Michael Dearing on Capitalism, Creativity, and Creative Destruction | Blitzscaling 03

This is session three of Technology Enabled Blitzscaling, a Stanford University class taught by Reid Hoffman, John Lilly, Alan Blue and Chris Yeh. This class features a guest lecture by venture capitalist Michael Deering, the founder of Harrison Metal, who is then interviewed by Reid Hoffman. This podcast has been produced by Greylock Partners. For more podcasts, class notes, slides and videos, please visit greylock.com the first part is Michael is going to give a lecture that he has prepared, which I'm actually looking forward to. I've actually gotten some preview of it and I actually brought my cards to take notes because I'm also going to have the privilege of leading the questions. We have selected questions from the things that you guys have submitted already and I have those on index cards in addition to my own and I'll interweave them. I've actually sent them all to Michael in the justin time basis about 45 minutes ago. So he's now computing like, oh, those are the questions that are going to come after the lecture. And so as a quick introduction to Michael, Michael teaches at the D School. He actually teaches entrepreneurship. He runs a very successful early stage venture capital practice called Harrison Metal. The way that Michael and I met is I tried, I think two or three times to recruit him to LinkedIn, to which he told me no each time. And we'll get to that, maybe more in the Q and A. But he is an excellent investor, an excellent product guy, and an excellent scale executive. And so we asked him to come and share some of his wisdom with us. That's it.

Thank you for the invitation. So this is going to be a little strange, but I'm going to ask you to come with me back in time. And I want to talk to you about a hero of capitalism who's long dead. Thus the footnote from beyond the grave. And poor John Lilly is stuck flipping my slides.

We're fixing that for the next class.

Awesome. Okay, so let's dive into Heroes of Capitalism. The first thing that I want to give you context for, and believe me, this all does tie right back to startups and entrepreneurship. I promise. The first thing I want to give you is 1000 years of context. I want to give you a thousand years of reasons why what we're talking about in this room matters. If you can see this and read the title, just digest it for a second and then maybe somebody give us a guided tour of this slide, this exhibit. What is this? Exponential grant of GDP per capita. Right. So it's the economic output of every person on earth from the year 1000 to the year 2000. I wish I had the brain power to come up with this data set, but I don't. But I did steal it from a person named J. Bradford Delong who teaches economics at Berkeley. And Professor Delong did his actually, his study, his paper was actually estimating world GDP 1 million BC to the present. I cut the million part off, the million to 1000 part because it's. The answer is it's really low. And this tells the story well enough for me. So therefore it works for you too. So real GDP per capita, constant dollars over time over 1000 year span on a semi log scale. So what we're able to do here is to see an incredible. What we're able to do here is to see an incredible change in, in the circumstances of being human on Earth. Give me your thoughts about this curve. When you look at it. What are some of the features that jump out at you, some of the landmarks that really stand out to you?

It went down for a while.

Yeah, round about the 13th century. Any guesses what that is? The plague. Yeah. Yeah. In case you ever do build a time machine, please do not put the settings to that because you'll have a 1 in 3 chance of not coming home. The population drop was precipitous, particularly in Europe. And so the productivity as really what GDP per capita is, is productivity collapsed. Now, if we go forward in time, what else do you notice about this curve? Industrial Revolution. Where do you see that beginning? Yeah, this inflection point. Kind of hard to miss, right? It's the most obvious feature of this chart with the exception of the incredible amount of flatness over the preceding 700 years. So the flatness with the extra painful dip, really bad. Have you ever lived through a low growth situation? Now try doing that for 30 generations. That would suck. This inflection point, Industrial Revolution, anybody remember from maybe other history courses you've taken or just your own readings, like what were some of the big things that happened to make that inflection point possible? So I heard that it's correlated really.

Nicely with the introduction of coffee shops.

Really?

Yeah. So in Ideas Having Sex with Danny Drinkers, you basically described that when people started meeting and discussing ideas in coffee shops. And you can correlate this with the rise of coffee shops, not Starbucks, but people meeting and discussing ideas from different disciplines.

That's fascinating, but I buy it. The exchange of ideas. Certainly something changed here with respect to. You could think about the density of population in some of those cities, the mobility of people to be able to Spend time with one another, mostly because they weren't in the fields trying to come up with their next meal. They had some more free time to exchange ideas.

Yeah.

What else do you think happened here? Insurance. So, like coffee shops, like Lloyd's of London, the first insurance company was founded in a coffee shop run by a guy named Lloyd in London near the docks. Okay. So once people were able to have insurance for business ventures, they could go in and take more risk. And therefore when you. It's risk reward.

Right.

So you can have a much greater potential income if you do take risks.

And you can insure against it.

Okay. So in that sense, you might actually go back to Adam Smith and say that the division of labor there started to get more granular. There were specialists in provision of coffee, the provision of insurance. There might have been specialists in the invention of new technologies. I want to read to you America. So that falls into the bucket of like heavily loaded one line class participation. So give me the highlights of what you mean by America. 1776, America was founded. Yeah. This is the spirit that made America great. Is the willingness in your first year of undergraduate, right, you're a freshman, to. No, no, I'm dead serious. This is the courage that we depend on to fuel that curve. I want to read to you a paragraph. We'll come back to this, I promise. I'm not blowing you off, but I need to think a little bit about how to respond to you. So I'm going to stall by reading Schumpeter. Joseph Schumpeter wrote this book, Capitalism, Socialism and Democracy. And he wrote it in the late 1930s, early 1940s. And the paragraph that I want to read to you, I think is really special. You'll probably recognize some of these terms when we get to him. This is Schumpeter writing about capitalism, writing about this. The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. steel illustrate the same process of industrial mutation, if I may use a biological term that incessantly revolutionizes the economic structure from within. Incessantly destroying the old one, incessantly creating a new one. This process of creative destruction, capital C, capital D, is the essential fact of capitalism. Schumpeter believed this was due to entrepreneurship. It was due to people you never heard of starting businesses you couldn't quite believe were real. Completely unsettling the economic output of model for the economy. A couple other things happened at this time too. One was plentiful sources of cheap energy became available in the form of coal, steam, eventually oil in the early part of the 20th century. So that the scale of the inventions, the inventions that these entrepreneurs came up with, the scale could be many, many times greater than anything that had been seen before. Humans didn't suddenly become a creative species in the late 1700s. They just started to get bigger levers and gears to turn the machines they built with so power was a huge part of this. The revolution in technical innovation, in transportation, like the railroads, in mechanization, like spinning cotton, all of those things played a huge role in that inflection point. The other person, John, if you could flip ahead. Thank you. The other person that's really important to know about is this person, Al Chandler. Al Chandler founded the discipline of business history at the Harvard Business School. And before he retired and sadly passed away, I had a chance to spend a lot of time with him and his colleagues at Harvard. Chandler's view was Schumpeter is right. Entrepreneurs play an incredibly central role in the process of industrial capitalism, in the growth of output in the wealth of humanity. But managers play an equally important role in amplifying the genius of those creative founders. And so Chandler's whole view was that the managerial revolution, which scaled with these companies, remember that entrepreneurs came up with the technology, the company scaled because of energy sources. They had to be managed at a scale that was unlike anything ever seen before in history. And so Chandler says that this invention of managerial capitalism was a fundamentally new invention that came with industrialization. So what do we have? We have this painfully flat period of about 700 or 800 years. We have this rapid change in direction of output per person on the planet Earth. By the way, totally unequally shared, correlates beautifully with population growth, the collapse in infant mortality, the widespread availability of education, medicine, et cetera, the increase in the dirtiness of our air, some would argue the temperature of the planet. This is a mix of things here happening, but all of the terrible things that came before it. Now we finally have an engine that can pay the bill to fix those things that are horrifying about life on earth. Slavery, war for food, all of these things were commonplace in this period. They were invented long before capitalism. Capitalism finally gave us an engine to pay the bill, to get rid of these things. So this is the context, the thousand year context that I want to have in our mind when we talk about entrepreneurship. Yeah, I was just saying also that.

