What Does it Take to Be Good at Series A and B Today?

One X is not good enough for me anymore at this point in life. It's not worth it. I want 3x the fund.

The problem with Series B is if you get it wrong, you end up effectively paying Series B prices for Series A risk. And it's exactly correct now at the A, you're paying series A prices for seed risk. But the whole point of having to be good at this job is being able to figure out which is which. Ready to go.

Guys. I am so excited for this. First, thank you so much all for joining me today. There's three of you, so like I'm just gonna dive straight in. I want to start. We have more LPs listen than I quite realize because I get pinged by all of them. And I wanted to start with like, what the are we seeing in venture right now and what your one takeaway is from the last week. Fabrice, you're our new joiner.

We.

When you think about what you've seen in the last week in Venture, that has struck you. What is it?

I'd say what struck me in venture and the new trends is we're still in the middle of an AI bubble. If you look at the amount of money that's going into AI versus every other category in terms of valuations raised, the number of companies getting funded, and I thought we were at the peak a year ago and then ventured, they won 100 billion investments in the category and so doubled from Q1 to Q4. And the other categories are not seeing much love. And I think venture as an asset class has been somewhat in the doldrums because LPs have felt overexposed. They haven't had distributions in 22, 23, 24, and frankly, 25. We were hoping the markets were going to reopen, but so far the IPO window has not reopened and the spigot of MA has not reopened. And so I'd say it's become an unloved asset class. I think it's the best. Simon Invest. But the in a way, investing in venture right now is contrarian. And I think you should be investing in funds that are not going after the lovingy, you know, AI, all AI, all the time category.

Agree on the time frame. You know, the big comment stepping back is nobody cares. I always thought no one cares about our problems. We're VCs, right? One thing I've learned is when you start bitching and moaning and then you realize and you step back and you talk to anyone else on the planet, they're like, let me get this straight. You have this wonderfully interesting job, you have a reasonably good current comp, you get to pay the percentage of the upside, you have visibility over three years in your comp. Nobody cares about our problems. And then when you start explaining that our number one problem is that valuations are too high, then they go, let me get this straight. Your number one problem is that you have to pay me, the entrepreneur, more money for my company? I like your problems. I'm glad you have problems. I want you to have more problems. So let's start with that. That said, I do think it's a weirdly tough time right now, right? Because it's simultaneously a hard time to put out new money because things are expensive and a hard time to get money back because exits aren't there. And if you think of the two by two quadrant, normally one of those things is hard and one of those things is easy and it's good like 21, easy to make money, easy to get money back, hard to put money out. It was expensive. Right now we have the low, low quadrant. It's very expensive to do these new great deals and at the same time exits are tight. So it's a tough time. But again, after I say that, I go back to first principles. Nobody cares about my problem.

I actually just had a conversation with one of the largest endowment funds in the world and they said the lack of liquidity, the big question that we have around that is is it a temporary adjustment in the venture ecosystem and public markets or is it a permanent structural shift in company building and maturation stages and liquidity cycles? If it is the latter, we cannot be in this asset class any longer to the extent that we have been. If it's the former, we will be patient.

The sentence has the answer. Because the only time it will change is when they get out of the asset class is what we said two weeks ago. Until while they keep putting money into the asset class, it will remain a stay private for longer asset class. And once the capital in the asset class reduces, then we'll go back to going public earlier. So economics is about seeking equilibria and kind of things push things back into balance. So the very statement sets up the solution.

I would just say two things, Harry, I think you asked what changed in the last week or something. What was the question? Some version of that? I'll tell you my, my micro learning, this is just we, I think even in VC and LP land, we live in this new news cycle. So like I had a company close a unicorn round On I think April 7th that there was actually a downturn in venture because of the Nasdaq, right? We had these Trump, Trump drama. I think the stock market fell 15%, didn't it? Nasdaq or something. And then everyone was freaking out in growth stage VCs for at least three days. For at least three days. And already this company that did a unicorn round has an offer to do an a top up round at an even higher valuation. So like we, for like, you know, it used to be when there was a downturn or something, it would have shocks for the system for at least a few months. Right now the shock, the shock doesn't even last until the next 20 VC comes out, right? So it's just, I hear all this stuff, but all I see is a gold rush. All I see is Gold rush in the SF barrier. All I see OpenAI says they're going to grow 1000% by 2029. Everyone's just looking to make an insane amount of money and they don't care about the nickels and dimes and the casualties and they will deploy every dollar they can. I think we can talk about liquidity and all this, but I honestly think that today is a much bigger gold rush than 2021 or other times. We get like, I've never seen such a goal because this gold rush goes all the way down to high school kids. Like this gold rush is up and down the stack of, of tech and it's both fun and a little cynical and a little crazy, but it's, this is, you know, in the 2020 gold rush, you had to be a crusty old B2B guy, right, that had been doing this for years or have something interesting consumer. Now every 17 year old kid is dropping out. I mean here, you know what this is like, but they're dropping out and they're in the gold rush. And it's, it's, it's glorious and weird and risky and full of baloney. But I've never seen anything like this Gold rush. Never, Never. Right? And yeah, we need that. But, and so, and again, we talked about this before. I honestly think almost every GP in market will deploy every dollar during a gold rush. This is the way booms work, right? You will deploy every nickel possible in.

