Big VCs Don’t Care Unless You’re in Their Top 5% - Michal Rokosz, Inovo Venture Partners - EP#118

I was at Foodpanda. We were worse operationally than quite a few businesses we competed with, but we had more money. And if I have like 5 times more money and I'm 20% less efficient, I'm still going to win.

First international VC that I've had on the show is Michael Rokosz. He is a partner at Inovo. Before he was writing checks, he was an operator. He was managing director at Foodpanda and COO at Bookseat. At Inovo, he has invested in more than 25 companies. Many have gone on to raise follow-ons from some of the most well-respected venture funds in the world. Like, the market has gotten Crazy, and I feel like we are definitely in like a 2021 bubble again. What do you think from your? Are we in a bubble right now?

I would say this time is different.

My guest today is Michael Rokosz. He is a partner at Inovo, the Warsaw-based seed fund that has become one of the leading early-stage investors in Central and Eastern Europe. Before he was writing checks, he was an operator. He was managing director at Foodpanda and COO at Booksy. At Inovo, he has invested in more than 25 companies, many which have gone on to raise follow-ons from some of the most well-respected venture funds in the world. He has watched his region change from copying proven playbooks to producing globally competitive AI companies. I've done a number of angel investments alongside Michael and Inovo, and I can say that they're the go-to fund in their region. And more importantly for their founders, they really hustle to help them. Michael Rokosz, welcome to Not Another CEO Podcast.

Hey David, pleasure to be here.

Thank you for doing this with me. First international VC that I've had on the show. So I was chasing you to do this for a long time. So thank you.

Glad we finally made it.

Okay, first question right outta the gates. What is the one thing that you look for in the companies that you invest in? The one thing for the founders, the companies that you invest in.

I think like we look at something exceptional in the founders and there's not one thing. I need something where I can tell this person is absolutely outlier, absolutely unique.

And what does that look like? Give me an example of what that looks like.

It can be his academic track record. It can be his first business at age of 7, 8. It can be his phenomenal achievement within a corporate he was working, or it can be some kind of passion or approach or what he delivered that's like completely different and better than what I saw.

How long before meeting someone for the first time and getting that exact thing? Like how long does it take you to get that? About them?

Counterintuitively, it's very, very fast. Like, it's sometimes within the first 5 minutes of a discussion or within like a very short window. I kind of, you know, calibrate whether I'm already on the I'm excited level or is it like somebody who's like within this, like, General populations of the same.

I something that I tell founders when when I have people pitch me, even I'd say great great founders, great companies. So many of them start right at their company without giving their backstory. How do they even end up here? And what you just said to me is actually also what I look for when I make the angel investments is. I care about their company, but at the stage that we're investing, I care about the person more. And so many times they just skip, they're like, oh, they're not gonna care about this thing, this thing that I did, when in reality, those are the things that I think set them apart.

Yeah, like I'll just give you an example. We recently had an offsite for our founders and they had a pitching training. And one of the founders was, and when I was like at high school, I did some coding Olympiads. And we're like, can you be more specific? And it turns out he won one of the most competitive Olympiads where the previous winners were founders of OpenAI. It's like, and he's like, yeah, you know, I won some Olympiads, like another day in the office. And that's like, sometimes people cannot tell that, but then again, If you cannot tell that, if you cannot articulate why you are exceptional, like, you know, if you are about to build a global company, you're gonna need to raise a ton of money and you're gonna need to get like 5, 10, whatever number of funding rounds. And basically somebody who's good at selling himself and the business is likely gonna do better than somebody who's like even very strong on execution, but is terrible at selling this business because at some point of time, And, you know, I was at Foodpanda. We were worse operationally than quite a few businesses we competed with, but we had more money. And if I have like 5 times more money and I'm 20% less efficient, I'm still gonna win.

