Nick & Beezer co-host Kanyi Maqubela (Kindred)

Welcome to a new 2023 Origins, a podcast about the LP and VC ecosystem. I'm your host, Nick Charles, and I'm joined by my co-host today, Beezer Clarkson of Sapphire Partners.

Hey Nick, happy to be here. Excited to do this.

Welcome, Beezer. Also, we're going to have a guest in a little bit, Kanyi Maqubela of Kindred Ventures, who's going to join us a little later. And in the meantime, Beezer, why are we here and why are we trying this?

We're doing this because you and I have spent the greater part of a decade having VC LP chats by virtue of us me being an LP and you being a GP and thought it'd be fun to open source this. And instead of talking high level, theoretically, take some real-time market stuff and chat about it with our guests and open, open it up. I don't know. That's why I'm here. Why are you here, Nick?

We're going to try out this video thing. That's going to be fun. So hopefully we look okay. And Yeah, I think I want to make this fun, topical, try to do it regularly if folks like it. If you have feedback on this, please send it to us. I'm @nchurls on Twitter and Beezer is @beezer232. You can also hashtag it with OpenLP. We'd love to hear your feedback. We're going to try something new. That's all I got. What do you think? Should we do this?

Happy New Year. Let's go.

Kanyi Maqubela, what's going on? Thanks for coming on.

Thanks for having me.

I have not seen you in a very long time, my friend.

Good to see you.

Really good to see you.

Good to see you.

It's really good to see you as well, Beezer.

It's okay. Apparently you two have been away from each other too long.

Yeah, we've been away. The heartstrings are tugging. It's real.

Yeah. What happened?

Pandemic, children, market turn, all that stuff.

So I'm going to jump right in and you guys please feel free to also ask questions as we go. I'm going to jump into some data that we got this week. So from both AngelList and Eric Newcomer's blog, which I think is just called Newcomer. Is that right? We can link to it after— we can link to it after the show. Let me give you a quick taste of where we are. Secondaries trading down 40%, 50% discounts. $100 million late-stage growth rounds basically gone from this data, or very light. Overall venture volume way down. Valuations at a billion— or sorry, valuation as a Series B and later way down, and angel and seed still hanging in, it seems, both from a valuation and a pacing perspective. So my first question for both of you is— I can opine too— is just where you guys think we are now. It seems that a lot of the current market wisdom is very bearish, conserve cash, extend runway, become more efficient, tough times this year and next. But I'm curious, just your guys' quick take on where we are and what this next year looks like.

All right, I'm going to start and then you're going to make it better. How's that sound, Kanyi?

Deal.

So here's the thing. I think we're at the "it's starting to get real" for early stage portion of the event. I think it started to get real end of 2021 into 2022 for growth. And you saw that in the numbers and we saw that in people we talked to, but it felt to your point, early stage was really hanging in for myriad of reasons we can get into, but the data started coming in the end of Q4. And so now we're all seeing it now, but we're hearing it now. And again, it's on the LP side. There's a bit of a delay, right? You guys are living it in real time and we just hear about it, but we're starting to hear people say, oh, the valuations are starting to move. We're starting to see seed rounds, but fast, go back to September, we weren't hearing that. So that's my kickoff to you. So it feels real now in a way that it didn't feel real before.

And my only edit to that would be yes, but 3 months ahead of you. And because, you know, quarterly reporting is a pesky little thing and I'm sure end of year reporting might create another lag. And the first sign of the change to my mind was how long it would take a round to get done. And so it used to be that finding the market clearing price was sometimes a matter of days. Finding the market clearing price has become significantly longer, has now moved to, at least in my Enik data, at the scale of weeks. And I think that was the first signal that there's a lot of uncertainty, but also that there's going to be a lot more repricing that's happening across the market because most of the time when you're trying to find a market clearing price, you're going to find it somewhere down. That has been a material change. And then the other material change I'm also seeing is, to your point about the growth, the growth funds having a little bit of a head start, a lot of the companies in our portfolios and in my peer portfolios that I've been seeing had acceptable balance sheets. At the end of Q— of Q4 of 2021 and had the ability to cobble together what was on the order of hundreds of Ks of extensions and maybe low single-digit millions of extensions, which are a lot easier to pull together when there's a sudden burst of uncertainty than tens of millions and hundreds of millions of additional cash. And now that those wells are starting to run dry, you're seeing a lot of companies, not just at entry, but who were hoping to just bridge to the next milestone, realizing they're not going to get there.

Okay, Nick, here's your time.

