At this point in Menlo's history, right, we are going for broke. We are going for the grand slam home run. We want to see everything. We want to win everything. Full stop.
In this discussion with Veni, we discuss the craziness that's happening in venture pricing, when to pay up, when not to, how to think about market sizing, how to think about when to sell, how to think about being collaborative in rounds. This and so much more in a true nerd venture fest that is this episode.
It is a very disorienting, confusing time. Each seed investment is an option bet. You're buying an option to see if it's an outlier. If there's an opportunity to make money on investment, we should do it. The rest of this is all noise. There's no way for venture to be successful in today's era without the max 7 participating in everything you're doing. There's no limit to what a person can do as long as you don't care who gets the credit.
Ready to go.
Veni, dude, I am so excited to do this. I am such a fan of your tweets. Who would ever call them blowhard, right? That's a terrible commentary on it. And I was so looking forward to this. So, thank you so much for doing it in person.
Oh, I love this. Thank you so much. And I cannot wait to see if I pass your test.
Dude, you'll pass my test. Now, I want to use this as a real learning discussion for me because I want to build a firm like Menlo and I want to learn from the wisdom that you've had now seeing multiple different cycles. You just told me a story that I loved and it was from, you know, two decades ago holding a sudden stock. Can you tell me that story and your takeaway?
Yeah. So a little bit of a past. Previously I was at a firm called Globan Capital Partners and we happened to be investors in a company called Avanex, which nobody knows about this company, AVNX. I remember the stock symbol even now because I was an associate, did not have carry in the fund. Avanex was a big winner, goes public. They gave the associates a chance to own shares at the IPO. So I bought some shares at IPO. I remember putting the princely sum of $5,000.
And at one point Avanex got up to 200,000. It was such a big portion of my portfolio. And my wife, who's much smarter than me, she was my fiance then, we were getting married. She said, 'Hey, why don't you sell some so that we can have something for a down payment for the house?' And I was like, 'No, no, no. Avanex is going to go up. Optical components is a critical part of the internet bubble. It's going to go, we're going to make a million dollars on it.' And you know how the story ends, right? It drops 90% and I think I sell it for around $8,000 to $9,000. So I call it the most important lesson I learned from a 90% loss, which is at some point you should take some chips off the table.
I'm not sure what to take from that because I know I remember having Jake Saper on from Emergence and when he broke down Emergence's returns, basically you just saw this one meteoric outlier that returned 90 to 90.
Well, with Viva, yes, but it was actually Salesforce.
And if they had held it longer and longer, obviously it would have been even more meteoric.
And so I guess my question is, what should we take from that? Because we also see the dangers of selling too early.
Agreed. I think a lot of this advice depends on the context of who you are as a person and what your balance sheet is. At this point in Menlo's history, right, we are going for broke. We are going for the grand slam home run because we have had home runs before. We have a history of putting it on the table. As a 24-year-old with very little in your bank account, when you have that kind of game-changing money, it just makes economic sense to take some off the table. And so I do think the advice is there's no one-size-fits-all for these things.
Did you say you're going for broke? Like, I love that, like all hands to the pump, we are going for this. Does anything change with that mindset internally? Like, is it more aggression? Is it more willingness to pay up? Is it more willingness to have less ownership? What changes with that?
What we mean is we are going to fight and try to be in the defining AI companies of our era. We want to see everything. We want to win everything.
Cool stuff. So, I want to start with a concern, which is I don't know what business we're in anymore. Venture is not venture anymore. I had my team come to me and say, 'Hey, we can't find anything under 100 million.' And I said, 'Wow, that's a high price for a pre-seed or a seed round.' And they said, 'No, no, no, Harry. That's the size of the round.' Thank you. This is not venture. What am I to do in this world? And can you invest without a billion-dollar fund?
Venture has changed. But I also think that you can't take a snapshot in time and draw, you know, a dot is not a line. And right now, you're right. Every AI company wants to raise, you know, hundreds of millions of dollars. And I'm surprised they only said 100 million because there are some new labs who want to raise billions of dollars, right?