Colonial empires, I think in the beginning of the draft had to do with.

Let'S say, India, us. Well, if I understand the point correctly? Yes. The ability of the colonial powers to distribute technology, ways of work, legal structures, not by choice, but by force, was a huge driver of economic growth in this period. But what's interesting about industrialization in each of the countries where it happened, first in Britain, then the United States, and now in places like China and India in the last half century, it always comes with an expansion of political freedom. It always comes with an expansion of personal freedom. It always comes with the writing of terrible, many hundred year, many centuries old injustices. And we're going to come back to that topic in a second. Go ahead. The other thing to note that connects you and what you're talking about in this room to the really important stuff in human history. The money that comes to Silicon Valley to fund these startups, to fund entrepreneurship, to fund the creative destruction of today. It doesn't come from the wealthy fat cats. Some of it does, but a lot of it, most of it comes from research institutions, universities, museums, foundations, hospitals, the guardians of civilization. So this cycle of creative destruction that drives economic productivity, that spins off wealth, that comes back and fuels institutions, that is something to be very, very aware of. This cycle is all linked. So no pressure, but it's your turn to drive this train. We've got to understand the Schumpeterian view of entrepreneurs as the engine of creative destruction. We've got to embrace the role of managerial capitalism to scale and amplify the genius of those founders. And we've got to use the proceeds of whatever we create to make that situation, make our situation better, to eliminate those things that are terrible about being on Earth that have been around for a long poverty, injustice, ignorance, sickness, etc. Okay, so no pressure, but civilization depends on you. Okay, There are three really fascinating parts of this curve. Now I've zoomed in here just to reorient. Same curve, zoomed in on the period 1800 to 2000. And there's three separate periods in that window that are really interesting. The first is the mechanization of manufactured cotton. The second is the transportation revolution, characterized mainly by the railroads, the railroads of Western Europe and the United States. And third, the technology revolution of Silicon Valley and the modern age that we know so well. We're going to zoom in kind of right about here early on. Oh no, we're not going to do Slater's Mill today, although we could. We're going to do the railroads. Sorry, I left a Slater's Mill slide in there. The thing to know about the railroads is that they were startups once they were startups once. This is a locomotive that was manufactured in 1830 in the UK. And at one time this was a startup very much like the startups that you know and love of today in Silicon Valley. And the startups were run by people like this. This is Daniel McCallum and he's the hero of capitalism who's going to speak to us from beyond the grave today. This is him in later life, obviously. But when he started out, he came to America in 1822. He was born in Scotland. His family moved to upstate New York when he was just seven years old. He came to upstate New York from Scotland. He looked at what his father did for a living. His dad was a tailor. And he decided the tailoring thing is not so much for me. So he started to think about what else he could do. Very young boy, 12, 13 years old, began to work with wood. He taught himself how to build practically anything with wood. He ended up creating something called the McCallum Arched Truss Bridge which got him a patent. He became something of a magician with woodworking and with bridge making. So self taught woodworker, became self taught architect, became patented architect, was hired by the New York and Erie Railroad to be the bridge apprentice in upstate New York. He was then promoted. This is all the span of a couple years in between each of these milestones. He was then promoted to head of bridges, to superintendent of bridges, pardon me, for the entire line. Then was given a general manager promotion to the head of the Susquehanna branch of the railroad, and then finally became the CEO of the entire railroad when he was about 43 years old. So this was somebody who was. If you just looked at his career, you would say this is about as entrepreneurial as it gets. Son of immigrants decided he had no future prospects in the tailoring business. Decided to go into something he loved working with wood. Continued to get promoted and create a career for himself out of thin air. Found himself inside a company that had once been a startup that he knew well and loved. As a local member of the team in upstate New York. They but then got promoted to be the head of the whole thing. And let me give you a sense of the scope of the whole thing. This is his bridge, by the way. The nice thing about this bridge is it lasted a lot longer than typical bridge designs and it required substantially less maintenance. And so you can imagine why in the capital constrained early days of railroads, that would be a really good thing for the railroads to have. So this was his claim to fame. He built many of these bridges throughout the Northeast. This is the scope of his operation. He started out as a maybe third or fourth rung employee in upstate New York on one of those tiny red lines. And he ended up running this whole thing. So why does this matter? I thought we were talking about startups, not big, huge enterprises. It matters because McCallum, in 1855, wrote a beautiful letter to his boss. And the letter he wrote to his boss, you can have it. It's online. It's one of the earliest writings that survive of anybody saying, here's what I think about general management. Here's why it matters what we do as general managers. And in this document, he writes about the incredible, the relative ease and fun and joy he got working on a small railroad of 50 miles long in upstate New York and compared it to the toil and suffering and awfulness and of trying to run a road 10 times or 100 times longer. And so mccallum wrote this letter to his bosses to say, we got to rethink how we do this because we've lost, essentially. He says it In a more 19th century, hard to understand way, but he says, we've lost what made it easy and fun running a small company, because now we're trying to run this big behemoth. Does that make sense? And this goes very far west. I mean, this is all the way into Kansas Territory, 1850s. So you get the idea. Okay, so I will save you. You should go read this letter, But I will save you all of the pain and suffering of reading it if you don't want to. And tell you what he says. He says the joy of running that 50 mile road was because I could see people with my own eyes. I could talk to them with my own voice. I. I could get the group of people to work on the right stuff at the right time. I could give those people responsibility because I knew who they were, right? I had a personal connection to them. I was also able to make sure the job was getting done day in, day out, because I was putting my own eyes on the problem. And in that 50 mile road in the startup railroad, I knew how things were going because I could see the trains moving or not. I could see the freight coming on, going or not. It was all very visible to me. And Also in the 50 mile road, we had a relationship with each other, we had respect for each other, and we talked to each other like human beings. In the 500 mile road or the 5,000 mile road, all of this went away. And so mccallum was struggling to say, how do I bring back what I loved about the small Road to the big road. And these are the five questions that he asked his boss. He of course had an answer for each one of these. For example, how do you make sure the job gets done? His answer was you get on the frickin telegraph. And every hour you tell me how it's going in Nebraska and you tell me in this format so that my clerk can write it on the board and I can stand in New York City and I can see how it's going out in the hinterlands. And every hour on the hour you send this formatted update back and forth using telegraph.

And.

