He had no prior venture experience. He wasn't technical. And he wanted to invest across every sector and country. He didn’t check a single box.

Today, Felicis is investing out of its $900 million Fund 10, and was early in Shopify, Canva, Adyen, Notion, and Supabase. People called paying 700x revenue for Supabase “idiotic”. Then the company grew 1,000x.

He took me inside 20 years of building Felicis into $4 billion of AUM: why success is the most dangerous moment for an investor, how to keep your edge raising bigger funds, why a generalist approach is best for catching new technology waves, the 7 cold emails it took to meet Tobi at Shopify, the endowment LP who grilled him like the CIA before backing Fund 2, and the 10x rule he learned from Larry Page.

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Timestamps to jump in:

• 0:00 Why success is the downfall of a good investor

• 2:04 Catching waves from YouTube to AI, chips, and defense

• 4:47 Is AI a bubble? How to tell what's real

• 6:17 Silicon Graphics: the company with no second act

• 7:33 Why AI infrastructure spend isn't hype

• 12:00 7 emails, no reply: how he met Tobi at Shopify

• 15:30 On adding value: "Just ask the founder"

• 17:30 The founder pledge: vote with the founders

• 18:26 Fund 1 was $4M of his own money

• 21:01 Find LP's preconditioned to believe in you

• 22:07 Venture is a people business

• 23:05 Raising Fund 2: the endowment’s "CIA interview"

• 26:48 Why outsiders bet on outsiders

• 28:23 Turner's rejected podcast audition

• 30:46 LP pushback on Fund 2 and Fund 3

• 32:56 Why he hired a CFO at Fund 3

• 35:04 Feedback founders can't argue with

• 37:21 Founders forget the clock is ticking

• 40:43 Backing founders through the first bad quarter

• 42:34 Does a 250x bigger fund lose its edge?

• 45:53 a16z, OpenRouter, Cursor, and big fund returns

• 47:30 Why deep tech needs huge rounds

• 50:57 Trillion dollar markets, billion dollar contracts

• 53:36 Why SpaceX and Anduril alumni will crush it

• 56:34 From a $50k first exit to "off by three orders of magnitude"

• 58:17 The software mindset in hard tech

• 59:38 Google's duct-taped servers

• 1:00:56 Scanning every book in the world

• 1:02:37 Larry Page's 10x rule

• 1:04:54 Outsider founders: Shopify and Adyen

• 1:07:17 Why Silicon Valley VC's miss companies outside the Bay Area

• 1:08:16 Generalist vs. specialist: 55 unicorns, no subject experts

• 1:12:17 Category winners sit between sectors

• 1:14:59 Don't obsess over entry price

• 1:17:24 Paid 700x revenue for Supabase, it grew 1000x

• 1:18:33 Notion, Canva, and the one-button product

• 1:20:27 The "OpenAI is about to collapse" crowd

• 1:21:41 Inspiration from Benjamin Franklin

• 1:23:47 Funding the twinkle in a founder's eye

Find Aydin on X / Twitter and LinkedIn

Check out Felicis

👉 Stream on YouTube, Spotify, and Apple

Transcript

Find transcripts of all prior episodes here.

Turner Novak:

Aydin, welcome to the show.

Aydin Senkut:

Thanks, Turner. Thanks for having me here.

Turner Novak:

So you had something interesting that you said recently. It was something along the lines of, once you see success for the first time in venture, it's kind of like the downfall of a good investor. I forget exactly how you put this quote. You probably know the quote or know the thinking. So what happens there?

Aydin Senkut:

I studied venture a lot before I got started, and now I have 20 years behind me. What happens is venture is one of those markets where when success happens, it's an outlier success. It makes you think that whatever caused that success is going to be the thing that drives it forward.

Like, you know what? I had my dog in the office that way, and I was wearing a blue sweater. Whatever it is, or this market, whatever it was that led to that, it gives you the sense that it's almost like, wow, this is invincible. This is addictive. You get the rush of that hit.

But I feel the thing that makes venture interesting is the high variability in outliers. That means that in the venture market, the thing that made you successful and the thing that was hot and interesting is probably not gonna remain so. The only way you can go back and reset your priors is literally the day after you've succeeded to say, "You know what? Let's go all the way back to the basics, reset." All the expectations that caused where we are today might not be the ones that will take us and move us forward to tomorrow and beyond.

My favorite analogy on that is a surfing analogy, right? You have an amazing wave. You hit the beach. You go back out there not knowing if you're gonna catch another big wave, but that's what the very best venture capitalists do.

The concept of reinvention and repotting is that just because you had the thrill of that amazing wave, now roll back. Paddle back, get back on there, and find the next big wave.

Turner Novak:

So what does that kind of look like in practicality, like actually doing it in practice?

Aydin Senkut:

I mean, look, I think in very simple terms, the way that our firm runs, we're a generalist firm, and we have one obsession. We wanna catch all the major waves that are happening globally. The simplest way to succeed in venture is it's all about high growth, and high growth is all a function of outlier founders and outlier markets. And the way you find outlier markets is it always comes on the back of a wave, not even a normal wave, but a tsunami wave.

Now is a very interesting time because I started my career at Silicon Graphics and Google. I've seen client server. I've seen internet. I've seen mobile. I've seen all the other waves, consumer and all of that. But now with this AI wave, I would say the waves are starting to get more and more monstrous.

The growth is staggering. You have companies that can start with billion-dollar contracts. We are having trillion-dollar IPOs. The sheer scale of things and the sheer intensity and velocity of things have so drastically increased. So that's basically what makes venture interesting, but it was not what people expected.

I don't think anybody expected five years ago that this AI wave was gonna be so huge, or that it was even gonna hit, and it's been around for 20, 30 years.

Turner Novak:

Yeah, we kind of already had these AI hype cycles and...

Aydin Senkut:

Machine learning, you know, blew up and... But then it hit this thing and took off. Same thing, it's gonna happen in robotics. It happened in many other areas where, "Oh, AI can't even draw a picture," and next thing you know, it's photorealistic movies two, three years later.

I mean, it kind of happened in the chip industry. You look at the early chips, they're basically a little bit better than calculators, and now they're doing insane things. So there is this insane growth that is very difficult for human minds to get around, because it is exponential. It is not regular math.

So again, it's just one of those things. You somehow wanna find it, wanna catch it, and wanna ride that wave. And then what we do as a generalist firm is to basically find multiple of those waves.

And we're never religious, right? Twenty years ago, when I first started, I'm like, "Oh my God, YouTube just got acquired. The big thing is going to be video monetization." Then it was consumer. We found e-commerce. It was mostly platforms. Payment platform, credit platform. Next thing I know, we're looking into security and infra, and then AI, and today it's chips, defense.

But it is not by chance. All of these things are going through some major structural shifts where there was so much critical demand. Right now, billions if not tens of billions of dollars of product or services are wanted and needed, and that's a great way to build a company and scale it.

Turner Novak:

How do you identify when something's changing, and maybe when it's permanent and real? Because to this point, there are almost false starts with some of these things.

Aydin Senkut:

Yes.

Turner Novak:

I mean, I don't believe this, but there are a lot of people that say AI is a massive bubble and it's all fake revenue or something like that. Go back to NFTs. There are definitely times where our imaginations get captured by a new technology. So when you're coming across it, how do you decide this is worth allocating some capital and time and resources to?

Aydin Senkut:

When I started in business, what people thought would be my greatest Achilles heel turned out to be an interesting strength for me.

Turner Novak:

What's that?

Aydin Senkut:

That is, I'm not an engineer. I'm not a specialist. I'm not a doctor. I wasn't a VP. I didn't run thousands of people. So everybody thought, "Oh, you weren't a very senior leader. You're not technical. There's no way you're gonna understand the nuances of all these things."

But what they did not understand is that this is more about understanding people. Of course you need to understand markets as well. But I worked at Google, I worked at technology companies. I've been with an extreme outlier, and I've seen how different that was from a standard company where things have kind of gone wrong.

So I have seen the most extreme place where things have gone right. And I've also seen the most extreme place at Silicon Graphics, where things went horribly wrong, and all the time, layoffs after layoffs.

Turner Novak:

What was Silicon Graphics? I've heard of the company before, but I'm just...

Aydin Senkut:

So for you and other people who don't know about the company, it was one of the highest flying technology companies in '96. They were behind the special effects at Jurassic Park. Steven Spielberg was visiting it, Bill Clinton was visiting it. They had these incredible computers and servers that were used in all kinds of different areas. I mean, it was almost like a Google-like company of its era.

It was started by these incredible engineers. The guy who started it was, you know, with Marc Andreessen, started the internet browser Netscape. That was the founder of Silicon Graphics.

If you use any DVR today, that technology was developed at Silicon Graphics. A lot of critical things we use today were developed at the firm. But what they basically underestimated is they had these expensive servers and machines. It's kind of like we make Ferraris, and then one day the Subarus and Hondas are like, "Oh, we're just as fast." And then that was the end of the company, and they didn't have a second act.

Turner Novak:

Okay. So it was a super expensive product, and they were not able to compete when a lower cost...

Aydin Senkut:

The Windows machines came up too fast. Because it's kind of like open source, right? You have millions of people working to make that efficient and better, and Silicon Graphics is a proprietary system. It just couldn't keep up.

Turner Novak:

You could say there are some analogies to today, potentially.

Aydin Senkut:

Potentially. There are some. AI now will probably go a little bit more to open source models. People will be more cost-conscious. And look, history does repeat itself and rhyme.

But going back to what we originally started talking about, the generalist approach is really important because of the way that we make investments. We need to understand what's gonna make a market important at a very fundamental level. Like, hey, if we cure cancer, it's gonna save billions of lives.

With AI infrastructure, whether you think the revenue is real or not, everybody's trying it. You can see people actually use the product, so the infrastructure is really important. There is a trillion dollar spend. That is not bullshit.

You can see it in public reports from Google, Microsoft, Meta, all these public companies. You can see NVIDIA's earnings reports. People are buying chips. Oh my God, now the next big bottleneck is memory chips. The next big bottleneck is data centers and energy. We don't have enough energy.

China has 10 to 100 times the energy we have. It's actually also a national security risk.

So the way that I like to combine things is, first of all, is this something that every person in the world or every business in the world is interested in or can use? And then, is there urgency to it? So for instance, payments. When we invested in Adyen, if you're a business, the thing that makes you a business is processing payments.

Turner Novak:

It's the revenue, like what's happening with money.

Aydin Senkut:

You know, like e-commerce, like Shopify. As long as humans have existed, there has been trade. I don't think you need to be an expert to understand that if you are an amazing trading platform or commerce platform, if you do really well, you're gonna succeed.

So none of these things were rocket science. I didn't need to be like, "I worked at eBay and I was a commerce expert." All I was looking for, from what I learned at Google, is what makes each founding team in each company unique and an outlier. Where I'm like, "No other company or founder has ever paid attention to this, or has ever excelled in this one area."

Or they have this one or two secrets that nobody else seems to be realizing, even though there might be other players. That's basically what we do. And then we build a book of these kinds of companies and all the big waves that we think are gonna be important, and so far it has served us very well.

Turner Novak:

So I think maybe Shopify's an interesting one, because I know there's this famous story of Tobi biking up Sand Hill Road and pitching everyone. And it's a snowboard selling website or something that he just kind of made. And it's like, "Ah, get out of here. Nobody's gonna buy stuff online." So what was it like when you met Tobi and the team?

Aydin Senkut:

No, it's a real story, because I showed up... Crazy story. So I'm married to a Canadian, and I'm trying to impress my wife. In addition to, also, it's an incredible company.

Turner Novak:

Were you guys married yet, or dating, or...

Aydin Senkut:

We were married.

Turner Novak:

Oh, you were already married. Okay.

Aydin Senkut:

So we were already married. I mean, she's not gonna get out of the marriage just because I can't win the company, but...

The funny thing is I keep sending email after email to Tobi, and there's just no response. So seven emails, no response. Then I find this Canadian woman, Debbie, who was partially also in media PR. I'm like, "Debbie, look, he hasn't responded to any other email. Will you also send another email?"

And she sends the email and Tobi responds. He probably was thinking, "Look, if I don't say yes, this guy is gonna keep sending me emails and intros from 20 different people." But he basically threw me a curveball and said, it's whatever, January, February in Ottawa, it's negative 30 degrees.

So I remember getting ready for the trip, and I'm like, "God, I don't have a coat thick enough to handle the weather." So I go buy this special coat, get on a plane, and show up. And every single thing Tobi told me was like the early days of Google, where everything you'd expect a search engine would do, that was not what Google was doing.

All the search engines add more buttons, and Google is like, "We have zero buttons." Search engines hire experienced people, and Google is like, "Nope, we hire the smartest people, and they figure it out." Every single dogma, they basically took it and turned it on its head.

I show up, and the first statement from Tobi's mouth was, "You are here because the Silicon Valley VC that we wanted," and I'm not gonna name the firm, "basically told us that we cannot build this firm in Ottawa. We have to relocate to Menlo Park. I am not going to relocate to Menlo Park." And so that was our opening.

So, you know, "If you convince me, and you're a good person, and you believe in our company, you might have room in the syndicate." It took six months and a lot of work, but we were in.

Turner Novak:

Took you six months? That's a long sell.

Aydin Senkut:

I mean, six months including all the emails.

Turner Novak:

Oh, got it.

Aydin Senkut:

I mean, it wasn't six months from when I showed up. But one of the things that was really cool is we also have this saying of engineering serendipity. So I was also thinking, "God, I'm not an e-commerce expert. How can I help?" But this is the kind of founder hustle. Sometimes you're in the situation where you're like, "Wow, I've never experienced this before. I need to figure out a solution."

So at the time, Shopify was just as good of a platform, they just didn't really have a big marquee customer to keep increasing the awareness. And we had also just invested in Angry Birds maker Rovio.

And Rovio badly needed an e-commerce site right before the holidays. So I connected the two of them, and Rovio was so happy because they were like, "This is going to be a huge merchandise business." I don't know if you remember, but people were loving those...

Turner Novak:

Yeah. There was a movie and stuff too. Angry Birds.

Aydin Senkut:

Yeah, there was a movie. So even before the movie, the merchandise was huge. And Shopify loved it because they got this marquee customer. It wasn't like, oh, this is a huge chunk of the revenue share, but it was very public, and it really boosted their awareness.

And so they loved the fact that we were thinking like we're an early employee of the company. How can I move the needle for this founder and company? You help them hire somebody important, you help get a really impressive customer. By the way, when the connection was made, both companies were like, "This is amazing," but neither company knew about each other.

There are so many situations in the world where a good match exists, but that doesn't mean that the people are aware that it should be made. And so that's why we like this concept of engineering serendipity a lot.

Turner Novak:

So then how do you figure out how to be valuable in that sense, in a way that is helpful for the founder? Because I feel like a lot of founders will say that with VCs, if you just do nothing, you're in the top 10%.

And so there's a lot of this trying to help too much. So how do you know that you're actually being helpful and doing something that the founders actually want you to do, versus just getting too involved?

Aydin Senkut:

Let me give you this crazy, complicated answer.

Turner Novak:

Okay.

Aydin Senkut:

I just ask the founder. "What do you need? What is the most important thing to you?"

Turner Novak:

Okay.

Aydin Senkut:

So first of all, it is something that does not scale. Everybody is so smart that they're thinking, "Oh, I can't afford to ask every founder. I'm gonna do this one thing, and I'm gonna offer that one thing to every founding team in every company."

It's great because then it's very easy to talk about. We have this one thing. That's what we do. But the reality is we have hundreds of founders. We ask every single one of them, and the answer was never the same.

You're a founder. Every founder is going through different trials and tribulations. There is something they need. It's very scary to us because a priori, you don't know what they're gonna tell you. They might tell you, "I need X," and you're like, "We're out of luck. I don't really know what to do about that."

But guess what founders do? They're faced with curveballs all day long. They're in situations where they're like, "I don't know. I'm not experienced enough to handle it." But your job as a founder is to figure it out.

And so the benefit of being a founder and investor is I know what's going through their mind, because I had to do it for my own firm. I'm a startup in venture capital. Maybe now, on Fund 10, maybe a more mature startup, but with that attitude of no hustle is too little, we're here for you.

And to your point that even if you do nothing, you're in the top 10%, there is actually something that is not called out, and it's been a rallying cry for us. Most founders do not trust their investors.

So the other thing that we did was we have the founder pledge. We basically say, "We will never vote our shares against you." Even just doing that puts us in a small number of firms that are really special and unique, and I don't think anybody followed us.

So to this day, every founder that comes through the door says, "You know what I heard about Felicis? You guys vote your shares with the founders, and you give founders the founder pledge." That's 1% of our investment, from our management fees, that they can use for therapy or coaching or anything.

So with the horrible example of Travis with Uber, our job is to make founders unbreakable. In your most fragile state, people come after you, and we're like, "We wanna do the exact opposite. We wanna invest in your mental strength. We wanna make you more resilient so that you're unbreakable when you're facing stress." And actually, when they're most successful, they're facing the most stress.

Turner Novak:

So talking about determination and being unbreakable, Felicis Fund 1, it was all your money, which is a little bit unusual for a VC fund.

Aydin Senkut:

I mean, yes. There are other people that have done it, but yes.

Turner Novak:

Somewhat unusual. So it was a $4 million fund. So why was it only your own money?

Aydin Senkut:

Because nobody wanted to give me money. So I'm like, "I have a little bit of extra money. I can go take a chance." And look, I don't blame them, whether it was friends or whoever. I totally understand. Because if somebody said, "Hey, Turner, I'm raising a fund," you'd be like, "Well, why are you raising a fund? Why would I back you?"

You wanna look for some validation. Have you run a company? No. Are you an engineer? Are you technical? No. I mean, I was the first PM at Google and the first international sales manager, and people are like, "Have you done venture capital?" No.

And then my strategy was very unique. We always had this strategy, even from day one. We had zero logos. Like, you have no podcast and you're getting into podcasting. And my dream was, I'm getting into venture capital. I am not gonna copy other firms. I'm gonna do something drastically different.

That was to look for underestimated founders globally and invest across sectors. And I wanted to break every orthodoxy rule in venture capital that LPs have. As a result, almost every LP that I talked to said, "Get out of here. We don't back people like you." And I'm like, "I'll start with my own money."

And after four years, I had 12 exits and 100 investments. Two things really happened. One is, if you make 100 investments, it's like you wanna be a professional athlete. If you basically put in more hours and work than anybody else by a factor of 10, I think no matter what your natural talent is, you're gonna be pretty decent.

And the second thing is I got 12 exits. I mean, there were so many new funds getting started, and then LPs are asking, "Well, why are we backing you?" And people are like, "I have three markups," or whatever. It's paper markups, and that's not bad. It's great, but having a real exit...

And I wanted to raise $40 million, and I already had a $100 million company exit, and then multiple exits to various different firms. So in some ways, you can say the LPs looked at me. For the first LPs that backed me, it was like, this guy is ex-Google. There are hardly any ex-Google people. He already has 12 exits. He made a lot of investments. He seems to be a really good fit for his strategy.

It just happened to be other LPs that were like me, that were starting out, and they were backing this new breed of investors called super angels.

Turner Novak:

So do you think that's probably a crucial thing to consider when you're a fund manager, or maybe a founder too? Finding the investors who are already preconditioned to buy into the thesis that you're pitching, whether it's very legible to them down the fairway or whether it's a little unorthodox? You need to find people who are already preconditioned to believe.

Aydin Senkut:

Indeed. And preconditioned meaning that... Years after, I went back to my LP, and I'm like, "I'm really curious. Why did you even take a chance on us?" Then she said, "Number one, there were a lot of factual things to support the decision to back you."

But also, my very first LP said something really interesting: "Look, we're also just starting out. The very best funds are not giving us allocation. So we think the alpha is gonna be in this new class of managers that maybe the very upper echelon doesn't care about."

