#57 - Kevin Hartz: Venture Capital

You know, there's a lot of companies being funded now that you know, are not massive size opportunities or they're one of dozens of companies in the same field that just lacks creativity and all sorts of other issues. So if you're going to really spend the time and build something great, you know, the expression is like, really make sure you go for it. Pitched a friend's business to Elon and he said, Kevin, I only invest in companies that change the world. And it's, it's a good litmus test to stick by. Okay.

That is Kevin Hartz. He's currently a co founder and general partner at Astar, an early stage venture capital fund, and co founder and chairman of Sauron, a home security startup. Before that, Kevin was co founder and chairman of Eventbrite, the first major events organization and ticketing company in the US which he started with his wife Julia. They IPO'd in 2018. Kevin was also formerly co founder and CEO of Zoom, that's X O O M, an electronic funds transfer and remittance provider which was acquired by PayPal in 2015 for just over a billion dollars. As a founder, Kevin's as seasoned as they come, so I naturally felt a bit guilty when I decided I'd sit down and insist on talking about the state and future of venture capital. Besides his success in company building, Kevin's been a prolific angel investor with early stakes in companies like PayPal, Airbnb, Pinterest, RAMP, Anduril, Uber, Palantir, SpaceX Square, and many others. But Kevin has the rare perspective of having experienced both at a very high level, which I feel gives him a unique insight into technology markets.

Well, the vast, vast, vast majority of companies are ephemeral. Like could be months, it could be years, it could be a couple decades. But most companies come and go. They go through a rapid rise and then they recede and go away. Your yesterday's news. Nobody really wants to work there anymore. There's the new bright shiny objects. And so the strength and power and fluidity to help create these fast companies and get them growing also takes them apart.

There's also an appreciation for the game on the board, which I find a lot of investors don't pay enough attention to at a point in time when private technology markets are only becoming more and more competitive and are more meaningfully interacting with the rest of the global economy. Post Covid. Covid an understanding of the state of play and your place in it is important. When your green dollar is no different than the next guy's.

What happens when You're a seed investor and you start doing growth in growth. Every company looks amazing because you know, you're in these seed companies that are just like getting started with two people in a garage and all of a sudden you see something that has real revenue. And, and then on the flip side, if you're a growth investor and you come down to seed, you're like, what are these things? There's nothing here. Zero. My theory on this is that it's multi stage funds that are just trying to nuke the, like the seed market so that seed funds don't end up doing, don't do well in, grow into their space and compete more directly because like Taken, Andreessen Horowitz, they're firing cash out. But a $6 million seed is a tiny sliver, like who really cares?

We spoke about the cost of capital competing in venture perpetual motion machines, incubations, Ipoing founders and investors as distinct personality types. King making the expansion of technology markets and mouse nuts. This is the Lavoisier podcast.

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Yeah, thank you so much for having me.

Yeah, thank you.

It's a beautiful home. It's really, really nice of you to have me here and thank you for making the time. I just want to start with a sort of level setting question here. I think it's in my opinion, sort of important to romanticize what you do in a way on a day to day basis and maybe in creating this rough model of how you think the world works and sort of having yourself fit into that mold to rationalize why what you do is important. So I'm curious, from your perspective as an entrepreneur, as an investor, what's your North Star? What's your model for how any of this fits together?

Yeah, I think I came out of graduate school and I didn't know what I kind of wanted to do with my life. And I was spinning around like some other graduate go to med school or law school or something. That falls into Peter's narrative of Peter Thiel's narrative of when you don't know what to do, you end up going to some horrific graduate school, like law school, and then ending up becoming a lawyer and you end up, you know, like falling into this profession that, that, that you didn't even, you know, you just didn't know any better. And. But you know, when I kind of took stock of what I like to do, I like to learn and I loved Being around smart people and interesting people and oh, wow, like in the mid-90s when, you know, Mozilla came out and, and it became Netscape and Marc Andreessen was there at the first rise of the Internet. It was such an exciting time. But I could say the same thing about all these different subsequent periods, whether it was at the time of Facebook and then LinkedIn and that revolution, or now, of course, with Transformers and ChatGPT and everything else in AI.

To look at the whole ecosystem top down, it seems like the fundamental bottleneck when we're talking about investing, and we sort of will be, I guess, for a while today is this question of why there aren't more great generational companies. So in your opinion, I mean, is entrepreneurship itself fundamentally constrained by a shortage of great founders or a shortage of real opportunities? Right. Is the world founder limited where we just need more people starting companies? Or is it opportunity limited with like a finite number of massive businesses that exist at any given point in time due to just number of opportunities, regulation, technological inflection points? What camp would you say you're in there?