And that's how I replicate the visibility I had at the small company level to the big company level. Does this make sense? Any observations about this list? Anything surprise you about McCallum's list of key questions for managers or about his story in general? Yeah, isn't it crazy? The first time I read this, which is about 25 years ago in grad school, I really thought this is odd that somebody who remember apprenticed as a woodworker, no formal training, didn't finish, didn't go beyond educationally, go beyond grade school. There's no such thing as business school. There's no role models. He had no apprenticeship. He was promoted every 24ish months into higher and higher levels of responsibility with no clue what he was doing. He basically admits as much as in this letter, these questions are really useful today.

There are no financial constraints or goals in there.

Yeah, it does kind of take for granted the financial viability of the business. Which by the way was not a good thing to take for granted because about two or three years after he wrote this letter, the railroad failed. But we honor that. I should say more importantly than all that stuff. Can you flip back to the picture of him? You see what uniform he's wearing? He became the master of railroads for the Union army. Thank God, right? Because if he had been the Confederates, we wouldn't be talking about Daniel McCallum. He was on the Union side. He played a huge important role in commandeering the supplies to feed General Sherman's attack on Atlanta. So hero of the Civil War as well as hero of capitalism. Flipping. Yeah. These five questions, no financial milestones or a preoccupation with finances still pretty relevant today. Anything else jump out at you?

Yeah, it appears pretty enlightened for a guy that's I guess, working with quite.

Menial workers in a position of authority.

It's concerned with his respect for others and relationships.

The fact that this is on the list now, the way he Says it is something to the effect of execute all of the above so as not to create embarrassment for the management, the managers. That idea of respect was really totally surprising and very unique, I think, for the times. Yeah.

Not only how applicable they are, but how unsolved.

And he wrote this 170 years ago. I find it a great relief that I'm not the only one who doesn't know how to do any of these things or who tries to figure out ways to do it. This has been going on a long time. This has all happened before. Still unresolved. I think somebody had a hand over here.

No.

Anything else before? We keep going on. Okay, so just to put this in Context, what was McCallum doing? He was participating in his own small way, right about here where the shape of this curve was by no means a foregone conclusion. In fact, they didn't even know that it was going this way. They sort of felt like something was different, but they didn't know it was going this way. They certainly didn't know the amount of wealth that they were part of creating. And they certainly didn't know that what MacCallum was doing in a weird way was directly tied to that injustice stuff that I talked to you about before. This is a book called Things As They Are in America. A British guy named William Chambers came to America in the late 1840s, early 1850s. And he wrote a diary of what he observed in the then very young country, pre Civil War. So one of the stops he made was to see the slave auctions in, in Virginia. And I'm going to read to you. This was happening a few hundred miles to the south of where McCallum was struggling with these lofty ideas of geez, how do we get people to work together and how do we make sure that the work gets done and how do we make sure that the right amount of responsibility is conferred on people. All those general management challenges that he laid out in his letter about the railroad a couple hundred miles to the south. This is Chambers writing about his visit to Richmond. Here, according to the announcement on the paper stuck to the flag, there were to be sold a woman and three children, a young woman, three men, a middle aged woman and a little boy. Already a crowd had met, composed, I should think, of persons mostly from the cotton plantations of the South. He goes on to describe the situations, the situation in the room where the auction was being held. And he writes, while intending purchases, we're proceeding with personal examinations of the several lots. What he means by that is that the people who came to buy the other human beings was poking and prodding them and looking in their mouth and checking their hands to understand how much they should pay. For those people I took the liberty of putting a few questions to the mother of the children. The following was our conversation. Are you married woman? Yes sir. How many children have you had? 7. Where is your husband? In Madison County. When did you part from him? On Wednesday, two days ago. Were you sorry to part from him? Yes sir. She replied with a deep sigh. My heart almost a broke. Why is your master selling you? I don't know. He wants money to buy some land, I suppose. He sells me for that. This cures that. That's why what you're doing matters. This would never have happened without people like McCallum. And the wealth that was created from that industrial revolution paid for the destruction of this disgusting industry. So that's why it matters. Oh, that's it. So no pressure, but civilization depends on you. And now I'd be happy to have a chat.

So in reading McCallum's letter, did you get a sense that he was a micromanager?

Oh, terrible. Yeah, terrible. He had practices not only for those telegraph rules that I mentioned before, excruciating detail about how the telegrams were to be addressed, the timetable on which they were supposed to happen, how you would decide to break a tie between two trains on the same track. It was an excruciatingly detailed operating manual.

Yeah. So it might be somewhat, given the education level, but it was like send me a telegram every hour. I could imagine a startup in Silicon Valley saying report your status every hour. It wouldn't be a great talent retention strategy.

No. He was flailing around for any tool he could get his hands on to try to recreate the intimacy of managing a small business on a large one. And of course he failed completely.

Yeah, well, and the financial one was a very good question. Yes, it was kind of a question of, well, there's other things that go into doing this. Although before the lecture I didn't know about MacCallum and he actually may be the very first example of a systematic attack on the scale up problem. So in the book we're working on, we actually may, we're going to go read the letter and we're going to see if we're going to include it. So it's awesome. So when you look at the curve, one part of that curve is obviously capitalism.

Yes.

But another part of it is also invention of technology. And those two are actually in fact obviously somewhat correlated. Although how deeply is kind of a little bit unclear when you think about this exponential growth in value. How much do you attribute to the incentive system that essentially capitalism does to destroy to create a decentralized system of incentives? And how much to technology, invention, and how do you look at that curve?

I think of them as mutually reinforcing, and if you took one away, the other would collapse. And we know that because we accidentally ran an experiment for 800 years as a planet where we had lots of smart people running around inventing new ways to do things. You could look at banking in Florence or printing in England, but these became very small enterprises. They sort of topped out at the like 20, 30 people range. And of course, the capital that accumulated around those businesses was tiny. What really unleashed it, in my view, was the disconnection of the good ideas from the money, from the management. So when you had to have one person who happened to have money, happened to have great ideas, and happened to have managerial ambitions, that's a small set of people. When you suddenly say, ah, the money people can be different than the inventor, and the inventor can yet be different than the general manager. That allows a multitude of connections that wouldn't have happened otherwise.

And when you did this kind of learning, did you also include kind of the weird paradox that venture capital was essentially invented post World War II? So. So it's actually very late in that curve.

It is very late in that curve. And I think what you have to look at is the substitutes for venture capital were essentially rich families and rich institutions. And you can go back to Slater's Mill, the people who put up the capital for Slater's Mill. Oh, that's why I had that damn slide in there. The people who put up the capital for Slater's Mill were the Brown family of Providence, the people who, after whom Brown University was named. This was a family that made their fortune in the slave trade and then in the textile business, and then had no clue how to mechanize their spinning operations. Slater was the embodiment of somebody who had the technical skill and inventiveness ideas mostly which he stole from the uk and they were able to pair together in a way that wouldn't have been possible previously in prior generations, the. The Brown family would have had to have the incredible good fortune of understanding the technology and having the money. Now all they had to do was be rich, and they were good at that.

And also, by the way, the history of venture capital actually started, it's all moved in many of the elite funds to the institutions you're mentioning your own greylock, etc. But actually the starting of them was actually also wealthy families.

Yes.