Yeah, I'm seeing a lot of— certainly I would echo a lot of those thoughts. I think we're also just seeing a lot of portfolio companies that quite frankly spent years surviving. So not just one extension, but companies in between seed and A or in between A and B for a while, just keep going. And there was always another dollar in the market to do that. And that capital has gone away. And so we're also starting to see the beginnings of companies that are truly shutting down. And we're just seeing the early signs of that. I suspect that will be a theme this year. I think there's a benefit to that. Like, a lot of those companies— and I'm sensitive to each individual one and the founder story and the pain that goes along with shutting a company down, so I don't mean to make light of it— but I think many of these companies, in fact, were not going to make it regardless of the market. And at the end of the day, it's a better use of time and capital, particularly for the founder, to go work on something new. So we're starting to see that. I'd say there's just general fear in the market. Like a year ago, there was terrible fear on missing out on the deal, and now there's awful fear on being in anything. And And that's been quite the, quite the 180 to watch across our peer set and later stage too. Kanyi, are you seeing seed and angel change?

Reluctantly, slowly, and as is typical of seed with something of a distribution of outcomes based on the founder persona.. And so there are still founders who are raising the round that in from 2018-ish to 2022 Q1 would have been a normal round, but is now starting to feel like an aggressive round. I'm still seeing those happen and I'm seeing those happen in most sectors actually. And so that's one note is founders and second-time founders, pedigreed founders, founders who've got deep ability to attract capital are doing it. And part of me also thinks is it's because a lot of the lifecycle investors are coming into seed and have been in seed in a pretty major way over the last maybe 18 months. Sequoia announced a new seed fund, what, 4 days ago. Index has one, Andreessen has one. And then the likes of Accel and Benchmark have been trying to do seed. And have been saying they've been doing seed almost for the whole time. And so another part of the dynamic, I think, is also just the nature of the competition. But on the other side of the ledger, you're seeing founders who are either first-time founders, less pedigree, less experienced, or experienced founders who are just reading the tea leaves, who are setting really low prices again. I am starting to see that. And what is increasingly becoming harder is somebody in between and I can throw out specific numbers if it's helpful, but those people who think that they can raise what a normal seed round was a year ago or a year and a half ago are kind of wondering why it's taking forever and they're getting crickets. So that's kind of what I'm seeing here.

Can I ask a question on your nature of the competition? Because it ties together one of the pieces in Eric, one of the slides in Eric's piece, which was essentially the top venture firms as however he defined it really slowed their roll last year. Hunter Walk put out a blog post. Sorry, maybe it was a Substack or Medium. I'm not sure, but we can link to it that talked about the death of the generalist fund seed fund and how in this market potentially to compete with everyone else at seed, you have to be a specialist seed fund. And given that you two do excellent work at seed, what do you make of those data points? And maybe you disagree completely.

On the first point, one of the things that I think I actually remember having a conversation with Hunter and Satya about this about 2 years ago or so, was this idea of the lifecycle fund moving into seed, whether or not that was cyclical or secular. And our conclusion was the genie's out of the bottle. If they think they can win at seed and think they can do it without there being too much signaling risk and too much of them boxing out winners that they want to get access to later, then they're going to do it. And they're coming up with all sorts of ways to do it, calling the fund a different name, raising dedicated funds with different pools of capital. But I think that genie is out of the bottle and I would be shocked if it goes back in. There were a lot of dabbles and tests of it and kind of in and out experiments over the course of the last 10 years. But now I think that's here to stay. On the question of how to win, I generally agree with the premise that if you don't have a strong reason why a founder should choose you, then it's going to be hard. I also further agree that having subject matter expertise context is a good reason to be chosen, but it's not the only reason to be chosen. Another reason to be chosen is because a founder really wants to work with you. And at Seed, when it's so human-driven, I actually think that that's still really salient and relevant, and it's something that I find is actually much more commonly why a founder wants to work with us is because they like us, or they like our prior successes generally, then, oh, you know exactly which life insurance people I should call for my life insurance startup. I'm not seeing as much of that. Nick?

I've found that, um, I've— I, I worry about that trend being secular and where we fit in. And I tend to agree. I've found just personally, I'm much more comfortable working in certain categories and areas of interest over the years. I do think perhaps we can win a deal in an area we've never invested before, but I find myself drawn and more comfortable investing in say, set of 5 to 8 categories where I feel like I'm not a, I'm not starting from scratch. And I tend to lean further into those over the years. I think that will become, so I, in other words, I don't know if you have to be a hardware seed fund or an AI seed fund, but I do think having a certain set of areas of expertise are going to be highly beneficial.

