Network Effects, Efficient Tools, and the Changing Landscape of Venture Capital with James Currier

the more users you have of the product, the more valuable that product is to all the users, right? So if you're the only person on Twitter, it's not very interesting. But if there's 10 people on Twitter and, and you know them, that's— it's starting to get interesting. You get their updates. But if there's millions of people on Twitter, all of them, then there's a lot of value. And so Elon had to spend $45 billion to buy it because he can't replicate it. It can't be replicated.

In this Venture Trailblazers series, uh, we try to feature people that have been pioneers, innovators in the space. Hence the point, Venture Trailblazers. And today, uh, talk about trailblazers, uh, let me introduce everybody to James Currier. James Currier is the founding partner of NFX. Uh, it's a venture capital firm with, uh, firm with over $450 million under management. James himself is a just amazing serial entrepreneur, uh, that started 5 companies. Uh, he's also angel invested in a whole bunch of groundbreaking companies such as DoorDash, Lyft, Patreon. I mean, there's— the list goes on and on. He's also helped 10 companies achieve more than 10 million users. And we're going to talk a lot about networks, network effects, and things like that with, with James because that's an area that he's an expert in, and I'm super looking forward to the conversation. So everybody, please welcome James to the stage. Uh, and James, if you can also maybe sort of introduce yourself to the audience, we would also really, really appreciate it.

Sure, sure. So I'm a kid who grew up in, in the Boston area in the United States, and I got scholarships to places like Exeter and Princeton and Harvard Business School, and then ended up in the tech world in the '90s, uh, just fascinated with software. And so I started 4 venture-backed companies Uh, the first one was called Tickle. It was one of the first A/B testing, viral, user-generated content companies. And then we did a gaming company, and then we did growth analytics software business, and then we did an enterprise healthcare software business, all of which did well. And, uh, and so then we, uh, did 50 angel investments, and then in 2015 started an accelerator. We invested in 80 companies over 2.5 years in that format and then flipped over, uh, NFX to becoming a venture firm in 2017, where we raised a $150 million fund and then a $325 and then a $450, and now another $325 we haven't announced yet. Uh, and, uh, so we got about $1.6 billion under management now, and we've made about 190 investments with that, with the venture capital group. And, um, and so yeah, I've got 4 kids and live in Palo Alto.

Amazing, amazing. So can you maybe tell us a little bit more about NFX, and if you can sort of go into network effects as well as part of that narrative, that would also be really good to kind of start it.

Sure. So, so NFX stands for network effects, and we became fascinated with network effects in 2004 when we had a company that did not have network effects that sold to a company with network effects. And our company had much better technology and much better people, and but they were worth a lot more than we were. And we realized it was because they had grabbed a network effect. And so we became students at that moment of what these things were. And, um, and, uh, by sort of 2010 or '11, we, we probably knew more about it than, than anybody else in the world. And, and so we decided to call our, our accelerator and our venture fund NFX because those were the types of businesses that we were looking for as investors, as angel investors, um, that, that we were really excited to invest in. And so, you know, we are a seed fund where we'll put in anywhere from $2 to $3 million to lead a seed round We meet every week with the founders after that. We're very involved. We don't take salaries. We're doing this for sport. My co-founders, Pete Flint, who founded Trulia, and my other co-founder, Gigi Levy-Weiss, who's in Israel, who founded Playtica and was the CEO of 888. And, you know, the three of us together have built and sold over 10 companies that were worth over $10 billion cumulatively. So which was twice as much as Andreessen Horowitz when they started that firm. So we have a lot of operation experience, and, and we're doing this for sport. We're doing this to create a legacy firm. And, and, um, and instead of investing at the A and the B with a multi-billion dollar fund, we're investing at the seed with sort of a $300 to $400 million funds. And, um, yeah, as we've got a team of 45 people, we do a lot of support. We help the, the, the founders with the PR and with recruiting and with fundraising and, and all the things, you know, deck design, all the things that, uh, the early-stage founders need to clear off the deck so they can focus on product and customers. And, uh, yeah, we've got offices in Israel, Palo Alto, and San Francisco.

Incredible. So why are network effects so important?