By the way, it was a similar kind of thing. That was kind of an interesting.

Absolutely.

Recapitulation of history. Yep. All right. So now shifting somewhat, you know, beginning to hone into some of the scale up stuff, but at the very broad. So it's kind of a call to arms for capitalism. It's a call to arms for entrepreneurship. It's called arms for creative destruction. When should someone, we have a bunch of students here, when should they consider doing a startup and when should they not consider doing a startup? And how is some of the way to think about that?

Well, one of the, one of the things I've noticed over the last about eight years that I've been exclusively focused on early stage ventures is that they kind of can't keep it inside them. It kind of bursts out whether it's a good idea or a bad idea. The founder has this explosion that they can't keep inside anymore and they irrationally allocate time and resources to this idea because they can't stop thinking about it. I think that's a prerequisite if you're going to. So if you smell that about yourself, if you feel like you can't stop thinking or working on an idea, if you find that you're working on an idea and the hands of the clock move and you never even noticed that the sun went down and you missed two meals, that's a really good sign that you have an idea you have to get out of your system. The other characteristics I think of the folks that when they know they're ready is that they are accidentally, accidentally not even trying to recruit other people, but accidentally getting their friends fired up too. And so the friends come and start saying like, hey, remember that thing you told me about last week I was thinking about a little bit more. That's the mark. I'm not like a mystical person, but I kind of think the market talks to you. That's the market talking to you. That's the market saying, tell me more. Pulling on you for more insight. If you have those circumstances going on, those are good indicators that it's time to do something about it.

And what are the indicators that you would use for checking the idea? Because obviously you could have those indicators. You could be crazy about them.

Yes.

You could be jumping off a cliff with no ability to assemble an airplane on the way down.

Right.

What are the cross checks that you think that people should do?

One really good One is to give a chunk of time in the schedule to Devil's Advocacy. And this was a tactic that I learned from Michael Eisner at Disney. Michael, I didn't work for him, but I worked for somebody who worked for him. And the whole idea there was every big good idea, is going to be subjected to a Devil's Advocate case, and somebody, probably the smartest person he could find, is going to be in charge of trying to destroy your idea. And he or she isn't going to be held as, like, you know, they're not going to be considered to be out of bounds for trying to destroy your idea. It was their job to try to destroy your idea. And that, that technique of saying, okay, you please spend the next two days finding everything wrong with this, and then you have full permission to be the biggest asshole you ever met trying to torpedo this idea. If you can find some people in your life who can play that role, that's a huge positive. As a founder, I think the other technique that I like to do with founders is let's do a pre mortem. Let's admit now that we failed, and let's forecast what it is that would have gone wrong to cause our death. And if we can do that openly and honestly and make a list of what those deadly risks are facing us in our venture, we may decide to bail, we may decide to keep going, but we can't keep going without building shock absorbers for those risks.

Love the two ideas. The version of the first one I do is when you're talking, you should talk to every smart person you know, and you should specifically ask them what's wrong on the idea. There's a problem when you're talking to him. I come to my friend Michael and I say, what do you think of my idea? They're like, oh, well, Reid wants reassurance, so, oh, it's great. Hey, you should do that. That's terrible. That's actually negative value, not positive. Like what's broken? And I think I already called John out on telling me that LinkedIn was a totally bad idea. But I've also told you maybe bad ideas are bad. Yes, that's true. That's a very good point. What role do you think people need.

That, by the way? People need that permission from you as a founder for you to give them permission. Say, I want you to be negative. Now, you don't even. I don't even care if you believe it, but give me your best shot. That social permission is especially in an area that's so Happy smiles and rainbows. As I was gonna say Silicon Valley, but Stanford's that way too, in a good way. Let's have a little bit of shock absorber against the rainbows.

And actually, specifically, part of the thing that John's feedback was very good on is that you can't build to critical mass. And so that helped confirm the strategic thing was the very first thing at LinkedIn was to build the critical mass. Because when you get to good feedback, that isn't necessarily die, but that's the, ooh, this is the mine. Make it past this mine. Because, you know, smart people going, this is the mine. You're like, pay attention to that, make sure you understand it. And that became the very top list thing that Alan and I and a bunch of other people were working on on a daily basis. Last thing, in terms of founding a startup, or at least this part of it, what role do you think considering competition should be on whether or not you have a good idea or not?

A lot of times the founders who pause on the issue of competition, they pause for the wrong reasons. And they say things like, well, isn't big company XYZ going to do something just like this? That's totally irrelevant. That's totally irrelevant. The perfectly competitive product that promises what your product promises is almost never the actual competition. The competition is almost always the substitute for buying your thing is doing nothing or hacking their solution in their daily life. The user I'm talking about. And so I think if you're a friend of a founder or a founder yourself, steer the conversation more like, wait a minute, I shouldn't be worried about big companies because they're slow and usually bad, but I should be worried about what's occupying my target user's attention today because that's really what I'm competing against. If you can answer that question, that's a lot more valuable than a competitive matrix that like a consulting firm would do.

Yeah, actually frequently that one I said discount the large companies competition. Unless like you're doing search and it's Google or unless you're doing Marketplace for used goods and it's ebay.

Right.

Because then you got, okay, no, you got to understand what that's going, but discount it otherwise. But do think about other startups. Right. Because sometimes, like a startup may actually have a better approach on the market than you. And that actually is a relevant variable. It's not to say you should pattern your strategy on them, but they should be in the consideration set.

Yep, yep.

So actually, given that one of the more funny Things. Given your presentation, what would you. Your advice for ebay, now that your year has passed, how would you reinvent?

Well, you got to keep in mind I've been gone longer than I was ever there, so been gone almost 10 years. But I do, of course, watch it. My advice is do more of what they've been doing, which is this unbundling of PayPal was, I think, the right thing. I think it was the right thing for shareholders. I think it was the right thing for the employees and the users to create more of a competitive market for the ideas. One of the nice things about the combination of lots of complementary assets is you can do command and control economy inside. You can allocate capital by the decision of the CEO. And what happens over time is his or her judgment is fallible and the market is actually a much better allocator of capital than one CEO or one investment committee inside a large company. I like the unbundling. I would encourage them to think about doing more of it. I certainly would also think about the amount of people that work there. It sure feels like a lot of. And I'm not advocating for layoffs, although I guess maybe I just did.

But anyway, you're advocating for asking the question.

Yes.

And actually, funny, I actually don't know your view on this. Some of the leading edge Silicon Valley people think that you should organize internal companies based on markets versus command and control. Do you have that point of view? If so, why? If not, why not?

I do, particularly with respect to product development resources. And I tried the handful of times where I've actually had management responsibility for a product process allocating software and hardware development time, which is much more scarce than capital, to particular projects. Tried to create a competitive market internal to the firm so that there was vigorous and in some cases, maybe even negative productivity. But the competition for resources was very intense, and the internal mechanisms for drawing the line were driven by the economic value of the idea rather than the whim of a particular senior executive.

But how did you make the decisioning happening? Because the decisioning, is it voting? Is it? Well, like, what was the proxy for.

The market net present value? We do.

But that's models, right?

