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Jon Bradshaw & Peter Harris

Peter Harris, a Venture Capitalist, will talk about the primary differences between venture capital and private equity.

What is the Future of Venture Capital?

Peter Harris, a Venture Capitalist, will talk about the primary differences between venture capital and private equity.

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Episode Transcript

Jon: Do you? A lot of VCs are heavily involved in the university.
Peter: But ah, there they are.
Jon: I mean, Gavin Christiansen teaches at BYU. Okay. You are heavily involved with UVU, but you've got labor connection. But a lot of VCs like Even will teach at Stanford. Yeah. So it's my understanding a lot of VCs get university positions, but university students probably I don't think that gives them a better opportunity to get funded. And I don't know how many VCs actually get funding from other than it allows them to build connections.
Jon: But my guess is a bunch of them are wannabes. Is it beneficial for a VC before we like dive into.
Peter: The beneficial for of easy to engage with the university?
Jon: Yeah, for the VC, not for the students.
Peter: Well, I think that a lot of VCs that teach at Stanford would argue that if they're able to source a really great deal, you know, they're able to meet a great entrepreneur and build a relationship there, that it only takes one to justify it, right? It's like we invested in Omaze and the founder of Omaze, Matt Paulson, like his roommates, were the founders of like DoorDash and Snapchat.
Jon: But they do that as a student.
Peter: I think the DoorDash guys did. Yeah, they launched as students.
Jon: But typically, like statistically, the big wins confirm what age group 40 and above 30 and above. Yeah. You'll get a lot of like random outliers but I don't know how many like I don't we just love that I had this.
Peter: So I don't think that the main motivation for VCs to engage with the universities is.
Jon: Deal flow.
Peter: Is deal flow.
Jon: Or it just takes a lot of time. Like Gavin, he has to drive to Provo.
Peter: I think it's something Gavin really enjoys. I really enjoy it.
Jon: yeah. I mean, he and.
Peter: His students like, I think that in of itself I.
Jon: Going to be very clear. I think Gavin's awesome. I was just it was a thought I.
Peter: Saw you just think he was time I get.
Jon: So quick off script I know you said you weren't prepared for this question, but I think those sometimes create the best podcast is what is the future of venture capital? And the reason I'm asking is I was listening to a podcast with Jason Calacanis and they're talking about how the market is changing. And so for a lot of software startups, one software is much cheaper to start a software company now than it was then.
Jon: It used to be much, much more expensive.
Peter: When Dan.
Jon: Then is, I mean, even like even from like five years ago, definitely from ten or 20 years ago. So you can get something off the ground fairly easily. Is now something where individuals can self-funded friends and families can self-fund it. I think at that point I think angels have more power now than they used to because I think VCs were kind of trumping them.
Jon: But some people just need a little bit more cash to get off the ground. And then instead of going the traditional series, a VC route, you've got companies like Pipe that if they're and especially with something like SAS where they can look at your revenue and if your revenue is predictable, you in theory could just say, Hey, I don't know what pipes terms are.
Jon: Maybe they take 20% off of a deal that's paid in year in advance, but you don't have to, you know, don't have dilution.
Peter: So to be fair, though, pipe is still early, right? It's still not proven out. It's a fantastic idea. We'll see if it actually ends up working.
Jon: You don't think Pipe will work out?
Peter: I'm not saying that it won't work out. I'm just saying like, let's hard to say that like the whole the whole world changed because we now have this company called Pipe, which is only done a few million dollars worth of transactions so far. So like, could it? I think it's a fantastic idea. I think there's a high degree of likelihood that it could be successful, but I wouldn't say that like, now we need to throw out all the models because this company called Pipe exists, right?
Peter: Like, it's very possible that pipe could launch. And it turns out that the lending they're doing is more risky than they anticipated and they have to charge higher rate rates in order for it to work, in which case then all of a sudden it's not quite as attractive as it used to be. Right. So as I'm saying, I don't we don't know yet.
Peter: Right. Like it's just too early to know yet. But yes. No, I agree. Like, it's never been easier to start a company. It's never been easier to raise money. Right. Particularly in the current environment where a lot of people are flush with cash. You add on not just pay, but you add on like the equity crowdfunding environment, which has raised hundreds of millions of dollars.