I think that is such an important point. I think that a lot of founders that don't sell themselves the way you're describing. I'm working with one literally right now, and he feels the imposter syndrome so much, even though he's really good. But exactly, he can't— it's hard for him to tell someone, I'm going to go, I am a great— I'm great. And I did all these amazing things. And to your point about the coding Olympian, the person just probably has low ego. And to them, it's like, I'm not going to go and pound my chest. But to your point, When it comes to this game, specifically fundraising, you're competing with a lot of other people who are pounding their chest. And you have a short, you just said it, 5 minutes. 5 minutes. And that every VC I talk to, 5 minutes, 10 minutes, the number, no one's telling me 30 minutes. No one's telling me, everyone is saying these short, one person said 2 minutes. Like you have that much time. Yeah. To stand out.

And I think it's sometimes, you know, these are the stories like I had a guy once, it was actually on the recruiting side who had a story that he worked at some amusement park and there was a broken carousel and the producer told them they need a week to send like one pin that was missing. So he basically jumped into the car, drove all night, bought this pin somewhere and brought it back and the carousel was working the next day. And I mean, this is kind of, it's a silly story, but this kind of shows you, you have the agency, you have this different attitude that when something needs to be done, you just get it done. And when you hear this kind of story, you're like immediately interested in a person. Like, it's like, oh, this guy actually has what it takes to get the tough stuff done.

Yeah, I think, You know, you, we, we've talked, you and I, we, we, one of the deals that we did together that also my children did, first angel investment for them was, was Nanogram. And when you introduced me to the founders, I mean, it was, it was that, it was actually everything within the first 5 minutes. And they were good at telling their backstory and their experience with Roblox and, you know, doing all that. That, that for me was a great example. of the backstory and the expertise and the something unique. And actually in their case, something unique, especially to what they're building. Like that was within fi— I don't know anything about mobile game. I know literally nothing, you know, but it didn't matter because you talk to them and you're like, well, they definitely know what they're doing and they definitely have a unique backstory. And so I, you've introduced me to a number of founders where when I meet them, I can see that that's the pattern. that you're kind of looking for. To your point, you know, the person who had the business at 7, 8 years old, and, you know, they're talking, they're 20-something, they're on their third company, you know, and it's, I can see that pattern.

I think the one thing I remember from my first call with Albert, the founder of Nanogram, he was, he did some kind of program in his primary school when he was selling Lego figures that he painted himself. And these were like collectibles. So he kind of made this market. I don't remember the details. It was like super interesting. But, and then when you speak with all the founders, they had entrepreneurial like achievements, like building the community, building the games, which made a lot of money, et cetera, when they were in their early teens. So that's exactly, and my colleagues in the fund make fun that this is like my type of founder. It's basically, you know, it's your third business when you're 20. But that's very often the case. That's not the only case I do, but that's really very often the case.

Yeah. What is it for you in terms of, so now you have this, you see this about the founder, you understand that. How long from that first 5 minutes where you're now kind of locked in to actually making an investment? Like what is that period of time?

So I would say on average it's around 2 weeks and we had cases where it was like 48 hours, but this was mostly driven by like very competitive and quick processes. And I think it's not wise to do it for both sides because you can have great impression on one call and then they can have also great impression of me, but then there are other people in the funds who are not so impressed. Like it's worth to see what type of value you can deliver, like what type of introductions you can actually make. And also for me to get feedback from my network that my judgment was kind of consistent. And you know, in our fund, we call it like wisdom of the crowd. It's basically if I love the founder and my two partners and one of our advisors have the same feeling, it's probably a go. Yeah. And and. There is a very low likelihood that like 3 or 4 people will be mistaken. If we can do it quickly within a week and all the other things make sense, then it's totally doable. And the other point is, you know, today, our top performing company right now from our recent fund is called Victor.com. Yeah. They got to $50 million. Great product. Great product. In like 7 months. Yeah. Amazing product. Like, you know, my productivity increased a lot thanks to Victor. And, you know, when we invested, they were building a different product. So— Oh, I didn't expect. Yeah, yeah, they were building a Fixer competitor. So what we saw was amazing team that their product was better than Fixer, but Fixer was first to the market. Yeah. And they launched Victor like half a year after our investment. So you can spend a month analyzing the market. Yeah. And then it doesn't make sense. Yeah. We had a case of a founder that I really understood the market well. I had some doubts whether the opportunity is big enough. I liked him a lot. And when I had a call with him, when I really wanted to discuss that we're interested, he told me, look, Mihail, I'm going to be honest. I'm killing this product in a week. It's like too small of an opportunity. And it was actually even a better signal for me that he's like really hungry to like find something that can be big. And his logic was, I'm 25, I have 10 years to build something big. Like if I'm going to get stuck at this business, I'm not going to achieve that. And all the time I spent on analyzing the market, client interviews, et cetera, was effectively wasted. So the reason we do that is to validate whether what the founder is doing about the market is doing correctly. So whether he's doing the right job, whether his market discovery, client discovery is good quality, or is he doing a shitty job, just good at pitching.