So if you want to create a company of value, uh, both for the world and for yourself uh, and for your investors, you need to have defensibility. And in a digital age, there's only a few defensibilities, uh, and, you know, it's brand, scale, network effects, and embedding— what we call embedding. And network effects is the greatest of these, uh, of these four, because they're available to startups and because once they get going, you just it's very hard to beat you. And so you have defensibility because of those two things. So embedding is something like Oracle, where they embed their software into your enterprise, and if you try to rip them out, it would be very, very painful. So they can just charge you 20% more next year, 25% more next year, you can't do anything about it. That defensibility is available to startups, but scale and branding aren't really. So we focus on those two types of defensibilities when looking at companies. And we encourage our founders to develop more embedding, develop more network effects. And on nfx.com, we've actually published the, the network effects manual showing you the 17 different network effects that are out there that you can use. They're sort of like colors in a, uh, like you might use to paint a painting, and you can use the different colors to reinforce, uh, each other as you build your product and as you build your business. And once you get a network effect or two or three reinforcing it's very hard for someone to beat you, and you end up taking 60% of the market or more. And that's what creates really defensible and valuable businesses. And if you think about any company you might admire that you think has created a tremendous amount of value, um, you know, whether it's, uh, Amazon or whether it's Facebook or whether it's Twitter or Google or, um, you know, and, you know, Intuit, they all have network effects. And, um, and we didn't realize that in 2004, but 20 years later we do. And we've actually published— actually, we have a masterclass on nfx.com. If you go up to the, the navbar, you'll see masterclass, and there's a 3-hour video that explains all this, uh, in a very consumable way. And the reason we do that is because we want more founders to come to us with network effects designed into their businesses. In fact, we've looked at all the, the applications we get for capital or the companies we look at. And while 70% of all the value created in tech in the last 30 years has come from businesses with network effects at their core— listen to that, over 70, it's about 72% of all the value created in tech in the last 30 years has been with companies with network effects at their core— less than 20% of the business plans have network effects designed in. So by publishing this, we're encouraging founders to come up with businesses that have network effects because we think it's in your best interest to do that. And then those are companies that we can invest in.

Well, speaking of that, you know, when you look at an investment with, with network effects, you know, what, what are some things that get you excited? Like, what do you look for in general when, when you see a company like this?

Well, the, the basic idea of a network effect is that the more users you have of the product, the more valuable that product is to all the users, right? So if you're the only person on Twitter, it's not very interesting. But if there's 10 people on Twitter and, and you know them, that's— it's starting to get interesting. You get their updates. But if there's millions of people on Twitter, all of them, then there's a lot of value. And so Elon had to spend $45 billion to buy it because he can't replicate it. It can't be replicated. Uh, so many people tried different— you know, I think Facebook even tried Threads to be a Twitter killer. It's gone nowhere. So, um, that's, that's what gets us excited is when nodes, people or companies or something, nodes are attaching to a network that then adds value to the other network. So you can have a marketplace network effect where, let's say on eBay or Craigslist or Monster.com, you have the employers and the employees, you have the buyers and the sellers. These are marketplace network effects, and those nodes are attaching to that central business that you can own. And if you get everybody attached there and you get liquidity, it can be very hard for someone else to replicate that. Liquidity just means can a transaction take place. So by looking at each of these types of network effects and seeing them in the businesses that are coming to us, that's really what gets us excited. And particularly finding founders who can think in that way, because you can't just do it once. You can't just do it once and then live off it. You have to do it You know, if you're doing a marketplace, there's many seasons of managing your marketplace, and you have to constantly be reinventing that network effect. And then once you get that network effect, you want to start adding more onto it, and then you end up with your very big company. So that's, that's what we're looking for. We're just looking for companies that have a trajectory to be very big. For us, you know, we want to invest in you and have you, have you exit, go public for, you know, $2 billion— not even $1 billion anymore, but like literally we want you to be big, because that's what moves the needle for our fund. And we think that's what's fun. Uh, it's going to take 100% of your time whether you start a bakery, which is not scalable and has no network effects, or whether you start eBay. You're going to be spending 100, you know, 100% of your time running this company. You might as well run something that, uh, that can be big.

You know, you mentioned founders, and there's a lot of founders on this call here, and you said, uh, about them having some sort of like network effect or thinking about network effects. Any other sort of qualities that, that you have, uh, determine or have seen throughout all of this investment experience that you've had, that some common qualities that a lot of other founders share?