"But we think they're going to have a lot of alpha because they're underestimated. It's kind of like this overlooked part of the market, but we think this is going to be where the puck is going." And they did extremely well.

Turner Novak:

Yeah. In a way, it's almost like your strategy was, "I'm gonna go to these unproven founders in weird markets that other people don't really wanna give a chance to." Because there's something better next door that's more attractive, and what's more, the markup's gonna come quicker.

Aydin Senkut:

What I'll tell you, the most amazing thing is, everybody thinks this business is all about making money and crazy returns and all of that. Yes, it is, but people really underestimate how much of a people business it is.

And I think what has happened, at a fundamental level, is the founder saw somebody just like them. Somebody that has been underestimated and is trying to break through, trying to break the orthodoxy, prove the skeptics wrong.

So we always connected at a human level. There was a reason why, even though we were the smallest fund and we were not the most established, we somehow always managed to break into these incredible companies and founders. They looked at us and were like, "You just need to be in the syndicate."

Turner Novak:

And so, raising Fund 2, I know that one was also hard, too.

Aydin Senkut:

It was a bit hard.

Turner Novak:

Yes. But it was easier in the sense that somebody actually did say yes. You did have people that invested.

Aydin Senkut:

The first yes was the most meaningful. Then basically what happened is several people said yes, but we still had a big gap.

And then our law firm made an introduction to one of the largest LPs in the country, an endowment. I sit across from this man who runs the endowment. He was 6'6", very imposing, and I'm like, "I don't have a prayer in hell. There's just no way he's gonna say yes."

Turner Novak:

Yeah.

Aydin Senkut:

He basically grills me for a whole hour, asks me the toughest questions. At this point, it's like a CIA interview.

Turner Novak:

Do you remember what kind of questions he was asking you?

Aydin Senkut:

It was all kinds of detailed questions. Like if you applied to the CIA: "Turner, you know what? We don't care... We gotta freaking go all in on all your..." I mean, we gotta go very deep.

So he just went very deep. At the very end of the conversation, he said, "I'm gonna tell you a crazy story." I think our story really inspired him. He said, "My grandmother, from a small village in Virginia, was the first from the state to relocate to Turkey and become a teacher in the American school in Turkey in 1927."

So there was something in his mind that somehow connected to his grandmother's background, and he's like, "I'm gonna give this guy a chance." He still grilled me, by the way. He grilled the crap out of me. But there was something in his mind like, "There is something I see in this person."

I don't know if that really helped or not. But look, human beings are always looking for something, and he just gave us a chance.

And one thing that I'm really proud of is we rewarded that faith in us. The funds that they invested in performed really well. All our funds are performing well, but the early ones performed exceptionally well, with incredible liquidity. I was very happy. "Thank you for your faith, but we've done our job to show that you were right to back us."

Turner Novak:

Yeah. Are you Turkish?

Aydin Senkut:

I am Turkish-born.

Turner Novak:

Turkish-born, okay.

Aydin Senkut:

American now, but Turkish-born.

Turner Novak:

Okay. So there's a little bit of the preconditions to want to identify with and support someone who is related to you, or similar to you in a way.

Aydin Senkut:

I mean, look, I think every human being does that in some sense. And it doesn't just have to be where you're born or your religion or your sports team or college.

Look, human beings are tribal. That's how we survived through the ages. You want it to be more than arm's length. You want it to be more than a transaction. Do I get you as a human being? Do I understand what makes you tick?

And I think at some level, you realize that all my life I was always in a minority situation. I was always underestimated. And what makes people great, what makes outliers great, is everybody's like, "It's this one thing." Every outlier founder has it, but it's mostly the motivation.

They're unstoppable. They have amazing grit and resilience, and in some ways I can relate to it. Because when people tell you you suck and you're never gonna amount to anything, what are you gonna do? Either you take it and you're depressed for the rest of your life, or you're gonna show them, "No, actually, I can amount to something."

But that thing is like rocket fuel. You are so motivated to prove to people that you're not a loser and you don't suck. A lot of founders go through that, you know? And I think that's why I relate to them, and that's why they relate to us. They definitely see it in our absolute fabric.

It's definitely part of how we bond with them and how we relate to them.

Turner Novak:

Yeah. It's actually kind of funny. Before I started the podcast, there was this one really popular business podcast that had almost an open call. Like, "Hey, we're expanding the show. We want a couple of new hosts to come on and try some new formats."

And I was like, "Oh, that'd be kind of fun. I'm probably pretty good at hosting a podcast. I'll try out and do it." And basically, I didn't make the cut. I was like, "Oh, I guess maybe I wouldn't be that good at a podcast." And that kinda always hung on me.

Then I was like, "You know what? I actually think I'd be pretty good at this. I'm actually gonna do it." That's not the only reason, of course. But in the back of my mind, it's like, man, I kinda just wanna prove that I can, in a way.

Obviously, having a podcast is not the end goal in life. It's a means to an end, I guess.

Aydin Senkut:

Well, I think it's really cool. You get to meet a lot of very interesting people. You get to ask a lot of questions.

Turner Novak:

Yeah.

Aydin Senkut:

Because with all these stories, there is the obvious part of the story, and there is the non-obvious part of the story. So I think you're doing an incredible job.

Turner Novak:

Yeah, it's pretty interesting because I'm a really small, early-stage fund.

Aydin Senkut:

Mm-hmm.

Turner Novak:

There's probably not very many of them that get to go hang out with the CRO of a company that's about to go public...

Aydin Senkut:

Yes.

Turner Novak:

And just hang out for two hours. How'd you do it? You open source it, put it on the internet.

Or the co-founder of another company that's doing over $1 billion in revenue just hung out for two hours yesterday. I found out, I didn't even realize, he's also in charge of a lot of the acquisitions that they're doing.

And I'm like, "Oh, this is pretty good." Jeez, like you say, "I've got a portfolio here, just in case," you know? So you kind of build up. You're not necessarily thinking strategically, or maybe you are, like, "Okay, I can use this to build my network," right?

Aydin Senkut:

Yeah.

Turner Novak:

Same with us. We probably wouldn't have hung out for two hours if we weren't recording this.

Aydin Senkut:

But look, at the end of the day, I think another part you're touching is networks, human networks. This is a networking business.

Turner Novak:

Yeah.

Aydin Senkut:

And you need to find out where the great talent is. We were very lucky. I think one of the ways to find the talent before it's obvious is, again, you gotta figure out the ways and you gotta go after them. But kudos to you for following your path.

Turner Novak:

One thing that I feel like comes up a lot: you were a solo GP, especially with Fund 2 still, right?

Aydin Senkut:

At Fund 2, Sundeep ended up joining me. He was the first person that I hired, so I had...

Turner Novak:

Okay.

Aydin Senkut:

Another investor. But it was still a very small team. It was Sundeep and I, and then we had an office manager who wore many hats.

Turner Novak:

Okay. Did you get any big pushback as you were raising Fund 2, Fund 3? Was there a lot of non-belief from folks? What was the biggest, "Hey, this is the reason that we're not investing"?

Aydin Senkut:

Look, I think the early pushback was a lot less about solo GP or not solo GP. First of all, we were trying to do something unique where it was very awkward to have a generalist fund. It wasn't very common that they would back generalist funds.

And then we're like, "Hey, we can invest anywhere in the world." That was another big anathema, because the traditional Silicon Valley wisdom is you've gotta keep these founders on a leash. Invest close to you, because you can keep a close eye on what they're doing.

Turner Novak:

Yeah.

Aydin Senkut:

I'm like, "These people are pretty great. Why would you wanna keep a close eye?" It's not like they're in kindergarten. They do not need adult supervision. A lot of VCs thought that the founders need adult supervision.

Turner Novak:

Yeah.

Aydin Senkut:

Because look, we're talking about outlier people here, right? You do not wanna kibosh the thing that gives them this outlier potential and the energy.

So I think a lot of the pushback was people thought, generalist fund, no prior venture experience. In Fund 2, at least we could say 100 investments, 12 exits. But then they're like, "Okay, well, these exits are not significant enough. How is it gonna continue?"

And then every time, we're like, "Nope." It's the exact same strategy. The exits multiply drastically, the scale of the exits multiplies drastically. We literally said exactly what we were gonna do. Now we're in Fund 10, and it keeps getting bigger, keeps getting a lot more exits.

Now I think there is almost no disbelief on that. It's more other questions. Another thing people were wondering is, hey, how is this strategy gonna scale, and is it gonna be important enough? But we put more score on the board. We put score pretty early on the board, and we made some really interesting decisions.

On Fund 3, we hired a CFO. Most of my peers were like, "Why would I spend money on a CFO? I'll just get somebody who's outsourced." And I will never forget this. We had the Fitbit exit. There was a small window, we sold the stock, and the stock crashed. And then I had peers who didn't have a CFO who did not sell, and they rode the stock to the bottom.

So there were a lot of reasons that they were initially like, "We don't know if this is gonna work." But then we did one thing extremely well: we really leveraged our board. I literally came in front of them and said, "Our aspiration is not just to be a venture fund. I wanna be among the very best. I want you to absolutely battle test us with everything you know about what it will take to perform at that level."

The first year or two, the board meetings were brutal. They were like, "This is wrong. You're off. You don't know this."

Turner Novak:

What were some of the biggest things where they were like, "You don't get it"?

Aydin Senkut:

I'd ask stupid questions like, "Why do you need reserves?" I made these statements, and then they put me in my place, and I'm like, "Yes." Later on, I understood why. They wanna partially defray their fees with recycling. It wasn't the reserves, it was the recycling.

But anyway, look, they had really good questions. They thought most VC managers are pretty stodgy and pretty stoic, and nothing is gonna change. A year and a half later, we had a board meeting, and when the meeting started, I'm like, "What do you think?"

And there was no question. It was incredible. They thought it was gonna take us 10, 15 years to do 10% of what they asked.

Turner Novak:

Mm.

Aydin Senkut:

And in a year and a half, we just ran through the whole list and then everything else they had. Now I'm like, "Bring it on. What else you got?" It was really great, because it's kind of like having a very tough coach. It sucks when you're in the gym and when you're practicing.

Turner Novak:

Mm-hmm.

Aydin Senkut:

But that's what excellence requires. You want people to question everything that you're doing and hold you to the highest standards.

And later on, when we have really tough times with the founders that we work with, it's something that I do. One of the things you asked earlier is, what do you really do for your founders? Sometimes what you need to do is tell them the truth, and the truth is very difficult to hear.

But the one thing that we do is we always put data behind it. I never say, "Turner, as a founder, look, this is a bad situation." I say, "You know what? Let me break it to you. We have hundreds of companies. Here's the ranking of everything you do across the portfolio."

Because we're generalists and we have a broad book, we never tell somebody you're good or bad. We just tell them, "Here's the market, and here's where you are. What do you think?" You can process the data, and it's very hard to argue with that.

Turner Novak:

So what might I be seeing if I'm a founder and I'm looking at this from you? What am I looking at exactly when you're showing the cross-portfolio, cross-market data?

Aydin Senkut:

Yeah, very critical things. For instance, "I'm doing really great. My growth is awesome." Well, your growth is 40th percentile.

"I'm doing very well. We're hiring a lot of people." Your burn is in the bottom quartile. Both are factually true. One is kind of the impression of someone, and then I'm putting hard data behind it.

And this is kind of my obsession with F1. One of the reasons why F1 is really cool is everything is micro measured. Every single detail is measured. So when you have data for every tiniest thing in the tiniest possible increments, it's almost impossible not to manage it really well.

There's a lot of complexity. But my dream is to come in front of founders and not just say, "You're good, you're bad." Just put data. Data is something that's hard to argue with.

Turner Novak:

Yeah. So then something like that might be, "We're hiring so many people, things are going great." We're in the bottom quartile on burn, but also my pipeline looks really good, and the rate of velocity of deals closing is in the top decile.

So then you could say, "Okay, maybe it's okay that the burn rate is a little higher, 'cause it looks like it's ramping even faster than the others."

Aydin Senkut:

Absolutely. Look, every founder is getting some great things right. But I think there is a more subtle point here. Every company is going through these things where something is kind of wavering. Some things are not great.

Turner Novak:

Mm.

Aydin Senkut:

There is one thing that nobody talks about. It is not whether something is good or whether something is bad. People forget that there is a clock ticking. So the most important thing is for you to be aware of it before the clock ticks and you're in the 11th hour.

If I just said something is good or bad, people get stuck on, "You're telling me something is good or something is bad."

Turner Novak:

Yeah.

Aydin Senkut:

But what you really should be asking is, "How much time do I have?" So we also keep a very strong eye on what the cash runway of the company is. How much time do we have to make decisions?

So it's not just that you have to make hard decisions. It's how much time you have to make that decision. The earlier you know about something, the more time you have to make a decision, especially if it's a hard decision that's going to change the trajectory of the company.

Turner Novak:

Any times that's played out in a good way?

Aydin Senkut:

It always plays out in a good way. I don't think there has been a single instance where there's good feedback or constructive feedback and it didn't. Now, the founder might not appreciate it as much in the moment. But I don't think there has been a single founder who didn't say at the end, "You know what? That was tough love," or, "That was not easy to hear."

But then stuff actually materializes. Because it's data, and because we can see the market, they can see it too. Later on, something happens, and they're like, "Yep, that's exactly what happened," or, "You were right, the data was correct."

So that to me is sometimes really, really important. And not sometimes. It's one of the most important things. Because I was underestimated, one of the things that drives me is I want the founders to see that we really care. More than writing a check to them, we really wanna help them change the trajectory of the company.

Whether it's doing the things that they ask us, hopefully we do a good job consistently. We really try. We work very hard. We're building a team to help us do that even more. But it's also saying the right things at the right time.

Turner Novak:

Mm-hmm.

Aydin Senkut:

So that it's not too late before you have to make a decision. Because there are many instances where you're on a board, you're a lone voice, and other people are saying, "Everything is good."

And then nine months pass by and it's like, oops, everything is not good. And not just that, we have three months left. What are you gonna do about it? So there are times when you know something and you have time to react. And there are other times when you know about it, but you know about it too late.

People did not tell you, and you did not realize it. Now you do not have time to actually handle it. So that, to me, is why it's super important. And the only way you can do that is if you have trust.

If you didn't trust me and I told you something hard, you would say, "Get out of here. I don't even know you." But if we somehow earn your trust, we did something that moves the needle for you, we proved that we can really help you, you're like, "Aydin, I might not enjoy what you're about to tell me, but I'm willing to listen to you."

Turner Novak:

Yeah, at least give me that.

Aydin Senkut:

"I don't promise that I will act on it..."

Turner Novak:

Yeah.

Aydin Senkut:

"But I'm willing to listen to you."

Turner Novak:

Well, I feel like that seems to be a common trait of the best founders. They know how to take different feedback from different people, and know when to act on which feedback.

Aydin Senkut:

Yeah.

Turner Novak:

Which sounds super easy when we just say it like that. But in certain circumstances, like with the example of burn rate and pipeline ramping, some people might say, "You need to cut the burn rate right now." Some people might say, "You've gotta go with your intuition. If these deals are closing, it's okay."

Aydin Senkut:

Yeah. I do need to add something, though. There is another part of this which I think is even more rare. Sometimes founders wanna do crazy things, and the investors are like, "That's just batshit crazy."

And sometimes what they really want is one of the investors to say, "You know what? That is batshit crazy, but you should absolutely do it. I trust you, and you will do great. And I will prove it, I will put even more money in the company."

There have been a number of situations, like n8n or Semgrep, where the company's doing really well and inevitably there is a little hiccup. As soon as the first hiccup happens, people start getting agitated. "Oh my God, we missed this quarterly goal and this one stat."

And we do something very unusual. We're like, "You know what? Yes, you had a bad quarter. Maybe you had two bad quarters. But the main trajectory of the company is going to a really great place. The reason why the numbers were off is because we have a very small n."

Every startup, when they're starting, there are not enough deals, there are not enough people.

Turner Novak:

Yeah.

Aydin Senkut:

One thing is slightly off, and it's going to derail the results.

Turner Novak:

Yeah, you have a deal that closes in July instead of June.

Aydin Senkut:

Yeah. If you look at it, you're like, wow. But that's the point where the founder is really vulnerable. And we do something different. We're like, "We'll give you more money. We'll give you support. We do believe in you."

And the founder is like, "Wow, this investor is not just telling me things. They're also willing to back it up. They wanna put even more money in our company at a moment where things seemingly were not that great."

Turner Novak:

Yeah.

Aydin Senkut:

And that part, I think, is very unique to Felicis. Look, if we exist 20 more years from now, that means we made a lot of good decisions. But I would like to say one of the key reasons is we've also done right by the founders. I don't think without that we have even a 1% chance of persisting through the next two to three decades.

Turner Novak:

So one thing that comes up a lot: you started with a $4 million fund. I think the latest fund is $900 million?

Aydin Senkut:

Just about, yes. A little over.

Turner Novak:

Okay. So a lot of people will argue... I mean, the scale of that is 25x more. Am I doing the math right? No.

Aydin Senkut:

About, roughly. I mean, if it was a billion, it would be 25... Yeah. Hundred, what? 250.

Turner Novak:

250 times more. So do you have the same edge that you had with a smaller fund? Do you lose anything as you scale up the size of it? 'Cause that's a common general thing in venture. They're like, "Oh, you're just getting fat and old," and you lose your edge.

Aydin Senkut:

It is... Math is math. And on the topic of fat and old...

Turner Novak:

Yeah, I'm not saying you're fat.

Aydin Senkut:

I'm not gonna say I'm a young person. But I was meeting with another investor today who was an ATP Top 200 player. We were talking about exercise.

Turner Novak:

Is that tennis?

Aydin Senkut:

In tennis. And I'm a tennis fan.

Turner Novak:

Oh, nice.

Aydin Senkut:

I work out six days out of seven a week. I measure my sleep. I train like an F1 or NFL athlete. I am very serious about it, 'cause this business is very stressful.

What people don't realize is if you're not in the best shape, you're not gonna be able to make good mental decisions. When you're dealing with a lot of stress, one of the things that gives you resilience is the shape that you're in. So I'm absolutely freaking committed in every possible way to be a high performer.

Turner Novak:

Yeah.

Aydin Senkut:

But look, math is math. But I think what is overlooked, first of all, is the people that make it really special. The other thing that I will say is, first of all, we own like 5 to 10 times more of the companies.

The exits have grown in scale 10 to 100x. And we are also writing bigger checks to companies, and it's because of our fund size that we've been able to get into some companies. So when you run the math that way, there's been about, I would say, 2 to 3x inflation just in terms of venture valuations.

If you say, "Hey, a $4 million fund from 20 years ago," that would be at least $12 to $16 million today. It's not the official inflation figure. If you look, you take your 250,

Turner Novak:

You cut it down to like...

Aydin Senkut:

100x. A billion is already like 250 from that. A billion today is more like 250 was 20 years ago.

Turner Novak:

Yeah.

Aydin Senkut:

The exits have been 10 to 20x larger, so now we're down at like 10 to 20, and then we own like 5x of each company. So actually when you do the math that way, it sounds like, oh no, with this large fund, you're absolutely gonna get crushed, and it's exactly the opposite. Actually, the fund size is what allowed us to continue with our ambition and scale and even get into some companies and rounds, and that's always been the dream.

Every time our fund size increased, we tried to expand the strategy. We used to only do seed and a little bit of A, maybe, if we're lucky. Then it was seed and A, and we still do majority seed and A. But there are other situations, good examples like Supabase and Runway, where we did what looked like a growth round, but it really was a seed or early A.

They had hardly any traction. It was a crazy valuation, which is another hot topic, I know, and people thought we were batshit crazy for being in those rounds. And then those companies went literally from like $100,000 to hundreds of millions of revenue in a matter of years.