Have you ever gone back and correlated the amount of time you spent making decisions, you know, deciding on a company and then the success of that?

So that's actually quite funny. We had a strategic offsite this summer and we took like last 2 or 3 years. And I'm the one who on one hand in the fund has the shortest average time to commit, but the longest time on sitting on the companies. So I tend, and that's my problem, to spend a lot of time on the companies that I see something interesting, but they're not there and then eventually passing on them. So we're pushing ourselves right now that you either are able to take the decision in 2 weeks, or it means you're not excited enough, or the company is not good enough to invest in if you cannot do it in this 2-week window. But the interesting thing was when we looked at the portfolio and the time to invest, there were, in most cases, the companies we invested very quickly performed better. We had 2 exceptions, but these exceptions was not us taking time to take our decision. It was the founders being convinced to take our money. So in Victor, it took like 2 or 3 months, but we were pretty, pretty fast to take like our decision. And we had like one another case where we were almost like immediately decided and the founder needed some time to decide whether he wants to do a round.

What is it that you, I mean, I have met a lot of your founders. I've presented at your Founder Day. What is it that they see in you? Like, what are you pitching them as your value add to them?

So we are a fund that's focusing on the Central Eastern Europe region. And what we can say is like, Look, first of all, we know your context. Even if you're like a diaspora living in New York or in SF, maybe someday you're going to build an R&D center in Warsaw. You have like amazing talent at a quarter of a price. We know how, like your context, we know how you like to work. And we're the same. Like when our support is needed, we're going to get our job done. If our support is not needed, We're not going to come and just show off, hey, we're here, we'll give you some strategic advice, et cetera. And we have quite a few companies where we have multiple US co-investors. We still do the most introductions to potential clients in the US or potential candidates to get hired. And I think that's something when they call the other founders, they hear. And it really works. Yeah. Like we very much push them to speak to at least 1 or 2 of our founders. And I think that's the basic part of the due diligence the founder should do of an investor. Just call 3 or 4 founders that had backing from the fund.

Yeah. I, well, I said in the intro and I meant it sincerely. I mean, I see the way that you, when you're talking to a company, even frankly, in some cases before you even invest in the company and you're sending them to me, you're sending them to other people, you're asking us to meet with them, give them advice, you know, give you a few feedback. Like, and I think founders feel that, you know, I say this a lot of times with the funds like yours, which is also a startup, quote unquote startup, you know, there you have a different energy than the established fund that's, you know, on this 5th iteration of their team, you know, and they've been around and they have the big name and they have all of that and they're multi-stage and they're multi-region and they're multi, like, You guys really, I feel, I feel at least in the way that I see it with your founders, like you're hustling for them like you work at the company.

We totally do. And it's basically, you know, if you're a founder and let's assume you have a term sheet from Andreessen and from Innovo, obviously Andreessen is going to help you with the brand and with the hires, but then you're going to be, it's very hard for you to be in the top 5% of what Andreessen has. Yeah. So, and we're gonna fight for you like there is no tomorrow because very likely like you're gonna be the important company for us.