Peter: First startups, right? So you've got Wi-Fi, you've got START energy, you got Republic Republic just announced like this huge Series B fundraising, you know, and they're doing everything from like equity to NFT is to real estate to video games like you can equity crowdfund anything these days. You've got big funds like Greycroft that just announced a $500 million seed fund, which is like crazy, particularly because they're like, we're going to write $20 million checks into seed stage companies, right?
Peter: Yeah. And I think what you're seeing is like everybody is like fighting to get in earlier and earlier and earlier because all of the the big funds that used to be only public equity investors, these hedge funds, they've they've all moved downmarket into the growth stage. So that's become more competitive. And now they're even starting to move into the series B's and the series A's.
Peter: And those are becoming more competitive and that's forcing everybody else further down the stack too, like the seed Pre-seed, that whole thing. So now you've got more capital than ever chasing deals at the earliest stages. And on top of that you've got it's never been easier to start a company than ever before. And so like there's this question of like, Hey, I can start these lifestyle SAS businesses that may not really be venture basketball and then other people that are like, No, I want to build like this big scalable thing and there's a lot of money flowing into it.
Peter: And then you add on top of all of that that this whole concept of blitz scaling that's been popularized over the last few years where it's like, Hey, look, we're just we're going to basically anoint the winners with lots of cash, right? And that's what you see with Tiger Global is largely doing is coming in saying, hey, you know what?
Peter: We're going to kind of anoint the winner because we're going to provide them a lot of cash, high valuation. It will be hard for competitors to catch up. Right. And that makes it tough if you're not in that company, you're in one of the competitors. Like, that's like that's tough, right? Like dollars can actually create competitive advantages just if they're used efficient.
Jon: Does this keep you up at night?
Peter: Does it keep going up? And I mean, I think the question I'm always thinking about is can we move fast enough to not miss out on great opportunities? Now, our funds are a little different, right? Like, I don't have to compete with Tiger Global per se, right? I'm not leading series arounds, right? If I was a fund that was a handful of friends, for lack of a better word, partners.
Jon: Okay.
Peter: With very little competitive advantage and a few hundred million bucks in a room. I think I'd be terrified. Right?
Jon: Like, literally terrified or.
Peter: Well, I don't know if they are, but I would be like, if I don't have any, like, if capital is my only competitive advantage, right? I'm a commodity in this market, and I think there are a lot of funds that kind of fit in that bucket where it's like, what? What do you offer that's really unique? You have funds that will offer you speed, you have funds that will offer you expertise, you have funds that offer you brand.
Peter: And if you don't have all those, like at least one of those in spades, like, I think you're you're in a tough spot.
Jon: Am I old fashioned where for the most part, if I were to raise, I'd be trying to get the brand, which would help me brace for the next one. But outside of that, I don't know how many of these funds help. Like, I've got a friend who works for Andreessen Horowitz and they've got like a whole.
Peter: Like a thousand people.
Jon: That work and like, but I don't know how much they're actually doing. And I'm also assuming if you're not like the top two or three in a portfolio.
Peter: They don't care. Yeah, well, actually what usually happens is that your top two or 3% of your portfolio, you don't do anything for them. Okay, Because I don't need your help.
Jon: But then the rest, you're probably like, How do we.
Peter: The rest of the time you spend like trying to help your your other companies that do need help.
Jon: Executive executive headhunting.
Peter: Yeah I mean a lot of funds will do will help with like strategy and headhunting and opening the door to potential customers.
Jon: Do you think they're good at that?
Peter: I think some funds are good at it.
Jon: I mean, look at Josh James when he started Domo, he started on mature, got tons of cash. I would argue that Domo was a much more difficult beast than he anticipated. And he was a seasoned founder. He just took a few years off.
Peter: Yeah, I was talking to a VC once and they said that the best startup is number three for an entrepreneur, assuming the first one is marginally successful, I'll second one always avoid because they'll always go into it with a lot of hubris and then fund that deal, you know, Company three like they've kind of learned their lessons across the first two, and that does tend to be the biggest success.
Jon: So if you count code base, if you don't count my first business, which is a lot of my business, I'm in my third business.
Peter: Yeah. And look at code base. It's crushing it. So if you think about what a VC does, you are like stepping out on a limb and saying, I'm going to give money to this crazy idea because this is the future. Right? And like, yes, entrepreneurs are also essentially saying the same thing. They're like, I'm dedicating my life to this, like this thing.
Peter: But like VCs do that again and again and again and again. when they make investments in subsequent companies and if you're not, if you don't have like confidence.
