Welcome to Origins, the podcast that dives deep into the business of venture capital, where we learn how the people behind the capital, both GPs and LPs, make decisions. I'm Nick Chirls, GP at Asylum Ventures, a newly launched early-stage venture firm celebrating the creative act of making startups.
And I'm Beezer Clarkson, your LP co-host from Sapphire Partners, where we aim to invest in exceptional early-stage venture capital managers, both emerging and established franchise VCs. And Nick, it's so good to have you back again.
Yes, I had two kids, twins. We haven't figured it out yet, but I'm back in this seat and feeling really good and excited to be back.
Wasn't the same without you, but we tried our best. Some of the feedback I've received is people actually like our banter.
So, I'm glad to be back bantering with you. We have an awesome lineup coming together for this year, and I'm really excited.
Yeah, and you picked an awesome episode for our turn on today. Our guest is Tomasz Tunguz, who's a GP and founder of Theory Ventures. He's an incredibly prolific and thoughtful writer on venture, has been for a long time, and really digging into it with Theory, which will be exciting to talk to him about. And prior to launching Theory, he was a managing director at Redpoint, and spun out in 2023 as a solo GP, making him, along with many respects, you, Villi, Sarah Guo, Eileen Lee, folks who have launched their own firms to go head-to-head with the much bigger multi-stage industry giants. So, we get to talk to him about the wonderful world of spin-outs and how that's going.
Yeah, I've actually known Tomasz for a long time, since many moons ago when I was at Betaworks. And he had just started his blog, actually. You probably remember this, but at the time there was like, I don't know, it felt like, you know, blogging wars. There was like, you know, everyone had a new blog. And Tomasz was actually different, very quantitative in nature, very much like an engineer's mindset. And he is technical, so it's been really fun and interesting to see him and his own career evolve, but he's been remarkably consistent with that blog, too, for, I don't know, it must be 15 years.
Yeah, really, really excited to talk about it. And then, you know, obviously he's raised two funds in like pretty short order.
Curious to hear your perspective as both as an LP broadly, but also an LP in his firm.
Yeah, no, totally. And he has really bucked the odds. Not surprising given who he is, but it has been a tough last two years for fundraising. You also defied all the odds, so you guys get to talk about how you managed to pull off what I bet a lot of people would love to hear the inside baseball on to figure out. It is still rough sledding out there for fundraising.
Well, to be clear, we've raised one.
We've got a long way to go before the next one. So, yeah, he's clearly struck a chord with LPs and with founders. So, I'm also curious to hear your view on re-upping, too.
Curious how he's thought about his team and his org and raising capital around it. I was poking around the website. There's actually not a ton on the website, so hopefully we'll get all the ins and outs and behind the scenes.
He's got a very specific, I would say, go-to-market strategy, which I think does differentiate him quite significantly. And it's sort of form-fitting function. Like he thinks of certain ways an investor needs to build a firm that expresses that. And my belief, not being an entrepreneur or founder, is that it reflects the people that he then chooses and that's part of how he wins. So, unpacking all that with him is, I'm excited to talk to him about, too.
Sounds great. Let's do it.
Tomasz, thank you so much for coming on the show. It's, I'm going to say, a personal privilege to have you here as someone who's been a big fan of yours publicly and privately and now on the podcast and as an LP in Theory. It's really exciting to have this conversation. And I was hoping we could actually start with Theory and just dive right in on the fact that we're seeing, and it's a hot topic in the venture world, the number of departures from top firms. I think the stat is over 800 first-time funds have been established since 2022, including yours. And I was hoping that we could just talk a little bit about why people, you think, are leaving. You can start with your personal journey on it or just extrapolate a bit on what you think is going on.
Yeah, thrilled to be here. Thanks very much. I think a big part of it is, I mean, the industry's grown quite a lot and so the total number of people who are in it is much bigger than it once was, right? I mean to have firms that are like six, seven, 800 people now. We have firms that might be going public. I think you're seeing a maturation of the industry. I think it reminds me a little bit of what's happening at or had happened in private equity. And so, the stat that I'd be curious about is like, has the rate of departure actually increased or is it just a base level effect where as the industry has grown, the end percentage of people leaving, that percentage has remained constant.
You know, I've tried so hard to get this number.
Yes, because I've had the same theory. Please, sir, you've got the data hidden away somewhere, I'm sure.