Can we just go click one level deeper in that? Because there's an important dynamic that's shifting right now that we should cover on the basis of that, which is it used to be that part of the value of specializing was not just so the founder would pick you, but so that you'd even get access to it in the first place, so that you'd get the call. And in a world where capital is very abundant, it's flowing very smoothly and rapidly, you got to get the call. And if you're not getting the call, obviously you're in a very tough space because you're going to adversely select. But in a world now where it seems like everything is for sale, it's not as much about getting the call. It's actually more about making great decisions. It's about picking. And I think in both cases, having muscle memory, having reps, having experience, having confidence in your taste and having concentration of people can help you, but it helps in different ways. And so in the first category, it helps you get access. And I think in the second category, it helps you pick. And I think that those are two, I think that's a dynamic that we're actually going to start to see shift in what's going to be valued for an investor to build their skillset. Like I think increasingly, I was joking about this with a friend that this is ironic, but the VC podcast era may be over. And it's because the idea of a VC podcast as a way to get access was such an important feature of the last 10 years. But I actually think that these conversations are more valuable to me looking forward as a way to clarify my thinking so I can make good decisions. I can pick.

Yeah. Yeah.

Because I think that's going to be way more important.

The VCL Peak podcast though, Kanyi, is just—

Uncharted territory.

Too safe.

Excuse me.

I'm curious how both of your investment decisions and selection and process have changed. In the last 3 to 6 months, if at all, in a market, in this market compared to a crazy market a year ago. Are there certain companies or in Beezer's case, fund managers that you're going to ask different questions or are there certain types of companies and fund managers that you would maybe look at differently today compared to a couple quarters ago?

Well, the LP side has a lot of similarities, but there's some important differences. And one of them is if you're an LP with an established portfolio, your first set of questions always goes to your portfolio versus what am I going to— is there room for new, which is different from every one of your fund cycles has a whole new room for new. So it's not the— so the question of are you doing something different, really the way I interpret that in my head is how are LPs today looking at their existing portfolio? And one thing that's resonant in my head, and a CIO said this to me about a few months ago, was the— they were saying this, but they were saying, I feel like the portfolio that I've had, in their case for a couple of decades now, might not be the portfolio I want 10 to 20 years from now because the world is changing as far as what is going to be the next generation of managers, either within their firms that they have now or new. But the question was, I just am not sure who yet to move with, but this year is going to help push that point because it's such a tough year. On the metrics and what counts as success and liquidity crunches that LPs are in. And all these things are just going to push some discussions in ways that I don't think were going to necessarily have gotten pushed a few years ago, as well as what does the go-to-market look like today. Like, the— you might be joking, but every VC has a podcast. But there's a whole bunch of VCs that still are very traditional in their structure and go-to-market, and, and maybe for the next few years, or maybe not. But I think LPs are It was just very prescient to me when they said this because I was like, yes, that is what a lot of people are thinking. But who do you switch and when do you switch and is this the year? And we can talk about LP budget squeeze whenever it's interesting, but it's slightly different from the VC can you fundraise versus dry powder conversation.

Well, you make one comment that kind of rhymes with one thing that has changed for me, Nick. And so If I'm taking myself seriously, I'd like to believe that I have a point of view that's derived from first principles and can withstand the turbulence in the market. And so theoretically doesn't change that much, but there's one place where it's changed a lot actually. And it's that for follow-on investing, maybe 15 years ago, the market used to be something of a weighing machine. And there actually used to be some sort of a rubric. A well-known investor writes a material up round into the company. It's a good chance that you should be writing your follow-on check. And then there was a period of time where that was happening for everyone's portfolio companies, for every company.

Yeah.

And so the idea of having to make follow-on decisions on the basis of external market signals was way harder. And you either had to make a a tough budgetary call to go in on way more of them than you had capacity for, or you had to find another way of expressing judgment about the quality of these companies. And one of the dirty little quirks of venture capital follow-on business is we like to tell ourselves and we like to tell LPs that, oh, we've got these information asymmetries and that's going to lead to better decisions. And if you look at most of these portfolios, the follow-on bucket is a lower IRR bucket. Than the initial check bucket. Like they're not making better decisions with more information. And I think that part of that has been a function of there not being a market as a weighing machine as much because so much follow-on was coming in. And so one way that I've— this isn't necessarily positive, but it's somewhat helpful is there's a few companies in our portfolio where there has been some interest and that's a useful signal again. Wasn't a useful signal before because, yeah, sure, it has interest because everything has interest. So that's been a big change. And I think we can somewhat start to look at market as a weighing machine for whether or not to be doing follow-on investments into companies that we're really close to a little bit more now than we were in the previous maybe decade.

