I will trust you and I will work with you and I will back you, but [ __ ] me once and we're done. Of all the term sheets that we put down, we've won 91% of them. So people once asked me what I was looking for: a smartass team building a kickass product in a big ass market. Those are the three asses. Was 2005 Jeff able to do that? 2005 Jeff was a dumb [ __ ] who knew nothing. I've been working my ass off for 21 years. Nights, weekends. I also want to get a bit more me time. If I was starting today, I would really focus my energy on, okay, this is the one thing I do and I'm going to try and get the best opportunities in that sector and then grow from there.
How did you get the Jeff handle on Twitter? How come I can't get Michael? Has anyone tried to buy it from you?
Welcome back to another episode of Invested. My guest today is Jeff Clavier. He is known as one of the best seed investors on the planet. And so, thank you, Jeff, for joining us today.
It's a pleasure to be with you, Michael. It's been too long since I've seen you. So, thank you for the opportunity.
Yeah, just before we came on, I was mentioning I think the last time we saw each other was probably six or seven years ago in a cafe in Palo Alto. And the world has changed a bunch since then. Is that fair?
But that was definitely pre-pandemic. So, I think you're even kind by saying six, seven years ago. I think it's longer than that.
Oh, wow. Well, you know, maybe I should ask you, given that, has anything changed in the world of seed investing since I saw you face to face last?
Oh, we probably have added another thousand or 1500 seed funds since we saw each other. Since, you know, there were none 20, 21 years ago when I started SoftTech, Uncor raised one of the first seed funds in history, a $15 million fund 2 in 2007. Then two, three years later there were maybe 10, 20 seed funds. A few years later there were 50. And then suddenly, because we demonstrated to the world that seed was actually an entry point for a lot of new managers, things just got out of hand and now we have about 2,000 seed funds. So somewhere along that curve, we've seen a lot of capital flowing into the hands of people who are good but maybe not VC lifers like you and I, right? Where for us there's not anywhere to go. We're sort of VCs and that's it. No one will ever hire us or do anything else. Whereas people now think about VC as kind of a step in a career and they get in and then they get out. And there's been a lot of fluctuations in the VC world where people sort of join firms and then ping pong around and then exit and whatever. So, it's been kind of interesting to see. And in this world where it's really hard for companies to raise a Series A, Series B unless they have that crazy traction with numbers going 5x or 10x a year and so on and so forth, we'll see the metal that those VCs are made of in order to help their companies.
By the way, you just made my life a lot easier on this podcast because you really teed it up exactly where I wanted to go. So when we both got started, like there were seed investors. It was Andy Bessel who you know from Sun, or some of the angels who invested in Google, and every once in a while you saw Larry Ellison do a seed round. There wasn't an institutional seed environment. You were one of the first. I think it's 17, 18 years at this point. You institutionalized it and now it feels like everybody's got a seed fund. To your point, there's like 2,000 of them. And so I want to ask you three questions at the same time. Number one, is this actually a category or is a lot of this tourism? That's number one, which is kind of what you referred to about people kind of coming and going. But I want to say if these people are serious investors or they just want to have a cocktail party discussion, that's kind of point one. Point two is, you're the granddaddy of the seed business. No, nothing about your age, just you've been at it longer than anyone. How do you keep differentiating yourself differently today than you did 15 years ago? And then the third question is, has the geographic scope of what you do or need to do changed because of that?