And they all have arguments for it. And it is a very disorienting, confusing time. I will admit that. But I also think these things change quickly. So you don't want to necessarily draw your long-term strategy with a snapshot in time. These things change quickly. So, do you play the game on the field as Bill Gurley says, or do you call timeout and say, 'You know what? I learned from 2021. You know what I wish I'd done in 2021? Less.' This is a really hard conundrum for professional investors.
You know, you're referring to my tweet, right? The Chuck Prince quote is when the music is playing, you got to dance. And as a professional investor, the danger of not dancing is that you do not know when this ends. Like, I'll give you a story. There were a bunch of really smart venture firms during the dot-com boom that got in in '93, '94, made money and decided to step out of the game in '96, '97. And when they stepped out of the game, they missed out on '97, '98, '99. And the LPs were like, 'What happened?' Like, 'We asked you. We invested in you because you're going to be at the cutting edge. You stepped out.' And they stepped back in 2000 on the peak, right? So, timing markets is really, really hard. So, I think you have to play the game, but I think you can play the game differently. You can choose to be more selective and you can hopefully think about portfolio composition and position sizing as a way of mitigating what happens when the cycle turns.
Portfolio composition and position sizing. What do we do with both of those in a market then like this? How do we change them?
I think you have to think about the venture portfolio as a bunch of options, right? Each seed investment is an option bet. You're buying an option to see if it's an outlier and so you want to have enough of those so you can make sure you have an outlier. And then when there is true quantitative evidence based on revenue and quantifiable metrics that there's going to be an outlier, then you position size up. So to me, you have to think about, okay, what is my fund size? How do I have enough at-bats to use a baseball analogy or a cricket guy?
And make sure that you have enough at-bats and then you only position size up on the things that are already proven?
Do you think seed still really exists today?
If you want to go into the core AI world with the new labs, I think seed is hard. But even like AI application companies, they're raising 10 to 20 like the old 3 to 5 days, which were still quite large seeds and that's gone. Honestly, I think there are two things that impact seed investing today. One is the size of the round and then you have this other sort of externality which is these large funds, maybe including us somewhat, being indifferent to seed valuations because they're using that as an option check to buy.
Because you are, aren't you? I don't mean that to put you on the spot, but...
Yes, I mean we are trying to buy ourselves a seat at the table and the cost of buying that seat at the table we're somewhat indifferent to at the seed stage because our real goal is to size up and invest in them if they become outliers.
Totally get that. Thank you for making my life harder in that respect. But I...
You should just invest in our funds.
That would be funny. That's very funny. Nicely transitioned there. I give you credit for that one. You said like, so you place these bets, so to speak. Completely agree. And then when you see discernible traction or revenue numbers, usage, whatever that is, then you can double down. Completely agree with that logic. We're seeing strange numbers like, you know, contracted annual revenue that's not actually annual revenue and it's kind of not live. You're seeing revenue run rate that's kind of extrapolated out from the best day in history and then we times that by 365 days. There's a murkiness to this revenue that we've never seen before that makes me feel quite icky in a lot of cases. Do you share that and how would you advise me and what do internal discussions look like around that?
If any metric is measured by an investor and they put a lot of weight on it, it's going to be gamed and that's just the nature. Maybe they should coin a lawyer for it. And there are two elements going on. One, I'm blanking. I don't know if it's Keynes or another famous economist who coined the term 'bezzle'. When there's a boom, the bezzle is high, which means there's a notion that the embezzlement of things will be so... not just people are going to pick metrics. People are also going to have some interesting accounting techniques which, by the way, will happen every cycle and this is probably happening at this cycle. So we're going to find out in the next few years exactly the accounting creativity of some of our founders and the metrics being gamed by some of the people, right? One good example of it in doing the SaaS way was a lot of investors put a lot of weight on net revenue retention.