Yeah. One, one very tactical change that we've made in the last quarter or two is a year ago, And we sit mostly at pre-seed and TBD on how you define that. But a year ago, we'd find a great founder, an opportunity. We'd immediately say, okay, we're in for a million at this price. And by the way, you can, we'd be highly confident that founder could go raise additional capital on top of that. In many cases at higher valuation caps, we're going. In many ways back to basics now, like syndicate building, who's around the table, who do we want to work with? Let's make sure the company has whatever it is, a million or two or three to get to the next milestone. And it's a return to what seed investing or pre-seed investing looked like in 2014, 2015. I also think it's a return to actually truly caring who else is on the cap table. Not that that didn't matter in 2020 or 2021, but I think in this market, you're really making sure that the other folks around the table are in fact the right people for this company in addition to Notation. So that's been a, just a tiny, not tiny, but a meaningful tactical change in the last couple quarters for us.

Let me ask you a follow-up question there. So I'm with you in that in spirit and I'm with you in practice in small ways. But the biggest difference is, at least for me, between 2014 and now is in 2014, I could tolerate a 3 to 5% entry ownership. And now I'm like, no, I want it all. And so many of my peers who in 2014 were like, oh yeah, we'll buy 5 too, or we'll buy 8 and we'll see what happens, are all like, no, we want 10 to 15, 10 to 20, and there's only so much dilution a company can take. And so what's gonna— something has to give there. And I'm wondering how you think about that.

But how much of that is a function of the fund size?

A ton. A lot of it. A lot of things.

Yeah.

A lot of it. Totally. And I, and, but a lot of my peers and some of the more disciplined ones, perhaps not. Have grown and some of them have grown a little bit, some of them have grown a lot, but even still, I think that ownership appetite has grown across the board among the people that I respect. And it's a matter of degrees, but I think the problem is still the curiosity for me.

So I think the first point I'd make is I think in the end, or at least in the short term, Founders end up eating some of that dilution for better or for worse. I think we're investing in a company now raising $3.5 on $12. That would've been like, they're choosing to still raise the same amount of money because they want to make sure they have the right runway, but the valuation is lower than it would've been a year ago. So I think to a certain degree, founders end up eating that, dilution. There's a challenge with that, even for early stage investors. And we all know this, that there's some option pool mechanics that can happen later. And so even though we don't think we're eating that dilution today as investors, we might later. So there is a, there's a cap on really how much we would want a founder to dilute themselves at pre-seed or seed. We're still just small enough where we have, I think, a little more wiggle room than a $100 million, $200 million, $300 million fund. But yeah, I think at the early stages, particularly with multi-stage and big seed funds, it's going to continue to be pretty competitive for a long time.

I would say it's not— this is not uncommon. The experience you're having is pretty typical, right? When you start with a smaller fund and you need to get in, so you build your business, and then as you build your business, you— Nick and I have had this conversation for years. I'm like, there's no one else around the table and you have the capital, go forth. And with that comes ownership. But then it makes it harder to play with other people, which is just the sadness at seed, in my opinion, my experience. Series A broke out of this ages ago. You don't have co-lead on Series A occasionally. It's pretty rare.

Let me ask you one follow-up on the op fund, Kanyi. You guys raised an op fund last year, right? How do you raise it? I presume for a bull market or thinking through the lens of a bull market, or maybe not, maybe that's the wrong assumption. How do the— and we're talking about follow-on for a while. How did the decisions How do those, some of those decisions change? Is there fewer number of companies? Like, how does that same fund size? I guess my larger question is for Beezer too. A lot of funds that got raised in '21 or 2021, 2022 were big funds, probably built for a 2021 bull market environment. What happens now? And we also saw through some of that data, there's a lot of cash sitting on the sidelines. Does that just end up being like a 3, 4, 5-year deployment rather than a 2-year deployment? Do GPs give some of the money back and resize smaller? Like what actually happened with all these funds that are maybe not right-sized for the current market?