Turner Novak:

And I think even as we speak, there's... So a16z is the epitome of high fund sizes, large fund sizes, and I think within the past day or two they've had multiple companies in the portfolio that have been acquired or exited for high 11-figure amounts. 10, nine, 10. I guess, yeah, nine and 10 figure amounts. So 12 and 13 figure.

OpenRouter, almost $10 billion it seems like. Seven, something like that. You've got Cursor getting acquired by SpaceX. And I'm pretty sure they own a good chunk of both of those businesses.

Aydin Senkut:

But you check.

Turner Novak:

Yes. So then you have this class that's been saying, "Oh, you can't get returns with that big of a fund size." And it's like, well, it looks like you can actually.

Aydin Senkut:

Not only that, but look, the world has changed. 20 years ago when I started, it was the software wave, so actually you didn't need a lot of money and you could start a company, and every week some company was getting bought out. So we had so many $100 million, couple hundred million exits, scaling to billion dollars.

Now you have a different situation where you have exits that are much, much larger.

Turner Novak:

Yeah.

Aydin Senkut:

But it's also deep tech, hard tech. Like we talk about AI, infra, defense, a lot of these sectors, and this is not a capital light business. These sectors are not capital light. You do need a lot of capital, which means that you need a minimum check to enter.

And so without this fund size, honestly, there are a bunch of companies, I would say maybe a quarter to nearly half of our book, where I don't know if we would've been able to get into those companies.

Turner Novak:

So how does that happen? Why are the round sizes bigger and the capital required more? What's going on that's different? Are they opening a factory? Are they manufacturing things?

Aydin Senkut:

It could be a factory, it could be manufacturing. I mean, you are seeing NVIDIA's earnings reports. You have to train models, you have to get GPUs, you have to hire people, which is very expensive. Even outside of Silicon Valley today, it's very expensive.

You need to buy a lot of data. Everything in deep tech is very expensive, and you need to put a lot of money up front to get there. But then you get rewarded because it's very difficult, and very few companies are in there. I mean, we have companies like Periodic Labs, and they're doing something insanely difficult.

They basically said, "Look, a lot of AI is focused on experiments and data, but there is one area where we do not have data and it has never been captured, which is physical experiments." In science, a lot of it was simulation, especially in key things like, hey, we wanna have a new material for transistors, or we wanna have a new superconducting material.

These are very important physics problems, and there are other chemistry problems. It's a very difficult thing to say, "Hey, you know what? We have a new synthetic material," because you need to test it in the real world, in the lab. And so this company literally spent, God, tens of millions, and they might spend hundreds of millions, to basically build a new kind of rapid scaling.

They wanna be able to go from dozens of experiments to thousands of experiments a day. And they are like, "Listen, nobody in the world is doing this."

Turner Novak:

Mm.

Aydin Senkut:

Everything was simulation. So on the one hand you're like, "This is batshit crazy," because they're gonna spend all this money to build an environment where, at the moment, you have a very good understanding that it could be important, but there is no immediate commercial thing. The commercial thing only comes if you have a discovery.

So you have to suspend disbelief and say, "I'm gonna do thousands of experiments. I will know the synthetic material will work, so I will be the first to market with the next superconducting material or the next synthetic metal that can be part of the new generation of transistors." But the promise of those is so big that the company will keep raising the money. I think they will have the breakthroughs, and then it'll be very important money.

But they have to put a lot of money up front to be able to do that, and that becomes the moat of the company. Then they are like, "We are the only company in the world that has that infrastructure that can do those experiments."

Turner Novak:

Yeah, 'cause it's kind of this classic thing where it takes a ton of investment to get to that scale. And it's not like software where the margins are like 99% on a new dollar of revenue. There are some physical things, so the math and the physics of trying to get up there and compete is pretty difficult.

Aydin Senkut:

Pretty difficult. Yeah. And it's a fantastic story. There was a machine there that's made in Austria, and I think there are like 20 of them in the world.

Turner Novak:

What is the machine?

Aydin Senkut:

It's a very weird machine. It basically consists of X-ray spectrometry. When you have a new invention, it's very difficult to see on an atomic level what the composition is. This machine combines two very difficult technologies and can see at a molecular level whether you have certain things present in what you think has come out from the experiment that you ran.

Turner Novak:

Interesting. One thing that you said earlier that I think is worth touching on is that the size of the outcomes that we're seeing is a lot bigger. A lot of people are saying this also. In the past, say in 2021, it was a very common argument everyone had.

Like, oh, the outcomes are way bigger, so let's also go bigger. Are we just doing the same thing again with the valuations of these companies getting bigger? We're saying $100 billion is the new $10 billion or $1 billion.

Aydin Senkut:

I think one thing that's a little bit different is some people make arguments without the data to back it up.

Turner Novak:

Mm.

Aydin Senkut:

We have a different attitude. We look at the data. We might be generalists, but we know how to do our homework.

Turner Novak:

Know how to read.

Aydin Senkut:

So this is why I call it trillion dollar markets with billion dollar contracts. The companies we have now have either a billion dollar contract or a multi-billion dollar contract, and you can see if that works, it's going to scale to $10 billion.

And I'm like, take that contract. If they ship it, we know it's going to be like $3 billion in revenues, and you put a multiple of five to 10 on it, it's not difficult at all. We're coming into this company at like a $1 billion or $3 billion valuation. I'm like, "I will take that bet any day." Right?

It's not gonna be like we're going from $5 million to, if we're lucky, 20, and 20 will become 50, and 50 will become... We're way past that. Now even Anthropic had a billion dollar contract with, I think, AWS first, and then Databricks had a billion dollar contract with Microsoft.

Now, the company is much broader and bigger than that. They're not necessarily our companies, but we're seeing other companies, whether it's in defense or chips or other areas. I mean, we are in an era where Google is spending $100 billion plus a year on data centers, and there are five other companies like Google. If you had asked me 10 years ago if Google was gonna be spending $100 billion a year on CapEx on anything...

Turner Novak:

Really.

Aydin Senkut:

I'd be like, you are not just batshit crazy, you should be on Mars. There's just no way that that's gonna happen. So I think when we say something, it is actually rooted in data. It's not like, oh, we're just guessing that numbers seem to be going up, so we will be a little bit bigger.

No, it's real data. It's real growth. I've been doing this for 20 years, and if you add the other 10 years that I was an operator, I've never seen growth figures like this. I've never seen initial contract sizes like this. I've never seen companies that can recruit like 50 people in just three months.

Turner Novak:

Yeah.

Aydin Senkut:

And you know why it's happening also? Because we have so many more startups. This is one of my favorite data points that nobody captured. When I first left Google and Facebook was about to go public, there was this Google/Facebook, I can't call it Meta, dynamic.

Turner Novak:

Yeah.

Aydin Senkut:

And I said, "The reason why Facebook succeeded is 'cause they hired 1,500 people from Google." They were pre-trained and ready, waiting to be deployed at a new company.

Turner Novak:

Mm.

Aydin Senkut:

If Google did not first hire and train those people, I don't know if Facebook would have ever become this big.

Turner Novak:

Really?

Aydin Senkut:

And you know what's happening in the press now? Because of Anduril and because of SpaceX, there are hundreds of super qualified, super ambitious engineers that once thought they had crazy dreams, and now they have seen that crazy dreams can become real. So nothing is gonna stop them.

Guess what's gonna happen next? Between SpaceX, Anduril, and Palantir, you're gonna have some insane hard tech companies, and they're absolutely gonna crush it. I can absolutely see that they're gonna crush it.

Turner Novak:

So why are they gonna crush it? What's kinda changed?

Aydin Senkut:

Because you have very brilliant people that are approaching classical areas with a completely different lens, and in the past it's never been done. So let's say you're one of those engineers, and it's never been done. Maybe you would second-guess yourself and say, "You know what? I'm probably crazy. It's not gonna work."

But now that we have had rockets made at like a hundredth of the cost of NASA, and the rockets are self-landing, do you think anybody's now ever gonna doubt that something batshit crazy can be done?

Turner Novak:

Mm.

Aydin Senkut:

That's human ingenuity at its core, right? There have been so many times that humans are like, "It can never be done." And lo and behold, an outsider comes and says, "I think it can be done this way." And next thing you know, it is done.

And so I feel like for the most part, technology was focused on software only. But now it is touching everything else. So this is the new era where you can truly suspend disbelief. There actually are people now, like when we're talking to somebody about, "Oh, this new nuclear technology," and I'm like, "Who is this person?" Oh, it was one of the core people at SpaceX.

We backed one of the SpaceX founders, Scott. He wrote every piece of software for the Falcon rockets. You think the guy that figured out how to build these rockets from scratch, did the simulation, did the testing, launched them, made them land, is not gonna be able to figure out the next thing? Of course he will.

You might say I'm batshit crazy to think it's inevitable, but I've seen the fire and I've seen how different he is. And it reminds me very much of Larry and Sergey, where for 10 years traditional people told us we're batshit crazy, and this stupid little search engine is never gonna monetize, and we're never gonna create a real business that can make real cash.

And $5 trillion of valuation later, I wish I had some of those comments recorded. It would be really funny to put it together.

Turner Novak:

Yeah.

Aydin Senkut:

We are by a factor of 1,000x beyond what people said we could do.

Turner Novak:

Isn't there a famous line where people were asking him, "Could you ever get to $100 million in revenue?" And he's like, "I wanna get to billions in revenue." And now they're closing in on $200 billion of revenue a year.

Aydin Senkut:

Yeah. I mean, this is the funny thing. When I was at Google, in the early days, I'm like, "God, please make this a billion-dollar company." I was off by three orders of magnitude.

Turner Novak:

Yeah.

Aydin Senkut:

And same thing as a VC. I had my first exit, and it was literally a $50,000 convertible that returned $25,000. I'm like, "Can I make a million dollars one day?" And then it's 10 million, then it's 100 million, then it's a billion, like an IPO. Next thing you know, we might have a $100 billion IPO, and there is a $2 trillion IPO now with SpaceX.

I think one of the things that I'm seeing, especially in things like robotics, is I don't think people realize how vast the market is. A lot of these markets, I think, are misunderstood because we never had somebody build a product that truly captured the market.

Turner Novak:

Hm.

Aydin Senkut:

We have 190 million people in labor. And by the way, just because you have robots doesn't mean that people are unemployed and are not gonna do other stuff, right? I mean, we have teller machines. It doesn't mean that we don't still have people at banks that talk to customers.

So I just think that this is a really strong argument. A lot of jobs will be taken by technology and robots, but then there will be other really interesting, even more intellectually rewarding jobs, and even more creative and satisfying jobs for people.

I don't think it's a zero-sum game. I don't think it's one of those things where for technology to scale from here and do these immense things, humanity has to lose. I don't think that is true.

Turner Novak:

In terms of some of these outside of software categories where we're seeing startups made, I've heard that in the past when we tried this, 20 years ago, 30 years ago, it was someone in a certain industry, whether it's energy or healthcare. It's someone who is from that industry and doesn't move at startup speed, per se.

And so you hit a wall and can't get around it. Versus today, it's the guy who did it at SpaceX, and he's done it before. And he's got the same kind of mentality. So that's why it's kind of worked today, because we've adapted the software mentality to the real world now.

Aydin Senkut:

I think it's the software mentality, but it's also outlier mentality. Elon Musk is an outlier for a reason. Jeff Bezos is an outlier for a reason. Larry Page, one of the things is they freaking don't do anything by convention. Every single thing that was done at Google had nothing to do with the way those things were ever done before.

Every single thing, they were like, "Nope, we don't like it. It's not good enough. It's not fast enough." This 10x rule, most of it is like, "Nope, we're gonna do it completely differently." It was crazy, but it really worked.

Turner Novak:

So anything interesting, like the most memorable unconventional way of doing something?

Aydin Senkut:

I mean, there was more basic stuff, like Larry basically designed these crazy servers at 10:00 PM at night. We thought, "Oh, we have all this money. Why don't we just go buy servers?" He's like, "Why would I buy servers? It's a huge waste of money. They're inefficient, they're very expensive, they're not designed to do what I want.

I'm gonna go buy these cheap Intel CPUs, and we're gonna buy a crap ton of disk. We're gonna literally duct tape it. And this guy, Sanjay, who just started a new company with Jeff Dean, he's gonna write..." He basically wrote the precursor of AWS, like the S3. Literally 10, 15 years before Amazon did that, he did an inside version at Google.

And he's like, "Sanjay is gonna run software." We basically used such cheap chips and disks that they failed all the time, and it pissed people off. They were like, "It's okay, we'll just write software." There was literally somebody whose job was to write babysitter software that knew when things were failing, and then somebody's like, "Run to the data center, 10 more disks need to be replaced."

Literally, people would go with drives and they would plug the drives in. That's early Google days.

Turner Novak:

Yeah.

Aydin Senkut:

Nobody rational would ever do that, but then Google fucking scaled way faster and way more economically than people imagined.

Turner Novak:

Have you figured out when is a good time to do something like that? Was there a reason that they built the servers differently?

Aydin Senkut:

Well, that was the more obvious thing. Let me give you the more batshit crazy example. There was a moment one day where Larry and Sergey are like, "Look, I think one of the biggest threats to us is all the knowledge captured in books. What if somebody captures it? Because we are only working with knowledge that's already on the internet, on the internet pages. There's a lot of knowledge that's not on the internet."

And there were skunkworks projects for a whole year where they took a bunch of people, like 10 to 20, and said, "Okay, you're gonna come up with a scanner that is insane. It has to scan like 10,000 books a day," or something like that. I forget. It's some crazy stat.

Turner Novak:

Okay.

Aydin Senkut:

And they literally spent a whole year on it. I don't know any other company where, first of all, rational people would go into a room, let alone say, "Everything that you're asking me is virtually impossible. No fucking way it's gonna work," and then they made it work.

Turner Novak:

Mm.

Aydin Senkut:

And then it kept happening over and over and over again. One day, they come to Google, and they're like, "We bought a satellite data company." Why do we need a satellite data company? It became Google Maps. One day we came to work, and 96% of the world uses Search, 98% use email. And one year later, like six months later, Gmail was born.

So it was beautiful. There were these moments of such extreme clarity where everybody realized... And by the way, not everybody agreed, but everybody realized it's important. Even though we didn't figure out monetization, or that it could be useful, until 10 years later, they were not afraid to take these huge bold bets.

Turner Novak:

Hm. And you mentioned something about 10x. I don't know if that's specifically what you're talking about. Do you have this 10x filter or framework that you kinda use? So what is that?

Aydin Senkut:

It's very simple. It was Larry's mental framework. I had many times where he asked me something really difficult, and I'm like, "Shit, I really don't know how I'm gonna do it. It's very tough."

But he basically told me, "Look, I have this 10x mentality that everything that you do has to be at least..." By the way, at least. 10x is not the maximum, it is the minimum. "10x faster, 10x cheaper, 10x better, ideally all three." Three orders of magnitude.

Turner Novak:

Mm.

Aydin Senkut:

And he said, "First of all, if you do that, whatever you put out is going to matter." Right? If I say, "That Apple Watch, I can give you for one-tenth the cost," you're like, "Fuck yeah. Let's get the watch." Of course I would wanna pay one-tenth the price. Or, can I get you a watch that has 10 times the battery life? You're like, "God, please. I've been waiting for this."

Turner Novak:

Oh, I actually have a notification, 1% battery life right now.

Aydin Senkut:

There you go. There you go.

Turner Novak:

Good timing.

Aydin Senkut:

So first of all, it is definitely gonna fucking succeed. But the second thing is, the only way you can do that is you need to be batshit crazy and think of a very creative way, because if that was easy to do, it would've already been done.

So the only way to push beyond convention and force people into outlier thinking is to ask them something that is so difficult that they have to completely unwind and un-build their mental framework, and then recreate it again to make that happen.

Turner Novak:

And it's almost like you can't have the framework in some... Like, you have to start from...

Aydin Senkut:

No, you have to start from absolute scratch. There's no way to make it work otherwise. Now, it was scary as hell. And then he said, "Look, the reason why I'm doing it is because if I told you, 'Hey, Aydin, 20% would be great,' you're gonna use all standard methods."

Turner Novak:

Mm.

Aydin Senkut:

If you basically said, "I know how to make it 10% or 20% better," it's 'cause you're doing something that is not game-changing enough, where the standard method is gonna scale. But if I'm asking you for 10x, the standard method is not gonna scale.

Turner Novak:

Yeah, 'cause you might just make this 20% smaller, and it just costs 20% less, and there you go. Solved it.

Aydin Senkut:

Or whatever, you give a little bit more battery space, and because you have battery, it can last, like, 20... But then you have this monstrosity on your wrist, right?

Turner Novak:

Yeah, it overheats more or something like that.

Aydin Senkut:

Yeah, 'cause you made the battery bigger.

Turner Novak:

Yeah. And it feels like maybe that ties back to when Felicis kind of had a lot of success investing outside of the bubble, founders outside Silicon Valley. Is that part of the success of a company like Adyen, Canva, Shopify? Is it that they're not in the conventional tech bubble way of thinking about things, or?

Aydin Senkut:

I think the answer is yes or no. I mean, look, I've still seen Google-like elements in those companies.

I remember my first meeting with Shopify. Tobi was telling me how excited he was, when he had only like 40 or 50 engineers, to take two or three of the best ones and create a real-time data warehouse. And he's like, "They're gonna work on something that's gonna make no money, it's gonna take a lot of time, and it's my best talent."

Turner Novak:

Okay.

Aydin Senkut:

But then the infrastructure is so important that it's going to set up the company for major success. The only other people that I knew that were crazy enough to do something like that were Larry and Sergey. They did things that were very unscalable, but also very important. This, you know, 10x mentality.

And then I went to Adyen. The reason why I found Adyen is because I found out even Google and Meta were having major issues in countries like Brazil. They couldn't process payments. The financial system was too complicated.

I'm like, "Well, did any company figure out how to do it?" They're like, "Yes, there is one company. It's Adyen."

And most people didn't know about it because they powered Braintree in the US, so people just didn't realize this company even existed. In fact, my favorite story is that Adyen was a special company, but when they were first getting announced in the US, I called the Wall Street Journal. The Wall Street Journal was like, "We don't have the company in our database. We don't even know it exists."

Turner Novak:

What?

Aydin Senkut:

It is... I am not making this up. It's a real story. I was so proud. I freaking found an investment where the Wall Street Journal doesn't even realize the company exists.

Turner Novak:

Wow.

Aydin Senkut:

Talk about being a contrarian, right?

But all of these companies... I mean, the Adyen team had like 100 years of payments experience. What they realized was that a lot of payment stuff, if you take the Google approach, was all old rails, and nobody freaking wanted to change the old rails.

They're like, "Fuck this, we're gonna do the new rails, and we're gonna do something that we always wanted to do but couldn't do in the old fintech companies. We're gonna build a new breed of fintech platform." And it was amazing.

Turner Novak:

So was there a common reason that a lot of Silicon Valley investors, or the top ones, quote unquote, "miss" some of these opportunities outside of the Bay Area?

Aydin Senkut:

I think it's much easier to say we're gonna invest in the Silicon Valley version. You don't have to work as hard. There is less risk. Nobody's gonna blame you if it goes wrong. Like, well, you backed some amazing Silicon Valley founders. Who's gonna tell you that you were stupid to do that?

Turner Novak:

Yeah.

Aydin Senkut:

It's definitely more risk. It's definitely more work. It's definitely more suspending of disbelief and having more faith. But to me, it's more rewarding. The journey is the reward, you know?

I used to tell my kids when they were very young, "Dad is just like Indiana Jones, except that I search for these amazing companies that are diamonds in the rough." That's my true...

Turner Novak:

Indiana Jones.

Aydin Senkut:

Yeah. I mean, he looks for treasures. I look for treasures that happen to be companies, where most people don't realize how special they are.