And so one of the ways to game net revenue retention is you could get a $100 PO, but better get a $10 PO and get a $50 PO a week later because your net revenue retention if you just got the $100 PO was, you know, 100%. But if you got the $10 PO and $50 PO, it's now, you know, 500%. And the net revenue retention looks much better. So once a metric is measured, it can be gamed and that happens. And so to me, a lot of this comes down to are the founders really focused on building a business? Are they focused on terminal value or are they focused on markups? And I think you want to find founders and investors who are focused on terminal value.
Do you believe in kingmaking? I know that sounds like a strange question. Kingmaking, the theory that multiple successive and quick rounds led by strong investors can really help increase the chances of a company being successful.
See, to me that is a great example of Soros's reflexivity, right? What do I mean by that is you have a company that does well, right? And because it does well and the revenue is growing really fast, it has a quick markup. And because of that quick markup, it gets more capital. It gets to come on Harry's show. And then it gets more notoriety that allows it to get more human capital to the financial capital. It grows faster and that's under the markup. Right now, these are good things as long as the revenue is happening and the core business is building. But someone, a copycat, can look at that and say, 'Oh, the secret is to have a markup.' And a copycat investor might look at it and say, 'If it's marked up, it's going to be marked up again.' And then reflexivity kicks in. And then everybody starts acting that way. And this explains how market cycles work until it stops. And one thing we know from Soros is that all reflexivity will eventually stop. We just don't know how and when. But until it stops, a lot of people can look very smart playing it.
We don't know how and when, but we can play the game of predicting how and when. If you were to predict how, what is the first signs of this cracking?
I think usually the first sign comes with some major debt default and generally equity is never the reason why these things crack because equity, you write it down, you just take the loss. Debt on the other hand, people have this expectation they're going to get paid back and so most of the cycles I know it breaks because people lever themselves. And so if you see what happened with, um, Leopold...
Right. Right. But when you're 4x leverage, it doesn't matter if you're right. You have to also get the timing correct.
Mr. Leopold's risk management class in high school, didn't he? Poor old Leopold. When the music's going, so yes, I completely get you there. How do you feel about like the multiple tranche rounds so quickly? I'm meeting founders very often where they're like, 'Oh, we're doing a round this week at 100, but then we'll be opening up the second tranche of it later next week at 200 because we've got so much demand.' This just gives me shivers and I feel like we buy any gold or we buy any car.
I feel like in every cycle you get the innovators, then you get the imitators and then you eventually get the idiots. And I think the innovation of the tranche financing was the notion that I can get build-with-me money where these are investors going to come build with me and then use that build-with-me money at a lower valuation to get just money at higher valuation and then eventually transition to just pure dumb money. And I think that's the logic of this, right? And so I don't need like money, all money is not the same. I will bring in some investors who are going to actually build the company with me and then I'll also bring in some capital along and then eventually I'll bring in some very low cost of capital. And I think that was the intention, but again, like everything else now, everyone's doing it and it's not tied to the quality of the company anymore. It's just become another technique for people to do. So I find these things start initially with some, the core of the idea is actually a good one. Okay, I want to actually raise capital but I want to distinguish between capital that adds value and capital that doesn't add value.
Will you do it as a firm if you're coming in in the latter tranche?
Absolutely depends on the situation. We have been on both sides of this situation and I think if the company is interesting, the founders are special, absolutely.
Yeah, why? I mean, at the end of the day I never care about what other people invest, what they do. I'm looking at this round and say...
Are you not hurt by the fact that they are saying you're legitimately less valuable than Peter Fenton who we're letting in at half the price?
Peter is amazing. I think the biggest thing I've learned over time is you never want to let your ego come in the way. My only ego is to make money for my investors. So, if I can make money for my investors, who the hell cares.
Have you let your ego ever get in the way?