Well, the vast, vast, vast majority of companies are ephemeral. Like it could be months, it could be years, it could be a couple decades. But most companies come and go. They go through a rapid rise and then they recede and go away. There are many forces at bay. But as a company goes over into the kind of elder years, I guess you would say, or the decline, it's an accelerating phenomenon where you just lose more talent. Your yesterday's news. Nobody really wants to work there anymore. There's the new bright shiny objects. And so the, the strength and power and fluidity to help create these fast companies and get them growing also takes them apart, except in certain cases where, you know, you can. What I think of is kind of create a perpetual motion machine like a business, build the foundations of a business that can really withstand that test of time. And we see those in the seven in the public markets that have mostly effectively set up really awesome monopolies. And God bless them for, for that, they did a great job. And then there are companies, you know, the perpetual motion of say a PayPal, which, you know, I kind of think of it as like in Genesis in the Bible where in the beginning God created like PayPal and sorry, that was a really heavy duty religious and reference to the PayPal mafia. They created this thing and it's managed to run, you know, for so many decades now since I think it's PayPal launched in the fall of 98 and the testament that it runs. It's seen some headwinds and so on, but it's an incredibly durable business despite everything in the normal trends of things.

To start to get into the state of venture, if that's what we want to call it. I mean, over the time you've been investing in companies, certainly over the time you've been involved in tech, the, the amount of capital in private tech markets and venture as a whole has just absolutely exploded. So before we talk about maybe the state of venture investing, maybe we back up and ask, how did we get here in the first place? What was the driver, the many drivers that led to so much capital inflow into these markets in the first place?

Well, it was all of the excitement that we experienced. I want to say it was the excitement and being a part of building some really great industries and driving innovation. But I think, you know, our friends in New York and all around the world started to see the returns that were coming out of this. It was always a very cottage industry. We, for example, lost a great one last week or just a week ago, Dick Kremlich passed away. And you know, he was out there with Arthur Rock and the whole group in the early 70s. And it was a very niche industry. And it always felt like as going through this, it always felt like venture was this thing that was only on Sandhill Road and very much cordoned off. And then you had this sort of mainstreaming of tech. It's democratized tech that, you know, you have like new funds starting as fast as startups now. And I was talking to a friend of mine, Mark Stodd, who started a fund called Dragonier. And Mark is very clever. He invests in public markets and has done incredibly well in private markets. I think his first investment in the private markets was in 08 and Facebook. And he's moved pretty primarily into the public markets because like, it's just way crazy, crazy competitive. And you know, the, and for the majority of, of funds and for the overall numbers of it, you're, you're going to lose all the returns because, you know, as Peter Thiel famously says, competition is for losers. And you have insane numbers of undifferentiated players all trying to invest in the same companies.

Just like a million threads I could pull on there. So hopefully we go through these one at a time on the topic of just the rise of these massive outcomes that we've seen in tech in public markets. There's an investor I really respect who once told me that the biggest learning he had in his 10 years of investing in venture that he's thankfully done very well at, is that oftentimes we continually and structurally underestimate the extent to which monopoly like outcomes dominate the rest of a market. And that unfortunately, even looking at public markets over the last 10 years, like the mega cap tech stock trade, was probably the best one you could have made. And a lot of people unfortunately are maybe a little bit more prone to or enjoy sounding smart rather than making money. So with any of that in mind, I think a lot of the outcomes here, or a lot of the drivers here are probably inflationary. But the idea of a trillion dollar tech company, let alone, I don't know, I think 11 publicly listed multi trillion dollar companies was insane. So I guess the ultimate question I'm trying to ask here is what do you think the fundamental shift is that led to such massive outcomes? Was it just the dynamic of Internet businesses? Was it something else? Why has there been such concentration?

It's a multifactorial kind of cause then effect. It was incredible talent that came and with a fortuitous cycle, you had the best talent coming into the, to the market, into the tech arena. It was demystifying tech. It used to be that you had to be a double E or PhD in this. And so it was opened up to a much wider audience. Then again, this, this phenomenon of tech reaching everyone and it usurped all the businesses in so many different areas, it just kind of swept them away. And not just in the United States. The incredible growth in all the continents of, of the planet like that, you know, saw this happen and so you just added zeros on these things. You know, in the 90s when it was Microsoft and Cisco and intel, you just couldn't believe how big they were getting in the late 90s. But it turned out that was just mouse nuts compared to like the. Can you say mouse nuts in a podcast?

I don't think I've ever heard that expression before.