Turner Novak:

Yeah, and you've talked a lot about being a generalist investor. A lot of people will say, "Oh, you should specialize. Generalists, you don't know what you're doing. You don't have the expertise. You overlook things. You get too excited."

So what do you think a lot of people miss on this generalist versus specialist debate? Why does being more of a generalist generally outperform being a specialist?

Aydin Senkut:

I mean, we have the data to prove it. I've made probably about 250 investments myself alone. We have well over 400 investments. We have 55 unicorns, which probably doesn't matter today. Nobody cares about a billion mark anymore, but we...

Turner Novak:

Yeah, you can start a company and get a unicorn.

Aydin Senkut:

We have roughly 20 IPOs and more. So we had some decent successes. We had about 160 M&A exits, and not a single one of those companies was led by an expert. Not one. Hundreds, dozens of companies, and not a single one was led by a subject expert.

So there's this argument from specialists saying, "If you're not a specialist, you're not gonna understand it." I think what ends up happening is if you're a specialist, you are so deep in the subject matter that you're gonna look at a batshit crazy way of doing things, and you're gonna say, "That can't be done."

Now, there are also benefits, where you're really smart and you can find companies. So there are multiple different arguments.

One, sometimes when you're an expert and there is a crazy, outlier way of doing things, you're gonna say, "No, it can't be done." It's easier to say it won't work than to say it will work, because you are so deep. You've been trained for 20 years. Now somebody's saying all those 20 years, the experience you had and the things that you learned, are wrong. It can be done this way. It's very against human nature to say yes to that.

Versus if you're a generalist, you know what? I'm not a chip expert. I can say, "Wow, this is a new approach. I can see why it's gonna work. Let's fucking go."

And look, we are not stupid. We do diligence. We obviously understand the market. We know the things that make a company special. I do think that generalists have a much larger playing field.

I kind of think about a tennis example. We're on a tennis court, and the specialist is like, "I'm gonna hit the shot, and I'm gonna thread the needle, and I'm gonna put it right in that little area close to the line." And the margin for error with that is really small.

With the generalist approach, I'm like, "You know what? I can hit the ball on this court. I can hit the ball on the next court. I have the whole court, and in fact I have seven different tennis courts." I have a lot greater margin of error. I also need to choose where to play and where to place my shot, but I have so much to work with, it gives me a lot of margin for error. I think I'm gonna be much more likely to make the shot.

And I also have this contrarian attitude. One of the things that I learned about being a generalist investor is that there is a lot more in common between the companies that we have in different verticals.

The argument is like, oh, Shopify has nothing to do with Adyen, which has nothing to do with Rovio. One is a gaming company, one is a commerce company, one is a fintech company. Now we have a defense company, we have a chip company. But I like to argue that all of these founders had very interesting common threads.

They were all outliers in completely different businesses, and they did some very simple, crazy things that might not overlap one-to-one. But I think understanding the outlier nature of these companies and founders trained us really well to pick other ones in different geos and different industries.

And by the way, we did not invest in Canva because it was in Australia. We thought, "Wow, this company is going to change creativity forever." It just happened to be in Australia because there was an ex-Google and ex-Meta team from failed products, and those engineers really wanted to prove themselves right.

There was an incredible founding team with Melanie and Cliff, and also Cameron, and they were like, "Hey, let's take these engineers and build something great." And the engineers wanted to prove they were not losers.

Turner Novak:

There's kind of this overlap of different specialties, like sector specialties, in something like that. Like an Australia-focused investor or a design-focused investor or a cloud investor or something like that. And all those different mega trends are kind of all coming together.

Whereas if you look at it in isolation, maybe you might say, "Oh, design isn't big enough," or, "We've seen in Australia this won't work," or something like that. But I feel like there are a lot of cases where the best companies kind of overlap a bunch of different themes. They kind of create a new market, or create the need for a new expertise in a way. I don't know if that's fair to say.

Aydin Senkut:

I mean, look, I think part of it comes down to this. In an outlier business, even if you look at sports, for instance, if you look at all the quarterbacks or whatever, pick any sport. I don't know what your favorite sport is. But the very top echelon, those people are different than the others.

Everybody is good to be in that league, but if you look at the people that go to the highest level, the playoffs and even beyond, the ones that are in the Super Bowl, they are absolutely a different breed.

And so what I basically learned is that you're an outlier business, but your business is like, "We're only gonna look at companies in Australia." There have been a lot of VCs that were like, "Oh, we're a Canadian VC." Well, how many of them invested in Shopify? "Oh, we're a Finnish VC." How many of them were in Rovio?

So there were so many instances. There was Blackbird, famously from Australia, and Canva, because they were like, "Wow, we're supposed to invest in Australian companies. Thank you, Canva, for being here."

But most of the time, the local VCs don't have a large position, or they actually don't see it, because they're just basically doing something different. They're like, "Hey, our mission is to invest in Australian companies." No, your mission as a VC, and this is the generalist dream, is the very best companies in the world, regardless of where they are.

Versus if you're a specialist, like, "Oh, I love the world, and I'm an optimist, but I can only invest in fintech companies, or I can only invest in consumer companies." And what if something happens that's no longer true? What are you gonna do? Right?

Turner Novak:

I could see, like, "Oh, we're fintech, but we're B2B. We're not consumer." Or, "We invest in Australia, but Canva, you're trying to go to the US, so I'm sorry. This isn't for us."

I think one interesting thing with Canva is people said you were crazy when you invested, because I think the revenue multiple was like 100x or something like that. I'm not sure exactly what the number was.

So is it super important to focus on the valuation? What's the thinking around when you bend the rules? How do you price a seed round, a Series A, even a Series D? How do you think about the valuation of these companies?

Aydin Senkut:

I study Charlie Munger and Warren Buffett a lot, and they talk about this concept that one of the secrets of making great investments is to have a large margin of error. In the beginning, they were buying the companies cheaply, and the margin of error was that you're buying it so cheaply that you're almost guaranteed to make a return. Later on, it was quality assets, but they're gonna find them when the quality asset is distressed, or right at the perfect moment.

Turner Novak:

Yeah.

Aydin Senkut:

It was their formula. So everybody thinks, "Oh, to be like them, you need to copy." No, you just need to understand that concept and apply it to your specialty.

So the way that I think about it is, look, we have one and only one business, and our business is not called invest in the cheapest company. Our business is not called invest in the lowest valuation. Our business is supposed to generate the best returns. To generate the best returns, you need to have the company that is the fastest-growing.

To be the fastest-growing company, you need to have an outlier founder. Do you think an outlier founder is going to wanna give up his shares very cheaply? They're not stupid. They know that they are the best, so they're going to demand a premium valuation. That doesn't mean that every premium valuation company is going to succeed and become a huge company.

So the way we think about success and margin of error is that I want a company with a growth path so promising... I like to use the word 100x. We talked about 10x. When I look at a company, the very first thing I ask is, "Is there a true 100x revenue growth potential in this company?"

Turner Novak:

Grow 100x revenue from here.

Aydin Senkut:

100x. So if I'm wrong and the company grows like 50x, and I paid like 2x, I'm still gonna get 25x. So I'm not even saying 5x, I'm not even saying 10x. What I'm really looking for is a true 100x potential. Now, I know it's pushing it a little bit, but that's why we choose the markets that we choose. That's why we choose the founders we choose. It's such a special combination, and you also have to get the timing right.

And look, I can tell you, even from our own data, you look at all the companies where we have the highest ownership, where we got the best valuation, and none of them have made it to the top.

And every single one of our outlier companies, oh my God, we barely eked out like a 1% ownership. The valuation was horrible. I was having heart attacks. We paid like a 700 multiple for Supabase, and everybody thought we were absolute effing idiots.

Turner Novak:

Yeah.

Aydin Senkut:

And then you look at it and the company grew like 1,000x. Not even 100x, 1,000x.

Turner Novak:

Yeah.

Aydin Senkut:

I was off by 10x on the 100x growth goal.

Turner Novak:

Yep.

Aydin Senkut:

How can that be not great? They are missing the whole fucking point. The whole fucking point is to find a company that's gonna grow not even 100x, like 1,000x. And then it doesn't matter what price you paid.

Turner Novak:

Yeah.

Aydin Senkut:

You know what I mean? The founder is not gonna tell you, "My company's worth $10 billion," when he has like $100K in revenue. It's going to be expensive, but it's going to be expensive with a math function. So if you pick a company in the right place at the right time that has so much growth function, then valuation becomes absolutely not important.

And if you're so hung up on the valuation, you're always gonna miss those outlier companies. The same thing happened to Google. They basically said, "Two PhD students?" People were like, "It's never gonna work."

Turner Novak:

Mm-hmm.

Aydin Senkut:

Notion, by the way. We're the only VC that invested in Notion and Canva. I remember Ivan. Right? Now that it's at scale, every VC wants to be his friend. We basically wrote him the first check on the back of a napkin, right?

And then with Canva, people said, "Oh, it's Australia, Sydney. What do these people know about scaling a company? It's a design company. Look at Adobe, it's a $200 billion company." And what's going on today?

Turner Novak:

Yeah.

Aydin Senkut:

You know? It's totally different. People always look at all the things that can go wrong, instead of the one thing that can go right that would make this an incredibly large company.

And then Canva became very large, and it wasn't about the 100x multiple. We were like, oh my God, the true creativity company does not exist. There was basically Microsoft PowerPoint, which was a piece of shit, and then there's Adobe, which is great, but it's so complex that you need a university degree to run the product.

Turner Novak:

Yeah, it's kind of a different product than Canva, and a different customer that they're going after, really.

Aydin Senkut:

But the point is that everybody in the world wants to be creative. Do you wanna feel dumb when you use a product? The first thing is you open Adobe, and I don't know what the fuck to do with this product.

Turner Novak:

Yeah.

Aydin Senkut:

I mean, I did. I opened Photoshop. I was like, wow, I need to go back to graduate school to learn Photoshop. I mean, yes, people learn it, but you just wanna create. And that's something that I learned at Google. When you came to Google, there was one button. There was no other stuff.

Turner Novak:

There was just search.

Aydin Senkut:

You just search. Or I'm Feeling Lucky. And you know what? The result is fucking great.

Turner Novak:

Yeah.

Aydin Senkut:

I love it. That's it. That's what people want. Give me the one-button product.

And so that's why I'm like, Canva's vision was really great. If the founders execute it... Do you think it's really difficult to execute? They have this killer crack team of ex-Google and Meta engineers. They have this beautiful idea, and I'm like, "I think they're gonna execute." And then the next thing we know, the company goes up 1,000x in sales in eight years.

Turner Novak:

Yeah. Well, I think, too, when you just look at... You don't look at the data, per se. I feel like there's this one guy who's been saying OpenAI is on the verge of financial collapse for a couple years now. What's his name? Ed Zitron or something like that? And like...

Aydin Senkut:

Oh, Zitron research. Yeah.

Turner Novak:

Yeah. He's this journalist who does these really long exposés of, "I've looked at the numbers, and OpenAI is six months from insolvency." And he's been saying this for a couple years.

But it's almost like you can look in isolation at, wow, Facebook paid a billion dollars to acquire Instagram. That's never been done before. A billion dollars for a photo-sharing app. That's the worst deal ever. But actually...

Aydin Senkut:

It was the best deal, actually.

Turner Novak:

It is, actually. You could actually make a lot of money from the photo-sharing app now.

Aydin Senkut:

Or Google paying a billion dollars for YouTube. They're making like $10 billion in profits a year now, or something like that, off of YouTube.

Turner Novak:

Yeah. I guess it goes back to the founder making a bold bet, like doing the real-time data, or "we'll acquire YouTube," or "we'll build our own servers because it does X, Y, Z."

I have a question. Do you have a favorite founder, or maybe investor, or a historical figure that you've gotten a lot of inspiration from? Could be an athlete, too.

Aydin Senkut:

One of the historical figures that inspired me the most is actually Benjamin Franklin.

Turner Novak:

Mm.

Aydin Senkut:

I went to Penn for grad school, but the thing that I love about Benjamin Franklin is how many different things he invented or innovated. He started a university. He started a hospital. He did all these crazy things. It's one person.

Turner Novak:

Didn't he also negotiate with France for them to come in and help us in the war?

Aydin Senkut:

He also did that. Yeah. I mean, I just wanna be 1% of Benjamin Franklin. I'm so inspired by him.

And one of the reasons for that is that the reason why I do this job, and I love this job, is that I'm an eternally curious person, and I just wanna keep finding... I'm not starting these companies, but I wanna be part of their journeys. I wanna find these founders that remind me a little bit of Benjamin Franklin. They wanna do this insane innovation, and I wanna be part of that journey, and I wanna repeat it over and over again. I just love that rush.

I love the journey. By the way, the journeys are never perfect. There are also really tough moments in the journeys, emotionally taxing ones. I love every minute of it. I don't just love the goodness. I can also take the badness.

So I think Benjamin Franklin is really inspiring, and he basically pushed humanity forward. As a result of the university he started 250 years ago, hundreds of thousands of students got educated and got really smart, and look at what they have done collectively. As a result of his innovations, science has progressed. We negotiated whatever treaty with France. Just think about how important even one of those things would be. He's done dozens of those things.

It's just super inspiring. We have this one life, and sometimes I think we think of it in a very limited way. Like, this is the little box, and this is all I'm gonna do. And all my life I'm like, "No, I do not wanna be in that little narrow box. I'm going to invent my own box. This is the box. And I'm gonna create, and it's gonna be a lot bigger, and it's not gonna have these narrow lanes."

And I love doing that with founders. So whenever I'm with a founder and they're like, "This is the dream," I'm like, "Batshit crazy. Love it. Let's go."

Turner Novak:

I mean, that's the point of starting a startup.

Aydin Senkut:

Yes.

Turner Novak:

Kind of the point of venture capital is funding people doing kinda crazy shit. And maybe it will work. And what happens if it works is kind of the point of it.

Aydin Senkut:

Maybe, but I think the founders also have kind of a good idea. You know?

Turner Novak:

Which, fair, yeah.

Aydin Senkut:

Yeah. There's a little twinkle in their eye, like, "Yes, there's a lot of risk, but there's this little thing or two." And then the next thing you know, some really amazing things happen.

Turner Novak:

Next thing you know, you've got Google and Canva and Adyen, Shopify. The list goes on.

Aydin Senkut:

Yeah.

Turner Novak:

Well, cool. This has been a lot of fun. Thanks for coming on the show. Appreciate it. Thanks for having me at your office.

Aydin Senkut:

Thanks, Turner. Appreciate it. Thanks for being here.

Find transcripts of all other episodes here.

Related Episodes

Matt sat in Google’s board meetings from Kleiner’s first check to IPO, and he might be the only person who invested pre-revenue in both Google and Anthropic.

While the company is still in their quiet period (and we’re both investors), we go inside Menlo’s pre-revenue, pre-launch Anthropic investment, how they rebuilt Menlo into a top AI firm, when to break the rules in venture, the three LP’s that made over $1B each on the $500M Anthropic SPV Menlo raised without being able to show a single financial, Menlo’s barbell approach to investing, and why today isn’t like 1999.

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👉 Stream on Spotify and Apple

Timestamps to jump in:

• 0:00 How to read Anthropic's S-1

• 1:21 Do AI companies actually make money?

• 2:23 Google didn't want ads. Anthropic didn't plan on enterprise.

• 4:51 Bending the rules to back Anthropic pre-revenue, pre-launch

• 9:50 You can't be a leading AI firm without a top model company

• 12:00 Leading the Series D at $18B six months later

• 14:22 Why the best researchers chose Dario

• 15:25 Menlo's first-ever SPV, nearly the size of the fund

• 16:44 The LP meeting that sparked a $500M SPV

• 19:18 Raising at $18B without showing financials

• 20:04 Three LP's made $1B+ each

• 24:23 Why Matt joined Menlo in 2015

• 26:00 Rebuilding Menlo over the past decade

• 32:49 Venture as a team sport

• 35:45 How to keep a challenger mentality

• 38:15 Why VC firms decay

• 41:31 The Anthology Fund: OpenRouter, Wispr, Goodfire

• 42:27 Ownership vs. backing the best

• 46:10 Why this isn't 1999

• 48:06 Frontier vs. open weight models

• 51:29 The barbell portfolio strategy

• 53:54 Avoiding the messy middle between early and growth

• 55:07 How to spot a category leader

• 57:18 Fortune 5000 AI adoption: "almost none"

• 59:06 Menlo is in 10 of 70+ neolabs: Skild, Chai, Axiom

• 1:02:13 Where $1B AI startup raises actually go

• 1:04:18 Phase 1 vs. Phase 2 of AI

• 1:06:26 What the AI IPOs mean for venture

• 1:09:11 What Matt does differently after 25 years

• 1:10:52 The Alex Smith lesson

Find Matt on X / Twitter and LinkedIn

Referenced:

Anthropic

Anthropic’s S-1

Menlo’s Anthology Fund

Menlo’s Modern AI Stack

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Transcript

Find transcripts of all prior episodes here.

Turner Novak:

Matt, welcome to the show.

Matt Murphy:

Thank you. Appreciate you having me.

Turner Novak:

So Anthropic’s S-1 just dropped. Everyone has probably read it or is reading it right now. A lot of people are commentating on the numbers. So what do you think about all the numbers behind Anthropic?

Matt Murphy:

Yeah. Well, I guess they’re still in their quiet period, so I can’t comment a lot on the numbers.

But I think there’s things that you read in an S-1 and you’re like, well, what is operating cash flow? What is gross margin? What is growth rate? I think those are the things that most people really look at as a barometer or indicator of how the company’s performing. And then you have these GAAP charges, like non-cash charges for warrants or convertible notes and things like that.

So there’s been this headline around negative $42 million burned or something like that, and that’s not really a burn number. It’s certainly not a cash number. It’s kind of a non-cash issue. I think there’s just a lot of people who don’t know how to read an S-1, so hopefully there’s some good reporting coming on the metrics that one should really look at to measure the business.

And understand what GAAP tries to do, which is give you a bunch of different dimensions of accounting charges and things like that that are non-cash, and I’d say not really leading indicators of how the business is performing.

Turner Novak:

So if somebody says, “All these AI companies don’t make any money,” and it’s just like a pyramid collapse or whatever, is that not true then?

Matt Murphy:

Well, if you look at the business, a lot of analysts, mutual funds, etc., look at operating cash flow. And they showed that they’ve been operating cash flow positive and expect to stay that way. So I think that’s a more interesting indicator of the health of the business.

That’s why I mentioned gross margin too. There are things that are a little bit more indicative of the fundamentals of a business than accounting charges. Not that they’re not important, but you’ve gotta look at the whole picture and understand what really are the true leading indicators.

But aside from all that, I’m so excited about finally having this flip, because there’s been so much speculation in terms of the business, what it’s all about, what its growth rate is, etc.

When I was earlier in my career, I got to go to all the board meetings from the time I was at Kleiner Perkins when we invested in Google to the time it went public. Still today, people probably think of it as the fastest growing business ever. I think it was zero to a billion in five years, zero to $10 billion in 11 years, or eight years. And then $10 billion to $100 billion in 11 years after that. So you’re talking 19 years to get to $100 billion.

Turner Novak:

Which, even by today’s standards, is still pretty good, I feel.

Matt Murphy:

Oh yeah. It’s tremendous. But then you have a company that comes along and can do that in a third or less of the time. So that just puts in perspective how quickly this company is growing, and what a different phenomenon we’re in with the growth of AI.

Turner Novak:

Were there any other similarities or maybe differences between the two companies, just getting to see them both up close? You’re possibly the only person that’s seen both of them that close.

Matt Murphy:

Yeah. Well, a similarity is, I think when Google started, Larry and Sergey did not want an advertising business at all. So you didn’t really go into it knowing what the business model was. They were going to charge per search query or things like that, and they got thrust into the advertising business.