The, in the boom.

And then we pull back. For those three days there was a pullback in growth. April 7th through 10th and back to the gold rush.

Fabrice, are you not concerned that given that gold rush realization and the speed of revenue strategies being what they are today, I have new AI companies like Macaw and Lovable in my portfolio who are scaling in just the most insane race. And then I am in ERP systems for concrete businesses which are going from 1 to 4 million, and I'm going, fuck me, Lovable does that in about a day. Do you not worry that you're going to miss out on the Gold rush?

So look, 9% of our investors remain in AI. It's just that I try to be disciplined and I try to invest in the companies where I feel that they have differentiated data sets, that they have valid business models, and where I'm seeing less competition. What worries me of the Gold Rush is there's too many companies doing the exact same thing, going after the exact category, and it's unclear who's going to win. And historically, I've waited until there was an emergent winner before investing. So I was happy to pay up. And frankly, you don't necessarily even pay up because the prices kind of adjust with traction over time. Like the traction evaluation metrics start aligning as you get A series, B, C, D, et cetera. And what worries me about the Lovable type examples is, yeah, they can go from 0 to 18 million in AR in like three months. But I think they can go back in the other direction. I mean, people, I don't know if people remember that AI company where everyone for a month basically changed their profile photo using an. Using AI. The name might come back to me and their AR or their MRR went from 250k a month to 30 million and 99% churn a month later and they were back to 500k and they raised like at that moment in time. And so these things are riskier than people think they are. Do I think that GitHub or, well, maybe GitHub is not the best example, can launch coding tools to compete with the likes of Lovable and Cursive, et cetera? Yeah, absolutely. So I don't mind missing the bubbly elements of the bubble. And I worry that people are underestimating the orthogonal risk of disruption from either OpenAI extending their stack. I build my own AI for fun. I built Fabrice AI and I started using LangChain and Pinecone, et cetera. And then OpenAI released 4.0 and became so much better. I just ripped out my entire back stack and moved to OpenAI. Same thing. I was using a different stack for text to voice and I use Whisper. I feel people are underestimating the risk of zeros, even though something can go from 0 to 100 million ARR very quickly and usually they're priced accordingly. And I care about what do you need to underwrite so you can still get your 30% IRR. And I think the risk of zeros is too high.

How do you weigh off the absolute undoubted risks of technical obsolescence, of being crowded out by the model companies? All the risk, the massive amount of competition where you're on the megatrend versus having none of those risks, but being so off the megatrend that you might just be in a backwater where nothing happens to some extent. I always think any company that has to go from a million in run rate revenue to 300 million, which is what an IPO looks like, you need something more than hard work. You need some kind of megatrend behind you. So we always wrestle with this question, Fabrice, how much do you have to play in the spot where the trend is versus how many orthogonal deals can you find?

How do you think about, first of all. Yeah, so I think I am actually playing a megatrend. It's just a different megatrend. The megatrend I'm playing is the penetration of digital writ large in B2B is very, very low. Right, like in your consumer life where you're about 25% penetration of commerce writ large. So you can get anything you want in two days, you can get food delivery in 15 minutes, groceries, you can get anything on Amazon, you can get Uber, Airbnb. Your life is amazing. And then all of a sudden you go to the BDB world and you want to buy petrochemicals. This is not even a catalog, a catalog, just a list of what's available. There's no connectivity to the factory to understand manufacturing capacity and delays. There's no online ordering, there's no online payment, there's no online tracking and there's no financing. And all this needs to happen in every vertical, in every industry and every geography. And it needs to happen for inputs, it needs to Happen for helping SMBs digitize. It needs to happen for helping the entire supply chains move out of China into other countries. I mean there's so many of these megatrends where currently penetration is like sub 1%. And these are multi trillion dollar categories. You know, petrochemicals is like 4 trillion. You know, gravel's like a trillion. I mean we're talking these ginormous. So it is a megatrend. It's just a slower one because it's happening because boomers are retiring and the new managers are replacing them. Want be in marketplaces rather than using RFQs. But yeah, it's slow, but it is a megatrend. And I'm coming in at 4 pre at pre seed, at 10 pre at seed and at 20 pre NAS. And I feel very comfortable that in 10 years these will be much, much larger with valid business models and way less risk of disruption.

I'm really interested. You said they're about kind of slow. I'm interested. This is for the whole group. But Josh Koppelman tweeted this week something that really struck me and I respect the shit out of Josh. He said, speed matters in venture. How fast you win matters as much as how much you being able to return in 10 years versus 17 years is a huge difference to the performance of your investors. 3x in 10 versus 3x in 17. Obviously enormous. And people just talk about 3x funds. I wanted to hear your thoughts and lessons on the importance of speed of returns, how big that is.