Just small, very. My business partner Bennett's going to watch this and he's going to be like, no, mouse nuts. But the, you know, those Companies in the 90s, Microsoft, Intel, Cisco, that we saw as these grand companies are, you know, compared to what, you know, at least Microsoft is today. And the rest of the magnificent seven are, you know, dwarfed in, you know, multiple zeros removed. So it's then it's really, instead of coming out of college and saying which this whole myriad of different companies to go to, it's really the tech ecosystem that dominates and is kind of Continuing to absorb the talent.

Okay, this one's a little bit hand.

Wavy and something I think about a lot. So maybe a bit of a flyer, but broadly speaking, maybe you disagree with the premise, but as far as I can tell, we're indexing more and more of the world around us in more real time and more granular ways. And suddenly as of the last maybe two or three years now, we're able to parse through that information way more efficiently. Like orders of magnitude more efficiently in a post AI world. Do you think public markets eventually price themselves in? Like, if all value investing is front running information, what happens when there's nothing left to front run?

Oh, you're taking me into the public markets and I try to shy away from it. I mean I would just simply answer that, that there's facts and then there's what people decide to make decisions in investing, you know, that can vary quite a bit. And then there is maybe elements that are hard to price in of the quality of a management team and beyond the ability to succeed with new product lines and continue to innovate. So I think that's something that we are worried that we'll get to, but I don't think we'll ever quite do that.

Totally. Okay, meat and potatoes here. Let's talk about the state of VC as a whole right now. I think Silicon Valley, and again this is sort of me being opinionated, has probably self servingly told us that raising VC is the best way to capitalize any company. But many of the greatest companies, I mean Microsoft, Dell, eBay, WhatsApp, Midjourney, more recently, were bootstrapped early on. Earlier on, granted this was sort of just what you had to do if you wanted to run your own company and not be ousted by investors for a professional CEO. But that dynamic has changed and capital is so abundant that this isn't as much of a problem anymore. So in your opinion, when is VC a suitable capital instrument for companies and when is it not?

Yeah, it's so situational. It depends on the founder, the market and so on. Look, but to be honest, most companies, especially if they're all bits, I know that there's been a preponderance of new businesses that are a mix and are quite complex or capital or capital requiring that that do need venture from the beginning. But look, if, if a founder can start a company and start building it and grow it and get it to profitability, they should do that at least for some part of the company's lifetime. And I encourage most founders. I was Just, just heard from a friend who's building something right now and you know, encouraged him just that to, to kind of build it, like grow it, get in contact with the customer because that's what's most important. Like I felt, you know, when we were getting eventbrite off the ground, the most important period or one of the most important periods was just the beginning where we were spending kind of 24, 7, just interacting with the customers, getting their feedback, changing the product in real time, pushing it out. And we weren't distracted by, you know, capital or who to hire, what kind of office or anything else. And it was a, you know, it drove capital efficiency, it drove lots of good habits. So I, you know, I. Against my selfish best interest. I do think founders should spend more time bootstrapping.

Historically, I mean, okay, so we've spoken about maybe what got us here in the first place. Generally what's happening right now as far as capital inflows are concerned. Looking forward at like a 30,000 foot level for a moment. I mean, historically, if you look at the history of private equity or other sort of asset classes, they tend to consolidate in bull markets, bringing lots of new competencies under one umbrella. And it seems like we're finally seeing venture capital sort of emerge from a similar phase with multi stage and crossover and platform and buyout and asset agglomerator and incubator and every model in between which feel like they've kind of emerged as symptoms of that huge capital inflow we spoke about earlier. What does that trend point towards? Like what's your read on the direction of this asset class? Or is what we mean by venture capital as a whole changing?

Well, I think everyone wants to kind of relive the glory days in some mechanism. Yeah. And some want to not end up in such a competitive situation so they consolidate or try a new model or, or whatever else, you know. But the reality is that you have, you know, some of the, like the great brands like A Sequoia that's strengthened and built its ranks and expanded into different practice areas. And then you have like the newer beasts like Andreessen Horowitz, which is, you know, has been really disruptive coming into the market and paying up on rounds, being very aggressive and you know, and so investors are naturally trying to justify their existence and their existence to LPs and what will look good in a presentation, that kind of stuff. Totally.

We suddenly sort of have this moment in time where two very distinct business models in venture have emerged. Right. One being, I guess, making money on returns one being agglomerating as many assets as possible and largely making money on fees. The former, in my mind, can almost always outcompete, or rather the latter can almost outcompete the former because they have a different cost of capital, right? Like as a seed fund. Most of us can't go running around San Francisco paying $100 billion post for some AI infrastructure deal Everybody's seen, has an opinion on and will outbid you on. All else equal, I mean, how do you compete at seed when larger firms can outbid you?