Yeah, I'm super curious to hear the LP view on this. For our op fund, it's an opportunity fund because it's opportunistic. And so where we are finding ourselves is more concentrated and playing a little bit more, a little bit more often. And so being able to take more of a leadership role around the cap table, more of a leadership role in a boardroom. And if there are any crossover funds, they're hiding in a corner in the shadow and you can start to, to earn a little bit of space against them for companies where you've got enthusiasm for the fundamentals, and you can do that with great pricing. With respect to the op fund, because of the fact that it is opportunistic and most of them are structured in such a way as to have some flexibility around the fees so that it doesn't burn a hole in your pocket and you don't feel too much pressure, you can actually selectively play offense around really good opportunities if you play your cards right and become more concentrated. We're finding ourselves becoming a little bit more concentrated and we're finding ourselves playing a little bit more offense and expressing more leadership on cap tables than we thought we would have the opportunity to do, frankly. But we're glad about that. On the early stage fund though, that is an important distinction because for that one, we do have a relatively fixed rubric that we're trying to invest against. And there's a set of assumptions about how the market is shaped. And if those, if the market shape changes, then you have to move those assumptions. And so for us, we're trying to do two things. One, we're going to add a few more shots on goal and we're going to invest for a little bit longer of a period of time. And, and I liked a little bit longer of a period of time thing and gosh, everybody who was investing in 9-month, 10-month, 12-month cycles in prior vintages is going to— the cows are going to come home to roost. But it's nice to have vintage diversification. And it's easy to say when it's a down market and you like are ready to extend it. And it's a lot harder to say when it's a bull market and you feel the go-go from everybody. But that's what is just lengthening the investment period, and then just adding a few more names because maybe loss ratios are going to be higher sooner. Maybe you can think of this as this fund and a little bit of the next fund in terms of your time, right? And in terms of what you're working on. And maybe you can push off fundraising a little bit and wait until the market gets a little bit more reasonable from the vantage point of the LP, at which point I pass it on to Visa to hear her view.

I love it because I agree with everything you said, which makes it so easy. And I would— so great, thanks. I would also say yes on the more names because we've just seen historically such low loss ratios. To what you said, Nick, there was so much raising that was out there. And the loss ratios, to your point, it's very painful, but it will help— it helps folks concentrate the capital in the companies that win. Because as tedious as it is to talk about, portfolio construction can change the trajectory of a fund so significantly. The good money after bad becomes such a deep hole to then return out of that a lot of times when people will come to me and they're like, oh, this must be a great fund. They have this XYZ phenomenal company from a return perspective. And maybe the company did return 33x or whatever it did. But if you had all this other money going into companies that didn't produce, it still might not return the fund. And that from a, from a fund construction standpoint, just feels like there could have been smarter decisions along the way. And so this market, I think, will actually help people to make those decisions. Because I appreciate it's always hard to say no. It's hard for an LP to say no to a GP. It's hard for a GP to say no to an entrepreneur, but this will just force it through. And it going to be taking a little bit longer. Yes. 3 years was typical for a fund investing timeline not so long ago. And there's reasons for that. And also it goes to my mind, like we keep talking about the dry powder that's out there. And I just had a call yesterday with another LP. And it's funny because the dry powder that's out there doesn't always feel awesome for everybody, right? Because the dry powder is essentially uncalled commitments LPs have made to GPs. But if LPs need to figure out when that money's being called and if they need it for other purposes, because a lot of LPs use the money in an endowment or foundation structure for multiple purposes. It's not that it's not earmarked, it's just that it's very sensitive in these markets when the publics are pulling in another direction and you don't have a lot of different places to go to find cash. So the dry capital is actually very stressful in some situations for LPs. And if people are going to decide to take longer, that could be useful. But being— I'm just going to do a shout out to the— what's it used to call it when it publics? PSA. If you know you're taking longer for your LPs, let them know. And if back in the day, like in 2000, people did just essentially released LPs from commitments, which is how they downsized the funds, right? You don't give the money back. You just say you're no longer responsible for doing it. We didn't see that so much in 2009, 2010. We just saw smaller funds raised. In the market and then people delaying the funds that were going in. So I expect to what the smart points you already made, Kanyi, I think that we'll see a combination of all of those and they'll speak to the fund and their strategy and how they want to play it, right? If you're going into 2023 with fresh funds, you might play it differently than if it's the tail end of a fund.

Beezer, we were talking about it this week. Just briefly, but there were a couple about Sequoia this week. And one of them was they're going to lower their management fees for certain funds. If we think about the next couple of years, founders have had the upper hand with VCs over the last few years. GPs have probably had the upper hand with LPs over the last few years. Some of those power dynamics are now shifting. And so I was intrigued with the lower fees headline, especially from Sequoia. That might be unique to those funds. So we can talk about that, but I'm curious from both of you, conversations with LPs and obviously Bizzy, you're an LP. Um, do some of these things get shifted in the next few years? Do we see fees come down? Do we see funds get smaller? Do we see certain terms in LPAs? Change and maybe what some of those could look like?