I saw the tweet and obviously it's true because we're being evaluated versus other use of the money and the common denominator of capital allocation is going to be some kind of rate of return per unit time. So the tweet is definitely true. I think the interesting thing is it's actually the hardest of the three things to control. Let me tell you how I mentally think about it. There's really three things that determine your return within a fund level. There's picking, picking out. If we do 20 deals, four of them have to be great deals. That's 100% in your control. If you can't get that right, you should lose your job. Then the second thing is valuation on the way in and valuation on the way out. Right. That's controllable a little. Right. But not as much. See the conversation on valuations going in now and then on valuations on the way out. We have an excellent 2014 fund that exited in 2021. And we always tell our piece. One entire turn of that fund we don't deserve. It was multiple expansion. The other turns we do from our picking. But sometimes you get lucky on the upside on return and sometimes you get unlucky on the downside. So valuation coming in, evaluation coming out, a little bit of control. The hardest thing to control is IRR because the timing of those exits. Everyone now is suffering IRR degradation. They're going to get the same return in 2026 that they thought they were going to get in 2024. It's just very outside your control. So, I mean, It's a very unsatisfactory answer. But the nature of our business is we are judged on irr. It's very hard to impact it directly. You got to get the other parts right. And then to some extent, if you do your picking really well, if you have reasonable control of valuations, then delayed exits simply mean more compounding and perhaps good irr. See, for example, the Founders Fund example. Last time, they compounded for a decade and a half at 20%. Sadly, a lot of the time pushed out IRRs. Pushed out exits just means lower IRRs. And it sucks. But to some extent, it's the hardest element to control. So I don't.

I have a cheat code for that. Oh, sorry, Jason. Go for it.

No, I. Well, I. I was thinking about this a lot, Harry. It's interesting that Josh wrote that. I was literally thinking about it this week, and I wanted to hear Rory's thoughts. I thought it was very interesting that Fabrice led with IRR to describe his fund. I do think it's impressive, but I was literally looking when. When Joshua. That. I was looking at my 2017 fund. And it is at. Here's the question to. Maybe especially to Rory, my. My. My. My virtual mentor here. It's at 4.3.1x with a 32.56 IRR. Okay. And I was doing some modeling. I'm not that good at math. Okay. That's why I do late seed. But I was doing modeling of. Okay, If. If the winners do a certain amount of different scenario planning. And honestly, unless I was delusional. Unless I was delusional, the IR would never go up. It's at 32.56. It will 5x an 8x fund. This is kind of. Josh, I'm like, okay, let's. What if this fund does 8x. Like, it would require a lot of things. I'm not. I'm not a chess beater. It would require a lot of things to go well. Okay? But the IR still wouldn't beat 32. So I'm like, what's. And I did ask my LPs if they cared. And here's the thing. They didn't care. Okay. But I think maybe that that was a too simplistic answer. I think the answer is, for early stage managers, we're just looking at multiple. Right? But I've never understood this since I started investing. Because I'm looking at this. I'm like, I can't do better. Like, I cannot do better than 30. And even 32.56, like, it is great. But that's all the way to get to 4.3 versus the NASDAQ. Like it's, it's, it's still like it's. This is a tough one, the IRR thing, right?

Well, it is. And it is. I mean, sorry, go.

I want to say the cheat code I use for IR, why silk can get 30% IR today is the virtue of being diversified means I own two 1 to 3% of any of the companies. And so what I've been doing is getting secondaries on the way up. So I've been doing the anti VC strategy of selling my winners when a company I feel gets overvalued and I can no longer underwrite a 10x, I'm underwriting at 3x in the future and a random is happening and whatever Sequoia and Dreeson Greylock are all competing to get in and the founder doesn't want dilution of 15% a pop. And so it'll take like 30% primary, 15% secondary. I've been doing secondaries and now that you have things like shares, post and forge and secondary marketplaces and so the vast majority of my exits in the last three years have come from secondaries.

You have to get the secondaries to get that irr.

Exactly. And it works.

The only thing is there's another tweet, Harry, and it was talking about, I forget who it was. One of these talking about tax efficiency at the GP versus the LP level. Right now, for me, I'm not selfish, but I would not want any like QSPS is good, don't get me wrong, but for me, I have some personal liquidity. I rather go long. Right? It's so much more valuable to me. Selfishly, I don't care about IRR as a gp, right? If I can get another X as a gp, tax deferred or tax free.

Whoa.

Like I can't be. I can't beat that, right?

And everyone wants that. So I'm coming back to you because I don't think the algorithm. So to be very clear, I don't think the algorithm is maximized irr logically. Subject. And I'm such a geek, subject to some caveats. The real algorithm is maximize multiple, subject to a constraint on irr.

Right?

They don't want you Maxim. No one wants you to maximize. Believe in this company, I love it, but I'm getting, I don't know, two years forward credit for revenue. At what point do you say, hey, even though I'm a believer, it's a smart thing to take some money off the table. I think sometimes it can be by.

The way, these are the only companies I can sell, right? No one's buying your dogs, right? Like, the only companies you can sell, the ones that everyone knows is a winner and thinks is amazing and they end up look, I sold so many companies at 100x ARR in 2021 and like, it was an obvious like, I love the founder.

I.