Yeah, I mean, look, I, I think, I think now is the time to realize that, you know, we live in the age of the startup industrial complex where things like VC Lab and NFX exist. We are feeding you information, we're putting it on your plate, we're making it easy for you. This was not the case 30 years ago. The only people who are founders and entrepreneurs 30 years ago had to be founders. It wasn't high status, it was a lonely job. People were physically misshapen, they were autistic, they were, they were just weird people. And I was there, I was an associate at a venture firm 30 years ago, and the people who came in the door were just tough as nails. Most of them already had a $3 million business that they had built on their own credit cards. There was no blogosphere to read about how to do a startup. There was no venture capital. There was only 40 venture capital firms in the United States, 150 venture investors. Now there's over 30,000 venture investors worldwide. So we live in an age of the startup industrial complex, which has drawn in a lot of founders who maybe shouldn't be founders because it's a very hard job. There's a lot of suffering, there's a lot of sleepless nights, a lot of mistakes. You're firing your co-founders, you're losing your biggest customer, you're having an investor back out at the last second. Um, uh, you know, you're missing payroll, you're going off salary. There's, there's a lot of challenges typically with building a startup, and most people think that it's like a career choice. It's not. It's actually sort of a whole mental, uh, sort of, uh, way of living. It's a, it's a whole way of living. It's not just a career choice. And, and so, you know, what, what most great founders have in common is that they're a bit insane. They're a bit crazy and they are relentless and they're, um, they're aggressive and they're fast. We call them, uh, sauvage or savage, right? We call them savage. We're looking for savagery. You have to move incredibly quickly. Um, you know, we had one guy who grew his company to 250, he narrowed it down to 30, he grew it back up to 120, he narrowed it down to 40. Like, it was just violent for years and years because of COVID and losing 95% of his revenue. And, but the guy was savage, and, and so he survived, and now he has a $60 million profitable business, and, and he's going to double and triple over the next few years and hopefully go public in the next 3 or 4 years. But it's been brutal, you know. He lost his fiancée. He had to live in different countries for 6 months at a time, 8 months at a time, while he was trying to raise capital because he couldn't find cap. And it was just, it was brutal. He like spent his late 20s and early 30s doing this, and he had nothing other than this. And I think most founders are deluded right now into thinking that it's a career choice, that you just kind of, you know, do a startup. Well, it's much just choice. I'm like, no, it's, uh, you have to be savage.

Yeah, it's pretty hardcore for sure, you know, especially being obviously on the other side, and you've been on the other side plenty of times. It's in general, um, you know, speaking of like the industrial complex, you mentioned that you're doing a lot of like, uh, tools and things like this. I, you know, you do so much stuff and you're like giving away for free, you know. What What is NFX Signal? Why are you doing it? How does it work?

Sure, so, you know, I'm a software designer and a foundation, and then I became a CEO, and now I'm a VC. So that's my trajectory. And so I like to keep building software. And, uh, and so, you know, there are certain tools that we wanted the ecosystem to have for the founders and other VCs to have. And one of the things we built is called Signal, uh, signal.nfx.com. This was before the, uh, The Signal messaging app blew up. So this is like 7, 8 years ago we started this thing. And, uh, and now this is where VCs build their profile. So your investing profile lives on Signal, you know, like your, your career profile lives on LinkedIn, your investing profile lives on Signal. And, uh, we started with 1,400 of the top VCs, uh, here in Silicon Valley, and now there's over 31,000 people who have built profiles there, uh, and we can, you know, you can see who you're investing with, and other founders can find you there. And so this is where great founders go to find their investors. And I encourage all you aspiring VCs and VCs to make sure you create your profile there, um, and, uh, and be found and indicate which sectors you like and stages you like and, and who you're investing with and the investments you've made. And it's a really good way for founders to find you when they're looking for, for for good capital. Another, another tool that we built is called BriefLink. It's basically a DocSend specifically for startups because it, like DocSend, it allows you to send the, the, the PowerPoint if you're a founder, uh, send that on an email link to, to an investor. But it also asks you 12 questions which a VC typically asks in the first meeting, and then it also asks you to put up a video. And so that That combination, that BriefLink, uh, allows the VC really to have a first meeting in 3 or 4 minutes because you get the answers to all the questions you're going to ask. You get a sense of the founder and how they speak and, and who they are, and you get the whole deck. And so it's a very efficient way for founders to raise capital because they don't have to take too many first meetings. The, uh, the first meeting they do take after sending a BriefLink to you, uh, is going to be like a second meeting. It's going to be much more productive. And you as a— you as an investor like the BriefLink because then you can get through the first meeting in 3 or 4 minutes instead of a half an hour. It's very time efficient for you. And so we have hundreds of thousands of— not— excuse me, we have hundreds and hundreds of companies per month that are using that, uh, to, to raise their capital. And over $5 billion has been raised by the funds— by the companies using the BriefLink. So it, it seems to work. And these are two public tools that we have available for folks, and we're going to continue to build more public tools to help the whole ecosystem thrive. We can only invest in about 0.3% of the companies we see, and so we hope that these tools help founders when we can't invest.

What an incredible service to the community. Thank you so much for doing this. I'm sure a lot of founders will continue to benefit from this stuff moving forward. Um, if, if you're— whatever you feel comfortable sharing here, you know, we do have quite a lot of VCs, especially VCs that are starting their firms, Fund 1, Fund 2, Fund 3, on a call like this. Anything you feel comfortable sharing about some of your internal tools or processes and things that you've sort of developed to kind of make sure that you kind of let the top sort of companies bubble up so you can make an investment?