I, if I had to bet, I'd bet yes. And I don't think it's going to be across the board. And I don't think a small pre-seed fund is going to see the same dynamics that a very large— they had raised hundreds of millions of dollars and a lot of it was on call. That's a very different dynamic. So I think that the fee terms will change in response to some of those situations, but I do think Sequoia and publicly talking about it is going to open up a discussion in other places. I would not expect most people to talk about it publicly though. So, because people ask for data points and you're like, you're not going to hear a lot of this publicly. This is a very private conversation that happens for the most part. But I would strongly suspect it's already happening. If Sequoia announced it now, it means it started before. I don't know when last year, we're not Sequoia LPs, but it had to, it didn't just happen the day of the Strictly conference, right? It obviously predated that. And I would expect it's definitely going to be fees and terms are going to be a conversation for this year for funds that are raising. And anyone not thinking that it would be is kidding themselves.

And by that you mean back to traditional 2 and 20 or something else?

Not necessarily, although I bet LPs would— I would be surprised if there's an LP that wouldn't be okay with a return to 2 and 20. I think some of the management fee cost is a question of what it's being used for from a budget perspective. And I think there could be more questions about that the same way if there's the sort of the LP vernacular, if a GP has earned the right to preferred economics, that's different than when people were launching with 3 and 30 with pretty much zero track record. So I think again, it goes, you can't make a broad brush statement, but you can say that in places where it felt like the cart got a bit ahead of the horse, you could see that being pulled back. Or there's just a lot of capital that people are sitting on and earning fees on, and there's not work being done against it. The point of the management fee is to pay for the work and to keep the lights on and do all that. It's not to sit there and earn money when nothing's happening. And just the discussion of what it's being used for will probably be a more intense conversation. I don't know.

You guys are on the ground.

And by how deep do you mean like LPs actually asking like, let me see your management company budget. Because that's, that I feel like never, I haven't seen that or heard of that in a long time.

No, there's still a few funds out there that, yeah, there's still a few funds out there that do manage budgets, but they're few and far between. That, that, that era is gone. Like back in the way beginning, Greylock used to do it that way, and that was a bit of what created a market standard for it. But no, I think more of a discussion.

You just mean, you mean, hey, there's two, no one, there's, you have two people working. That's to have sense what the fee stream looks like.

Yeah. Dirty secret LPs can do math. And if they're doing math and they're saying, and PS, I'm not sure you want an LP that can't do math, but maybe you do. But if they're saying you're earning like $30 million a year in management fee and there are 2 people, what's it, how's it going? That's a conversation that was harder to have to your point in a market that was go. And I think it's a conversation that will be having, if it's not already being had. And there could be good reasons for it. I'm not saying that there aren't, but I think the conversation will come up.

One of my takeaways from that, from the Strictly VC and this fee lowering thing, is more just the intensity of the fear, uncertainty, and doubt coming from a couple of different pockets of the market. And FTX was obviously a catalyst in this and not a small catalyst, it seems. But where I think that's going to also play out is in the family office, the less sophisticated family office, the individual investor, the person who was caught up in the YOLO moments and feeling loose with their cash. Seeing an unprecedented set of moves from one of the best known and best regarded firms, making them feel like, oh, I don't know if I should be allocating too much. I should go back to safety. So I feel more like it's a FUD or a fear, uncertainty, and doubt that's going to cast a pallor on everybody's fundraising, particularly in those long tail where it's people who are emotionally reacting to that as much as anything.

What do you guys think the, if you were to look out a year or two, what do you think the, this is a very broad question, but what do you think the venture landscape looks like in terms of firms, number of firms? Do we think 50% of seed firms are going away? Do we think multi-stage is just going to dominate every category? If you were to predict some of the kind of basic market dynamics around venture in a year or two from now, what would you think that looks like, if any different?

I'm going to bring my crazy 8-ball to the next one of these because I feel like there's a— I just don't think venture is going to collapse the way it did in 2002 and 2003. And there was just, there was a cratering. It went from $100 billion raised in one year to $10. I might be off by a number here or there, but the order of magnitude was so intense. I don't see that happening in the next 2 years here. And that was part of what pushed the number of funds to such a smaller level. I do think the number of micro funds and the smaller funds, to Kanyi's point, there are a lot of people that were able to raise funds based on other VCs as LPs or VCs with LP programs, or high net worth folks because of stock or whatever, that's— if the market doesn't right itself publicly on the public market side, that pressure will keep those— make it very hard to fundraise. Not impossible, but just a lot harder. The number of institutional funds, I don't know, I would give it maybe 10 or 20% here or there. I think once you've institutionalized, it's much harder for it to end, but it could diminish in size. Or people will just also, it's not 1 to 2 years. You can drag your fund out 1 to 2 years and wait to raise. It's not, that's a bridgeable distance.