And I’d say in the case of Anthropic, they knew what the business was going to be, but they didn’t know they were really going to be an enterprise business. They started off just kind of like, “Hey, we’ve got an API, we’ve got a great model. We’ll figure out where it’s best to take it to market.”

But at the time, OpenAI was dominating the consumer interface, or consumer interaction. And they partnered up with Amazon and Google, both for compute, but also for distribution and technology partnerships. That took them down the enterprise path, which ended up being the even faster, more lucrative market to go after, which is how they catapulted themselves to number one.

So those are some interesting similarities. Oftentimes there’s a great underlying foundation or technology, but it’s not entirely clear exactly how you’re going to monetize or what the business path is forward. And I’d say that’s true of a lot of technical founders when they start a business. Certainly both companies were founded by elite and special technologists in Dario and Larry and Sergey.

Turner Novak:

So when you first invested in Anthropic, they were pre-revenue, right? They had no revenue-generating products?

Matt Murphy:

Pre-revenue, pre-launch. At least in the case of Google when we made the investment, you could see the usage was very, very high. They just weren’t monetizing yet. But yeah, go ahead.

Turner Novak:

So how did that go? How did that even come about? Because everyone’s heard these stories that Anthropic couldn’t raise that round. Like, no one wanted to do it. So how did that come about where you guys ended up leading the round?

Matt Murphy:

Yeah. Well, we participated in the Series C and then led the Series D. The Series C is when we participated. We could have led, but the company at the time, like you said, was pre-revenue, pre-launch, at a $4 billion, $4-plus billion valuation.

And I know to a lot of listeners today it’s like, oh, $4 billion, isn’t that kinda common? But if you roll the clocks back to ‘22, ‘23, there were no companies like that. That was a spectacular exit for a company. Literally spectacular in the history of venture if you exited at a $4 billion valuation.

Turner Novak:

And you were coming in.

Matt Murphy:

And now that was kind of the entry point. And then you’ve got issues like, well, what fund does that go in? How does a venture fund do that? And then because it’s pre-revenue and pre-launch, how does a growth fund do that? So it was kinda caught in the middle.

But I’m glad that we had a partnership that was all in on AI and aligned around, hey, this is at least the second best company in the category, the best technical team, and we just have to be in this category. We kinda bent the rules a little bit to say, “Hey, all right, it’s imperfect for either fund, but this is a special team, the team that created ChatGPT.”

The models were benchmarking really well, and it was a massive market. So we kinda bent the rules a little bit to say, “Hey, let’s participate in this round with a goal to lead the next round.” And obviously that worked out fabulously. As soon as we invested, we had a different type of relationship with the company.

We were working with them on a bunch of stuff, be it recruiting, talking to customers, and just a lot of strategic issues that come up early in a company. And then we really saw them put together the deals with AWS and Google, and the revenue flywheel just starting to spin.

Both big, meaty deals where they were saying, “Hey, we’ll come in and help you do an FDE project, a forward deployed engineer to come in and help you build something special with a large telecom,” but also this drip of a long tail of developers. So we saw the company go from zero when they launched in April to, it’s been reported, something like $85 million at the end of the year.

And we saw that happening in September, October, and just jumped on it to be able to lead the round. And I think unless we had made that small initial investment, we wouldn’t have had the relationship to have seen all of this stuff going on, as well as to have earned the trust with the team to be able to lead that round.

Turner Novak:

So when I think about 2022, I did a first close of my second fund in the summer of 2022. Now, that’s not a very happy time or fun time to be raising money. So in terms of all those internal discussions you had, I’m sure it was probably, of all times, a pretty difficult time to say, “Hey, we’re gonna plant our flag in the ground right here.”

So how did those discussions go of taking a really big bet?

Matt Murphy:

Yeah. Well, it started off, like you say, just really difficult, because it didn’t fit in either fund. It was kind of like, what are we doing at four and a half billion? Even if this thing doubled, it’s not gonna be meaningful to the fund.

So these are all the kind of conversations you get into with VC’s. Like, “Hey, it’s not gonna move the needle unless it’s a 10x,” and who’s gonna bet this company’s gonna be worth, let’s say, $45 billion? $40 billion. That sounds insane. That sounds crazy, right? But we’re in new times here.

There’ve been massive exits like Cursor, etc., that came after our investment. But I think the point was, as this AI market was taking off, it was taking off at growth rates that no one had ever seen before. The other technology waves have always been constrained by something, whether it was devices or access to high-speed internet or comfort with your data being in the cloud.

This was immediately for everyone. So you saw all the trends showing that this was gonna be a much, much bigger trend than any that we’d seen before. So it was controversial, but at the same time it’s like, “Hey, we wanna be a leading AI firm. How can we be a leading AI firm unless we find the number one or number two company in the category that is a model company?”

Because the model is basically the heart and soul of this whole AI economy. It’s the brain and the intelligence that helps all the other applications build around it. So from that standpoint, I initially was like, “Oh, my partners are gonna think I’m kinda crazy. Do I really wanna be out over my skis?”

And fortunately, when you have a very aligned partnership that’s willing to dream the dream with you, they’re like, “Come on, Matt. Let’s do that.”

So that was the first investment. And then, like I said, the second investment, where we did the $500 million-plus SPV, was a little bit more like, “Hey, this is much more obvious.” The valuation then jumped up into the $18 billion range, so now we’re talking a whole different quantum. But at that point in time, you’re like, “All right, this company is extremely legit. They’re scaling quickly. Amazon and Google have chosen them as their partner of choice.”

So now you had the OpenAI and Microsoft axis versus Anthropic and Google and Amazon. I know that’s all changed, but at the time, that’s the way it was playing out. So you saw these really important pieces come into place. You saw the model just being frankly better, and them executing really well.

I think Dario’s just always been an amazing technical visionary, and some of the best researchers in the world were all flocking to join the company. So all these advantages were starting to compound. And it’s kind of crazy. The cycle of raising capital used to be every two years, maybe two and a half years. All the things I talked about happened in under six months. Amazon, Google, that revenue going from zero to roughly 100.

So you saw those data points and just felt like this was our one shot to be aligned with this really, really special company. And again, it was great to have a partnership that said, “Hey, we need to do this, because we want to back one of the two main model companies, and this is the one that we think, over time, will be by far the best.”

So anyway, that’s kinda the story, and then off to the races. Since then, none of these things are a straight line. I think how the enterprise versus consumer market played out, finding an absolute hit mega market like coding, and the way it just came out of the Anthropic labs, shows you not only the level of technical talent they had there, but also the creativity and understanding of how to take a great technology and meet the market. And some of those things were starting to become obvious early on.

Turner Novak:

Maybe it’s hard to tell, but do you know what it was that made all the best technical talent wanna go work with Dario at Anthropic? Did he say a specific line, or was there just some kind of a culture there that attracted people? Do you know what it was?

Matt Murphy:

Well, certainly authentic. A true technologist. I think a lot of the best researchers in the world wanna work for somebody who’s kinda like them. And no offense, but Sam’s more of a business person.

Turner Novak:

I’ve always seen him as a deal guy, almost.

Matt Murphy:

Yeah. Okay.

Turner Novak:

I see him as a good deal maker, which he is. He’s done it many times.

Matt Murphy:

Right. Yeah, exactly. That’s his superpower, and Dario’s is building amazing technology and recruiting amazing researchers. So I think it was that. It felt like he was more like them, and they wanted to be part of the vision he had.

I also think Anthropic’s always had a tremendous culture, a low-drama culture, and they have certainly stood out there relative to some of their peers.

Turner Novak:

So then, in terms of how you did this SPV, because I think it’s probably interesting to people. I think your fund...

Matt Murphy:

Our first SPV ever, by the way.

Turner Novak:

And I think your fund was like $600 million. Am I remembering that right?

Matt Murphy:

$750 million.

Turner Novak:

$750 million. And so you raised an SPV that was almost the same size as the fund.

Matt Murphy:

Yeah.

Turner Novak:

So what was that process like? Because I’ve actually heard many people say, “We don’t do SPVs. We’ve never done them before.” Had you guys just never done it? You didn’t see a need for it? How did this come about, and what made you flip over?

Matt Murphy:

Yeah. I think historically, if you look at Menlo, we went from an early stage firm, Seed and Series A, and then we started our Inflection fund, which this investment eventually came out of. That was considered early growth, which we define as $3 to $10 million of ARR. That was early growth, right?

Turner Novak:

That’s like a customer for Anthropic, isn’t it?

Matt Murphy:

Right. Right. Well, and by the way, that’s why our strategy has evolved a little bit. That used to take a year to 18 months, and now that’s like a week for a lot of companies. So that $3 to $10 million range is harder to pursue right now.

Turner Novak:

I feel like some of them are adding $10 million a day now. They’ll publicly say, “We just had a $10 million day.”

Matt Murphy:

Yeah. The last day of the quarter can be a $10 million day now.

Because we had this opportunity to lead, what had actually happened was we had Anthropic at our LP meeting, which was in early November.

Turner Novak:

Was this ‘23?

Matt Murphy:

Yeah. So we had Anthropic at our LP meeting, and this executive came and blew everybody away.

Turner Novak:

It was Neerav, I think.

Matt Murphy:

Yeah, it was Neerav, like you said. Exactly. Kind of a stealth warrior within the company who’s been a jack of all trades, but has really worked on important initiatives.

He was working on the financing and really the big customers they had, a number of things like that early on, when a company’s lean and everybody’s doing a lot. So he came to the LP meeting and absolutely blew everyone away. And our LP’s after were like, “Hey, how do we get in this company?”

Turner Novak:

What did he say? What did he say that blew people away?

Matt Murphy:

I don’t feel like at that point in time people really understood the power of AI, how it was being used in the wild, and what it was capable of. Especially people from all over the country.

And now it feels like, oh, we’re all using it, we all understand. But just like four years ago, a $4 billion valuation felt hard to fathom. So much has changed so quickly that lots of things that we take for granted today were new to us back then.

So I think it was just understanding all that. And he was incredibly articulate and painted this amazing vision for where AI was going and what it was gonna solve. So out of that meeting we had a bunch of our LP’s saying, “This is fabulous that you’re in this company. Can we co-invest with you?”

And before you knew it, there was a couple, three hundred million of interest. And we’re like, “Oh, we’ve never done an SPV before, but this is a special company. We wanna lead the round.” But the round’s gonna be pretty big. We can’t do it out of our $750 million fund. We can do 50 or 100 out of that fund, but we can’t do the rest.

So we said, “Hey, how about we take capital from our fund and our LP’s, put this whole thing together, and make a proposal to lead the round?” And as history would have it, we were definitely a little over our skis at the time. You get a lot of people interested, but when you go and shake the trees, some things fall out of the trees and some don’t.

So there was a scary period there for about 30, 45 days where I was like, “Oh my God. I think we’ve over-committed here, and we may not pull this off.”

Turner Novak:

So are you just texting everybody, like, “Hey, this is going on”?

Matt Murphy:

Oh, we did a couple of webinars. But it’s funny. What I didn’t realize when we raised the SPV: we were very collaborative with Anthropic, and they were supportive of it, but they said you can’t share any financial information. And so I’m like, “Okay, fine. People are just gonna believe the dream as much.”

We could take publicly released things that gave us some product slides, but you’re asking people to invest at an $18 billion valuation, and you can’t show any financial information. I think we could say what last year’s revenue was, but we couldn’t do any forward projections.

Turner Novak:

Wow.

Matt Murphy:

So that’s kind of a tall ask when you’ve got big state pension funds and things like that. We did a couple of webinars, and then we did a bunch of one-on-one follow-ups. But there were a bunch of people like, “Look, we just can’t responsibly do that as a state pension fund.”

But I can tell you that three did, and they’ve all made well over a billion dollars at the last round valuation. So all in, this is a pretty amazing return. Fortune favors the brave, and we’re glad that we had some LP’s that came along the road with us.

But it wasn’t what maybe you would expect in hindsight, because things have always been unclear, and then they get clearer as the company’s grown and shown what it’s capable of. But we got it done. I think we closed in two tranches, with the last one in April.

Turner Novak:

So you did have a little bit of time to land the plane. It wasn’t like a one-week thing.

Matt Murphy:

No. We signed the term sheet in mid-December, and then we didn’t even really start the process until January. Let’s say we had everything firmed up by March, and then it all closed, last close was early April or something like that.

But it gave me a lot of empathy for entrepreneurs raising capital, because essentially what I and one of my partners became was basically the capital raisers for Anthropic. Not that they really needed it, because if Dario got in front of anybody, or that team, Tom Brown, all of them, they would’ve had a much easier time than I did.

But we committed to raise the capital, and so we were out there talking to LP’s and saving them the time of talking to a bunch of institutions, so they could focus on the thing they’re really good at, which is building amazing technology. And I’m glad it worked out.

Turner Novak:

When you’re in there raising the money yourself, and people are just like, “Yeah, I’m not that interested. This doesn’t seem that good,” it just hits you in the face over and over again. You’re putting your name on the door, putting yourself out there, and people are saying no.

Matt Murphy:

Oh, yeah. Some of our biggest LP’s, who like I said have made well, well over a billion dollars, so it’s great that we were right. But it did feel at the time like a potential existential moment for the firm. If we were wrong, losing state pension money, or not leaving our best LP’s in good graces with us, would be a really bad thing.

But a big swing always has those dynamics about it. So I’m just thrilled that we were able to do it. We knew this company was gonna be big and special. We just didn’t know quite the quantum of what that would be and how fast.

Turner Novak:

Yeah. Well, talking more about Menlo more broadly. So are you guys 50 or 51 years old?

Matt Murphy:

Turned 50 in November.

Turner Novak:

Okay. Well, then you’re almost 51 at this point. It’s already almost November again.

Matt Murphy:

No, no. This year we turned 50.

Turner Novak:

Oh, you’re turning 50.

Matt Murphy:

Turning 50. 2026, yes.

Turner Novak:

Oh, got it. Okay. And you joined about 11 years ago. So of all the places you could’ve gone, why did you pick Menlo?

Matt Murphy:

Yeah. Many reasons, but one easy one was that one of my closest friends from business school, Mark Siegel, had been handed the keys to take over the firm from the founders. And generational transition is really, really hard. It blows up a number of firms. It slows them down. They miss technology waves. It’s one of the hardest things in venture, and Menlo did it beautifully.

Beautifully in the sense that they handed the keys to Mark and said, “All right, Mark, you go do this.” And then Mark did an amazing job to first get Venky and then me. Shawn Carolan was off running a company, and we recruited him back after about a year. So that was the band that came together. And then Mark retired about three years after that. I guess he figured his best work was done, to get us all together.

So it just felt like, after being in the business for 15 years, to come in and really have the opportunity with an almost 40-year-old firm, a great brand, a long-standing firm with a reputation for being in a lot of amazing companies. They’re a group that always does the right thing. Those are the reputational things that you want.

But I think at the time we were also missing a bit of edge. How hungry is Menlo? Is Menlo everywhere? Do you feel Menlo in the market? Are they early stage? Are they getting there before you?

Turner Novak:

Were people saying that you weren’t doing any of those things?

Matt Murphy:

Well, I think that was just our internal critical observation. The firm had gotten much bigger, to billion-dollar-plus funds, and part of bringing it down to the studs with me, Mark, Sean, and Venky was to say, “Hey, we’ve got a single $400 million fund. We’re gonna go back to early stage and rebuild from there with a smaller team.”

And all of what you see today has really been brick by brick since then. We added an early growth fund because we felt like at that point in time there was this wedge in the market. You had growth that was like $10 million and up, and then you had early venture, but the momentum companies in the middle weren’t really that covered.

Turner Novak:

This was the $3 to $10 million run rate, right?

Matt Murphy:

Yeah. And I’m talking back in 2016 to 2018. The venture and growth markets were a little bit more bifurcated, and now everything’s blurred a lot more. But that got us into the early growth business and allowed us to get into a number of high-velocity winners. It allowed us to double down on a company like Anthropic and continue to do that round by round.

I’ll give you another example. When I joined the firm, we didn’t really have any services team. At the firm I came from, Kleiner Perkins, we had a pretty big services team. We polled our entrepreneurs and our network of people in the industry: “What are the two or three things you really care about from your venture capital firm, your partner?”

It was, “Well, I want a really great partner who’s there and does the right thing in up and down times. Super solid, trustworthy, doesn’t whipsaw around. Just a great advisor on the things that really matter.” So check. I think we’re all wired that way. And then after that it was, “Hey, I want people who can help with talent and deals.”

We didn’t have any of that, so I brought over a guy named Jordan Ormont, who I worked with at Kleiner Perkins for eight years, to build out our talent function, which now has three people. We hired a person named Houman out of Qualcomm to come over and run our biz dev function. We run a lot of EBCs. Any customer you wanna get to, talk to Houman or Bryan, who’s on his team.

So we looked at the market and said, “What is Menlo doing today? What is the market expecting? How do we fill in that void?” Tactically and strategically, we needed that to be a more competitive firm.

Then there was, hey, there’s a lot of high-velocity companies in that $3 to $10 million range. We can’t play in that market because the fund size isn’t big enough and we’re doing early stage venture, so let’s add that.

And then, I’ll roll the clocks forward a little bit, you get into things like, hey, this new technology wave is coming. We sat out crypto, we sat out VR, thankfully.

Turner Novak:

Those are probably some good moves.

Matt Murphy:

Yeah. Crypto money was made, but in terms of real businesses and so forth, there’s a lot of trading companies, things like that. It just wasn’t for us. We can’t be all things to all people.

But as soon as the AI wave started to come along, we were like, “This is our moment. We have incredibly high conviction inside the whole firm. We’re just gonna put all our chips on the table on that.”

Turner Novak:

And so what period was that? What kind of year?

Matt Murphy:

It was shortly after the launch of ChatGPT. So what are we talking about? 2022, roughly that timeframe. End of ‘22. Maybe six months before we funded Anthropic.

And we were the first firm, I think, to put out something on the AI infrastructure stack. Every time a technology wave comes along, there’s some new infrastructure stack that comes out. So we put out this market map, and we did it for our own internal thesis work, to guide where we thought we should be investing. That’s the way we are: a very thesis-oriented, thematic firm.

And then you start saying to yourself, “Hey, this wave of even applications...” If you look at SaaS applications, there wasn’t really a lot of technology under the hood. You had to build some things efficiently, but you used Amazon, and you were building really cool workflows and interfaces and things like that.

Now, if you look at all of these companies, whether it’s something like Legora, which we’re an investor in, or Lovable, etc., there’s huge amounts of technology under the hood. So we felt like the investors who thrived in the SaaS era were not as technical as those that were needed to thrive in this environment.

And that example was even on the application front. If you look at the infrastructure front, same thing. So we hired Tim Tully, who was the CTO of Splunk for a long time. Cisco bought them for $20 billion, so obviously a very successful company there.

Joff Redfern, who was the chief product officer at Atlassian. Matt Kraning, a PhD in machine learning from Stanford, who sold his company to Palo Alto Networks. Deedy Das, who was the founding PM and engineer at Glean. Amy Wu, who had been in venture and at FTX, interestingly.

So all this team came together over a period of three, four years. Much more technically oriented, and they understood developer communities, things like that, that are really flourishing right now.

So if you think about all the bricks that had to come together: we had to have a fund that could invest in a company like Anthropic at their stage. We had to have a prepared mind in the thesis work to say, “Hey, here’s what we’re looking for and why.” We had to have the services team to help add value, because companies would say, “Hey, why do I pick Menlo?” And then the thesis work that I described.

All of that has compounded to be a real advantage. I don’t think it would have happened if Anthropic had just shown up and we were like, “Hey, this company’s great. They created ChatGPT. Let’s do this at four billion.” It took all of this. It took a team surrounding us to give us the courage to do it, the technical work that we’d done, and the ability to win, because they were like, “Look, Menlo seems like a great firm. You have all these things behind you.”