Yes. So we look at 8,000 companies a year, and we think in the next 2 years we'll be looking at about 15,000 companies per year. And to, you know, do that with 5 partners, The only way to do that is with software. And so we have an internal team of 16 people who are working on data management and working on software development for both our internal and our external tools. We've had that for 7 years. We actually hired our head of product 5 months before we started the firm because we're so committed to building software. And so we save an enormous amount of time doing that. I know that And, and, you know, increasingly we're just adding more and more AI to every aspect of the sourcing, analyzing, when, you know, deciding, winning, and supporting aspects of the venture process. And, um, it's, uh, you know, it's a big initiative for us and has been. I know that you guys provide a software suite to everybody with, um, with Decile, which I, uh, I think every VC needs to have really good software to help with all the data management and the process management.

Um, you know, you and I were just talking about this, that when you first started, there's maybe, I don't know, 150, whatever number of VCs. Uh, it was pretty, pretty hardcore. Now there's like 31,000 profiles on just on NFX alone. There's, who knows, there might be more. Um, love to get your views on sort of the arc, right, of how we, how we got here and where do you think the future is now, you know, that there's this many VCs, uh, the way that the, the approach that you have to take in sort of sourcing, my guess is, probably has to change. I'd love to sort of get your, your views and insights on this.

Yeah, so essentially, you know, the venture community in 1994 when I was an associate of Battery Ventures in Boston was 150, uh, general partners across 40 firms that were active. We had a $42 million fund and we were the one of the most active venture capital firms in the United States. And, um, there was 75 associates, 150 GPs and 75 associates. That was the whole community in the United States. And there was maybe 2 law firms in Boston and 3 in San Francisco who even knew how to manage the documents for doing private equity investments in these tech companies, like What were the vesting schedules for the founders? And, you know, what did clawback mean? And yada yada yada. All these terms were very tightly held by basically 5 law firms in the United States. Starting in 1994, coincidentally the year that I joined, when we got, um, the internet, we entered the age of software and Software made it so much easier to build high-scaling tech companies using the browser and TCP/IP, and all the standards have been adopted, that there was a flourishing of opportunity for founders, which they filled in. Then they started to need more venture capital. These firms, these venture firms and these law firms, got overwhelmed with what was happening And so more venture firms were starting to be funded. And we also needed, remember, to not only do software, but we needed to do tech, uh, telecoms data infrastructure. So we had to build out the internet. There's a lot of switches and a lot of fiber optics and a lot of that, you know, mobile telephone switching network. There's a lot of telecom infrastructure that needed to be built during the '90s. And it was a huge thrust of many of the investors called datacom or hot boxes in many cases. And by the end of the '90s, we had about 600 GPs, general partners, in the United States. Uh, and then the crash came of 2000, uh, and then, um, things sort of started to pick back up in 2003, 2004, and that's when the startup industrial complex really started. Where by the end of 2013, we had 6,500 general partners, and we had, you know, tens of thousands of startups all flourishing in the consumer internet and more and more in the B2B internet and software space. And, and by the end of, um, that was by the end of 2013. And then, you know, fast forward to today, we've got 31,000 And my, my bet is that, you know, we will have 60,000 VCs, uh, in the next 6 years. I think we're going to go from 30 to about 60,000 people around the world. And the reason is twofold. Number one, the diffusion of knowledge about how to do tech, the diffusion of knowledge about how to do VC is accelerating, you know, from those 5 law firms and those 40 little venture firms who did no PR and didn't talk about what they did. It's now accelerated. Another reason is that the surface area of technology has grown. So now we're getting into robotics, we're getting into climate, we're getting into bio, we're getting into, um, you know, space, uh, not just software. There's so many new technology areas— agriculture— so many new technology areas that need startups that we're lucky that we already have 31,000 VCs because we need 60 in order to cover the surface area of all the technologies that need to be invested in, all the problems that we can solve using technology over the next 30 or 40 years. And, um, and I think that more and more people are learning how to, you know, and realizing that they are capable and tough enough to be startup founders. And so I think it's just going to grow from here. And I think that limited partners, by the way, people with these piles of capital, you know, 90% of limited partners still have no venture capital investment. And they're just learning about the asset class. And, you know, it's only a $200 billion a year asset class. One hedge fund is $200 billion. One hedge fund can be $200 billion. The whole asset class for venture capital is still only $200 billion a year. So for us to grow that to $400 billion and double it from 30,000 VCs to 60,000, it's not that hard to do as long as enough of these LPs take 2 or 3% of, of their overall you know, capital and allocate it into our asset class, we're going to hit that no problem in the next 10 or 15 years. So that's where I think it goes. I think the world needs it. And there's a lot of opportunity and a lot more surface areas for us to look at.

Well, it's going so global too, right, James? I mean, there's people—

That's the last thing to mention is that the diffusion of knowledge has left just Boston and San Francisco. It's going around the world. And, and so everyone's going to get involved for sure.