It is, it is. And you have to have faith that people are not padding the models. And you have to have devil's advocates tear apart the models and it becomes quite a bit of overhead. But if people are held accountable to economic valuation of their ideas over time, you can start to get a pattern, you can recognize a pattern of whether people are good predictors. Of their own economic value, their ideas, and then allocate the resources on the basis of the most, the highest NPV projects on the list. The downside to this is, of course, that you feed the beast, the mothership business, because the npv, the net present value of assigning more resources to the highly profitable, already huge business is, is unbeatable really, in an internal market. And that's why these big companies end up being slaves to their core business. And they can't beat you, they can't beat you on innovation or speed.

And would you recommend that a startup implement a marketplace mechanism from the beginning, yes or no?

Yes, but with a different pricing model. I don't think startups should have to go through the rigorous pricing and valuation analysis that a large company should. I think ultimately the founder has to be the guardian and the editor in chief of that product roadmap, and she or he has to say, here's where we're drawing the line and here's why. Everybody can submit an idea, everybody can make their case, and I'm going to listen to everything, but it's a benevolent dictatorship on the product side.

Interestingly, I think I disagree with you there because I actually think that the frequent thing that characterizes the startup phase is we are all casting our lot in this one direction, actually. In fact, having somebody who is an autocrat or a small number of people who are autocrats and doing that for the efficiency of focus on doing that is actually in fact a key part of the success. But I do think it's interesting that as you get to the higher levels of order of magnitude of scale, there's a fork in the road that happens there. That is actually super interesting. Who do you think is the most successful company that implements a marketplace internal mechanism for this? Hmm.

I've been very impressed with how Airbnb allocates resources for product development. And I say that because I think they're, I think, and this is an outsider's point of view, I don't have any special inside knowledge, but the people I know who work there often talk about, like, the things they need to invest in today for how the user experience needs to be 9, 12, 24 months from now. And, and so I think they have a perspective on managing the portfolio of investments that's pretty evolved and very effective, it seems. I also think that they're very economically driven. I think they do the math on these investments that they make. Now, Airbnb is not what you might call a startup anymore, but it is an early stage company. In the spectrum of companies that decades long, big companies that are decades old, I think smaller companies. There's a company that I work with right now called Signal sciences, which is 10 people in the app security market. And Signal Sciences has product about as wide open a funnel as you could imagine on the front end of the process. And the founders do sit at the center of that and they listen to every idea, no matter how far off wacky in line with the strategy, and then they cull it and then they have an honest conversation about why we're building what we're building. So it's kind of a hybrid of like wide open, chaotic market on the front end, but benevolent dictatorship when it comes to writing stuff on the roadmap.

In that case, probably benevolent. Sometimes benevolent, sometimes not. It all depends. Yes. So shifting. There's kind of a mainstream view now that contrarian is being important.

Right.

So it's a very common or a consensus view that contrarianism is important. Do you think contrarianism is important in the startup idea? If so, kind of how in more color? And if not, kind of, why not? Is it critical to be contrarian?

I don't think it's imperative. I do think it's a nice feature of a startup. I think it's certainly the place where you find value as an investor because of course, it's the wild enthusiasm of conventional wisdom that chases prices higher in those investment rounds. I appreciate contrarian thinking in a founder from that perspective. I think it also, I'd more like, I'd more enjoy the contrarian point of view because helps me understand how the founder's brain works and his or her roadmap, from technical insight to the product idea that they have. If it's totally surprising, there's a lot of interesting stuff happening in there and I like it more from what it tells me about the founder's brain thinking process.

Yeah, I actually think that to get a massive discontinuous result, something it actually in fact usually has to be contrarian, at least at the time of founding and going, because otherwise we have a lot of different entrepreneurs, a lot of different efforts. The actual limiter factor is a lot of people competing for the same capital, talent, market, space, customers, et cetera. On the other hand, actually I think part of where the whole contrarian theory goes too far is actually, in fact you can have something that is maybe specifically contrarian, like take Workday, which said, okay, people didn't believe that going to the cloud was important and so they made that key contrarian decision. But Actually a next generation of high quality HR software. You said, well, this is much easier to use, much better. It has the benefit of like it made one key contrarian decision, but everything else was just very good execution. Because it's not contrarian to say have a much better UI or it's not contrarian, those kinds of things. And so it's a nuance of it that I think is actually important. Okay, so shifting to some of the kind of more what you'd think of is kind of how we do startups questions. How do you think people should think about evaluating themselves as founders? Like when they think, am I a good founder or not, Should I do this or not? Part of it is having the passion that you mentioned before.

Right.

But part of it is also other attributes. What are the things that you think people should consider in their self evaluation?

I think there's two separate answers to that. Let me do one which is really simple and one's a lot more complicated. The simple one is that the stages of life you will go through as a founder, first you have to have an insight, a technical insight. Second, you have to turn that insight into a product. And third, you have to hopefully, God willing, turn that product into a business. Those are about as different sets of pursuits with very little in common with each other. And so if you are energized by the idea of coming up with the technical insight and then moving to productization and then moving to the business building phase, that journey will be satisfying and exciting to you. If you find yourself totally in love with the technical insight manufacturing process, that is a real problem. And then you end up having science projects, not companies. If you find yourself endlessly prototyping and tinkering with the product without regard to the business economics, then that's a warning flag as well. I think you have to be energized in today's market where the expectation is that if you're onto something, you're not just moving from these stages, you are screaming across those stages. You have to be willing in the earliest days to see yourself as okay, today we're in technical insight mode. In a month we're going to be productizing. We're going to be worried about business economics shortly thereafter.

And after we get to the other nuances of this, I'll actually add a few things. But how do you find co founders? How should you select co founders?

The advice I normally give people is take inventory of your own brain. There's a video on my website on harrisonmetal.com called the Cognitive distortions of founders. And this is an inventory of the five most common wacky ways of seeing the world that I've observed across thousands of founders that I've talked to over the last decade. The founders, if they have an idea that say, I'll pick on one which is a black and white thinker, somebody who's very judgmental about people and products he or she has, they form very quick opinions and they're very strongly held. The black or white thinker oftentimes needs to be paired or shock absorbed by somebody who can point to the gray or the nuance or say, I like this thread of it, but what about this idea over here so that the other people in the team don't get shut down by the visionary black and white thinker. So I think of it like pairing your deadly risks with great shock absorbers and just acknowledging that you've got deadly risks that are the flip side of your great strengths is a huge step in the right direction. And then pairing the co founder is probably the most powerful way to shock absorb. And ideally you're even shock absorbing each other.

And actually since you mentioned that, one of our students questions and apologies if I get the name exactly right or wrong on the pronunciation. Naheet Desai asked, as an investor, what kinds of cognitive resources any do you look for in founders and how?

Well, the ones that I really zoom in on is first, a sense of personal exceptionalism, a sense about themselves that, you know, some countries have this about themselves. This is a sense that you're not destined for an average outcome in life, that you're somehow operating outside the boundaries of normal for your peer group. That sense of personal exceptionalism is a very, it comes in very handy when you're founding a company. The black and white thinking one is a real example. I think that's an important skill for me. It proxies for the speed of decision making. I don't actually like black and white thinking because of the error rate can be high, but I do like the speed part of it. And speed is almost all you have in those days. Another one is very related to Joseph Schumpeter who we talked about earlier. Sort of a Schumpeterian mindset, which is no matter the pain, the creative part of creative destruction is what gets me up in the morning. And so I am so excited about building the new thing that, that I will put myself and others through the torture of the destruction. There are a couple others in that list. Let's see.