That point is an important point also. These points are the things that I want founders to hear because these are the things where they're like, oh my God, but I have this great brand and I have this great, you know, this person. And I tell them, unless you are literally like in the top 5%, they don't care. Like, for a fund of that size, it literally doesn't matter. I see it with some of the funds that I've worked with in the past that friends of mine work with. And if their company starts to take off, you even see partners that aren't even involved in the company, they're like, can I come to board meetings? Can I come? And then they don't even want to come to your board meeting because you're in the 50th percentile. Yeah. But the one that's in the top 5, there's like 47 people in the board meeting just so they can say they touched the company in some In some way, you know, and and I I I think as of I think I understand why that's the case. I'm not saying I agree with it, but I think I understand why that's the case at those types of funds. But but people feel like the brand is like they're gonna somehow you you get Andreessen and now you're successful, like just because of that, you know, versus like the the investor is one piece one piece of that puzzle.

No, I mean, obviously if you are supposed to hire somebody for like VP sales position and he's backed by Andreessen, he's more likely to join than when he's backed by Mavlov. And it opens a couple of doors for potentially some enterprise clients where they need some kind of validation that the company is serious and it's not going to go out of business, which actually it's a question mark whether a big fund is actually helpful in this matter. And then, you know, some people think, okay, they're multi-stage. If I'm gonna do well, then they're gonna give me more money. But if you're gonna do well, everybody will give you money.

Exactly. Exactly. I actually don't think enterprise customers know who's invested in most of the companies they buy from. That's something I hear from people and I don't, I am even as a small company, most enterprises, like if you're selling to the IT guy, He doesn't know who back. He doesn't care. Like he's not paying attention to that stuff. You know, I think maybe if you're talking about multimillion dollar deals and you're selling to big, big, big enterprises, you know, like and you're selling to the CIO, maybe, maybe. But even then, I don't know if they know who backs you. But I agree with what you're saying. I'm curious, you know, your region. Can you talk a little bit about? The region? Because when we've talked, I do feel like it's undergone a pretty big change, especially last 2, 3 years. I don't know if it's the AI kind of revolution that's doing it. I don't know if it's just time, but can you talk about maybe the region as you've seen it as an operator now to an investor?

So can we look at the whole decade that I was in? Because I think When I joined, there was no venture capital and basically most of the like great companies that were built were built like for private money and then going to like local stock exchange, et cetera. No VC financing. And you had amazing companies being built that won like local markets. Like we have Allegro, which is like an Amazon for Poland with like 50% of Polish e-commerce. It's a huge company, IPO'd. Like worth over $10 billion. Then we have InPost, which was the logistical backbone for Poland that was like built in 10 or 15 years. They're probably the best, most technologically advanced logistical company in the world. They invented these parcel lockers. Now they are rolling out throughout Europe. And in the last like decade, we started having the companies that were building in the SaaS market, but basically not inventing something very new, but rather replicating the models that existed. So the big successes were like Grupapracy, which is a job marketplace, were Docplanner, which is basically a marketplace for doctors, was Booksy, which is a marketplace for beauty, which was basically after the Booking.com and the food and like the most obvious markets were done. You could have attacked the other markets where no clear leader was. And these are like businesses worth like billions of dollars, like also Preply, the marketplace for tutors from our portfolio or Bolt, like amazing company, like doing better in Europe than Uber. And something that changed in the last few years, like first of all, if you look at OpenAI, like key engineers, the founding engineers, like a third of them were coming from our region, like mostly from Poland. And then if you look at this like coding Olympiads or computer science Olympiads, we have the biggest like per capita number of medalists. So we have a lot of smart people on the like mathematical side. And these are the people who are very important if you want to build in AI. So they used to historically go to like Googles or Jane Streets or hedge funds and so on, or continued a career at the university. Now they saw you can actually solve more interesting problems when you join startups that are trying to build a meaningful tech breakthrough. And obviously, you know, we have ElevenLabs, which in 5 years got to like $20 billion valuation, which is the 3rd most valuable company Like founded by Polish people. It's like only our national bank, it's like bigger. And it's like the 3rd or 4th like most valuable European tech company. It's amazing. It happened in like 4 or 5 years. And now people see that. Yeah, now you can see, you know, you see all these early employees that their ESOP is worth now millions or tens of millions of dollars. And that's why people want to build more ambitious things. So Now we see more and more companies that basically want to build the next frontier of technology. Like Victor was— Victor built the AI employee category, like Anthropic followed. Yeah. It's not like we copied something or whatsoever. Like we have Pathway that's building a post-transformer infrastructure. Like they're going to reinvent potentially how all the models are done. Like that's absolutely massive. Like Pathway is a case where they moved to Silicon Valley because of you need to be close to the other labs in order to iterate more quickly. But also now on the physical AI and robotics space in Hungary, in Poland, you have a lot of teams that you cannot really compete with Chinese on the hardware side, but on the software computer vision side, you actually can. And this is the next frontier. And the fun fact, what I see is when we speak to these brightest guys, They're like, whatever is in software is boring. Now I'm thinking about physical AI. Yeah. Because in software, it's going to be grabbed, like all the interesting bets are taken. So I want to make bets around physical AI because this is actually exciting. Yeah. So I think we're going to see a lot of great companies and actually more and more from our region will be like the first to category, the category defining.