Um, you know, everyone add your questions to the Q&A. We're doing this for you. I do see quite a lot are starting to come in, so I definitely want to start giving some of these questions over to James really quick though. For the GPs, uh, in, in the audience, James, that are sort of kind of like getting started, um, right now, how do, how do you think, how do you think about sourcing, you know, for the, this sort of next generation of GP? I mean, historically when you only have so limited amount of like firms, you can kind of sit back a lot of times and just get a bunch of intros and like not have to be as aggressive and sourcing. Uh, I don't know, with this kind of volume, it feels like it's going to definitely shift. This is at least my personal view, but I'd love to get your views on it too.

Yeah, absolutely. I mean, when I was an associate at Battery, even in 1994, I was smiling and dialing. That was my job. I was 24 years old and they wanted me on the phones calling up founders. I would read paper-based, you know, newsletters and paper-based magazines and niche little, you know, mobile switch, you know, magazines. And then I'd read the Wall Street Journal and read Forbes, and anytime they mentioned the tech company, I would track them down using 411. I would dial up the operator in Virginia or whatever, and I would track down the company. I would call them up and I would try to talk to them. That was my job. I sat there with a headphone on sourcing deals for the partners. Even in '94, it was an aggressive type of emotion, um, to, to find these companies. And I would enter them into the database, and then I'd get credit for entering them into the database. And we built our own CRM. A guy named Ollie Kern was a partner I worked for, and he, he designed and built a CRM back in, back in 1990 that the firm used by the time I got there in '94. It was on Microsoft, it was on Apple. Anyway, so yeah, no, I think that that's only getting more competitive. It's only you know, getting, uh, more competitive to find the deals first and then approach the founders. And, and then it's getting more competitive to win the deals because, you know, the founders are going to have a lot of choice between who's investing in them in many cases. And, um, you know, what's interesting is that, you know, someone says, well, the best companies always have lots of choice. And I'm like, well, a lot of the, a lot of the companies who have a lot of choice don't end up being the best companies. And a lot of the companies that end up being best didn't have a lot of venture capital choice at the beginning because the market's really inefficient, because there's still a lot of randomness, uh, in what companies end up working and why. And so that, that inefficiency, that randomness, is actually the place where there's profit to be made for venture firms. Uh, and so, and so it's going to continue to be a data game, it's going to be a speed game, it's going to be a branding game, it's going to be, uh, an aggressive sourcing game. It's, uh, it's just It's like any business, it's going to get harder. And I think the VC job was, you know, I don't want to call it easy back in the '90s and the 2000s, but it was certainly easier. And going forward, it's more of a blood sport. And it's great because the VCs now have to behave well. And one thing I'll say is that, you know, and this is my opinion, but, you know, the further you get from Silicon Valley, the nastier the VCs are. And that's because there's less competition. But there's so much competition in Silicon Valley that everybody here who's been— who's still around has had to be pretty founder-friendly. And if you're not founder-friendly, very quickly the, the founders find out and you do not have an option to invest in, in the good companies anymore. But as you get further away, you have a different mindset. I know in Europe there's a lot of ideas that investors feel like they own the company or they can control the company from the board, or it's And it's just, that's crazy. I mean, it's just, it kills companies, that mindset. And so the Silicon Valley mindset of founder-friendly, quick, service orientation, I encourage you to adopt that, uh, as you, as you want to be successful in venture capital. Because if you don't, the founders will find out really quickly. Now we have a thing called the internet, and there's places where people can talk about your behavior. And so the competition, I think, is going to make a better, faster startup industrial complex for everybody.

I mean, I can't agree more. You know, when Adeo and I started this whole like VC lab thing, that was one of the problems we were literally trying to solve. We were seeing like angels, right? Like trying to get on boards and do all this stuff and like all over the world and things like that. It's like we need professional venture capital everywhere. And I, you know, yes, good behavior is critical, right? And it aligns around the success of the company as well, which is also super important. Right. If you're too aggressive with that early, it just, it just makes it much more challenging for them.

Yeah. There's a lot of VCs who are playing business. I call it playing business. And they think that their job is to be tough and their job is to, you know, talk about, you know, spreadsheets and legal stuff. And these startups are barely alive, man. There's no, there's no assets to divide up. There's zero-sum thinking that, uh, that we get the further you get from Silicon Valley is toxic. There, there's the— you know, you have to have a mindset of abundance. You have to have a mindset of, no, we're just going to build the pie bigger for everyone.

Um, so, you know, you meant—

you mentioned that mindset. It's, it's don't, don't play business. Don't— you know, even in New York, like, it's tough. It's like this, this mindset of the PE shops is, is, um, is about dividing the pie and who can get the most and who can have the sharpest elbows. Like, the PE firms, the guys go to bed. If you're suffering, then they know they did a good job and they sleep well. And that's how they measure their successes. Like a mafia boss, if you suffer, they've done a good job. And that's not how VC should be.

Well, and the results are so binary, you know, either these companies become wildly successful or there's just not a— there's no pie. There's no, like, not one or the other.

Yeah. And if you get your money back versus nothing, it really doesn't matter to you.