Go to the website.

Okay, yeah, yeah, go to the website.

And we'll post it. We'll get the link to post it. Yep. So one of the things I would add to what you said is you've got to think about, in addition to the whole passion product kind of company, as an arc, you have to think a little bit about do we have the key foundational skill sets that can actually tackle this market? It's anything from can we build the product to can we go to market and how do we acquire those? The ones that are in the founding team have to be the. Without this, we shouldn't even try this project. Obviously there'll be a lot of skills that you acquire through hiring. We're going to get to that in a second. And so you have to think about that as I think as a kind of a cross check. And then I actually think that part of what you have to think about is part of the role of founders, different from people you're hiring is being generalists, like tackling any problem that kind of comes along and that flexibility of it, because there's just a laundry list of unexpected pivots and challenges that you're not anticipating that one or more of the initial team is going to have to go jump on. One of the things that we think starts very heavily in this phase is generalists and you get to more hiring a specialist as you scale. Those are the kinds of things that think about adding to this. That actually speaks back to what Michael was saying earlier about you go from a technology to a product monetization.

If you really love the technology, too.

Bad you can't do it. One of the things about good founders is you're drawn to the problems that nobody else in the team can solve. So you have to work, you need. There's nobody else. Yes, exactly. And so then let's talk also about the first few hires. Like, how do you hire? Well, like, you've got ideal teams are two or three. Sometimes it's solo, sometimes it's five. Two or three is usually the ideal founding team. Now you make your first three hires, your first five hires. How do you advise the various startups you work with, what kind of hiring process to run, what to do, what not to do?

Well, I get very worried when I see people come with a shopping list and they're like saying, okay, I need 32 ounces of front end developer and I need a pound of iOS backend. It just doesn't work that way. And I think the early stage should be about surrounding yourself with people.

Who.

Share your passion, but who also will pick up and do anything. And of course, there's a checklist of things they have to be able to do. But. But I think of it like, I look back at the successful early hiring experiences versus the unsuccessful ones, the shopping list. There's almost always a red flag on there's something going to be wrong here. And the most successful hires, I think, in the early days come from your network or one degree separated from your network. And that's because the passion has been transmitted in an organic way, not through a recruiter or a third party or an ad. I think that has its place, but it's much later in the cycle, those first few. I think you probably already know them.

Yeah, And I actually agree with that. Not just because of the signal, but also because of a bunch of other characteristics. Like, you know, are they going to go through the valley of the shadowy view because you're almost always there. Are they actually, in fact, committed to we are going to get this ship to port.

Right.

Are they, for example, things that are very difficult to measure, even in reference checking, which is obviously critically important. I always prefer reference checking to interviewing, if I had to pick one. But questions of, for example, how much of general learners are there, how much generalists are there, how much can they pick up? Something new that you don't expect is all kind of. And you get all that much more through your network.

I also think that these conversations have to be focused on. Tell me about a time when you fill in the blank. Tell me about a time when you faced, like a horrible disappointment. Tell me about a time that you consider your greatest victory. Tell me about a time when you realized you were different. You know, go back and talk to people about their lives. That will give you a flavor. People repeat the same strengths and weaknesses over and over again. And all you have to do is ask for a few stories and you'll get a very good view into who they actually are.

Yep. Like solving key problems.

Solve a key problem. What did you decide to do with your free time when you had your summers to yourself or when you had an open space in your course calendar or you had three months to go do whatever you wanted between gigs? What did you do when you had perfect freedom?

And by the way, the students are probably having a little bit of deja vu. Some questions like this while our application process.

Oh, is that right? Good, good, good, good.

And there was a reason for that, by the way, which you were revealing. So when you're. So now you got your founders together, you may have hired a Few people you're going, what are the first things that you focus on?

Well, it goes back to that McCallum list. I can't tell you. I mean that is, I walk around with that thing. It comes up every single day for me with founders is who's working on what is that the most important stuff? Do they have the authority to keep moving ahead or are they blocked by something? How do we know how it's going along the way? You'd be amazed how many 10 person companies get surprised at the end of a release or a rollout or a month with like, oh well that didn't work. Well, how can that be? We're sitting right here like how can we, you know, so those McCallum questions that he was really trying to say, look, running the 50 mile road is a joy and easy compared to this nightmare that I'm in. Here's the things that I know are the fundamental duties of a leader. And that's I think just as true today in startups as it was for MacCallum.

Is there a question you would add to MacCallum's list if you were to.

Have a seventh for early stage ventures? I probably would go back to the question about financial viability. You know, are we sure that we're building a business? And unfortunately in the current funding environment, many things are being backed with venture capital that are not in fact going to be businesses. They're either public goods, science projects or hobbies, but they're not businesses. And so I think that's a discipline that I would like, I would Add to the McAllen list.

Hobbies is a very gentle word. What is the importance and when of having your go to market and distribution strategy?

I think that you have to have a hypothesis of it and I know that it's very unfashionable to have the idea of a full detailed plan on founding day. That's not what's going to happen. But I do like to know how the founders think about that, how found think about that because it helps me understand how their brain works. So I think of it like an opinionated person who has the guts to found a company ought to have some hypothesis about how it might go to market.

And do you think would your decision to invest ever gate on that?

Yes, because if it doesn't exist, it's a laziness of mind and red flag. Now I think there's, you have to distinguish is there a prototype answer to that question versus how close to awesome is that prototype answer? It doesn't need to be Close to awesome, because we're going to have many, many cycles to figure that out. But there has to be a prototype. You can't convince a stranger to give you money. You shouldn't be able to convince a stranger to give you money. If you haven't said, and here, by the way, is how we will go to market. You could be completely wrong, but you can't withhold that view into your brain. It's like saying, I don't have a prototype yet of the actual software. You'd never say that.

And then I'm going to give you a brief list of things that are my suggestions, but you can mod them and comment. I want you to actually specifically comment on them. What are the things you can ignore? What are the things that you go at the early stage, don't pay any attention to this or do minimally or do intensively. A board of directors, hiring executives, knowledge about advertising campaigns, planning your brand, a plan for scaling customer service, detailed analytic dashboards.

These things, so far, these are all on the list of things that you think you can safely ignore.

Mostly, not always. There's always specifics.

I just would like. I would say every founder should have his or her own list of things they plan to ignore. And they should also know that if I'm going to ignore board of directors, I need to have a governance approach. I need to make sure that somebody is looking at this who isn't just me who can critique the strategy. Might be an advisor, it might be a trusted colleague, it might be a co founder who has the.

Remember, we're talking about five to 15 people kind of in the company. This is this phase.