It's not clean. So, we're cleaning, but exactly this, which is it feels like a large number, but as a relative percentage, maybe not so much. I mean, the industry would have to hit steady state at some point because obviously the first decade doesn't count because there were about 100 venture capitalists. But somewhere when it started being about five or six thousand individuals, anyway, that's, I've had the same question, don't have an answer yet, but we'll see. I think there's one part of it is we live in an environment where people are constantly starting companies and have new ideas. I think that's a big part of it. I think the other dynamic is it's really rare for people to remain in one company for effectively their careers, right? I mean in venture, and I don't know private equity as well, but in venture that's sort of the way that it was. Like you think about like, I don't know, like Don Valentine starting Sequoia and he's there for like 50 or 60 years, right? And you don't see that in industry. Like you don't see somebody who works for 60 years at IBM or whatever the cliche is. And so now I think there's a sentiment there that's pervading. And then the last thing is the industry itself has fragmented, right? As it's grown, there's a need for many different kinds of products. And so I think there's a customer segmentation and there's, I mean, you know, VCs are market makers in a certain sense. We make a market between limited partners' capital and then startups and the LPs are looking for different kinds of financial products. And then startups themselves are also looking for different kinds of financial products. And so as we see opportunities, maybe we work in a larger or more established firm and we see an opportunity to capture a niche in a unique way, it's very exciting, particularly given all the inspiration that's happened around us to go and start something new.
I would add to that perhaps LP accessibility, I think, has gotten like marginally better. Maybe still not as accessible as like maybe venture capital accessibility for founders, but like a little bit better. I mean, Bessemer, you're probably a great case in point of like very public response stuff, easier to get to than maybe some LPs. Whereas like historically I think like the GPs at those firms like held those relationships like crazy, crazy close to the vest. Maybe this is more a question for Beezer. And like how do you square that with in fact like people have much shorter lifespans at firms now. Does that matter? Do you care? Like does Tomasz with Theory, in Theory, like have to walk in and say I'm going to spend the rest of my career at Theory for that to work?
I think stereotypically yes, because one of the challenges you have in looking at a firm's performance is if the people shift, how do you then tie the historical success to future success? So the simplest thing is, oh look, it's the same person. Yay, go team, right? And when they change, could be better, might be worse. But the reality, I fall in the same camp that you're thinking, Nick, which is it's unusual, highly unusual to see somebody doing the same thing in any industry for that long. So why do we anticipate GPs will do that? And the flip side, I'm just going to throw this nugget in there, the average CIO contract is five years. And some are shorter. So it's not even just GPs that switch around, the LPs switch around and I've always been somewhat amused that people think LPs stay in place forever, too. And the answer is no. So everybody's switching around. But I would be curious, Tomasz, if you went out and tried to fundraise and said I'm going to do Theory for, I don't know, five funds, which is probably a good 15 to 20 years with another, you know, 100 years of back-end management on those portfolios, do you think LPs would have been receptive or they'd have been freaked out? Because I think some would be on both sides of that fence.
So, and we talked a lot about this. Like we talked about generational transition, we talked about key person risk particularly within the context of a solo GP and fund one, many conversations around that topic. And this might be naive, but my perspective is as long as you can convey a plan that convinces an LP that the firm and the positions will be sensibly managed and that that transition is slow and measured, you can instill a sense of confidence, right? So, some firms have like planned retirement ages, right? That would be one construct or we have like promotion criteria, we have a 20-year plan for the firm in terms of like what it means for generational transition. And so, communicating that at the beginning, I think was really important. So, I think it's just about predictability. It's just like in any investment, right? Unpredictability creates volatility, it creates uncertainty. People really don't like that. So, if you take like the other view, which is let's look at private equity. A lot of these private equity firms went public, right? Like KKR and Carlyle. I think we'll start to see this wave happening in venture. It's a blog post that's coming up this week. And there you have this notion of investing corporation. Like let's contrast that with how venture started, which is a bunch of people at lunchtime saying, 'I'm really excited about this company. I'm going to cut a 100K check. How much are you in for? How much are you in for? How much are you in for?' That created the partnership, and that's kind of the way that venture started. And now we're getting to a place where we're starting to see the investing corporation, where compensation is not necessarily tied to the underlying funds. It's more a bit like a hedge fund, which is more cash bonus rather than carry. And there I think you have this like maturity curve, where at some point as an investor in one of those funds, you're kind of just investing in the franchise as opposed to investing in a single individual. And there are individuals that are absolutely essential to those firms. Not that I would imply that, but the firm itself sort of endures more than the performance or the retention of any underlying individual or position. We're probably going way off topic now, but I think there's an underlying belief there that whereas generational transfers historically in venture have been perhaps not as successful as many would like, that perhaps there's also been some like really good lessons learned over the last couple decades with venture and maybe also using private equity as another place to look to, that maybe that actually ends up looking better in the next couple decades compared to the last.
Yeah, a lot more people I think have been through, I mean not to say like even in the corporate world these things are hard, right? Like you look at Salesforce and Taylor, like that dynamic, you look at Intel and the transition of power there with Gelsinger and not that I know him coming back and whether that, I mean succession is really hard. It's just, it's a really, really hard thing and I think especially when you have firms that are created around a single individual, the whole organization molds that person. When that person leaves, the organization needs to then like reshape itself.