So every journey is not a straight line, and ours was very intentional, putting all the bricks together. I’m really proud of how it’s come together, and even more so about what’s ahead.

Turner Novak:

Yeah, you were telling me that the most fun you’ve been having is actually the team building side of it.

Matt Murphy:

Yeah. Venture can oftentimes feel like an individual sport, and I think we’ve always tried to practice it more as a team sport, because it’s more fun to do it that way.

I think it’s more helpful to entrepreneurs, because you get the whole team, different people who can provide different things. Joff Redfern, former CPO. Tim Tully, former CTO. So we’ve got a lot of people on our team that can help in any situation. And not just help the portfolio companies, but help me.

The reality is, even on the Anthropic investment, I felt highly, highly convicted about it, but it was Tim who went and spent a lot of time with Tom Brown to say, “Okay, I understand this compute multiplier thing, what they’re doing, why they’ve been able to build these really powerful models at a much lower cost, and why we think that can compound and is an advantage over time.”

There were things like that. Otherwise I would’ve been making it more of an intuitive people decision. Like, I just feel it. I feel like this is the one, the market. And then when you can back that up with somebody who has been the former CTO of a $20 billion company saying, “No, this is special technology,” that made my life a lot easier, and made sure I’d done my homework as much as one could.

So like I was saying, it can feel like an individual sport at times. We play it as a team sport. But also, at the stage of my career that I’m at, having been in the business for over 25 years, it created a new challenge and opportunity for me.

To feel like we were building more than just an investment track record, but a set of people that were really proud and happy to work together, and more productive working together. Seeing the firm rise from where we started, with all the things I mentioned, our challenger mentality, and getting up into one of the top handful of firms in this wave of AI, which I would say that we’re at.

That’s more gratifying than the next incremental investment by far. And I think that gives us the opportunity to work with even better entrepreneurs, to have a bigger impact, to have a higher win rate, to have higher access, all those things that matter.

It’s all compounding, and so it’s energizing. You were grinding away for 11 years to get to this point, and if any of those pieces I mentioned along the way didn’t happen, maybe we never would have gotten here. Especially and including that initial decision on Anthropic. It’s been so seminal to our success as a firm.

But then you wake up every day, not with paranoia, but more like, wow, we’ve worked so hard and done so many things to get to where we are now. How do we build on that? How do we take even more advantage of that? No one is happy resting on our laurels or feeling like we’ve arrived. It’s like, now we’re here, and how do we make this an even bigger deal and do more with that opportunity? That’s what’s completely exciting and exhilarating.

Turner Novak:

So when you say the challenger mentality, it feels like you’re trying to continue to carry that forward. So what is it? And maybe another way to think about it is, what is not having a challenger mentality?

Matt Murphy:

Yeah. I would say the challenger mentality when I started 11 years ago was, hey, there’s a big gap between where we are now and where we think we want to be. Not necessarily in reputation or principles or who we are as people, but how we’re perceived in the market. The things we’re in the mix on, our ability to win, our ability to have an impact with entrepreneurs, all those things. There was a gap.

So that challenger mentality was, we’re going to fix all that. You can’t flip a switch, so that’s the long journey.

Now the challenger mentality is a little bit different. It’s not going from here to here. It’s like, all right, now that we’re in this cluster of really great leading firms, how do we continue to compound that as an advantage? Instead of reaching to get there, now that we’re kinda there, it’s how do you not lose that position? Because there’s no telling when you’re gonna find your next Anthropic.

So it’s, well, what else are we doing to continue to build the team, compound the reputation, and show why entrepreneurs should work with us? That’s just the mission every day.

So it’s a bit of a different challenge from when you feel like you’re climbing up the hill. I don’t feel like we’re at the top of the hill at all, but I feel like we’ve come such a long way, and now it’s more about making sure that we continue to capitalize on where we’ve arrived.

And that often starts, and our business starts, with convincing entrepreneurs that you’re the firm they wanna work with because you’re different. You’re more fun to work with. You’re better to work with. You add more value. You ask the right questions. You don’t bother them. You do the right thing in hard times. Those are the kind of values that we wanna take forward that will compound for a long period of time.

Turner Novak:

I’m asking this because you’ve been doing this for about 25 years. If you look back, there’s always these firms that kind of fall off. It’s always happening. You guys displaced someone when you went on.

Matt Murphy:

Believe me, we’ve all seen it.

Turner Novak:

Yeah. And I think you first got into this in 1999, am I right? So have you seen any common patterns of what tends to lead to this kind of decay?

Matt Murphy:

Yeah. I think it’s poor handling of generational transition.

Turner Novak:

So how does that usually go, in a bad way or a good way?

Matt Murphy:

Oh, a bad way: people hang around too long and younger, talented partners leave.

Turner Novak:

So the guy who would’ve brought in the new hot founder goes and starts his own firm, or goes somewhere else, and you don’t even see him.

Matt Murphy:

Right. You kinda lose your younger generation. Or let’s just say you don’t have as much alignment in the firm.

I’ll keep saying this, and it probably sounds like a broken record, but some of the best decisions we’ve made are because we’ve had incredibly high alignment within the firm to do something that at the time felt like, “Why are we doing that? It’s a little bit off-spec for us.” But we were so aligned, a high-trust organization.

If you don’t have a high-trust organization, if people are fractured and doing their own thing, when somebody comes in with an exception like that, it’s like, “That’s not what we do.” So you start creating false guardrails. A lot of things can start to break down like that when you don’t have alignment within the firm.

That’s just one example. I think a lack of generational transition can lead to that. But frankly, a lot of those dynamics can happen in a firm even if it’s not a generational issue. People are practicing the business too much as individuals, and you’re not getting that collective strength that makes you better as a firm.

I think also a massive one is what we already talked about: missing a technology wave. If you were late to the AI game and you weren’t a top firm, I don’t know how you recover. And if you’re a top firm, you can recover because of your reputation, but you’re playing catch-up.

So I think those are some of the many stumbling blocks that can happen within firms. They’re always out there facing firms. It’s not an easy job, for many reasons.

Turner Novak:

Well, one hard one was sitting out of crypto or Web3. I had many people tell me, “Oh, you gotta get into Web3. You’re missing out.”

Matt Murphy:

There was a lot of fast money made.

Turner Novak:

It’s so hard.

Matt Murphy:

And a lot of money lost.

Turner Novak:

Yeah. So what do you think you have to do in order to have a culture that can do that? How did you guys think through it, and how do you define that we have this culture that allows us to make these decisions that are maybe hard at the time?

Matt Murphy:

Yeah. I think some of it just started a little bit serendipitously, where we just did it. Like, “Hey, Matt just really felt passionate that we had to be in this company, so let’s make an exception.”

And then you see some of the exceptions that you look back on, and you’re like, “Oh, well, we didn’t have ownership. That’s a waste of time.” It’s like, well, actually, we didn’t, but we leveraged that into a follow-on investment.

I’ll give you another example. We started this thing called the Anthology Fund in partnership with Anthropic after we led the round. It was $100 million carved out for startups, where we do between $100k and a million, roughly, just to give us a broader aperture. Because it was hard to tell at that time what was gonna be big and what was not. Which application areas, who knows, which areas of infrastructure.

So it really gave us a much wider aperture on a much broader set of companies, to see which ones started working. That strategy led to OpenRouter. Our first investment was $100k in OpenRouter.

Turner Novak:

Oh, wow.

Matt Murphy:

And you read about the rumored $8 billion acquisition by Stripe. That led to Wispr, which has been the leading dictation app.

Turner Novak:

Just the voice-to-text?

Matt Murphy:

Right. Yeah. Multi-billion dollar valuation. Goodfire. Four or five really valuable companies came out of that strategy.

So I think it was about creating some flexibility to open up the aperture around a new technology wave, and not be narrow in thinking around old thoughts, like “a venture firm doesn’t invest at this valuation” or “if you don’t have a certain ownership, it’s not gonna move the needle.” I can go down the list. So many of those exceptions led to where we’ve been able to get to as a firm.

And now we’ve institutionalized it more. As part of the fund, we’ve got full slots, and then we call them exception slots, or stub investments, where you start with a smaller investment, hoping that it gets bigger later, instead of being very religious or dogmatic about needing to own a certain percent at that time.

Because sometimes, frankly, even if you’re a great firm, you may lose. And let’s say you lose. Would I rather have something in to build a relationship, or just say I lost and I’m not gonna do anything, because if I can’t own 10, 15, 20%, I’m not doing it?

So I think you have to be really thoughtful about being behind the best entrepreneurs and the best companies. You can’t go wrong in this business if you’re behind the best entrepreneurs and the best companies, so find a way to do that.

Turner Novak:

A lot of the discourse gets caught up on the math and the ownership. And they’re 100% right that you do wanna own more versus less. But again, do you wanna own more of something that’s not worth anything, or own a little bit of something that’s worth a lot? Obviously you know the answer to that one. So I guess it’s finding the happy medium.

Matt Murphy:

Yeah. You can’t do all exceptions, or you’re gonna have a fund of just a scattered set of things where you don’t have any board seats, and you’re not building that reputation as the investor people really want on their board.

Those are the times where you get more ownership. And unless you’ve proven yourself to be worthy of that, you’re not gonna be able to lead the next round. So you have to have clear examples of how the firm operates in both situations. Super important.

Turner Novak:

And I know one thing you were telling me is that you’ve changed your mind a little bit on the size of the outcome. 25 years ago, a billion-dollar outcome was like what Anthropic is today. That was the max. You don’t get any bigger than that. How have you evolved your thinking around how big companies can be and how fast they can get there?

Matt Murphy:

Yeah. Well, it helps when you’ve got companies growing from one to 100, a billion to 10 billion, all these kinds of numbers. That just tells you that something’s different. Sometimes we have to speculatively ask, “Is there even a market here? How big is it?”

The great thing about this is there’s enough existence proof around how quickly some of these companies are growing, and the outcomes we talked about earlier, whether it’s Cursor or OpenRouter. Look, I’ve been in this business for over 25 years, I’ll say that again too. Never have I invested in a company, not even close, where 14 months after investing, the company’s being acquired for a rumored $8 billion or whatever. That just doesn’t happen.

So times are different. I was around in ‘99 when it all collapsed, and I can tell you this feels dramatically different, given the scale and quality of the business models and who they’re selling to. Sticky enterprise customers, applications that would be really hard to rip out, etc.

And some companies need to work a little bit on their gross margins, but that’s a longer conversation about open weight models and all those kinds of things.

Turner Novak:

Yeah. Maybe we should talk about that. But in terms of the parallels with ‘99, was there anything that was happening in ‘99 that maybe wasn’t obvious at the time, but is obvious now, that’s not happening today?

Matt Murphy:

Well, I think with ‘99, you had a much narrower set of people doing new things that were making things take off and explode, but on a relatively low percentage of the population. And I think that’s one of the reasons why things hit a wall.

What I mean by that is, think about the internet browser. How many people had great broadband? How many people had PCs, things like that? It was highly uncomfortable to use your credit card. So you had some small set of the population that had those things and could get over that, and could help these companies get off to a fast start. But then you didn’t get the next 98% of the population.

Turner Novak:

So we kind of plateaued, in a sense, in a lot of ways?

Matt Murphy:

Yeah. It’s not that it was a false positive. But I think if you could have more easily gotten to the next 98%, or even the next 50%, then the scale of the businesses would have caught up and helped them fix their gross margins and things like that.

But it took too long to get there. And the beauty, as we said earlier about AI, is it’s immediately available to every consumer, every enterprise, everybody. So it’s just a totally different dynamic.

Now, that said, I think it’s more than that. This wave has proven to have good, durable business models, like I said, selling to enterprise customers. There was a lot of ad swapping and just really poor business models back in ‘99. But if I really look back on why things hit a wall, it was the combination of not having durable business models, too small of a population, and not enough time to catch up to that at scale.

Turner Novak:

Maybe an interesting segue: you mentioned the open models. There’s a discourse now that nobody’s gonna use these frontier models anymore, and you should use open source models for everything. I see people saying that. It seems like that’s not necessarily happening, maybe just a little bit. But where do you think that settles out? Is everyone gonna continue to use the state-of-the-art frontier models? Are people gonna use open source?

Matt Murphy:

And then you have the Jev wave, which is an alternative to models. So I think what’s basically happening is, as companies mature, everybody’s built their harness of some kind. And they’re figuring out within their harness what the best model is to serve that application, that part of the application, that query, that agent, etc. And that just makes sense.

At scale, when you get so big, you start to turn the knobs. The first part is just, “Do I have an application anybody cares about? Let me just make sure it’s awesome. I don’t care what it costs, because I just want it to be awesome.” And then you’re like, “All right, now it’s definitely awesome, but my gross margin isn’t that great. So how do I fix that part?”

So you go down that path and do a lot of testing, and say, “Well, if I use frontier intelligence for 70% of the application, what’s the outcome? If I use it for 20%, what’s the outcome?”

So I think the narrative over-corrected on, “Hey, it’s all about open weight models.” And now you see people walking that back to, open weight models are great for some set of tasks, but frontier intelligence just really, really matters. When you have that, it can make so many applications so much better that it’s worth paying for it.

Because what do consumers want? A great product. And if you give them a bad product, they’re gonna go look for a really good product from somebody else. So you can’t compete by providing an inferior quality of product or inferior intelligence. You just have to figure out where it matters and where it doesn’t.

So all that turning of the knobs underneath the harness is where there’s a lot of expertise going on right now. What do I think it looks like? I don’t know. I think it’s probably over 50% the main foundation models, like Anthropic. It’s probably somewhere in the 20, 30% range for open weight models, depending on your application.

But there’s other things happening too. Caching is becoming a lot more predominant, so now the harnesses can catch a lot of the requests and serve them from cache instead of from the model. So there’s a bunch of other techniques that can bring cost down. And then you’ve got something like Jev, and we’ll see how big that can become.

But it’s just natural stuff. People are always optimizing their infrastructure. We’re talking about the model layer, but there’s a bunch of optimization going on underneath the models too. Like a company where my partner Tim’s on the board, Gimlet, where you try to figure out the right underlying GPU to serve that request.

It’s not even about which model. It’s which GPU. Is it NVIDIA? Is it AMD? Is it a TPU that’s best to serve that? Which stack? Sometimes it’s based on availability, but oftentimes it’s based on the per-token cost for that type of query and that intelligence. Same thing that OpenRouter was helping people work on: how do you figure out the right model for your query?

Turner Novak:

So then where do you invest today? I know you talked a little bit about how you do smaller checks at Seed, and then you deploy maybe a little bit later. Are there certain areas you think make a lot of sense? And I know you’ve mentioned before that you don’t think Series A is a good spot. Maybe you can explain.

Matt Murphy:

Well, no, I wouldn’t say that. We’re definitely doing Series A’s for sure. I think what I meant is we’ve taken a little bit more of a barbell approach right now.

This is never static. Remember, two years ago we were doing more early growth, the $3 to $10 million, and then that segment shrunk. So on the growth side, and I’ll come back to early, whenever you have a big technology wave like this, there’s a set of early leaders that continue to compound and be the leaders down the road.

We talked earlier about Menlo’s investment in Uber. That was one of the formative applications around mobile, along with Airbnb and Spotify and Square and things like that. You roll the clocks forward, and the companies in that first wave that cracked a significant use case are the ones that have stood the test of time. AWS, etc.

So what we’ve thought about is how do we identify those in this technology wave? Which is why you see us in Lovable, Legora, Suno, Higgsfield, OpenRouter, and Anthropic obviously, and on and on. It’s like, “Hey, let’s make sure. This is a unique point in time. These winners are likely to compound in an outsized way for a long, long period of time, and we wanna make sure we’re in every one of them,” every one that we think has a great entrepreneur, etc.

So that’s one strategy. And then the earlier strategy is really more like, “Let’s go earlier, let’s do more Seed.” Not just the Anthology Fund, but real Seeds, ownership Seeds. Spend more time at places like Stanford, in the technology labs, things like that, where a lot of these researchers are coming out.

And as an aside on that, nobody really spent a lot of time tracking down researchers 10, 15 years ago, because they were just generally not great entrepreneurs. And now the researcher is king, or queen, as entrepreneur for a lot of these companies. It’s been a great wave to see that whole pool of talent really lead this next wave as entrepreneurs.

But what I’d say we’ve done less of is there’s a messy middle right now between Seed, Series A, and later stage growth. And why it’s messy is because companies can start so quickly now, there will be many of them. They’re all gonna grow really quickly initially. You might have a false positive around a company.

There were tons of competitors going after Lovable’s segment, and then Lovable pulled ahead and became the household name in its category. You could have easily made a mistake and not been in Lovable and been in something else. And you can go through different categories where that’s true. Or maybe there’s a category like legal, where there’s Legora and Harvey, and there’s two leaders and a bunch of other companies that don’t matter, because they’ve taken all the oxygen out of the category.

So basically, get in early and believe big in a market, and hope you can build the company, hope you’re right. But that messy middle, where you’re gonna pay a very high valuation for a company where it’s entirely unclear whether it’s the leader or will be the leader, is just a tricky spot right now.

I’m not saying we won’t do it. It’s just that that used to be our sweet spot for growth. And now we’ve said, “Hey, let’s do more barbell.” We want early technology projects and later leaders.

Turner Novak:

So what do you look for when it’s flipping to, oh, they’re a leader now? Is there something, or some things, that typically are a tell for that? Is it just the growth rate?

Matt Murphy:

Well, certainly growth rate’s part of it. I think there’s validation that there’s a really significant market there.

Turner Novak:

So how do you gauge that?

Matt Murphy:

Probably by their customer diversity. They don’t have some huge customer concentration, where they’ve sold to the two labs or two Fortune 500 companies and gotten two $10 million deals. They’ve got a long tail of significant revenue.

But certainly growth rate is a validator of the market as well. You just gotta feel like, “Hey, look, this product is clearly very, very different than the last wave of product that was serving this market,” or this market didn’t have a product before, and the time to close a deal is very short. Something’s just going on there.

And legal’s a good one, because legal is a terrible area to sell software. And then you start selling something like Legora, and you’re like, “Well, sales cycles are ridiculously short. Deals are fast, and usage rates are crazy high.” That’s probably telling you you’ve got a big market.

But I think even earlier on, you just start to see some dynamics. Like, wow, sales quotas per salesperson are not the normal, “Hey, it’s 1.2 to 1.5 or 1.8 for an enterprise sales rep.” Enterprise sales reps are closing $3 to $5 million of business, or this thing’s just being pulled, more PLG.

So you start to see things like that happen early on, where you can extrapolate from that. Versus saying, “Well, we had to add one salesperson with a $1 million quota to sell this, and then we added three more.” The physics of that are very slow. The real outlier, standout companies now are growing most often through PLG, but also through ultra-efficient enterprise sales.

Turner Novak:

Yeah, I think Anthropic is the king of that. It’s insanely surprising how big the enterprise relationships are. I think there’s a number in the S-1 that said two customers were 25% of the revenue or something. You can charge a billion dollars to one customer. It’s like you used to only be able to maybe do that to the government.

Matt Murphy:

Right.

Turner Novak:

And when I think of what those customers are paying Anthropic for, there are probably a lot more customers out there that are gonna be paying a similar amount of money.

Matt Murphy:

Yeah. It just shows you the value of the technology. And if that happens at some large company, you’re like, “Well, why isn’t that happening at many more large companies?”

Probably just because they haven’t tried it out enough. They haven’t enabled their organization to do it. They haven’t re-platformed all their existing applications. And that’s why, not specific to Anthropic, but if you think about this market and how big these companies have become in such a short period of time, and then you look and you’re like, “Well, wait a minute. How penetrated is the technology in the Fortune 5000?” Almost none.