Well, and the reason I'm zooming in on board is because most of the companies I fund are that size and I always put a board on and I'm always on it. So I think they serve a really good. I think they serve a really good and valuable function. And if you're going to do without one of these things, you should just have a hypothesis or a shock absorber in its place to do that, to do that function. One of the things I wish was on your list, and maybe it is further down, is fricking PR and the idea that founders are brands and that companies need to have high profile and be written about by whomever. It's a lie. It's a complete and total lie. And it's manufactured by the people who sell ads for page views to convince you that you need to talk to them. And it's a complete and total lie. You may decide for your own reasons to go do PR for your company, but it doesn't actually change the outcome. In fact, many times it can actually tip the outcome in the wrong direction. And recruiting is a perfect example of this. If you are getting, if you're deciding to do PR because of recruiting, the people you will attract are the wrong people because most of your life as a company will be spent not being written about in a flattering way. And so if that's what they need to be motivated, they're going to be very disappointed.

And by the way, as a pointer here in our first class, we mentioned that one of the things you will see as we go through each of these stages between these very smart people doing this is some things will be reiterated. They're kind of surprising. And those are things to actually pay attention to. And some things walls disagreed and that's fine. This was one of the points that Sam was making, Sam Altman was making in the last class. It actually in fact is a reiteration point and that was part of the reason to kind of point out what the patterns of surprising similarity would be on the board of directors. What I more mean is actually, in fact, if you find a financial partner, co investor, you should actually get someone who is maximally adding value. The normal position is for them to partner with you by board of directors. So I actually agree with you, just to be clear there. However, sometimes I see founders going, okay, how do I build out my board? Like, how do I have independence now, et cetera, at the five to 15 people?

No, no, initial wisdom's the other way around there.

It's like, why do you need a board at 5 to 15? Just build products like ignore the board. So maybe you could talk a little bit more about what you mean. And it's not fiduciary guidance or anything else you're getting.

I think it's the healthy accountability to the market, which you have to remember if you've got no customers and you've got no product, you're not. But you've got a pile of money provided by those awesome institutions. You've got a civic. It's a citizenship duty, right, to actually sit down and say, okay, here's where we're going to spend it, here's how long it's going to last us. Is there anything we should be doing differently in your opinion? You can get that a lot of ways. I like it with a board just because I think it gives people in the seed stage, it gives them a dress rehearsal for what it's going to be like when they are dealing with, you know, handful Sandhill Road people.

You know, I don't really like to be identified as a Sandhill Road person, but that's okay.

You know what I mean?

You know what I mean?

It's fine.

I live in denial.

Well, you get to name yourself Reid.

I try.

Yeah. So I think of it like a dress rehearsal for varsity level company management.

Well, since we're on this part of financing, what recommendation do you give? Just founding teams, the founders, first couple of people in terms of how to think about financing. What are the key do's and don'ts. And obviously the backdrop is everyone's reflex is simply go for the highest valuation and the highest amount of money because that looks like a scorecard.

Well, and it's even worse than that because the conventional wisdom today says punt totally on valuation and use debt, use convertible debt or even worse, something called simple agreement for future equity. You know, which God knows what that is. You know, I think Schumpeter probably wouldn't have. No, no, listen. Nobody came to this country because they wanted to be, have great convertible debt terms. People thrive in this environment because they want ownership, they want to add value to their ownership and then they want to sell their ownership later for more. And along the way they're going to create hopefully a fortune that will do good things for the world. We kind of can't help ourselves when we make a fortune as a species, we do good things with the money. Even the worst people you can imagine, when they're drop dead, that money's gonna go to really good use. So I think this is an ownership economy and I like to be part of an ownership economy. I encourage founders, treat yourself to real shareholders, real shareholders, people who rise and sync with you, people who do not have particularly special downside protection, people who do not have a lender's claim on your assets. This is all nonsense created by the legal profession. And some, I don't even know what to call them, hucksters who want to explode the size of the venture capital.

Business in the earlier description.

Something it's a terrible disservice to teach founders that they don't deserve shareholders who rise and fall with them, who don't sink and swim with them, who aren't tied to the mast with them. And that, unfortunately is you do not get that when you sell convertible debt or when you have highly distributed financings from people who, for you, it's like a generous tip that they gave you. It's not even really Skin in the game. So treat yourself to shareholders. Have the hard conversation about valuation. It's perfectly okay to disagree with somebody about the valuation of your company. By the way, the math to do a valuation on an early stage company is really simple. How big a check do you want to write? Divided by what ownership percentage do you want to have? If you can do that, and I know you all can, because I could do it in fifth grade, you can value a company. That's all it is. So ignore the advice you're getting from lawyers or whomever to do convertible debt with no valuation. It's. It's a terrible poison in our industry right now.

Do you think the same thing about convertible notes with caps?

Yes. Even worse. They're disguised as. It's. What's the. It's lipstick on a pig. Is that the right thing?

That is an idiom.

It's still not ownership. And by the way, that cap is never the today value of the company. And so what you're asking the investor to do. And you would never do this because you're smart, you're in the front row of this class. You would never take the deal where I said, okay, I'm going to ask you to help me on a bunch of stuff, and then I'm going to give you shares valued at the price after you're done helping me. That's a terrible deal. Why should you pay for value that you helped create? Why should you not benefit from the upside that you get from taking that venture risk? At the beginning of the venture, you should get a price that reflects the value today, not the hypothetical value 12 months down the road.

Yeah, I mean, the key.

Does that make sense?

And actually, I will take these questions in a second because this is an important issue. The key way to look at this is if you are actually selecting a good partner in building this business, you want someone who's motivated by trying to magnify the value of your business as much as possible. So you want to give them actually a stake at where your valuation is and then you come to kind of agreement. Actually, there's a good process. It's one of the few things in entrepreneurship is zero sum. It's what percentage? Because it's a zero sum negotiation. But the way you navigate that zero sum conversation is actually, in fact, very helpful for understanding how good partners you're going to be in the future. It's a good test on both sides because it's a difficult thing to navigate. But once you navigate that you've solved that problem and then You've given your partner an incentive to. How do you grow the business as much as possible. That's the reason I. Uncapped convertible wallets are a terrible idea, right? Like just horrible. And almost never do them personally, other than like de minimis checks to say, sure, fine, it doesn't really mean anything, etc. But I almost never do them. Capped is still a problem because you should do exactly what. What Michael's talking about. Sometimes capped is a hack that, you know that, that is more acceptable for that reason. Now, we had two questions. One was here on this.

Yeah. So as a founder, if you're trying.

To raise money, you have options to take money from in the form of.

A convertible note with a cap or without cap.

I think part of my understanding of.

Your criticism is that it seems like an unfair deal on the financier side because you're helping grow the valuation of the company without getting a piece of that. But as a founder, if you're raising in a competitive fundraising environment, like right now, where it's much easier to raise.

Money than historically in a lot of.

Cases, if you still think that you're going to be getting like, the valuable benefits of a partnership and because of.

The competitive nature of VC right now.

Some are willing to give you like.

A cap convertible note that inflates your valuation.

How much of that is important versus, like the, you know, working with a.

Partner who will provide benefits beyond money.

And obviously, you know, from your perspective.

As people who are providing. We're teachers in this context, not venture capitalists.