Do you? Do you? Is the infrastructure, as you and I have talked, I haven't been to Warsaw. I promise I'm coming. But is the infrastructure has? Do you feel it in the city? Like, do you feel kind of this evolution of people? Because I feel, at least for me, I think that forever Polish engineering, like people were coming to Poland, putting putting engineering, you know, teams there, all of that. But it feels, at least from afar, from the people I know there, the people you've introduced me to, there's like a different thing happening because it's not just the engineering, it's all the other pieces as well. And it's the founder communities and there's the meetups and there's office space. Like, I'm just curious, I haven't seen that evolution. I'm curious if that's something that's happening there.

You know, I used to live in Berlin. I came back to Poland like around 10 years ago. And back then, I think Warsaw was just a little bit behind for Berlin. Now I think it's like way ahead and it's amazing place to do business. And you can see that by Polish people coming back. Like if you look at the migration net to UK, it's actually in favor for Poland. So more people are moving back than going to the UK. And it's because of the interesting stuff you can do. Some people told me in London it's already done, you just execute the playbooks. In Poland you can still build stuff. And then, you know, we recently had like top Palantir people willing, not Polish people, willing to move to Poland to actually build there. With more and more people from like Western European cities moving to Poland because of availability of talent and the opportunities. That's like completely new, like it hasn't been happening for the last years and I think we're not making enough PR because if you look at the quality of life, you know, it's like in Warsaw, a single girl can go to a party and come back at 2 AM at night walking and she will be safe. I don't think in most of the European cities and some US cities it's like feasible. So this is like the safety, cleanliness and everything on the top level. It's really amazing. And, you know, the fact that this city effectively was built within the last 20 years, everything is new. So it's really, really working. And then if you have good quality of life, people come there and then you have this amazing talent. Like Mistral recently opened their R&D center. Wonderful AI is building like a huge team in Poland and more and more companies are opening like offices in Poland. Tallinn in Estonia used to be a thing, but Vilnius recently It's like crazy. Yeah, we had a year when we did like 3 investments in Lithuania, but the amount of startups there is like really huge. And it's like interesting because there was one company called Kilo Health, which trained a lot of people who are very strong at user acquisition. And that's one of the competencies you need in startups. So then there are now a lot of startups who are able to hire people who have amazing experience in spending hundreds of thousands of dollars on paid marketing effectively. And thanks to that, they take off quickly, they raise money, and the whole ecosystem is growing very nicely. So for B2C, Vilnius is an amazing hub.