That's like, still like a zero in venture math, basically. Yeah, yeah, I hear you, I hear you. There's a, there's a question here, uh, you know, this is coming from a founder. You know, you mentioned that, you know, right now, like, when you're looking, you're looking for companies that could potentially go public, become worth billions and billions of dollars. Can you share some of the pros and cons of companies going public?

Oh yeah, I mean, um, you know, you can see companies are, are going public later and later because the transparency is horrible. I mean, this is one of the reasons why most crypto companies fail, is because they issue a token and that token is essentially public voting on their stock, and that transparency is deadly. When you are building something like a startup, it's such an ugly process. So many things are broken, so many things don't work, that you just— you want to be public as, as late as possible. And, you know, the cost of being public in the United States is like $4 million a year, uh, just in just expenses. 3, you know, $2 to $4 million a year. It's enormous, you know, time suck for the, for the top management, who are your greatest resources. It's a, it's a, it's a mental switch, changes the, the mentality. I would say the greatest point of leverage of any startup is the founders, and now the founders are having to think about the public stock all the time. The employees are now thinking about the stock instead of thinking about the, the customers and the metrics. So yeah, there's enormous cost to being public, and you're seeing fewer and fewer companies, uh, choosing to go that path, which is unfortunate. So, um, but eventually a lot of these tech companies are going to have to go public, and they're going to have to learn that. And you're going to see a lot of management teams get switched out at that point because it's, uh, it's not a lot of fun.

Um, there's a question about kind of marketplaces and network effects and things like that. Any, any advice for founders sort of trying to which side of the— they should build when they start to think about maybe building like a marketplace business. Do they want to— should they build a supply versus the demand side? Uh, you know, um, and just any, any sort of kind of comments that you can give there.

Sure, sure. So for, for— I'll answer the question, but in general, for questions like this, you should just go to nfx.com and go into the content area, and then you just scroll down the left side, it says marketplaces. And there's like 40 articles about marketplaces. One of them is called, uh, you know, the 19, uh, ways to solve the chicken or egg problem. So which do I go after, supply or demand? How do I do that? So there's a whole article that lists all the tactics for, for solving that problem. It's all written right there. There's videos, there's podcasts, there's all that. It's all, it's all right there at nfx.com. nfx.com is the second most trafficked VC website in the world after Andreessen because of the content on it. It's, uh, it's so deep and it's so good that, um, this stuff gets sent around by everybody, and this is sort of the Bible for, for people building marketplaces. So, um, uh, I would encourage you to go there. So the answer generally is that you want to go after the harder side. Typically, one, like, if, if you get the— if you're near business, if you get supply, the buyers just show up, then focus on getting supply. If it's the opposite, if you have demand, people who want to spend money, the supply will just run to give them their supply. Then go after the demand side and, and then put them in cold storage of some way with a SaaS product or, or any of the other ways of solving the chicken or egg problem there. But, you know, we've had a lot of founders who come to me and, you know, let's say, let's say it's a supply-driven market meaning whoever have the supply, the buyers just show up. And they keep telling me how great they're doing at building up all the demand, all the buyers. And I'm like, guys, I don't care. That's the easy side. I know you're making progress there. Of course you're making progress there. A 12-year-old could make progress there because that's the easy side. What I want to see you make progress on is the hard side. And that's the difference between a real founder and the person who's just trying to pretend.

Uh, there's a question in the chat about your views on how network effects apply to industries.

Do you—

first of all, do you think network effects apply to all industries, most industries, or is there like a specific type of industry where these just generally tend to work?

No, uh, you know, the network effects are hard to apply to things like space where you're just building metal things and throwing them into the, into the space. Um, we have 2 investments in space out of our 180 investments. 2 of them are in space, and those don't have any network effect. But, uh, and then, and then there are some businesses where you have to have a network effect. So everything in crypto, uh, is network effect. Without a network effect, there's nothing. Uh, so, um, and then there's all the other industries are in between. I mean, most of the big companies in, in consumer software that, uh, that are big, I would say 80% of them have network effects, 90% of And then of course, 98% of all the value in consumer software has network effects. So there's a difference between the success, you know, companies that are existing and the companies that have value. And if you look at the value, it's mostly in network effects businesses on the consumer side. Then you have B2B software, you know, which you have less of them have more of them are embedding rather than network effects. And then you have things like bio where, you know, if you're going after a molecule, there's no network effects. But if you're going after a platform like a Mammoth Biosciences or a Ginkgo Bioworks, Those very much have network effects, what we call platform network effects. So different industries have different amounts of network effects naturally, but that's why most of our investment skews toward the companies with the network effects.