Well, and the other thing we are, is we, we vote with our dollars. Right? And so if, if an investor is willing to do that deal that you set a capped convertible note and she or he is saying, I will help you just the same as I would with straight up equity, you have to just ask yourself if you believe it. Well, I'd say about 60% of the meetings I have on a weekly basis with founders are people I don't even have a business relationship with. They're just people who say, hey, can we talk? Because I need help. And the number of those founders who are showing me polluted cap tables with useless investors who do nothing, who promised the world, who said, oh, my Rolodex is your Rolodex, you're in trouble, call me. The phone's ringing, the shit's hitting the fan, nobody's picking up. That doesn't happen. That just doesn't happen. When somebody is going to lose a lot of money and a lot of ownership in the business, it just doesn't. I think that you have to ask yourself, is equity. The idea of equity was invented after thousands of years of people trading with each other and learning how the human operating system works. And there's a reason why some people like to be owners. It's so they can help and they can make it worth more money. Not because they're altruistic, but because they are highly motivated to put points on the board financially. And so to ask that, to believe that the human operating system isn't what we, for thousands of years sort of have seemed, it seems like it is, is really a stretch. And I'm seeing lots of founders who are just, they're looking at their list of 30, 40 investors, each of whom have put 25 or 50 or $100,000 in and they just can't get any help because it was a lie from the beginning.

The two amplifications I would do is one is at every single financing we did in LinkedIn, we did not actually take the maximum value. We actually in fact made choices based on who we were partnering with in terms of the offer because it was very much on partner. And then the second thing is I personally and a bunch of investors have passed on deals because the cap table is too scratch screwed up because that means that that's likely to screw up the company on the road because we're investing at a 5 to 10 year horizon and so we're looking at patterns that actually in fact will trip you up. And that's actually in fact a serious problem. So on this topic, there was another question back here, but it's like anything else you should reference, like there are some people that are outliers, that are clear value. Yes. And you run them on any cap table. Yes. So you should reference. Yes, for sure. So.

So the discussion of basically, I'll remember you, the discussion of delay valuation versus a price round, it's been a hot debate for many years, but I guess the advent of the safe sheet has really started to bring these issues up again. The other sheet that people tend to use are the Benwick series seed docks. Yes. It's more of the middle road. Would you advocate for that? That's exclusively what I use in my business. Exclusively.

Just in case it didn't get out in the Microsoft is the Fenwick series.

Yeah. SeriesC.com is a set of open source and it's also on GitHub, a series of open source equity financing documents created by Ted Wang at Fenwick and West. And it's the Only template I use Jason Baymig because I'm on GitHub, so pretty common. But who's the partner when you guys are starting out? Who's the firm that pick up the phone the most? That's a good question.

What do you mean by that?

I'm not sure if it ever hit the fan, but when it did, who.

Picked up your phone? Well, so part of the reason. So I did my series A with Mark Kwame who was then at Sequoia, and then series B with David Z who's at Greylock. And I put in a number of angels into the Series A as well because part of the thing is a network distribution and basically nobody got into that round at all unless they were actually in fact active at either one. And both, like all of the top tier funds, all of them have an active participation model. There isn't a top tier fund that doesn't have an active participation model because that's the thing that actually helps build truly great companies. But for example, one of our mutual friends is a guy named Josh Koppelman at First Round Capital. He was an angel investor and he helped. That was before actually. I think he had done First Round Capital and that sort of thing. And those are the kinds of things. But. But that's actually when you're actually asking for like you should reference check, as John says. But when you're actually asking people to participate, you should have an explicit conversation about what this alliance looks like. Like what is the thing that we are doing together and what should I expect and how should it be. And the person should be straight up and you should call them if they're not being. If they're not being. If they're not holding to what they agreed to. There was another question back here. Yeah. I want to understand better why you dislike the safe documents compared to the SEE documents. They get rid of the convertible theft, which I think is great to get rid of that. So why more elaboration of why the safe documents are.

Well, I'm deeply suspicious of anything that's acronym is designed to make you trust it. The Patriot act comes to my mind. I also don't know what problem it's solving. I'm watching a very well developed advanced system in capitalism where I give you money in exchange for a small piece of ownership in your company. It's not a complicated idea. The math behind it is totally simple.

The safe works the same way. I'm talking about a cap safe, of.

Course, but I'm not a shareholder.

But you wouldn't either in a series C?

Could be. Heck yeah. I have certificates framed behind my desk. The ownership point. Look at the difference between renters and owners and how they treat their homes. Look at the difference between rent controlled situations and ownership societies. Ownership mechanisms ensure the best long term custodianship of those assets. And we may not like some of the complexity that goes with that, like the difficult conversation around, well, how much are you worth today? Oh, I'm not yelling at you. Yeah, yeah, yeah, yeah. But you know what I'm saying, it's just a choice.

But also the safes don't fix the price. Safes work just like the burn ones do on the pricing. They're just not debt.

Yeah, well, I don't know what is. What is that then?

It's like very last question for this session.

So you mentioned that it's not in the developer's best interest to do a highly distributed deal and also that you want to have ownership, a stake that gives you ownership. From the investor's standpoint, what is the ideal situation, let's say, for Suzy.

Would you like it to be in terms of.

Well, I was going to say that's a Reid question.

So look, I think your ideal circumstance is you actually end up with two components. One component is a lead investor who is literally getting into the foxhole with you, who is going to be with you through because you're going to have difficult times, especially from this essentially the family side startup. You're going to have multiple times looking forward in the future where you're like, why did we ever think it was a good idea? Why did we ever think it was gonna succeed? You want someone who's gonna work through those problems with you. And your lead is really important. The lead is also important as having a good partnership with you, being able to help you navigate some of the challenges, being able to help you do your next round of financing. Because that's usually the key is the lead is the person who's gonna help do that. And you have to think about not just the upside circumstances, but the down circumstances. You have to think, I might be hitting it out of the park, I might be doing okay and I might be in trouble. And I want a good partner in all of these circumstances. They might be particularly good at one of them, but they're good at all of them then ideally now. And then the question is, what's the percentage that motivates them? Most funds, that's 20 to 30%. Right. There are circumstances where they can trade below that, but those circumstances usually Like I come and my product's already launched. I got massive traction. Okay. I can be motivated, a lower percentage because I know I'm already at a higher risk thing. I've got an idea. It's the back of a napkin. It's like, look, if I'm going to put the work into this with you and I'm going to allocate the time and try to make it happen, what's the appropriate percentage? And usually a way of looking at that is kind of. It's like a financial co founder to your percentage. It's like I'm partnering with you doing this. But then you also want to get some people in the network in terms of who are key, other angel investors, key people who could help with the business, bring customers, bring talent, bring advice, solve key problems. It's a data business. Do you have a great data person who might be an angel investor who could help with that? And it's specific to the business and your ideal configuration is that lead plus a select few of highly valuable people that you can essentially partner with and that's your ideal circumstance. So there were a set of very good questions in the LinkedIn group. We will give some props to you. We actually noticed them. I actually have them all printed up here as we do it. And so thank you for them. But I actually thought the financing thing is so critical during the family one that actually, in fact it was worth actually going into depth on that. And that's part of the reason why I diverted to that.

And if it's helpful, I'm happy to maybe write up some of the answers.

To the other questions as I sent them to you. And so with this, thank Michael for joining us. Thank you very much. Thank you so much.