I think you get caught in ways around negotiating for valuation or being in a syndicate or sometimes you're offered the opportunity where you think you're offered a small piece and you're like, well, I'm too big for that piece. I think in this business you have to have a high degree of humility because every week I get hit, I get punched in my face by things I don't know and I think the biggest mistakes are when we get too caught in our ego. Look, the reality is simple. We raise money for institutional investors with one and one new goal which is to return more of them back. If there's an opportunity to make money on investment, we should do it. The rest of this is all noise. And I think too often because venture capital tends to be dominated by personalities, people get caught in these. You know, you probably don't know a lot of people at Goldman, right? Everybody can say David Solomon who's a CEO but the idea is Goldman makes a ton of money and those people just go do their job and I think too often venture capital we end up because there's so many personalities and people it becomes more about who and our ego as opposed to just do the job.
I think that's forced by the fact that we are fighting for constrained supply though. If you're looking at say Goldman's public team, you can buy Nvidia, I can buy Nvidia, they can buy Nvidia. It is a free market here. We are both competing for Max at Lorra and our check. If he takes yours, he won't take mine because there's one lead check. And so we have to have personality. We have to sell ourselves because there is a constrained supply.
No. Yes. What you say is absolutely true. Which is that you have to have these two dualities and manage them. One is you have to have a personality. You have to be able to project a sense of differentiation, right? Because why does someone choose Harry and not me is because they like Harry, right?
Clearly, I see that in person even more so.
But I think if you get caught in that and you get so immersed in it, then you lose the sense of what the core purpose is, right? The core purpose of having that personality and charm is to make money for your investors. That's why it is, right? And if there's a time for you to make money for your investors where you have to let your ego take a backseat, you should do it. And that's the right thing to do. Now, I'm not saying it's easy to do. I'm not saying I've done it, but it's the right thing to do. It's kind of like I know I got to eat right and exercise. I know that. I don't do it often, but I know it's the right thing to do.
Yeah. But Jim Conn is so good.
Some things in life are worth it. Like butter chicken.
I'm a dish. Oh, you are? Oh, well done. Well, don't worry. I like a doom too.
It's fine. We said about price kind of, hey, we're a little bit less focused on it when it's early. There comes a time when it does matter with the greatest of respects.
Oh, say it, say Menlo kind of pay up.
And for all you entrepreneurs out there, we definitely pay up. So definitely call us.
Yeah, you do. And every time I'm like, man, like paying up and you prove me right, like you're right. And I'm proved wrong when I'm like, God, they're not disciplined on price. And so I guess I'm questioning like, do we just need to completely reshape how we think about TAMs and market sizing?
Let's think about when people pay up. People just sometimes pay up to be able to win the deal, right? But I think sometimes people pay up because they're able to see a bigger TAM than the other investor, right? And I think in those cases, you're not actually paying a higher market price. You're able to see that the opportunity is bigger and therefore you're willing to see that possibility. Now, sometimes you're going to be right, sometimes you're going to be wrong. So to me, I don't necessarily think it's just price. Now, sometimes you don't see the TAM, you're just trying to win the deal and that's the price it takes and you're just a clear price taker and that happens too.
The problem is venture is an asymmetric game. You can lose the dollars you invest but you can make 10x if you're right. And that asymmetry means that the sins of omissions are way higher than the sins of commissions. What do I mean by this? You only see the deals we do, right? You don't see the deals we pass. But the most expensive mistakes venture capitalists make are the deals they passed, not the deals they did.
When you say that, what's the most memorable pass that haunts you? What is it?
My most memorable pass was that I was a young board member on a company called Plaxo, which had an incredible board. Mike Moritz, Ram Shriram, Tim Koogle from Yahoo, and little unknown me and Sean Parker and Todd Masonus who was a founder and Cameron Ring. Sean had some challenges on that board and was asked to leave that board and he was going, because I was the only person within 10 years of his age in that group. He was telling me he was going to Boston and he's going to work with this college dropout and he's like, you should get involved. And I'm like, uh, Sean, you just got booted out of this board and I have no idea what I'm doing and I didn't even take that meeting. And you know, I probably had the opportunity to write a, you know, $50,000 check into that. And those seed rounds were different. They were million-dollar seed rounds. That's a tough one.