So now, so there's all this money flowing in, we see all the valuations, they're, I would say they're not as crazy there as they are in the US or in the Valley or whatever, but regardless, all like the market has gotten crazy and I feel like we are definitely in like a 2021 bubble again. I think that some of the deals, you know, $75 million of revenue and $20, you know, $10 billion valuation. And, you know, it feels like the, you know, the Miro days and $17 billion valuation on $100 million of ARR back then. Then they get sold for $1.2 billion when they're doing $600 million of ARR, however many years later. I fear that. Do you think, what do you think from your seat? Are we in a bubble right now?

I would say this time is different. That's the best quote for a stock investor. But what I see differently versus 2021 is like right now you actually can see the exponential outcomes. So never before have you seen companies that can get to a billion in ARR in 2 years. Yeah. Like Higgsfield has grown. It's a founder from Uzbekistan. He grew from $1 million to $1 billion in 18 months. Yeah. And when you think about it, if you see him at 20 getting from $1 million in like a quarter, and you might say paying a billion valuation would be crazy. Yeah. But if somebody is on such exponential trajectory, he's gonna pay that off. Yeah. If you look back at people who backed Anthropic pre-revenue, you probably would think they paid crazy amount of money. Now they are heroes. Yeah. And then if you make 10 such bets, you're gonna end up with a couple that in hindsight will look foolish. Yeah. But Miro was a bet that it's gonna be a generational company like it was on another territory. It ended up not being this, but They got to $600 million.

I know. They actually did from a revenue perspective, you know.

It's an amazing company.

$600 million. That's an amazing company. Amazing product, amazing company. Just the outcome.

Yeah. So, and people who invested there will get their money back. Yeah. They're not losing money because they have liquidation preference. So it's not a bad deal for them, but it's not a, you know, I also have a couple of companies where I invested. The company's like tripled in revenue. Grew profitable, and I'm selling them with like a slight profit, like 10-20% profit. Yeah. So you might say, oh, I really overpaid. But my bet was this company are going to grow 10 to 20x. This bet didn't work. But you know, in venture, you basically have one or two companies that will return your whole fund. You're looking for this. So it's kind of, if you're paying a $500 million valuation, it doesn't mean this company is worth $500 million. Yeah. If you look at the Victor.com case again, like Axel paid like $400 million, yeah, when the company had like $10 million in revenue. You would say they were crazy, yeah? But then they have $50 million today, 3 months post-investment. They paid less than 10 times ARR, yeah? That's quite decent, right?

But what you said there, I think about You know, one, 2 companies, you know, returning, one company returning the fund many times over. I think back to the founder, 'cause again, I, I speaking to the founder, I think this goes back to what we started this whole thing around storytelling. Because when you're in front of the investor, the only thing they're gauging is whether your company, I think, you tell me if I'm wrong, they're gauging whether your company is gonna be the company that returns the fund. And if there is no, if, if they can't squint and see that your company is gonna return the fund multiple times over, they're not investing. Like that's not their business, right? I think this is, again, this literally goes back to the beginning of this conversation, which is you have the founders who are like, I have impossible, I can't say that I'm gonna do that. How am I gonna do, build that kind of company? A billion of revenue in 18 months? That sounds impossible. But the thing is, is that that is happening actually. Real companies are doing that. And if they don't, If an investor doesn't feel like you could be that, could be that, why would they make that bet? I mean, it's they need it to be one of is it? I don't know that when I talk to investors, even when I've interviewed them, a lot of them are like, "Don't founders know that?" And I'm like, "I don't." I think you're giving too much credit. You know, first-time founder who's not in this business, it you don't fully understand the dynamics on the other side of the table.