Jon: That's to be social. It's all shaking.
Peter: Yeah. I mean, you got to be confident, right? And so you know, I can see and then you layer on top of that that they say no more often than they say yes and and they can come off as very, very cocky and arrogant because it's like, you know, if you're an entrepreneur, you're like, I've dedicated my life and soul to this thing.
Peter: How can you tell me my baby is ugly? You're so arrogant. Rah rah, right?
Jon: I mean, maybe it's a two way street. Maybe, you know, I was on the on the angel side, which is like pseudo OVC. And then I'm now a founder that specifically stayed away from funding. You know, every now and then I'll be like, I wonder how my life would be different. But generally, like, you know what? It's easier to go close another contract than it is to go, you know, kiss you.
Peter: Yeah. Now it's back and look like I think you are right to an extent. Like there are VCs that don't really empathize with the entrepreneur, right? They've never been through it. They don't, they don't understand how much it sucks. You know, the highs, the lows, the mental pressure. And they just, you know, sit in their ivory tower. But, you know, look, I think that day is going away because entrepreneurs can get capital from a lot of different sources.
Peter: And so, you know, historically, it used to be the competitive advantage was capital. I got money, so come kiss the ring. Right. And now entrepreneurs are like, yeah, no, there are a lot of places I have capital, right? You got capital, but so do all these other people and platforms. And I can sell my my product and I don't need as much money to begin with.
Peter: Right. All of these things. And all of a sudden that's not a compelling competitive advantage anymore.
Jon: So as far as the future of venture capital to the way you would look at it right now is money's a commodity.

You were getting a lot more pressure from these bigger funds upstream. I think you're saying if, you know, if you're a like a, as a VC fund have just a bunch of friends, if you have no real competitive advantage, it's tough. And then a lot of the VCs are trying to differentiate. I do agree that executives that are willing to come to startups are probably few and far between, and it's probably better to work with ABC where they probably get hit up by a bunch of very proficient professionals that are also interested in, you know, taking a risk and and scoring big that a regular headhunting firm couldn't find.
Peter: Yeah, well, look, if Sequoia comes in and leads year round, it's an incredibly strong brand and subsequently it's going to be easier. Like if you're you're debating whether or not you should join the startup. Knowing that Sequoia invested gives you confidence the company is probably gonna be able to raise another round in another round and raise a lot of money.
Jon: And so funny stories have.
Peter: Become the success, right?
Jon: Funny story from my past when I did Boom Startup, which was like a super, would you even call them Startup A.
Peter: An accelerator.
Jon: An accelerator. We gave people like 15 K, but even 15 K from an external source seem to give those founders either the confidence or the people wanting to join them. The confidence of like, Hey, this is actually a backbone idea with some type of traction. And it's kind of funny because looking back at, I'm like, Man, I was 15.
Jon: K Like, it's like.
Peter: Yeah, but it was 15. K How long ago? You know, 2010.
Jon: Adjusted for inflation, 25, 20 years.
Peter: Okay. But I mean.
Jon: Ten years.
Peter: More than that. It's like the social proof, right?
Jon: Yeah. I mean, I think the social proof helped from either somehow I help them build, I think attract slightly better talent. Yeah. Any other thoughts on this, Peter.
Peter: In terms of the future of venture?
Jon: Yeah, the future venture.
Peter: Look, I think that the thing that's challenging with Venture is that it kind of comes and goes in waves. Right. And, you know, it's like history. It never repeats, but it rhymes.
Jon: So that sounded like very profound. I've never heard that phrase before. If you were to anoint the industry and change it right now, what would you do? How how would you change the industry? The typical question I saw that.
Peter: Your big question. Yeah. I mean, because to me I believe in markets and so it's hard for me to say like.
Jon: That the markets.
Peter: And it's hard for me to be that arrogant, to say like, I know exactly what needs to happen here.
Jon: What would be the first thing that comes to.
Peter: Mind is like, what needs to happen is happening and it's okay. Yeah, right.
Jon: And so you're seeing people responding to Tiger Global, which sounds like it's just they're taking much bigger bets much earlier.
Peter: On and paying higher valuations. Yeah. So essentially what they're doing is they're saying, okay, and this is this is one of the things that that I have tried really hard to understand better is that when you work in venture, especially for longer than like five years, it's hard to see the potential in the long run.
Jon: Yeah.
Peter: So I'm.