And, you know, right now there's a really interesting kind of follow-up question to this in the chat. You know, obviously AI is really hot right now. You know, it's become kind of like a thing, you know, for founders building in the space. And maybe also just think of it, come, come to all the emerging managers or new, or new funds that are being launched to kind of go after the space. I mean, how do you think about like differentiation? How do you think about building companies that are going to be around in a long time right now with all the recent Apple announcements that, that in itself might have put some businesses out of business, you know, just from what I've seen at least. Uh, love to get your views on all this.

Well, it's a big— it's a big issue. Think of AI as a new technology, just like the mobile technology came along in 2008 where we had smartphones suddenly and all the capacities there. If you look at— if you do some back-of-the-envelope calculations, you'll see that, um, companies that started with the mobile tech. So, so most startups that are successful have jumped on a new technology. Some people come to me and they say, well, you know, Gen Z buys differently than, uh, Gen Alpha buys differently than Gen Z, than millennials, and so there's an opportunity for me to build this e-commerce site. That never turns into a very big business. Those sorts of thinkings like, oh, people are getting older, baby boomers are are getting older, they need to be serviced. This doesn't produce a big, a big company. What produces a big company is a new technology. And when smartphones come along, we got Uber and we got DoorDash and we got Poshmark and we got a bunch of different, uh, companies that end up becoming worth billions and billions based on that technology. However, if you do the calculations, the software incumbents who existed before 2008, they captured about 93% of the value of mobile. And 7% was left for startup founders and VCs like myself. In the AI, the AI technology is sweeping through. It's also going to give startups an advantage in the same way that mobile did. Question is, of the billions of value created, what percentage will startups and early-stage investors like us capture? And my guess is it's going to be closer to— instead of 7% of the mobile revolution, it's going to be closer to 3 or 4% with the AI revolution. The incumbents have a distribution advantage. The incumbents can adopt AI pretty quickly and are doing so. If you drive down the 101 in Silicon Valley, all the billboards are tech billboards. And now they all say things like AI first Okta, AI first Brex, AI first Oracle, you know, whatever. So now all of the incumbents are becoming AI companies. And adopting that as quickly as they can, certainly in their marketing, and, you know, slower in their actual technology, but they're doing it. They're aware of it. They're not asleep at the wheel. You can't just sneak up on them. So, uh, we do have incumbents with a big advantage, but you do have to think outside the box. Now, we also have a problem, which is that a lot of founders come up with the same ideas. So we, about a year and a half ago, you know, we, we, well About 5 years ago, we started an AI spreadsheet looking at all the AI competitors because we were investing in AI and companies doing stuff. But when the whole thing sort of became public that AI was finally happening in a big way, we published a bunch of articles, including one where we published a market map because we were having all these conversations with founders who said, hey, James, I've started this company. We did zero revenue last month. This month we're doing $20,000. Next month we're doing $40,000. We're growing really fast, you need to invest. And I would say to them, I've talked to 20 companies in the last 3 weeks doing the exact same thing, and you're all growing that fast. I can't invest in any of you because it's not clear who's gonna, who's gonna break out. So, um, they didn't believe me. They were mad at me for saying that. They're like, I don't see anyone in the market, I don't hear about anybody, you know, you're crazy. I'm not crazy. So we just published our spreadsheet with all these tabs, and everyone— and then they could see, yeah, there are 20 competitors. Yeah, there are 60. But yeah, there are 120 competitors in this exact space. They're all doing very close to the same thing. And so there's been a lot of groupthink in the startup industrial complex about what a good AI company would be. And I just encourage you all to, to look at that spreadsheet. I encourage you all to realize that everyone's having the same ideas, and think differently because the incumbents are going to take a huge chunk of it, and then the startup founders are all having the same ideas, and therefore it's going to be very impossible for you to break out. Uh, and so you have to think something completely different using AI that no one would think of and, and make it work in order to, to have it happen. And there will be founders who do that, and there will be multi-billion dollar companies built. Um, But, but you have to be more outside of the box than you think.

Fascinating. And that's like really good advice for all the emerging managers on the call too, as well, right? Like, you got to also think really hard about this and make sure that this, in fact, is something that could be sustainable and become an enduring company that could potentially go public at some point. Right. So both go hand in hand. You know, speaking of trends and things like that, James, are there any trends that you're particularly excited about right now as we, uh, as we sort of kind of scale out beyond AI and other things like this?

No, I mean, I think that, I think that, um, you know, we are doing 25% in tech bio, so software-driven biology. Uh, we are doing 25% in Israel. We continue to believe in that ecosystem. Uh, we are— almost everything we touch has some form of AI. I think it's sort of irresponsible to build a tech product without AI today. We focus in on gaming and fintech and marketplaces and on property tech and then on gaming and crypto and along with bio. So those are the, you know, we are very much a best ideas firm. We don't, you know, we each have expertise in our technology verticals, um, and, uh, we, we have, you know, sort of, you know, U.S. 55%, Israel 25%, um, and then sort of, you know, 7 to 10% in Europe, 7 to 10% in LATAM. Those are the geographies we're in, those are the sectors we're in, but we focus very much on seed. So all of our investments are sort of seed. Our average check size about $2.8 million. Average ownership about 18.25%. Um, so, so that's, that's what we're focused on.