What was Sean like back then?
The way he described Plaxo, his vision actually worked out. He understood virality, network effects in a way, his thought process around what happened at Napster, you know. So my rule of thumb is I'm always looking for people who are incredibly good at communicating very complex concepts in a simple manner and just have insight. And Sean just had insight around human behavior and complex concepts and could boil it down in a simple way. He was a really good communicator.
He gets to have Justin Timberlake play him. So...
I mean it's a pretty cool one. Drops the love it. We actually did that. We were the 20-minute VC. Now it's just 20VC. Yeah. Thanks, dude. I was talking to Amy beforehand, speaking of kind of the fantasy back there. Amazing partner of mine, amazing partner of yours, and she said that you care a lot about understanding what brought founders together and hearing about you talking about Sean there made me think of this. Why do you care about what brings founders together and are there any patterns or signals that excite you?
The company you build is a team you build, right? And so much of the DNA of a company is set by its founding team. And so what brought them together? Why they thought in a world of six billion people they should be the people to do this? How they think about each other's strengths and weaknesses. I think these things all sort of like Minority Report, they're like a precog that tells you around how they're going to make decisions, how they're going to build the rest of their team. So I think it gives you a clue about who are these people and ultimately I think the company's culture and DNA are going to be shaped by the founders.
You can ask one question that you find most revealing of a founder quality. Doug Leone's to me was the one I remember most and he always says, 'What's your worst reference?' So, you know, that's a great question.
I generally ask your five best friends, right? And imagine they're in a room and if I had to ask them three words to describe you, what would that be? That's a question I normally ask people, right? I'll tell you, I listened to Mike Moritz on the interview and he asked a question and his favorite question is if you could go back in your life and change one thing, what would that be? I think that's a pretty interesting question. The reason why I like to ask how your friends describe you is I think you're more likely, if I were to ask you what do you think about yourself, it's harder. But when you think about your friends, you can sort of externalize it and then that gives you a clue about how the people around you think about you. And it also tells you your self-awareness because usually after I do that, I also do references and I'm trying to see if the references match someone's self-awareness. Right? It's actually okay to have, if you know your weaknesses then you have a much better chance of managing them. It's the people who are blind to their weaknesses that usually have challenges.
Don't mind, my weaknesses are revealed in the comments section of every interview. So I see them glaringly. You know, one thing that's been I think uniform across the industry is we've seen ownerships go down. Even the hailed benchmark now take less than 10%. Obviously...
I thought they said 20% are bust.
Uh, maybe, maybe let's stick to that message. I love the benchmark guys. So that absolutely, but does ownership matter as much anymore?
Of course it does. Ownership always matters. But I think you have to think of that relative to the opportunity. Right? What I mean by that is, yeah, would I love to have 20% of a company? Sure. But I'd rather take 2% of a trillion-dollar company than 20% of a $100 million company. Right?
So you'll do deals now for 2%, 3%?
We did Anthropic, we own less than 2%. So my point is that I think when you think about ownership you can't think of that in isolation.
But I think you're either in the ownership game or you're in the money movement game.
I disagree a little bit. I think when you're getting your option bet, you want to have ownership because when it's not clear, so let's say you know it's an outlier. If it's an outlier company, then you are in the capital invested game. Prior to it being an outlier company, you have to be in the ownership game. Your best situation is you're in the ownership game in an outlier company and then because of that you go into the money movement game. You know what I mean? Same result.
No, I thought you said the ownership doesn't matter pre it being an outlier because you're there for the information. When it does become known, it becomes a money concentration game.
You want to have enough ownership though. I mean, you look at Higgsfield, my partner Amy, she killed it. We got 15% of the company for a $5 million check. You had Alex on your podcast. Incredible entrepreneur, incredible business, right? So in that case we got the ownership and then we also have the opportunity to then size up.
