a startup. But there might be different reasons where other locations are great. And sometimes being away from a hub is harder in the short term, but better for the long term in that if you headquarter somewhere that's not surrounded by tech companies, it's harder recruit people, but it's easier to retain them because no one's poaching them.

And last question, the IPO market frozen, M&A happening, but maybe still more slowly than people would like. How are you advising your companies to think about exit timelines and strategies? Because I, I really keep thinking that something's very fundamentally changing in the venture industry.

There's definitely fundamental change, and a lot of it is frustrating. It's the result of policies that the government made, and I think those policies oftentimes have caused more harm than help. A lot of these policies started out from wanting to protect innocent investors from making bad investments, but the reality is that they've also excluded the average public investor from the best investments. If you were a public market investor 25 years ago, you could have invested in Google when it was still a pretty small company and enjoyed incredible growth, but you can't invest in Stripe or OpenAI or other companies that are already much bigger than Google was when it public. So the policies really frustrate me because they're bad for the little guy. Yeah. They're bad for the exact person they were supposed to protect. In terms of the changes and how it changes what you do as a startup founder, first of all, I have to confess, maybe I have the luxury that I work at such an early stage. I'm not the person advising CEOs on this stuff. By the time they're that close to liquidity or so on, they've got other advisors much smarter than me to turn to for this type of question. I focus people on just create value, build something that is valuable, not just the asset of your own company, but build a product that serves other people. And I generally try to encourage people not to obsess about making money and obsess more about serving other humans. Build a product that's so wonderful that other people just love it and want to give you money for it.

Well, Ali, I wanna let you go, but thank you so much for making time for us today. It was really, really great to catch up with you. I'm so excited about Neo's momentum. It's pretty remarkable. So congratulations.

Thank you. It has definitely been a long journey, and I'm grateful to you, Connie, for having been there from the very beginning and for remembering and being kind of a constant throughout. Thank you so much.

Oh, that's sweet of you to say. Well, I hope to see you soon.

All right. Take care.

Take care.

The Strictly VC Download podcast is hosted by TechCrunch editor-in-chief Connie Loizos and me, Alex Gove of Strictly VC. Strictly VC Download is produced by Magnolia. With editing assistance by Teresa Lonconsolo and Kel. Thanks for listening. We'll see you back here next week.