And this is a very international audience, so obviously this is amazing that you're doing this, so much work, uh, internationally. Um, obviously like the US is still a kind of a big part, which makes sense because it is a great, uh, ecosystem. But how do you sort of think about these other markets, uh, that you mentioned? You mentioned Europe and other things, and How do you, how do you maybe, like, how do you operate or source differently, if at all, in those ecosystems versus, say, uh, something that you're like, you know, more comfortable in, like USA?

So the sourcing, the sourcing is the same. It's, it's through relationships, um, and it's through market maps that we do when we're investigating certain areas. We'll end up discovering a company in London or a company in Berlin or a company in Buenos Aires and then we'll reach out to them and, uh, and chat with them and see how they're thinking about, about what they're doing. You know, um, I think that there's an enormous amount of opportunity internationally, uh, because the U.S. system is so competitive at this point that, um, while you have some more headwinds like currency challenges or, you know, legal problems and, and that sort of thing in some of the other countries, it's a little a little more friction. And then, and then particularly like, uh, VC investor mindsets are a big friction we find internationally, um, uh, that ends up killing companies in many cases. Um, you have this real benefit of the fact that, you know, there's much less competition from other startups in that geography, and you can design something that's very specific to that geography, which will give it an advantage and a defensibility against a U.S. company who's trying to come in later. Um, and, uh, and by taking some of the best ideas from around the world and bringing them to geography, that's sort of the lowest risk way to build a very interesting tech company. So I think there's a lot of opportunity. Are the exits at the $2 billion range? Not typically, because the markets tend to be smaller and slower moving. But, um, but you can certainly get a $400 or $800 million exit if the entry price is is, uh, low enough, then, then it can be very much worth the time.

So for you, it's not as much of a sourcing, uh, issue, it's more of a diligence issue, I guess, uh, to make sure that it can get to that level of return that you need for the fund?

That's right, that's right. It's, it's the, the exits are often the challenge, and then what are all the sort of, you know, uh, things that could kill the company, uh, whether it's inflation or or some sort of law change that takes place that we're just not aware of. And suddenly you find your business doesn't work anymore. That happens.

So, you know, we have about, you know, 3 minutes-ish left here, and I want to be very respectful of your time, James. You know, this has been amazing, by the way, everybody. If you've sort of enjoyed this talk, I'd love to see some emojis. And I mean, I've learned a ton myself. So thank you so much for being so gracious with your time and sharing so much insights. James, any final words of advice for the entrepreneurs on this call that are starting? Let's assume they're all sort of in the sort of pre-seed, maybe seed stage. They're international, global, they're building, they want to like, you know, they're hardcore, hopefully, you know, any sort of advice for them as they're kind of building out their companies and What are some things that they should be thinking about?

Yeah, I mean, like I said, you know, you need to really steel yourself. This is not easy. Most of these things don't work. So we look at 8,000 companies a year, we'll invest in 30, and, you know, 80% of those won't be big. That's a very small number of successful companies. So it's— you have to really steel yourself and you have to be savage about it. You have to be relentless. You can't— once you start, you can't give up. You can't ever say die. You know, the reason that all 5 of my startups have worked is because I always have redundancies. I never have a single point of failure, a single office, a single salesperson, a single engineer, a single customer. I never have— I never had a single point of failure. In any of my companies. And so because most things go wrong, it was okay because I had a fallback and a fallback. I had Plan B, I had Plan C, and I had Plan D. And that just takes hours and hours of work, and, uh, so that you have Plan B, C, and D to move. And, and that will keep you from going out of business, which then keeps you in the game long enough to get lucky. And, uh, all of my successes have come through a lot of luck. But the reason that I was always successful for the last, you know, 30 years doing this is because I never went out of business 'cause I had plan D in place when plan A, B, and C all failed. And then I got lucky eventually. So that's how I would think about it. If, and you know, look, the other thing is, you know, take the Landmark Forum, take the Hoffman Institute, take whatever psychological seminar, get a psychology coach. It's worth the money. You know, these startups are, I tell people there's no corporate transformation without personal transformation. They are a journey for you. They are vehicles for your own growth and transformation. It's not about earning money. The people who think it's about earning money will be very disappointed. You have to focus on yourself and on your own personal development and your communication with your co-founders, your communication with your board, communication with your employees to lead them, to create a context for them to build their LinkedIn, to build their career, to have, you know, good relationships with people and feel like their lives are productive and meaningful. And that's your job, and all the weight's on your shoulders. But, uh, but that's the job you're asking for. And so if you're not up for it go work at a post-Series B startup. But if you're up for it, steel yourself and, and make it happen.