Yeah, I feel the same way. I do think that the speed and intensity of the micro VC contraction, it perhaps is being underestimated by a lot of managers. I think that a lot of the funds that are between 5 and 40, maybe 30, maybe who were maybe doing it while running a company on the side. There was plenty of that happening, right? Or they're doing it, one of them is running the company and the slightly more junior person is doing the day-to-day or something like that. I think that the, that this is the last vintage for the lion's share of them because of how much of that capital was supplied by unorthodox heady times, bull market, excess liquidity environment, that's gone. And so I think that since the sources of capital for that are gone, I think that stuff is going to be gone. I think there's going to be a little bit of a, there's going to be more accelerator energy. I think that there's going to, I personally think there's going to be substantially more accelerator competition to Y Combinator. And I think you're seeing it with Yeah, you're seeing it actually in those labs. Sequoia's Ark and South Park Commons, et cetera. I think there's going to be a lot of those. And I think some of them are going to be really interesting because how do you get started is going to be like really hard and raw and messy again. And so needing to fill that market gap, I think is going to come back. On the institutional funds, I'm with Beezer, which is The only thing harder than getting a fund started is ending one, right? Once it's going. And so I think that's going to be fine.

You know, that said, I, and this is mostly just anecdotal through conversations with other VCs and GPs, like people are tired. Folks are tired. It's been 2021 was obviously insane and 2022 was a rough year and I do think in the coming years you'll see a lot of folks just step back, like voluntarily.

Are those at the, like the smaller micro seed funds or in a larger established multi funds or maybe both?

I would say there's going to be two areas of stepping back. So to Kanyi, to your point, a lot of the micro people, folks that were, or even people that were doing it part-time. I think they, a lot of those folks just realize like, this isn't that fun. It's more work than I expected. It's actually hard to do well and make money. And I'm gonna, and I haven't raised that much money and that much funds, and I'm just gonna go do something else. I think there'll be a category of that. I think there is also a category of older guard, been doing this 10, 15, 20 years, and I think are going to question whether or not they want to sign up for another cycle.

So I don't think that's terrible. Can I say that without being offensive? Because people coming up the ranks need to see potential or they don't want to go. And PS, a lot of these funds that are really big have a lot of checkwriters. And it's— to your question of can funds downsize, part of the pressure on downsizing is what do— who wants to write one deal every 3 years? That's not what people sign up for to get into venture. So it's there's right-sizing on both sides.

I have a question for you about that, Visor, which is— so sorry, really quickly on this topic. I agree with you, Nick, but I actually think it's a different demographic, or there's another demographic perhaps who is going to be interesting. And I remember somebody, and I don't remember who exactly it was, saying something to the effect of, this market is so hot that a blind monkey throwing darts has a good track record right now. And I just do think that there's like the people who started investing after 2009, like all have synthetically good results. And like some of them have good results where they don't necessarily have good inputs on those results. And when the data starts to, when the data is no longer, oh, like how many unicorns did that crossover fund just mint you with in the last 6 months? But it's rather how much real work have you done? How much How many 9-figure revenue companies have you been able to source and support? Like, that suddenly is a really different dynamic. So I wonder if people's jobs are at stake in part because of it being a very different kind of game that so many people trained the wrong way.

Oh, I get asked about other mass layoffs happening in venture pretty routinely. The challenge, of course, is there's just not that many. You can't lay off 10,000 people in venture. It'd be the whole industry. But Yes, it's the past. That's always been part of it, right? Firms expand and then the world changes. And to your point, there's a mix between it's not fun and I don't have the skills that got me here aren't going to get me to the next step. And yeah, so there, I think there might be a rehashing of it, which my biggest concern honestly is that it's going to crater the little diversity that we've had. So I'll just throw that out there as my concern. But aside from that, I think it's pretty healthy for the ecosystem.

I largely agree with what's been said. Micro funds thin out, the multi-stage firms are not going anywhere and get bigger. I'm actually very interested in the, like, middle Series A or B firm that was probably not viable in 2021 competing against Tiger and all these crossover folks and like You're a $400 million Series B firm, maybe even tier 2, and in some ways maybe you have a, a new lease on life in this market. There's less competition and maybe you're viable again in a market like this. I don't know the answer to that. Be curious if there's views, but that's one segment of the market that in my view could maybe survive and benefit. From a market with less capital.

I don't disagree. You still have to pick.

Picking.

Right.

Turns out picking is a thing.

Yeah.