Those are great questions. So, I will answer the third first. Geographically, we're still very much doing US and North America with a few investments in Israel because obviously Israel is an incredible source of innovation and entrepreneurs. In the early days, we were very much New York and Boston. Now we don't care where the CEO and go-to-market is in the US, Canada, but we really want the focus to be on the US market from a go-to-market perspective. And then engineering can be anywhere. It can be back in Israel, it could be in Europe, could be anywhere. It really doesn't matter because the pandemic has taught us that you can really be innovating anywhere on the planet. And for us, what matters is this focus on the US market for sales and marketing. To your point about tourism, I do think that a lot of people who enter the seed market have a genuine interest in building something that will last. The problem is that sometimes they don't know how hard it is, right? Because I was a VC when I moved to the US 25 years ago. I did four years as a traditional VC before starting SoftTech and Uncor. And that gave me an appreciation of what it means to actually be a VC, right? To actually manage a firm is a thing. And a lot of people just make the transition from angels or operators to VC without that prior understanding. And sometimes it's a hard landing when they figure out what that actually means. So I don't know that there is a lot of tourists. There certainly were a lot of tourists in 2020, 2021 when literally you just did that and you raised a $50 million fund. Now raising capital is harder than I've seen in maybe a couple of decades. LPs are extremely demanding and they only back GPs that they think can really differentiate and not only generate awesome returns but also help them with liquidity. So the tourist aspect I think is sort of behind us, but you definitely hear people saying, 'Look, I did this thing, I raised this fund in 2021 and it's hard, and so I don't want to raise another fund, so here is the fund, I don't want it, I'm just moving on.' And LPs are like, 'Well, yeah, you can't, especially as they back some sort of GPs, there's nowhere to go.' It's like, who do you give the portfolio to? So that's a real concern on the differentiation. I think that the big thing that we have is we're 21 years old, so we're an adult firm. So, I've built an incredible team that is able to really help entrepreneurs go from zero to one, one to 10, and 10 to 100, and then bring in great co-investors along for the ride. And we're always, or pretty much always, leading or co-leading the rounds that we get involved in. We write the largest check. We always buy 10, 12, 15% of the companies when we invest in a seed round. And so the number of leads in the market, firms that actually do what we do, that sit on the boards, that do all the work, is actually something that you can count on two hands, maybe four hands, right? So between 20 and 20, over the last couple of years, I think our win rate is 91%. So of all the term sheets that we put down, we've won 91% of them. So the differentiation is both the brand, the reputation, the fact that we really take good care of our founders. We've built this amazing team on the platform side, on talent, that support our founders, and our founders just preach about everything that we do for them and they help us win more deals and they help us through referrals. So that's how we do it.
Given what you said right now, I find in the seed stage that there's a lot of people who want to just join the round, to the point you made, right? There are very few leaders. People and there's endless angels and seed funds and everyone wants a piece of the round. But given what you said now, is it worthwhile collaborating or should you just take the whole thing yourself?
No, we fundamentally believe, I've always believed in the virtue of collaboration and bringing other smart investors to the party. So a typical Uncor round will be: Uncor takes, call it, 50-60% of the round, then there's very often a smaller seed or pre-seed fund coming in. We always leave room for great angels, people who have small checks but can really be instrumental in supporting the company, and then we always make room for insiders if they want to do their pro rata. So, yes, we could take 20% of the round, but then if you edge people out, they don't come back and give you access to their deals. So you have to be super thoughtful about that and sometimes even cut back, and we've done it. Sometimes we collaborate with our dear friends in the market and we just take 10%. So you have to be really mindful of not imposing too much dilution. Have enough ownership for your own needs, but also make room for other people. A lot of art, not science.
I'm curious about something you actually said about five minutes ago, which is that it's a hard time to raise capital right now.
I'll be honest with you, my experience is the opposite. That at least in the seed stage, everything's getting funded. And even quickly, it feels like a little bit back to COVID. And we're seeing things get done quickly. Why did you say it's a hard time to raise capital in the season?