Really? I mean, you need to understand to what type of fund you're talking to. Yeah. Because there are, if you have a smaller fund, they need like a smaller outcome. So some people have more like private equity mindset and they are happy with a 10x outcome. That's like fairly safer. And there are such funds. Yeah. I think specifically now in segments like AI rollups, for example, or if there is still a marketplace to be built. People look at it, okay, that's actually a business case that might not like return my fund, but will very likely do a very high return on what I invest. But then the problem for the founders is, you know, my colleague is doing a million in revenue and he got like whatever, $50 million valuation. Why I should also aim for the same? But if his ceiling is like 10 times lower, he's not going to get this type of valuation. Because then the math won't work and you need to understand the game you're playing. And I think the founders that do, then they can play the fundraising really, really well. And there's another point. It's not only that I need to believe that this company will be the generational company. I need to believe that the guys that are investing at Series A will actually be excited about this case as well. Yeah. So I kind of know and feel what they're looking at, which markets they find attractive. What metrics they will need to hit, and so my job is kind of to figure out. Okay, does it have the generational potential? If yes, is like what is their plan sellable for Series A so they can raise the next twenty million for the next round? Because if it's not, and this is the paradox we discussed on it a little bit, like the best bets are contrarian. But if you're contrarian and nobody will give them money in. A year from now for Series A, even if you're right, they're just going to fail. So it ends up being a type of consensus play, but it's probably the only play you can play today. Like you need to get into these companies that will target the big and obvious markets that are like crazy competitive and will just outperform others.

And like you said, I mean, I think there's a lot of conversation going on about this. I've been saying it for a long time. The moat The moat is kind of quickly going away. Any moat, and actually, unfortunately, to build these generational companies, capital is moat. I mean, you know that that like you you said that before, and I think that it sucks to say that because it kind of you know you want to talk especially me like how do we run the company the best way? How do we do this? How do we do this? And there's some level where it's just. If you're 20% less operationally efficient or effective, but you have 5 times more money, the money most likely is gonna win out. You know? And I think that that's, you can also subsidize. I mean, we're seeing this with, I mean, we're seeing this with so many companies today. You can also subsidize all the customer acquisition, all the usage. You know, you can run like many of the coding agents at negative gross margin. I mean, which sounds absurd, but you can run at negative gross margin, you know, for a long time. I think the food delivery companies, right? I mean, that's what they were running at. How did DoorDash end up being the one left standing? They just outlasted everyone else with like, you know, losing money every order until everyone else just couldn't do it anymore. You know, I think that, that's what I feel.

But I think if you look at it now, like Bessemer has did this nice classification of the supernova type of companies that are getting to like $100 million in 1.5 years. And they can be gross margin negative. And it's like you have 24 hours, yeah? And you can only do limited number of things. So now imagine there are 2 founders. One will optimize his model usage to have good economics. The other will just grab the market like crazy, losing money on every customer, yeah? And in a year from now, founder A has a good gross margin and 1,000 customers. Founder B is losing money on every client, but he has 100,000 clients. And he's able to hire 5 people to solve this problem. Yeah. And the fact he burned like $10 million on inference doesn't matter in the long run because he's the one that won. Yeah. And also I think right now distribution is becoming in mode. Like you need to have, you need to be able to build like world-class tech and be really great, great at it, but you need to be able to do world-class distribution. And then the question is like, what economics are acceptable? And I think some of the most aggressive companies have approached that they can actually run on a return on ad spend of zero on a lifetime basis because they're like, if we are able to win this customer, our competitors will not win them. And then, you know, you will develop additional products, et cetera, et cetera. Yeah. You might optimize the models and so on. Yeah. And then, you know, once you are Ahead of them, you will have this scale advantage. You will be able to hire people who will optimize like routing to cheaper models or maybe like some additional use cases, or you will have actually time to think about optimizing pricing and so on.

I think this is definitely happening. I mean, right, this is the Uber-Lyft story. This is the, right now I think in the legal AI space, this is definitely happening, you know, and you see It just doesn't matter. There's only so many law firms in the world. So if Harvey, Lagora, whatever they have to pay to acquire the customer, to your point, it's a good point. You make a good point of whatever it costs, that law firm is probably not going to the other one. You know, if I get them locked in, you know, it's it's uh so anyway, yeah, it's an interesting um it's a scary you're literally like that's like the true like rocket ship that could burn and go up in flames, but if it doesn't, you're going to the moon. You know, it's like you're running really close to the— something happens in the macro world, something happens and you're doing that. You have to either continue to be able to sustain doing that or you kind of, you know, you're playing with fire a little bit. But all the companies that we think about, the supernovas, seems like they're all doing that.