And maybe I'm just playing devil's advocate with myself, but maybe there's still just, there's fewer really great companies, like Kanyi said, like truly great businesses. And for those, the market's going to be just as competitive as it's ever Last question for you both. How do you both manage psychology through this? So 2021, everything's up and to the right. I think we all were probably busier than we've ever been. 2022, a lot of tough conversations. How do you manage your own investment psychology? And I'm curious if there's any tips and also just strategically more day-to-day, month-to-month, quarter-over-quarter?

The hardest one for me is something where we, which we advise our CEOs, which is like to plan like a miser or like a CFO, but dream like a pure optimist and to do those at the same time. And I am trying to figure out how to balance my worry and cautious pessimism about the next couple of quarters with enthusiasm about technology and about early-stage startups. Like, those feel like such incredibly competitive psychologies to be in. And if I'm in the mindset of one of them, it's cool, let me go fund companies, let me just get into dreamer mode and get excited about stuff. And it's really hard to context switch from that to, hey, my friend, you don't know yet, but you're dead right now. Because everybody around you is too, because I'm also feeling that sometimes. And so that's just really disorienting. And I will say that this feels like a more normal and frankly more aligned place to be because it sounds somewhat more similar to the advice that we give founders than last year or the year before, maybe 2 years before where it was, wait, why am I not getting a unicorn a month just like everybody around me? And why am I not, if there's food on the table and everybody's eating, should I grab a turkey leg just in case? Like there's a lot of that behavior that was happening and that's kind of dark and weird. And so I'm glad to not be in that anymore. This is hard, but it's the hard that seems like the right kind of hard for me at least.

I love talking to you guys. It's so good. But I think that's exactly how, what gets me through is that it's easy to go to the dark place of, oh, this is going to be really hard. And then finding the people that you can ideate with or whatever it is that gives you energy. For me, it's people. And I love the fact we can now do this virtually, but for me, it's always in person is really the energy giver. And then how do you then get the sort of, yeah, the mojo to keep going, bounded with the sort of reality of not losing sight of the fact that yes, what is it? Build your castles in the sky, but keep your feet on the ground. And having teammates or, or thought partners or whoever you wanna construct your world that can help you do both. Because too much of the negative is, it's just, yeah, it's gonna be really depressing. The world's a tough place and you can keep a lot of it on there, right? Especially when you're tired and there doesn't seem to be an off button.

Those are two really good ones. I'd add a very tactical one, which is spend less time on social media. I let Twitter go in 2021. It was making me very upset, similar to Kanyi Maqubela's unicorn a day or unicorn a week or month. And that was highly beneficial. I'm actually oddly thinking about coming back to Twitter. I just like, maybe you guys can tell me.

Nick, I just left.

Yeah.

And what do you use it?

I left a month ago for the opposite.

Really? Why? What was the opposite?

Bill Gurley says play the game on the field. And I felt like the game on the field was like, ah, hey, ah. And that I didn't, it was a tough game. It's not a fun game to play. But I feel like right now actually being on Twitter, there's so much fear, uncertainty, and doubt. And there's so much like negativity. And pessimism that I don't want to get drowned in that. I actually am trying to protect my optimism. And so, it's not just focus, but I'm trying to protect my optimism by staying off of social media. And so, I'm on Instagram with my kids and looking at people's dogs and I'm having a jaw. It's going great.

I would say one of the other mental health things that happened for me over the last 2 years was that I became like a full-fledged soccer mom. And, you can't, you cannot like sit there and watch people play and talk to their parents and be on Twitter. And it just gives you this break and it's just very wholesome. He's just on a nice team with nice people. They're not gonna win every game. It just doesn't matter. They're just out there running around having fun. And it just re— yeah, it kind of refreshes the mindset of what's of being grown. But I'm intrigued by this no social media. You're not gonna do TikTok, you're not gonna do whatever the 6 other new things are. No.

Okay. Yeah.

Yeah.

It is getting old. Although I was thinking like maybe with all the crazy chest beating gone, Twitter is maybe a better place now. But maybe not.

You let me know.

Yeah, maybe Instagram.

Send me an Instagram DM. That's where I'll be.

I'll tell you what, I do think, I do think that Twitter is a phenomenal signal on what not to do. And it's maybe used, just maybe useful, just poking in there just to get the broad market consensus and signal. So 2021, everything's going to infinity. That would have been a phenomenal good time to to sell things. And this year everything's going to zero. And I think using that as a marker, a pretty interesting time to buy things and to invest in companies that are going to be hopefully very valuable in the next 5 to 10 years. Appreciate it. Much love y'all. Thanks. Good to see you. See ya. Bye guys.