So it's a hard time to raise capital for GPs. On the GP side, it's really challenging. A lot of programs are coming back. As I'm sure you read the news, a lot of endowments are under attack, so they're not really that interested to put money to work. And so GPs have a hard time raising capital. On the other side, it's true that the smaller amounts that are being invested are sort of up into the right. The number of deals are actually going down, which means that there's a super heavy concentration of dollars in the top companies, and they're all AI companies. I don't have Q3 numbers because we're just wrapping it up, but at the end of Q2, 40% of all the dollars in the US invested in the US went to 10 companies. Just think about it, right? And so it's crazy. And certainly for anything which is AI with AI something, either tooling or vertical applications with good founders or whatever, they certainly have a lot of choices as to where they get funded and things go fast. But it feels to me that we're just depleting funds very, very quickly. When I hear about the mega funds investing a billion here or two billions there, at some point they're going to run out of their commitments. And founders have understood that SPVs are not that great. So if you can't do SPVs and your funds are running out, you need to raise again. But then if the LPs say, 'Hey, I want liquidity, so I'm not going to give you more capital,' we're going to have an issue. I mean, we just raised a brand new fresh $300 million just a few months ago, so we're good for three years, but we raised in record time. We were done in 10 weeks.
I mean, it's hard, it requires meticulous preparation and work, but yes, the execution was very fast and we appreciate all our LPs. So, the point is you have to pace yourself. And the one thing that you and I know very well is that LPs want you to tell them what you're going to do and you have to do exactly what you said you would do, right? That's what they want. And so if you say, 'I'm going to deploy this capital over three years' and you show up after 15 months saying, 'Oh yeah, I'm done. Get me more,' they will hate you. They may actually still give you another fund, but they will hate you. By the way, you teed up another topic that I wasn't planning on covering, but I want to cover it now. Which is your allusion to the fact that perhaps private money is more finite. So, there was an incredible chart by Michael Zimbleist, who is the chief economist at JP Morgan. Hopefully they can put it in the show notes, where he basically says the reason that the US stock market keeps going up is because there's less and less equity available and more and more funds available. So you've got all this liquid money out there from retirement plans and other things that's got to go into an ever decreasing pool of equities. And so it feels like the money for the public markets is almost infinite. The money for the private markets, like I said, because they have to actually go through a cycle of raising from LPs, you don't have these automated things until the US government changes its laws and lets you make automated contributions to private money, which may or may not happen soon. It's making its way now through Washington. You've got this imbalance where nobody's going public unless you can get like $400 million. You've got to privately finance all these companies till they get the $400 million of revenues from a finite pool of capital. And so you end up with not only massive concentration like the Mag 7, you have massive concentration in the private markets as well and a drying up pool of capital. Where does this take us if the US government doesn't change the regulation around automated contributions to private capital?
Well, I mean, that gets us to a starvation. So the mega funds have also, and I would add to what you said, that the mega funds have just increased their hold on the market where they have an ability to raise multi-million dollar funds every few years. And so a lot of the capital goes there. And at some point it creates a situation where VCs who are not established, who haven't proven themselves, and proving yourself is really like fund one, fund two, it's all on paper, right? But fund three, fund four, it's like, 'Okay, well, show me the money.' Show me DPI. And in an environment where when you and I met and I got going, my time to return back in 2004, 2005, 2006 during the early days of Web 2.0 was barely 3 to 5 years, right? So that means that I was actually getting liquid within 3 to 5 years. And when I raised fund 2 in 2007, my angel portfolio was already 5x DPI in three years, which you would never dream of right now. It's just impossible given what the market is going. And then when I had my first IPO, Fitbit in 2008, it was after eight years. Now you can barely hope to go public before year 13, 14, 15. So the time to returns has doubled and the time to prove yourself. Just think about it. It's 15 years. It's five cycles. It's crazy, right? And so what's happening is you have real pressure on GPs to monetize early through secondary liquidity, which the good news is it's available. The bad news is the discounts, the spreads are just massive, right? And so people are only interested in your best names as always, and they want to buy your best names at massive discounts. And so you're basically trading your future returns to get a bit of DPI, which is really what LPs are trying to get you to do. So we didn't have to do that for a raise, but we know that there is definitely expectation to actually show the money for real because they need that to actually get the cash recycled and invest in new funds. And we're just, as you said, stuck in the situation where there's a few IPOs, but they're so high in terms of hurdles, they're hard to get. And M&A is kind of waking up, but it's in this kind of weird, especially given the environment from a regulatory standpoint, right? Where you can't really buy companies, so you kind of invest in them and you suck them dry of their talent or whatever. So it's super bizarre, right? But it's happening for just a happy few. And there is just trillions of dollars of liquidity stuck in the system because we just need more IPOs and more exits.