Okay, so they’re doing some coding and some productivity. How many of them have really re-platformed their whole application stack? Nobody. We’re just at the very tip of the spear on all the re-platforming, and all the new internal productivity apps that all these companies are going to build out, and just their comfort level and understanding of AI. So the whole next leg of this wave is spectacular as well.

Turner Novak:

Yeah. It’s always surprising to me when somebody says that AI is kind of overrated, or they don’t really get it. And I’m like, “Oh, so what do you use?” “Oh, we use Copilot or something, in Word.” Like, well, that’s why. Come on.

Matt Murphy:

Exactly.

Turner Novak:

And so there’s the Anthropic revenue chart. You look at that and you say, “Okay, let’s invest in the next Anthropic.” There’s a bunch of these neolabs, as people call them. It’s basically, okay, we’re gonna do exactly what OpenAI did, we’re gonna do what Anthropic did. I think there’s over 70 of them. I think 77 was the last number.

Matt Murphy:

Probably another dozen. I think we’re in ten, by the way.

Turner Novak:

Oh, you are in ten?

Matt Murphy:

Yeah, yeah. We’ve been pretty active.

Turner Novak:

Okay. So why do that? What’s the thinking on investing in more of these?

Matt Murphy:

Yeah. I think there’s two strategies. One is there’s an alternative universe where the model is super strong. So we did Skild for robotics. For robotics, it’s how you train the model and what it does. It’s dealing with things like gravity, etc. They’re just different physics.

Turner Novak:

Yep.

Matt Murphy:

Chai Discovery for drug discovery. Not to say that’s not obviously a big thrust for Anthropic, but Chai has their own models to develop antibodies and things like that. So these are alternative models that are complementary to the main foundation models.

Axiom Math, which is basically math-oriented models. Historically, foundation models haven’t been...

Turner Novak:

They’ve been language, right? More focused on words.

Matt Murphy:

Yeah. Or look at something like Suno. Mikey and team there have built their own audio models to make that experience magical. So for them, they built the model to enable the service. Same with Wispr. They built their own models. So there’s a bunch of that going on. There’s the kind of companies that have built their own model to deliver a consumer service.

But then there’s a bunch of other models that are just highly complementary to existing foundation models. We have this one called Inception that does diffusion for text, which makes it super fast for things like coding. It’s an alternative approach. We’ve got another one that does continual learning, which is a different approach.

So with anything we’re doing, we’re not saying, “Hey, this is going to go right at Anthropic and take revenue from them.” It’s more, where are the adjacent opportunities or use cases that can benefit from a complementary model? That’s how we’re pursuing the strategy.

Now, 70 of these, and many of them raising a billion as an A and then two or three billion as a B, that’s clearly not going to end well. But right now, with the desire for the technology and the talent, there’s going to be some amazing outcomes, like Fei-Fei’s company. I have no idea what they had actually built or what their revenue was, but that’s a spectacular outcome, to be acquired for $8 billion before I think you really have any revenue traction.

So I think right now, if frontier intelligence is the product, that product is incredibly valuable if you as a company don’t have it. So I think we will see some spectacular acquisitions and outcomes, and I think we’re also gonna see a lot of big craters in the ground as well.

Turner Novak:

So I think a lot of people would wonder, why do you have to raise so much money? Do you know what people are usually spending all that money on when they raise a billion dollars to start this company?

Matt Murphy:

For the model companies, it’s much clearer. For the application companies, maybe it’s a more nuanced answer.

But for the model companies, training’s really expensive. With the caliber of people you have to hire to compete with all the labs that want this talent, A, you have to pay people insane amounts of money. You have to either buy or rent a bunch of GPUs just for training before you can even start generating revenue.

And before you start generating revenue, you have to take a long time to figure out, “Well, where’s my competitive advantage relative to the models that are dominating the market? And then how do I take this to market in a way that’s consumable for entrepreneurs and for other companies who wanna use it?”

One of the beauties of Anthropic is the way they built out their harness early. It very quickly moved away from “it’s just the model” to all kinds of surrounding surface areas, like Claude Code, Claude for Life Sciences, Cowork, etc., that breadcrumb people into the experience.

So a model is half the battle. It’s table stakes. You have to have a great model, but then you have to figure out how to meet the market. I think that’s a highly underestimated part of the equation here.

Turner Novak:

Hmm.

Matt Murphy:

So we talked about the lab companies. Then it’s the application companies. Why do application companies consume so much? Well, because growth is expensive. The reality is you may need a lot of FDEs, you still need a lot of salespeople, and you need to support customers.

So I think the capital raised by these high-growth companies is really more a function of their growth than, hey, they’re just spending a lot of money. If they were growing at 100, 150%, which historically would’ve been amazing, these companies would be wildly efficient. Also, we talked earlier about some of them needing to fix their gross margins, so some of that is bigger capital burn, etc.

So I just wanted to cover both sides. There’s the model company burn, and there’s the application burn.

Turner Novak:

And I know you kind of think about it in two phases. There’s phase one and phase two. What are those two phases?

Matt Murphy:

I think phase one was really dominated by, “Hey, I just need a model. I’m gonna use OpenAI or Claude.” And if I’m doing stuff in the enterprise, Claude obviously became the default. That was wave one. I just wanna use this technology, figure out how to use it, have some success with an application, and great, now I have something that’s working and scaling. Perplexity, Legora, OpenEvidence, all these companies that we talked about before. So that was phase one.

Phase two is really now thinking about, okay, now I’ve scaled up a company. I’ve proven that there are a number of consumer and enterprise hit use cases, so now I really need to think about optimizing my infrastructure stack. That’s probably the way I really think about the second phase.

It’s so much broader. Not just open weight models, but some of the alternative models that we talked about. The whole SDLC, the software development life cycle, is being rewritten. The great thing about all this code being written with Claude Code is it creates a ginormous amount of new potential applications and potential functionality.

But the SDLC becomes a big bottleneck, because you have to figure out, okay, how do I merge all this? How do I test it? How do I get it into production? How do I make sure it doesn’t break anything? So there’s a whole set of surrounding tooling.

Security: how do I make sure, in light of all these potential vulnerabilities, when we’re at an all-time high in terms of risk, that the code is secure? So there’s a whole set of surrounding products that are really taking off because so much more code is being written and applications are being rewritten.

And then we already talked about all the infrastructure stack optimization. If you can even shave a few cents off cost per token, it’s a ginormous difference. So there’s a big race for companies who can help people do that better, like Fireworks, where you train and optimize your inference together.

Turner Novak:

With the Anthropic IPO, and SpaceX just IPO’d. I actually don’t know when OpenAI has an IPO.

Matt Murphy:

Next year.

Turner Novak:

Next year. How do you think that’s gonna change the venture market? Any big difference, or do you think it’s just gonna keep cruising along?

Matt Murphy:

Yeah. I don’t know that we need a lot of changes right now. There’s been enough really strong M&A to validate that some of these valuations and companies we’re backing are going to have great outcomes.

I think the issue could be if there wasn’t a vibrant M&A environment right now. It’s like, whoa, everybody’s got all their chips on the table, and there have been no exits. That’s kinda scary. Should we slow down? Maybe we should slow down anyway. But because there’s been some pressure taken off through the release valve of acquisitions, capital back to LP’s, returns, that’s good.

I do think one of the benefits of the major labs going public is it’ll turn some attention to the next wave of companies after that. Because for obvious reasons right now, people are all centered on those two top companies, and understandably why. They’re the biggest, and they’re kind of the heart and soul of what built this whole industry.

But once they’re public, I think people start to look more and more at, “Okay, so what are the 10 companies after that?” Right now, attention’s very focused on the two.

Turner Novak:

Yeah, now that you mention that, I feel like I’ve heard less about SpaceX since it went public. I didn’t even notice until just reflecting on it the past couple seconds.

Matt Murphy:

Well, I don’t think you’re gonna hear any less about Anthropic.

Turner Novak:

Okay. That’s good.

Matt Murphy:

I think that’s a function of SpaceX being kind of a multi-asset business. Are you talking every day about rocket launches in our echo chamber here in Silicon Valley? In this AI wave, it’s everything about what’s going on in the AI world. xAI has a lot of good technology there, etc. But they’re not really in the headlines competing for the core of this market like some other companies.

I think it’s brilliant what they did with Colossus, and the partnership for capacity with Anthropic and things like that. But I think that’s probably why. I don’t think it’s that they went public and people don’t care anymore. There was a big buildup. It’s Elon, it’s SpaceX, all this. But when you look at the thing that people are really talking about right now, it’s the xAI piece, and that piece of the business just isn’t quite as exciting as Anthropic, let’s say.

Turner Novak:

Yeah, that’s fair. So you’ve been doing this 25 years. Is there anything you’ve done differently recently versus earlier on? Anything you’ve changed about how you operate as an investor?

Matt Murphy:

Yeah. Some of it we’ve talked about. A lot was just being a little bit more flexible.

Turner Novak:

Like you’re saying, you bend the rules a little bit if it feels okay to bend on it?

Matt Murphy:

Yeah. I’m kind of a rule follower. I grew up with rules and those principles for how you do this business. There’s some really good things about that that you want to adhere to, and then there’s others where you’re like, “Eh, times are a little bit different right now. We need to make more exceptions and be more flexible.”

And listen to my younger partners more, and learn from them, and not feel like I’m all-knowing. It goes back to our team approach. The energy it brings, having younger partners or more technical partners or partners with more operating experience, just adds so much to the way we make decisions. It makes me better.

So I think it’s partly just the way we’re prosecuting this opportunity as a team. It’s bending the rules a bit when it makes sense. Not always. You can’t live by exception. And then, maybe I said this before, more courage. Dreaming the dream more.

I think earlier in your career, certainly for me, you’re very worried about, oh, you can’t make a mistake. And the more it gets in your head that you can’t make a mistake... Alex Smith, the famous football player, number one draft pick, talks about this. Early in his career his coaches were just on him all the time about, “Don’t make a mistake.”

And it was only when he got Harbaugh as a coach, who was like, “Just go out there and don’t worry about making mistakes. We’ve got the play for you, and if the play didn’t go right, that’s on us. It’s not on you.”

Turner Novak:

Hmm.

Matt Murphy:

And I think it took a while for me to get out of that mode of worrying about making mistakes, and really allow myself to be bolder and think bigger. Your partners can help lift you up on that, like we did with Anthropic. And then I can help lift other people up too, and that’s been a really exciting chapter.

Play more to win. Don’t worry about losing. Win as a team. Accept the fact that this business is really hard and there’s going to be a lot of losses, and do that in a very classy, empathetic way.

Turner Novak:

Well, this has been a lot of fun. Thanks for coming on the show.

Matt Murphy:

Yeah. I really appreciate it too. Good to talk to you.

Find transcripts of all other episodes here.

Related Episodes

He’s an early backer of Audible, Houzz, Chegg, Tipalti, and Navan, where a $50k check became a stake worth $1B+.

We get in to the 30-minute conversation that turned into his first fund, why most partners add negative value, the days his calendar is empty enough to surf on a Tuesday, his fund that had only five companies (and why diversification is a lie), how Navan went from a $90M run rate to zero in a month (and survived), why he does cross-fund investing, refusing DPI when LP’s want it, and the 30-year history of Israel’s startup economy.

A great listen for anyone building or running a fund, or curious how a solo GP competes with the big firms.

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👉 Stream on Spotify and Apple

Timestamps to jump in:

• 0:00 Running $2.7B with no team or partners

• 1:58 How one person can beat a team

• 4:43 Omission beats commission: why committees miss

• 7:13 What really fills a partnership's day

• 9:23 The returns business, not the production business

• 10:58 A week in his nearly empty calendar

• 16:49 The mistakes new solo GP's make

• 19:34 Eleven funds, zero slides

• 22:09 No thesis

• 24:28 Why diversification doesn't work

• 27:14 The fund with only five companies

• 30:44 TripActions insight: everyone hates their travel software

• 34:59 Paying employees to spend less

• 37:34 COVID: $90M run rate to zero

• 39:24 How Navan survived

• 41:34 A $100M round with no way to price it

• 44:29 Keeping the team: the real test of leadership

• 46:04 What Oren looks for in founders

• 50:39 Cross-fund investing, and "trust me, bro"

• 53:59 Always his own biggest LP

• 55:14 The DPI stand that cost him LP's

• 58:54 Decart, and the Anthropic deal

• 1:03:54 Inside the 30-year rise of Israel's tech ecosystem

• 1:07:19 The Yozma program that built an industry

• 1:11:59 Why Israelis build now instead of selling early

• 1:14:39 Moving to the Valley in the 2002 nuclear winter

• 1:17:19 Audible, and why the first home run matters

• 1:19:29 Leaving Apax, and going solo

• 1:22:04 Peter Thiel and a fund raised in 30 minutes

• 1:24:24 The second fund: 48 hours, still no deck

• 1:25:49 ICON: helping Israeli founders crack the Valley

• 1:30:29 The leader he admires most: Anwar Sadat

Find Oren on X / Twitter and LinkedIn

👉 Stream on YouTube, Spotify, and Apple

Transcript

Find transcripts of all prior episodes here.

Turner Novak:

Oren, welcome to the show.

Oren Zeev:

Thank you so much.

Turner Novak:

You’re probably one of the most unique venture capital investors. It’s just one person, you have no team, you don’t do meetings with all the other people on your team. I think the headline number, is it $2.5 billion?

Oren Zeev:

I think it’s more.

Turner Novak:

$2.7. Important to get that on the record. So how does that work? Because I thought you needed to have a big partnership and a bunch of people on the team.

Oren Zeev:

Turns out you don’t.

Turner Novak:

Why not?

Oren Zeev:

It turns out that many people think of this a certain way. Less so now, because there have been many examples, but if we go back 10, 15 years ago, people, including myself, did assume that you needed it. Because why? Because everyone does it, so probably that’s the way. We tend to assume that whenever we wish for something, somehow the fact that you have a partnership and different partners, and everyone weighs in, and supposedly everyone adds value, and you have an office and processes and all that, somehow it necessarily helps the cause.

My experience has been that it’s not necessarily true, and not only that, many times it’s the opposite.

Turner Novak:

Really? Everyone kind of parrots this, like, “We add all this value. We roll up our sleeves, we do all this research.” It’s probably harder to do that if it’s just one guy.

Oren Zeev:

Let’s break it down. First of all, most partners add very little value to each other.

Turner Novak:

So what’s an example of that? How does that play out? Because having a team, doesn’t a team work better than an individual?

Oren Zeev:

It doesn’t, I think. In my experience, let’s start with the most obvious things. I think speed is super important, and by definition, by yourself you can be faster than anyone.

Number two, at the end of the day, the result of what we do is a function of access and judgment. The ability to see and win deals, and judgment. On seeing deals, I’d rather source the deals myself. I don’t want to rely on another partner. If they really like the deal, most of the time they would pursue it themselves.

Let me take it back. When you have a partner, you look like 1,000 other partnerships. When you operate the way I do, you’re unique, and differentiation is always better than better, as the saying goes. So even in the access, it adds uniqueness, it adds differentiation, it adds speed, which is a huge differentiator in winning a deal. Also, it’s a better experience for the founders, because the founders meet me, they know I call the shots, I make the decision, I fall in love. Most of my investments I make within 24 to 48 hours. It’s a wow experience for the founders.

Turner Novak:

Hmm.

Oren Zeev:

The typical alternative experience is to go through a process where the partner pursuing the deal needs to convince their partners. First they need to communicate to their partners. They need to write a memo. That takes time. They ask all sorts of questions and do diligence that they don’t necessarily think is important, but they need to show that they did the work, because someone on the investment committee might have a question.

Turner Novak:

And sometimes in those meetings, you need to be able to ask. If you’re pitching it to me, I need to ask questions. So I need to come up with things to have you then do work to answer my questions, and they might not be important.

Oren Zeev:

Exactly. And I’ve gone through it, because my first 12 years in venture I was in a traditional partnership. Generally speaking, my partners added zero value to my deals. Zero. Negative value to the decisions.

Turner Novak:

So how does that play out in practicality?

Oren Zeev:

There’s another interesting insight that most people don’t think about. Our business is not symmetrical. Mistakes of omission are much worse than mistakes of commission, because if you do a deal that you shouldn’t have done, you lose your money. But if you don’t do a deal that you should have done, maybe you lost 100x the money, or 200x the money, that you could have made.

And your partners, even if they happen to be smart, and even if there’s no internal politics, which are two very big ifs, are never going to push you to do a deal that otherwise you would not have done. They would push back against deals that you want to do. The thing is, even if they are right nine out of 10 times, it’s enough that one time, because they pushed back, you couldn’t do a deal that you wanted to, and that deal was 100x, that the whole thing wasn’t worth it. You would have been better off doing the nine bad deals that thanks to them you didn’t, but missing the one because of them.

This asymmetry is why I think the notion that a decision by committee is necessarily better than a decision by an individual is wrong. A committee necessarily gravitates more towards consensus, whereas an individual can just go with their gut and do something that maybe is a little bit out of consensus. So it’s easier to be contrarian when you’re operating on your own, because there’s no one you need to persuade. I think that’s an advantage too.

So overall, I don’t think I would have been better off if I had people, even if they were great people. Obviously I don’t think I’m the smartest necessarily, and there are many people who are. But I’ve done the partnership route for 12 years, my first 12 years in venture, and it’s also less fun, to me. Right now I 100% control my schedule. I don’t have all sorts of meetings that are essential if you’re trying to manage an organization. I find it a total waste of time, personally.

Turner Novak:

So for someone who’s never been in that role before, let’s say you’re suddenly plopped into a venture partnership and there are like 20 people. What does your day usually fill up with that a founder might be surprised by?

Oren Zeev:

I’m not even talking about the founder. The founder maybe doesn’t care, although they should, because you have less time to help them. But there are so many things. First of all, every investment that you do make, including the ones that you couldn’t deliver, is so much more work. Then there are all sorts of internal coordination meetings. There are status meetings, every Monday at the very least.

Now, you don’t want to look like you’re a slacker, so you probably are keeping deals alive longer than you should, even if you’re never going to do them, just to show that you have five, six, seven, eight things that you’re doing, as opposed to showing up on Monday and saying, “I’m not working on anything.”

Turner Novak:

Yeah. I definitely have days like that. As a solo GP, I’m like, “I’m just not really that excited about anything right now.”

Oren Zeev:

Exactly. But if you were in a partnership, and you are a little bit less secure about your position in the partnership, you have to be very gutsy to come to the partners and say, “This week I’m not working on anything.” I’ve been there, done that. I saw how I behaved and how my peers behaved.

And then you have to manage the people if you’re a little bit more senior. You have to appraise them, manage them, help them develop. You’re expected to do all sorts of things for the firm. This event, that event. You find yourself in the production business of all sorts of things, of events, of this or that. So many things that it’s not even a 10x difference, it’s a 100x difference in terms of how productive I am versus when I was in a partnership.

Turner Novak:

Do you have an AGM? Because that’s one thing a lot of people have.

Oren Zeev:

No. I tell LPs I’m in the returns business, not in the production business. I don’t want to produce events. I don’t have an AGM. I don’t have any events, any periodic ones. I do have quarterly reporting, but it’s all numbers. There’s an outsourced CFO, just the numbers. It takes me five, 10, 15 minutes to go over the companies and the valuation process for the purpose of the quarterly report, and that’s it.

I don’t write stories, because LPs don’t read them anyway. Every VC that I know is writing all sorts of summaries on the portfolio companies every quarter. And I say, I don’t believe that anyway. By the way, if an LP is interested in those things, they’re just going to opt out, because I tell them ahead of time, this is how I operate. I want to filter them out if they expect things of me that I don’t want to change for them.

Turner Novak:

And I guess you have more time then to find and help the best founders, because you’re not writing a term sheet.

Oren Zeev:

My days are really empty. My calendar is very empty.