Jon: Going to give you an.
Peter: Example, right? Like we looked at Space X back a number of years ago and it was at a $10 billion valuation. And they had they like it, they did like a billion in revenue. And at the time we were like, wow, ten X on a rocket company? Like that's just feels so expensive. And in part of my head I was like, But I think this company could be worth 100 billion, right?
Peter: Today, Space X is worth 100 billion. The reason it's worth 100 billion is because some investors believe that it will be worth hundreds of billions into the future. Right. And that was not something that, like I believed when we looked at it. Right. I could see it getting to 100 billion, but I didn't know that. Right. If I could believe it could get much bigger than that.
Peter: But he's also it's like the whole global economy is opening up. Okay. Right. You've got like I don't even know how many companies that we've looked at or we've invested in where the employees are spread out all over the globe. Right. Probably most, if not all, have employees all over the world. You have not only employees all over the world, but you have consumers of goods all over the world.
Peter: And as economies grow and GDP improves, people have more disposable income and that results in larger markets. And so I think going all the way back to it, to Tiger Global, on to a lot of these funds that are deploying billions of dollars into these companies, it's basically saying, hey, look, the world economy like we are bullish on the world economy.
Peter: It's going to continue to grow and perform and do well. And the markets that we look at today that are worth billions or hundreds of billions or whatever, like they're going to be worth multiples of that into the future. And correspondingly, these companies that we're investing in will as well. Right? Like to me it blew my mind that like we would ever have $1,000,000,000,000 company and now like we have companies that are 2 trillion.
Jon: Everything is possible inflation, right?
Peter: Well, inflation is definitely part of it.
Jon: But but also the borders are.
Peter: Also really big before inflation. I mean.
Jon: Back when we were doing when I first got into like the SAS space, yeah, you know, a lot of the time the focus was what market are you going after? I remember like TechCrunch was publishing articles at the time and they, they, their hypothesis of an article I read which I don't know what's right or wrong, was that the models that are working in the U.S. are probably the models that will work in the Brazil is Brazil is becoming an emerging market.
Jon: So fine models that worked well and try to transplant them, that was something I looked at or I looked at, but I thought about it fairly seriously. I know Hirevue is a local company that focused on the U.S. market, and I'm like, I don't know why video interviews would not be popular in a country like Brazil. Sure. And so but at the time is very like it was copying and pasting.
Jon: And we're right now I think you would just go.
Peter: But now companies just expand internationally.
Jon: And internationally like some of the class are working with now. Internationalization is one of the things right out of the gate. Yeah, we're going to support these three languages, which I don't think was something in common even a couple of years ago.
Peter: Yeah, So these markets just keep getting bigger and bigger and bigger. And so then if you're Tiger Global or you're one of these big funds you look at and you say, if these markets are so big and they're growing so fast, then you can almost take a seed stage strategy. We're like, All right, I'm going to deploy money into a lot of companies and I'm going to hope that one of them isn't worth $1,000,000,000, isn't worth 10 billion.
Peter: I'm going to hope that, like a handful of them are worth 100 billion, 200 billion, 300 billion, right. And when when you get to that level of scale, you can make up for a lot of losses. Right. And so I think that part of this thesis here right. And plus it's like, hey, we're going to hold these things longer, right?
Peter: So part of Sequoia's whole strategy is like, hey, most of the gains that Sequoia generates for their LPs happen after a company goes public, not before. Right? And so the.
Jon: Public markets in.
Peter: The public markets, because they hold the investments longer. Right. A lot of venture funds have this have these restrictions, like when the company goes public, you have to sell because you're not a public equities investor or it's a ten year fund. So the company takes 15 years to eventually become Airbnb, then to bad you like you had you should have sold five years ago, right.
Peter: And you missed out on all of this value creation that happened in the subsequent five years. Whereas like Sequoia, you know, and others basically look at this and say, nobody else has better information and better experience and a better exposure to this company than we do. Why would we not take advantage of that, that that information advantage and hold it for longer if we feel like that's the right thing to do?
Peter: So, I don't know. I think they're near going back to your earlier question, I think there needs to be changes in like structure of how funds are structured, how capital is deployed, and for fund managers to get out of this like old school way of thinking of it, that it's a two and 2010 year fund, blah, blah, blah, and realizing like, hey, there are maybe different models that could work better for different types of start ups and funding environments.