So I want to combine two things you said and ask a question. So it's taking 15 years plus, it's getting harder for GPs to prove themselves because it takes so long. So you have fund one, fund two. You don't have liquidity. You kind of suboptimize liquidity through secondary and you can't prove yourself. And so if you play this movie forward, is this bad for innovation? Meaning it's going to be harder for people to fund breakthrough innovation in the early stages because you can't get really new funds running with capable people who can do this.
I don't think so. I think we're going to get, and to be very candid, you and I could have had that conversation, Michael, like five years ago and I would have said kind of the same thing. The scale would have been maybe a bit lower, right? But people, like true entrepreneurs will find a way to get financed. It may take them two years to raise their first fund, but they will have at it and they will prove themselves and maybe hustle to raise another fund or whatever. So I've been expecting a contraction of the industry and to be very candid, it hasn't happened. Because if you ask me, the last time it made sense to have the number of funds that we had was probably back in 2010 when there was like 25 of us, because it was really good and we were working together because no one had big funds and so it was super collegial and it was awesome. It was a true community of people backing entrepreneurs. And then everybody raised big funds and started to not really compete, but we can't see three or four great funds working together anymore. It's just impossible. The rounds are too small and the funds are too large.
The big circle up whatever supplies available.
Yep. So I think to your point of innovation, I think that seed is still very much able to support innovation. So pre-seed, seed, the big question for me, where we really have a choke point is Series A and Series B. Because what's happening is everyone is trying to find a very specific type of company which is reinventing a sector or AI enabling certain functionality or tooling some things, and then they will try and plop as much money as they can. And as soon as one does a Series A, you can almost be certain that within 3 to 6 months they're going to do another Series B, if it's not like 3 to 6 days. It's crazy right now. And so you just have this concentration of dollars in very few companies. But if you have a normal company which is growing nicely but not crazy, it's super hard to raise. And that's where I see we're going to support those companies, give them a second seed or whatever, and we'll try to get them to break even. But breaking even early is super hard and you never get to a great growth curve, and so you end up with something which is barely interesting. So it's really challenging, and we're trying to guide our companies through this, and it's really rough. So to me, that's what I'm really concerned about for my companies: the ability to raise a Series A, Series B.
You know, you're originally from Europe. I now live in Israel. The US stock market has raised the standards such that the banks only take you public if you've got $300-400 million of revenue. Why hasn't something like the AIM in the UK, the Nouveau Marché in France, the Tel Aviv Stock Exchange emerged as an alternative to be a lower-scale IPO, meaning go IPO here when you've got $80-100 million and then you can do a listing on NASDAQ or the New York Stock Exchange? It feels like one of those should emerge to compete.