But I think, you know, from the founder perspective, you're entering a very, like, let's assume you're going to decide whether you want to join this race. And it's basically, if you're not winning there, you're screwed. Like you're going to have a tough time. And, you know, if you're not at this like top trajectory, your gross margin is negative. You're not growing as fast as you assumed. You're not going to raise more money. You're not going to even have a chance to make the unit economics work. Like you're, you're going out. Yeah. In like 2, 3 years. And, you know, I actually have a workshop with some hackathon winners tomorrow, whether it makes more sense to bootstrap or to do VC. There are a few people who say that expected value of your stake as a founder statistically is higher if you bootstrap because of so many failed cases in the VC. And, you know, if you have like Miro was a good case, but I think Airtable was the liquidation preference stack. Was close to what the final price was. In the end, I think founders are going to do well, otherwise they wouldn't do the deal, but they're not going to do so well. But I recently see, you know, especially now in the times of AI, you can raise very little, like do the seed strapping, raise like a million, get to a company with $10 million ARR, like 50% EBITDA margin, and everybody should be happy, especially the founder. And, you know, very often I recently had a founder who's like targeting a niche of like 1,000 businesses in Poland. And he's like, no, nobody serious is going to attack this. And it's like a clear niche. And I'm going to grab like 20% of this market and it's going to like be a great passive income going forward. Like this company is going to be maintained with just a few hours of my engagement. So, you know, when you're starting a company, it's kind of the niche segment place with very limited funding might be a good idea for like you as a founder personally, unless you really want to build a generational company. Yeah. If you want, come to me.

What do you think that founders don't understand about your job or being a VC in general?

I think a lot of founders believe they should show profitability in the plan, which is something I don't like. I think their perspective that, hey, we already see that there are some people that might want to buy us is a good signal that we will have an exit. But for us, an exit at like $50 million quickly, it's a backup, not a scenario we want. And I think a lot of founders think like my job is to come evaluate whether it's a good business, like almost like passing the test. And my job is actually about finding the anomalies. It's not a logical business. It's like you need to, like the companies that really break out that become decacorns are anomalies. That's not a, a regular course of action. So basically the question is like, if this is a guy that's like very strong and is doing everything kind of by the book and executing well, why would these like, uh, standard inputs give non-standard outputs? Yeah. So That might actually be, I want people who can show they're doing something in a different way.

Why, I feel like in all the conversations you and I have had, you love being an investor, feels like that. Why?

I'm not smart enough to be founder. So, you know, I have great pleasure to work with these people. And, you know, we, I don't have my hoodie, but we have on our merch like, we love founders and we really do. And I think it's basically meeting this person who believes he can change the world and then seeing them making it happen and being somebody who can help them with one or two roadblocks on the way is like very, very fulfilling. And From the very non-romantic standpoint, if you look at it, if you're a founder and you have like 2% chance of hitting this dream company generational output, in 98% of the cases you will be screwed. Yeah. If I have 50 such bets, like unless I do shitty job, I should have 1, 2, or 3 cases that will go really, really well. And obviously my economical output from this will be worse than this one founder, but it will be good enough.

Great way to end this. Thank you so much for doing this with me. I really enjoy it and I've enjoyed getting to know you and your companies and everything. So thank you for doing this with me.

David, like, thanks a lot. And also, you know, thanks for all the support and insight you've shared with the companies. It's like if somebody is coming to New York, That's probably the best address to knock on the door if you can only make it into his busy calendar.

Thank you so much. For those of you listening, I hope you enjoyed. If you did, please share this out with your networks and we'll see you for the next episode of Not Another CEO Podcast.