Well, I'm going to recenter us a little bit around when you were launching Theory. What was the, I don't know if you want to take it from the customer segment and how you were thinking about doing the firm or how you told it to LPs because I appreciate it's the same core information, sometimes the narrative gets expressed slightly different to the founder than to an LP because the audience is different. But can you tell us a bit about what you're doing and why you did it in that kind of context?
We decided we ran Monte Carlo simulations on historical venture data and tried to figure out, okay, I read this book, it's called A Man for All Markets. And it was about this guy in the 1960s and 70s who started a hedge fund that produced like 25% net returns consistently for more than 25 years and he worked with Claude Shannon who was creator of information theory and Shannon's like most notable work or at least the one that I remember the most is like information is surprise. Anyway, out of that statement there came an investing philosophy that this guy named Thorp developed particularly around convertible bonds and it was really successful. And what I took from that book was if you start with the math and have the math on your side from day one with your business plan, you're in a really good position. And then you can kind of weather all markets, right? When we started to raise Theory One, the Fed had just raised rates 500 basis points. Like the stock market was falling pretty significantly. You had pretty enormous illiquidity within endowments and foundations. And people were trying to understand what is the size of the private book relative to the public book. What's my overall venture exposure? How much is this worth? What am I doing with secondaries? So there's just a lot of uncertainty. And so the idea was, well, if we created a business plan in that kind of tumult, it should be able to survive lots of different market conditions. And so let's use math to get us to a place where we have the probabilities on our side. Like that was critical to me. And it starts with another story, which is I remember I was attached to the hip of Jeff Yang, who hired me into Redpoint. In 2008 or 2009, Marc Andreessen and Ben Horowitz came to visit Jeff and explained to him that they were starting a firm. And they sort of laid out their plan and their strategy. I'll never remember the room. I remember sitting in that meeting, but, you know, 15 years later, they've executed that plan and I'm pretty incredibly. And so that always stuck in my mind as long as you have an extremely clear business model, an extremely clear plan, and you stick to it, and you let the compounding kind of take care of itself, you should be in a pretty good position. So it was really critical, I think, when we started particularly during that moment in time to have those two components to the strategy.
I can imagine LPs loved that. I cannot underscore that enough. Was that your experience? Was that part of the secret sauce of being able to raise during tough market? I mean, holy cow, your first fund was not, was a, it was a tough market to raise in. And I don't know. I mean, maybe the second fundraise was better, but if you could talk to us about the LP reception and what you thought really clicked, that'd be great.
The clarity was really helpful. And again, just being able to go into predictability. And this was not immediately apparent to me. I mean, I had a hunch that this might be the case, but it became clear to me after our first annual general meeting, the LPAC dinner, when some of the members of our LPAC, I asked them like, 'Hey, what do you think 12 months in?' And they said, 'You did what you said you were going to do, and that's unusual.' So, I think it's, I mean, as with like any investment, it's really about like instilling confidence. I mean, let's say you start with meeting a startup who's awesome, and then they show you a plan, and then they hit or exceed that plan, it instills a tremendous amount of confidence, right? And that they were able to pick the right direction, they had the business plan, they picked the right. And sure, whatever, they'll deviate 5, 10, 15% because of the underlying market forces, but being able to execute your goals, I think, is really important.
If you were to summarize maybe what that plan looks like at a very basic level.
Great question. So, we are a firm that builds highly concentrated portfolios. We put 12 to 15 companies in a fund, and we concentrate in those businesses. And we do that using a significant amount of research. So, the goal is to invest in a small number of companies, and just have significant positions in them because venture capital is a power law, and so we can have, if we can have as much capital as close to the Y axis as possible, we should be able to generate venture returns. And we talked a little bit about like, let's talk about LP segmentation, right? The way that I think if you're a multi-asset class limited partner, you have a public book, a credit book, a private book, you might have real assets, and on the very end of the risk and duration spectrum is venture. And that might be, it's probably like single digit percent, maybe on the high end it's a little higher, except for people who follow this one school of investing. And so, that part of the asset of your book is meant to, when it hits, it really has to hit, right? Like that's the point. It's a high variance. It's one end of the barbell. And so, we really wanted to create a strategy where that happened. We'd own significant fractions of the companies, and if we found a winner and lucky enough to partner with a generational company, that the multiple of the fund would be extremely attractive. And so how do we set up a firm to be able to do that? How do we create a business model to be able to do that? What is the underlying organizational structure to enable that to happen?
Let's talk about perhaps like lessons learned in fund one. So fund one was, correct me, 230 million I want to say. And you talked about like one year in you're getting some feedback you did what you said you were going to do. Where were the deviations?
You know, a couple of things went the right way. I think we were really lucky to raise the fund target that we wanted to and have a great LP base. Thrilled to work with you as well. And I think the second thing, the team came together much faster than I thought. Like if you look at the fund one pitch deck, we thought we would be five people at the end of fund one, which was probably March or April of this, basically now, and we grew to about seven within six months. And so we had a team.