Peter: And let's be flexible, which also means that LP's investors in these funds also should be thinking similarly, like maybe there are more unique structures and we need to be like more comfortable and okay with that. if we really, really want to maximize like ultimate returns.
Jon: Okay.
Peter: But as far as a lot of rambling.
Jon: A lot of rambling and not a lot of specifics, but a lot of high level, I feel like you're we're seeing like a lot of things like what the safe note and convertible notes that are happening in the seed stage.
Peter: Okay.
Jon: I'm also not as familiar with the later stage, you know, stage deal terms. That's something I should probably get more up to speed on, but it'll be interesting to see what's happening. But yeah, like you're seeing your Tiger global and these others are just they're anointing you know in theory the winners if there's an actual true economic market and they throw in cash it makes it almost impossible for anyone else to compete.
Peter: But that's not impossible.
Jon: And some of these companies are imploding like we work. And it was the dog one that imploded to the dog. There was like a dog walking Airbnb, one that wolf, Wagga, Wagga.
Peter: Wagga. I don't know where I can put it, but.
Jon: What I imploded. I think I had significant internal.
Peter: Issues to my SoftBank went out and I mean that's what they were kind of saying. It's like we're going to anoint the winners, right? And they made a whole bunch of investments and some of them, like we work, didn't pan out quite as well as I had hoped. But you know, others are doing very well. So and I think I think that's what I'm saying.
Peter: I think like the Tiger Global's, it looked at that and they said, hey, it's not that SoftBank totally got it wrong. Maybe they were a little over allocated in some deals like we work. But the fundamental thesis of like, let's to play a bunch of capital, let's make a ton of bets, let's move really fast so that we become the funder of choice for entrepreneurs, right?
Peter: Allows us to basically place a lot of bets in some of the best companies out there. And some of those will go on to become huge companies, right? The next Googles, the next Uber's, the next Airbnb is the next Facebooks, etc. and all you if you invest in you holding on to like a Google from the time it goes public to today, like you're up hundreds of X on that deal.
Jon: How is the market changing what you guys do at the University Growth Fund?
Peter: So for us, the thing that keeps me up at night is just the speed at which great deal turn. And so that means how.
Jon: Fast are these deals.
Peter: Really.
Jon: Fast getting done. I mean.
Peter: Companies are getting term sheets like after an initial call.
Jon: Okay. Which gives you.
Peter: That same day. Right. Okay. And then they're closing like I've heard of deals getting closed in like two weeks, three weeks from from like the first meeting to, like, money in the bank, which is insanely fast.
Jon: How much time does it take university growth land to close it on a deal?
Peter: We've done it in as little as a week and a half.
Jon: Okay. What's the standard?
Peter: I like six weeks.
Jon: Okay. Six weeks is good.
Peter: I don't always get it. I rarely get. I don't know. But why do you.
Jon: Like six weeks?
Peter: I just. You don't feel. Rush. You can actually get through all of your diligence and feel really good about your decision at the end of the day. Okay. And for us, right, we're running a student program, so it's like teaching students and having them work through it. And they're balancing with classes. And so for us that six, six weeks is ideal.
Peter: But like I said, we've done it in a in a in a week and a half. Okay. For the right deal.
Jon: What's been your biggest miss? You know that.
Peter: Big you know a deal that I that I regret not pursuing harder.
Jon: Which is.
Peter: It was divvy.
Jon: Divvy the local divvy the.
Peter: Local do it. Yeah so I had a lot of friends that were like, hey, you got to check out this this company divvied divvy like they're doing really well. And it was really early and I and I thought honestly, I got them confused with another company and I was like, I don't know, I don't know. And I should have proceeded harder than I did.
Peter: So kind of missed that one. I don't know for sure that they would have given us an opportunity to invest. I don't want to suggest that we had that opportunity, but it's one that I wish I had pursued more aggressively. at the very earliest early stages. Okay, we still may not have done it, but and they set it up.
Jon: But I like that honest approach. So there's no ego from Peter.
Peter: A lot of ego.
Jon: From me. I don't think there's I mean, there's confidence. I think there's a difference between confidence and ego. Well, awesome. Anything else you'd like to add to this, Peter?
Peter: No, that's fine. Thanks for having me ramble.
Jon: All right, you better head off to the University of Utah and go judge those students. Their idea is not this. Do it. I did that on purpose.
Peter: Awesome. Sounds good. Thanks, John. All right.
Jon: Thanks, Peter.