That's a great question. And we've certainly asked ourselves that question with our companies which are doing well and are in the $100 to $200 million in revenue but can't go anywhere because, as you said, $300 million. I don't see a company, except on the crypto side, like most of what's gone public recently is more like in the $400 to $500 range. And so there should be an ability to do what you just said. I think that there's a lack of appetite and aggressiveness from those other trading places like Nouveau Marché or AIM. I think the Australian Stock Exchange is actually the one that has listed a few companies. Life360 went public there. And the problem is that from an industrial standpoint today, if you do that, it's felt like a failure as opposed to a success. And then they flipped everyone and went public on NASDAQ a couple years later, which is incredible, right? It's a great company which I passed on years and years ago. I was probably the first pitch of the CEO, and I remember it was the first time and last time I saw the entire team wanting to literally murder the CEO because his speech was so bad. But Chris has done amazing afterwards. But it's still stuck in my head. And so there should be this on-ramp where you go public there and then you go there. But I think that the other markets are just not aggressive enough, and local investors are kind of afraid that they would get secondhand goods, right? So I think we need a few great companies to do what you just described, and then maybe that will actually create an alternative way to go public. But no one is really pitching that. None of the bankers are saying, 'Okay, you guys, we're going to take this company which is at $200 million in revenue. We're going to take it public there, and then two years from now we'll be on NASDAQ.' And to be candid, I don't know how we would react to that because the question is, what sort of multiple are we going to get, right? Because over there, the multiples tend to be more compressed.
So, and the thing is for a great company, your ability to stay private and raise more capital at higher valuations is there, right? Just increase your ARR, get a good multiple, someone will fund you. Like, 'Okay, you raised that $1.5 billion, let's just raise that $3 billion, let's just raise that $5 billion.' And so because the private markets at the growth sectors are really sort of easy, not easy, but easier to raise from, then you stay private for a long, long time.
Yeah, eventually, like we said before, there's just more money in the public markets, and I think somehow someone's going to have to figure this out. Maybe it'll be the Clavier-Eisenberg Alliance for secondary markets for markets in other countries. Listen there first. Hey, so you have something called the three asses rule.
Yes. You want to tell everyone about that?
I've sort of used the three asses for a while. It's basically, so people once asked me what I was looking for, and I said, 'Look, it's basically a smartass team building a kickass product in a big ass market.' Those are the three asses. And we used to have a fun interpretation of that. I think we still kind of use that, but we focus more on, 'Hey, let's just zoom in on the team, the smartass part, and make sure that we operate in the biggest market, and then the kickass product is something that we'll care about, but because we're doing more pre-seed these days, we really angle on the team.
It's the right combo of people who have enough experience of the sector that they're trying to work in or the tools that they're trying to build. So they can really understand their target user and the functionality that needs to be built, but are not so locked into it that they would not innovate and reinvent the way things are done. They have the right combo of an awesome leader, someone who's great at projecting and telling a story, a storyteller in the CEO seat, someone who is able to attract both investors and employees. An awesome CTO architect, someone who's really able to think about next-generation architecture, infrastructure, product that can scale, and so on and so forth. And if you add a third, that's probably someone who's really strong on the product side.
So you've been at this a long time, and I like to ask this question if people have been at this a while. So that's what you're looking for. Do you have a methodology for knowing whether you found it, or is it all in your gut?
I mean, the methodology would be, 'Hey, we just check what they've done.' We talk to references, we try to get a view from people in our network who know them. So very often we're going to fish in very dense ponds, like people who work at Meta or people who work at Stripe, or really strong schools, right? But sometimes, and you know recently we backed the first engineer here at Instagram. Shen is incredible. So based on their pedigree and resume, we're going to sort of know that they probably have something interesting. But at the end of the day, we spend roughly between a week and two weeks to run our process. And it's kind of gut feel confirmed by tools and references and talking to people. But at the end of the day, when you meet someone and you know that they have it, and you look at the team they've assembled and you're super impressed. We had the case recently with a company called Coups, K-O-B-Z, which is additive manufacturing for the shoe industry, and the founder is incredible. He spent two years figuring out the process that the company was going to use to print shoes at scale, and he assembled a team of execs that joined him at pre-seed when he had almost raised no money because his vision is so great and he is so great that he convinced those people to leave their jobs or their retirement to actually join him. And when I saw that, I was like, 'Holy [ __ ], this is one of the strongest exec teams I've ever seen in a pre-stage company.' And so talking to him, spending time with them, I knew.
And every bit of information that I gathered through my reference calls afterwards were just confirming that gut feel that I had.