Do you get my rationale though for actually it doesn't matter if you have ownership in the first place. What you're buying is the information to size up.
I get that. And if you're asking me is it better to be in the company regardless of ownership or not be in the company, yeah, it's better to be in the company, but it's even better to be in the company with ownership because now you actually have gotten your ownership that's going to drive real returns because the problem is once there's an outlier, everybody knows about it. It's no longer a selection game. It's just, okay, can you get access and can you... it's a position sizing game. There's no alpha there. And then that's the truth in the AI greatest hits. Everybody knows these companies.
How much of your fund will you put in a single company?
I don't think we would put more than 20% of...
Have you gone up to 20% before?
Uh, we have hit 20% on one company.
It's got to be an exception, right? Generally...
That was a hard conversation. We 10x'd this year, we 10x'd last year. Okay, Veni, let's do it. But I do feel that you have to think about the question of ownership and concentration as when... what do I mean is that where was the company, when, what information do you have, how much conviction can you have as an outlier company because the thing about position sizing is you want to position size when the data is there and if you position size it ahead of the data then you're taking a lot more risk. So the question is not did you put 20% of the fund in one check at the beginning of the fund or did you ladder up to 20% on the basis of new data. Obviously it's much better to ladder up on the basis of new data. And I think in an era where venture capitalists are going to have ownership come down, right, I mean I wish we could get 10%, even 10% is hard right now. Your way you're going to win is you're going to establish a position and then size up as a company does well so that you have sized it commensurate to the outlay opportunity.
Totally get you and get that and everyone says but ownership doesn't matter so much because outcome sizes are so much larger than they've ever been and they are, that is a valid answer. My question is are they on the whole, like do we just have a breadth of companies that will be much larger or is it really just a handful of Anthropic and SpaceX and Cursor on the smaller end at 60 billion which is still enormous and amazing but is that a good enough justification for ownerships going down?
I think the problem comes down to your portfolio composition, right? If you are in one of those outliers, I think you can survive with low ownership. But what happens if you are not in these big outliers? Then because what essentially you're playing a game, to use baseball analogies, you're playing a game where there's only grand slam home runs or strikeouts. There's no singles, doubles or triples, right? In cricket terms, by only scoring sixes and not having ones and twos. And the problem with that is that if you don't score the six and you don't have the ones and twos, that's going to be a tough fund. And so part of getting ownership is giving some insurance for you that if you missed out on the outlier, the sort of midsize outcomes can still move the needle for you.
But will you do singles and doubles?
No. The goal is always to score home runs, right? But sometimes you strike out and so if you strike out all the time, that's going to be a tough fund. So the idea is that you want to at least say, 'Okay, I went for the home run and I got a triple.' But I just don't think founders are aware and I say this and people always get at me and I think they kind of miss the point because I say it lovingly for awareness for founders that the game has changed and that going from 1 to 4 million and then 4 to 8 million and then 8 to 16 and then banking in 5 years time we're going to hit 30 and that's an amazing achievement but it is just not enough to get venture excited today. Do you agree with that?
Yes, I agree with that. Again, snapshot in time because you're seeing companies like...
But do you think Veni will ever go back to being excited about that?
Well, if you're not, they're not excited about it today because you're seeing companies go from 1 to 10 to 50 to 100. So they're getting to 100 in 3 years or in some cases they're going from zero to 1 billion in 18 months, right? So when you see those kind of companies, of course you want to do those not the ones. But that's because we are a moment in time where there's certain trends allowing you to do it. I don't think this continues forever. And so I think this is where I think you have to take the long horizon look at this. Right? There were companies who grew, they grow fast but there's a combination of things that make these companies grow fast today that may or may not continue.
Totally get that. When they grow as fast as they are, the rounds come thick and fast and the prices are high.
Yeah. I mean, you look at Instinct, God bless, I wish we were, you know, they've gone from, I don't know, 250 million to 10 billion in 10 weeks.