Turner Novak:

So what do you do on a daily basis, then, as a solo GP? Average week, what does it look like?

Oren Zeev:

Let’s pull it out. Because a lot of people, when you talk to other investors, they’re like, “I talked to eight founders today.”

Turner Novak:

And I’m like, that’s insane.

Oren Zeev:

Not me. Many VCs, once you start measuring it, you’re trying to optimize for whatever you’re measuring. So you want to show the LPs that you have broad deal flow. “We saw 8,000 deals this year.” Exactly, and we only did one out of that. I try to see as few as possible.

Let me check now. Monday, 7:30 yoga. 9:00 AM I had a board meeting. That’s it.

Turner Novak:

Oh, nice. That’s a good day.

Oren Zeev:

Two hours. Then Tuesday, 7:30 a call with one of my companies. 8:00 a candidate for CFO for another company. 9:30, so an hour window, I had advising a founder who wanted some help, and then I had a board, and from 11:30 totally open. At 4:30 I had another quick call with another founder. In between, by the way, I went to the ocean, I surfed, on Tuesday.

Turner Novak:

That might get scrutinized if you’ve got to run that through the partnership.

Oren Zeev:

I’m not going to hide anything. I’m just doing my thing. Today is a full day. Today I had two board meetings in the morning, and another call with an investment I’m making now, and then I drove here and I’m doing this with you, and I have another meeting in San Francisco, and that’s it. At 3:30 I’m finishing today.

Tomorrow I have one board meeting at 7:00 and then everything is open. I have a haircut at 2:30 and that’s it. Nothing else. Probably go to the ocean, depending on conditions. And then Friday I have one call at 7:30. On purpose it’s at 7:30, because I do want to keep the window open in case there are good conditions in the ocean. And at 2:00 PM I’m talking to some other VC who just invested in one of my companies. 3:30 and 4:00 I have two meetings, and that’s it. So super empty.

Which really allows me to be super responsive to founders, because every day on top of this there would be like five or six founders who just sent me a, “Hey, do you have five minutes? Can we have a word?” And I’m always the most responsive, they tell me, because typically within minutes, or seconds, I respond.

Turner Novak:

So a lot of people would say it sounds like you’re not actually doing any real work, quote-unquote.

Oren Zeev:

They would be right. Two meetings a day, I’m not doing work. It’s a hobby. I just take it seriously, but of course it’s not work. Work is something that you do because you have to, because you want to provide for your family, and I don’t have to do it, so of course it’s not work. It’s just a pastime. It’s what I love to do, but it’s not work.

Turner Novak:

So this whole concept of solo capitalism, the solo GPs, when you first did it, it was kind of unheard of almost.

Oren Zeev:

Almost, yeah.

Turner Novak:

Today it’s a little bit more popular.

Oren Zeev:

There is a trend, yeah.

Turner Novak:

So what do you usually see? You said you give some advice to people. What’s the advice you typically give? If I came to you like, “Hey, Oren, I want to start my own fund,” what happens next?

Oren Zeev:

It’s not like I have a recipe. It depends what they’re asking about. Usually they ask more pointed questions, and then I try to answer whatever they ask.

Turner Novak:

So being a solo GP, are there any things that I should be thinking about, like common failure modes? Are there any big mistakes you’ve made since you started doing this?

Oren Zeev:

I can’t think of anything. I made mistakes in specific investment decisions, of course, but in terms of the setup, no, I don’t regret anything. But one thing I would say is that you want to set expectations with LPs, for example.

If I did have lengthy written reports and an AGM, it would be very difficult after fund three or four to say, “Okay, from now on we’re stopping it,” because everyone got used to a certain setup. So basically I tell them, try not to commit to things, because it’s very difficult later to change. If you set expectations day one, it’s fine. And by the way, you’d be surprised that LPs care about these things much less than you think they do. In fact, in my experience, most of them don’t. But of course, if you start a certain way, it’s difficult later to change.

So if you really care about something, have the courage to just say, “This is how I want to do it.” For me it was easy, because if I had to do things differently in order to raise money, I would rather not raise money. It was real. It wasn’t a bluff. It’s not like I was committed to raising money. I said, look, if I can continue to behave as if it’s my own money and be able to leverage other people’s money, that’s great. If I can’t, I’d rather just not do it and use my own money. So for me it was very easy to draw the line in the sand. And I can understand that if someone really wants to raise the fund, and they don’t have the option of doing it with their own money, it’s advice that’s easier said than done.

Turner Novak:

Yeah. You kind of have to mold your strategy into what the capital providers want you to do.

Oren Zeev:

Which I never needed to. So if you can avoid it, it’s great. You don’t want to do things because you’re expected to. You want to do things because you feel that right now it’s the right thing to do. And that’s why I also try not to tell LPs, “I’ll do this, I’ll do that, this is my strategy.” I never present a single slide to any LP, ever.

Turner Novak:

So you don’t have a deck at all?

Oren Zeev:

No, I don’t have a deck. Not a single slide. I never told them, “This is my strategy,” because what if I change my mind in a month, or two? Only to the extent that they ask me, I answer, but I can feel differently about it next month. And for me it worked. I’m not necessarily advising it, because maybe it wouldn’t work for someone else, but for me it worked.

Turner Novak:

So I feel like you meet an LP, and step one is like, “Oh, cool, let me check out your deck.” What do you say when they say, “Send me your deck”?

Oren Zeev:

I never had a deck. This is my 11th fund, and I never, ever, in any of the funds, had a single slide. And they accept it. You’d be surprised that not only do they accept it, they often find it refreshing.

Turner Novak:

Really? But don’t they need to look at some stuff to make a decision?

Oren Zeev:

The only thing that I have is a spreadsheet that has all my investments, everything. It’s very detailed. Cost basis, dates, which class of shares was bought at what point. Very, very detailed spreadsheet of everything that I’ve done, and really that’s it. Whatever they do with it, I don’t know. They probably now tell Claude to analyze it and come up with questions they should ask.

Turner Novak:

Come up with some questions I should ask.

Oren Zeev:

Exactly. I don’t know what they do with it. But all the information is there. What is not there is the packaging of the information in slides. And no, this is a spreadsheet. All the information, I’m not hiding anything. Of course, if they have questions, I answer the questions. I’m not being tricky about it. I’m not trying to come up with fancy slides. I’m just being very authentic, just like I’m sitting with you right now. I’m not thinking ahead. As you know, I had no idea what you were going to ask me.

Turner Novak:

Yeah, you’re actually one of the first people, maybe the first person actually, because usually I’m like, “Hey, I’m starting to plan some stuff out, anything you want to talk about?” And I think you responded in like a minute, and you just said, “I don’t really want to prep anything. I don’t need to.”

Oren Zeev:

So I’m the same with LPs. Luckily I’m in a profession that I guess doesn’t require preparation, because if it did, I would probably be toast.

Turner Novak:

You wouldn’t have made it. So if I’m an LP, though, I’m saying, “Okay, what’s your strategy, your portfolio construction? What kind of sectors do you like?” They like to see all that stuff.

Oren Zeev:

I focus where I have an unfair advantage. I focus on the Israeli ecosystem, not exclusively, but I really focus where I feel I have an unfair advantage. I’m less focused on anything thesis-driven. I’m very flexible. I want to see something that a minute ago I wouldn’t have even thought about, and all of a sudden it makes sense, and be able to pursue it. So I don’t want to have pre-planned, thought-out ideas of what I’m looking for.

There are a few things that I don’t do. Historically I haven’t done them, so I’m probably not going to. For example, I never did healthcare. I just feel that I don’t have the intuition. I’m pretty allergic to all this crypto stuff, so I’m not looking for opportunities there. I try to stay away for the most part from hardware, although now it’s all the rage, so maybe it’s a mistake.

And I try not to go where everyone else is going. By the way, one reason I don’t like thesis-based investing, at least not for me, I know for other people it works, is because for the most part, every single fund will have the same thesis, so everyone is chasing the same opportunity. I want to be a little bit more independent in my thinking.

And honestly, you would think this would be more of a challenge with the LPs. I haven’t found it too much of a challenge, to be honest. Now, I may not know things. Maybe people never even reached out to me. I doubt it, but maybe people who didn’t invest after a meeting, maybe that was a factor. After all, they don’t tell you why they don’t invest.

Turner Novak:

They usually say like, “Oh, it’s not a good fit for us right now.”

Oren Zeev:

Something like that. And I don’t really ask. But in the end, it doesn’t even matter if it hurts me or not, because I really prefer not to have LPs who are not aligned with how I operate.

Turner Novak:

And I think one thing that you do that’s kind of different from a traditional fund, there’s a bunch of academic papers that say venture portfolios should be very diversified to spread out the risk. What’s your opinion on that?

Oren Zeev:

I don’t agree. First of all, from the LP’s perspective, I think there’s zero value in diversification, because they’re diversified anyway, because they invest in multiple managers. And from the manager’s perspective, obviously you don’t want to put the whole fund in one company, because you can never be so certain about one single thing.

But you also don’t need 30 or 40 companies, I think. In my opinion, if you invested in 10 companies and the results sucked, the problem was not that you invested in 10 and not 20. The problem was elsewhere. Maybe it was a terrible vintage, maybe you don’t have any advantage in the access, maybe you have poor judgment. So I wouldn’t put the entire fund in two companies, but actually I did have one fund that only had five companies. And it worked.

Turner Novak:

Wow. So it worked. How did it work?

Oren Zeev:

Two clear home runs, another one which is still TBD, and another two which probably are not going to work. They’re still alive, but probably are not going to work. But overall, having two out of five be huge home runs was huge.

One of them was Next Insurance, which got bought. I led the seed, at incorporation, and it was acquired nine years later for $2.7 billion by Munich Re. And the other one is Navan, which I led the seed and the A on. From the fund that I’m talking about, I led the A, because I had led the seed personally, even before I had that fund. And that one’s a huge winner too, much more than 100x. As you know, it’s a public company now worth seven and a half billion. I originally invested at $10 million pre, so even though there was a lot of dilution, it still worked out.

Turner Novak:

Yeah, I think the headline that I saw was you invested $50K and made a billion or something like that. Is that math right?

Oren Zeev:

No. I never invested $50K, so I don’t know where that comes from. My stake is worth more than a billion, but I invested a lot more than $50K. And I don’t do these amounts anyway.

Turner Novak:

Well, it’s probably the personal check that you wrote, or you wrote more than that initially?

Oren Zeev:

Oh, I know where it comes from. I put $50K in their previous company.

Turner Novak:

Oh, that’s what it is. And that’s personally, and that created the relationship, and then you invested in Navan.

Oren Zeev:

Yeah. So the $50K indirectly led to the billion plus, but it wasn’t a $50K investment in Navan.

Turner Novak:

And that’s an interesting story. So you met them, and you probably invested before they started this new company, because you knew them. You had the relationship, like, “Oh, I’m in.”

Oren Zeev:

Before they got working. Originally, I was chairman of some company that eventually failed, but I was trying to find a VP of engineering for it, and that’s the context in which I met the technical co-founder, Ilan, in 2013. He basically said, “Thank you very much, but me and my friends plan to start a company, so no.”

And then, but I really liked him, and through this I met his friend Ariel, and they started a company called StreamOnce. At that time I was only doing consumer and they were doing B2B. I didn’t understand what they were trying to do, but I really liked them, so I said, “You know what? I’ll put some money in.” By the way, this is before I even had the fund. I put $50,000 in, which, even when I didn’t have a fund, I was writing seven-figure checks personally. So when I wrote $50,000, basically it meant I’m not making a real investment, but I like something about it.

So I invested $50,000 in their company, and six months later it turned out that I wasn’t the only one who didn’t understand what they were doing. They too didn’t exactly understand what they were doing, which led them to the smart decision to sell it, to Jive. They sold it maybe for $15 million, which was fine, because they only raised two million.

Turner Novak:

That’s a life-changing amount of money.

Oren Zeev:

I don’t know if it was life-changing, because by the time they were able to sell, Jive’s stock then tanked, because they got stock. But they made low seven figures each. It gave them the confidence, the next time, after they finished their two years at Jive, to start what was called TripActions.

I have a photo from the decision to go for it, when the whole company is just the two of them and myself. There’s no one else at that point. I said I would lead their seed round. This is before I had a fund, so I put the million and a half in myself, personally, out of four million. So I led the first round, I brought the rest. Lightspeed also joined with a million. But I led it with a personal check of a million and a half. That was the seed. When they did the A, that’s when I raised the first fund, and so I also led the A from my fund. So I led the first two rounds.

Turner Novak:

And how did that company go? It was software for managing travel at your company, essentially.

Oren Zeev:

Not even software. It was actually what it is today. It was basically the online travel agency, but a modern one. The big innovation, it’s a little bit qualitative, but I think this is really what made them successful. Up until then, it looked like no VC would have had B2B travel as a thesis in 2015, because people assumed this problem was solved. You had Concur, you had Egencia, which was part of Expedia, you had American Express, I forget the name of their subsidiary, and other companies.

Their big insight was that this market looks like it’s done, but everyone hates their travel solution. Because when these companies were built, the first generation, let’s say early 2000s, they saw the customer as the CFO. They didn’t see the individual employee who travels as a customer. So they didn’t cater to the needs of the traveler. They built a piece of software that maybe had the control and visibility that the CFO wanted, but was a nightmare to use for the travelers, for the employees.

Turner Novak:

But the travelers had to use it, because the CFO just said, “This is the software we’re using, go use it.”

Oren Zeev:

Yes, but they went rogue because they hated it. So 50% of the time they would find excuses: “I couldn’t find this flight, I couldn’t find this.” And that’s a huge problem, because if 50% of the time people don’t use the software that they’re supposed to use, then you don’t have the control and visibility that you thought you had.

Turner Novak:

So you’re using a shitty product that doesn’t even give you what you thought you were getting.

Oren Zeev:

And if you remember, at some point, maybe 10, 15 years ago, people started to talk about the consumerization of the enterprise. But the first generation of this software was before that. People did not think of the user experience when they sold to companies 20, 25 years ago. Today it’s changed, obviously.

So their real insight was, these things suck, and companies don’t really have a lot of loyalty to their travel solution provider, because luckily it’s not too integrated with other critical systems. So it’s actually not very difficult, if you come up with something superior, to get it switched. And the fact that they cater to the needs of the individual travelers is also a huge selling point to the CFO, because then you can reduce the leakage. The amount of travel that doesn’t get captured by the platform.

Turner Novak:

So what did they do? How did they get people to start using it?

Oren Zeev:

They just thought about the consumer. They built something that was more comparable to using Booking.com or Expedia or Kayak as a consumer. It would take you three minutes to book a flight and hotel, as opposed to an hour.

Turner Novak:

It would take an hour to book?

Oren Zeev:

It was crazy. And to this day, Concur, Amex, all these things are still crazy. They still haven’t been able to innovate. The other core idea that they had, which today is a feature, it’s not that emphasized, but in the beginning was a much bigger part of the story, was the idea of incentivizing the employees to think as owners.

How do you do that? Basically, if the budget for the trip is $400 a night, but they decide to stay at the $200 hotel, let’s share the savings. Let’s give the employee maybe a third of what they saved versus the expected value for the trip. So all of a sudden, because before that, employees had no incentive.

Turner Novak:

Well, you’re traveling on a company card. Why stay at a nice place? You would get the most expensive thing, whether it’s worth it to you or not.

Oren Zeev:

Of course. But if you can get a third back. So that was a key feature in the beginning. Today it’s also a feature, but it’s a feature, not the main thing. And because of it, companies that use TripActions, and now Navan, do save significant amounts on travel. Not because they forced it. Before that, people tried to control the behavior of the employees with rules, with policy. This is what you’re allowed. But it’s much better, instead of trying to control behavior, to influence behavior by changing the incentives.

So that was the original idea. The funny thing is, it’s not that different today. Today everything is AI-driven, that’s the main difference, but it’s still the original thesis.

Turner Novak:

So I’m super curious then what happened during COVID. COVID hit, people just stopped traveling. And it wasn’t a public company yet, right? But it was pretty large.

Oren Zeev:

Yeah. That never happened to me in my career. They were like a rocket ship at this point. In February 2020, they were probably about $90 million run rate, growing very fast, and by April it was zero.

Turner Novak:

Like, no one traveled?

Oren Zeev:

Zero. No one. Because even consumer travel, some people did travel. But business travel went to zero, and it took much longer to recover than consumer travel. People rightly talk about Airbnb as a hero in their response, which they did, but at least they had some business. Some people went from short-term to long stay, rented for a month or two.

Turner Novak:

They were kind of doing the COVID work-remote trips.

Oren Zeev:

Work remote, yeah. For Navan, zero. One of the reasons I have so much confidence in Navan is that if they survived this in flying colors, then I can talk about it, if you’re interested, about what they did exactly. What doesn’t kill you makes you stronger. This is like the worst curveball you can think of in a business. I’ve never seen a business go from a rocket ship to zero without any visibility on when it’s coming back. That’s quite crazy.

Turner Novak:

Okay, so I do want to talk about what happened. How did they navigate that? Because it’s a public company now worth, I think you said, $7 billion.

Oren Zeev:

Market cap now, yeah. But back then it wasn’t public.

Turner Novak:

So how did they navigate it?

Oren Zeev:

A host of things. First, they were the very first company to fire people, and got a lot of grief over it, because we fired over Zoom. We got grief especially from the Israeli media, that we fired over Zoom, as if there was any other way to fire people.

Turner Novak:

Yeah, because back then it was like, if you made eye contact with someone who had COVID, you would get it and you would die.

Oren Zeev:

Exactly. That was the worst part of the time. So, within a week. First of all, cut expenses. Second thing, we already had the beginning of an expense product, and people would buy expense management even during COVID. So we switched resources, and the expense part got a boost.

Turner Novak:

Just like expense reimbursement. “I go and get coffee for work, I pay with my card, and I need to get reimbursed from the company.”

Oren Zeev:

Expense management, yeah. Or a chair for the home office, probably. Now, the synergy is that 70% of expenses are related to travel, but there’s 30% that’s not. So at least you had something to sell. And even within the travel product, we changed, we introduced new features. For example, there’s more of a risk on this route than that route, COVID-related. So, expense-wise, they made changes very rapidly.

Funding-wise, luckily we had raised a few months before COVID, so we were pretty well off. However, in April, Ariel managed to do another $100-and-something million round, which was amazing.

Turner Novak:

In April of COVID? How did he do that when the business was zero?

Oren Zeev:

It was structured. He was able to convey the confidence that it’s just a matter of time, that if we survive this, we’re actually going to come out stronger, because it’s not that the business went away. It’s going to come back. This was a round done by Greenoaks. There was no way to price it, because how do you price it? So it was very structured. But in hindsight, they did a good deal, and they deserve it. They needed big balls to do it, and kudos to them, and to Ariel for pulling it off.

And there were a host of other things. The main thing, though, was, what was the real risk? Once we did the round in April, there wasn’t any imminent risk of running out of cash. I know some people believe that maybe travel has changed forever. We didn’t believe that for a minute. We believed it was temporary. At some point, we didn’t know when, but at some point it would come back.

What was the real risk? The real risk was talent. And not the travel talent, the travel talent had nowhere to go, so we were not worried about them. But engineers and go-to-market people, it’s very transferable. In March and April that was not a problem, because everyone froze. But come June, some companies were starting to dramatically grow. You had Snowflake, you had Zoom, you had Databricks. All these companies in 2020 were growing like crazy, and they knew we had good talent in engineering and go-to-market. They were targeting us like crazy, which I don’t blame them for, because we would have done the same thing. I think at some point Ariel may be the only employee in the company who did not get an offer.

So the biggest success of Navan during 2020 and 2021, this is 100% in my book the ultimate test of leadership, was the fact that we managed, for the most part, to keep our talent. The fact that Ariel was able to inspire the confidence needed for people to still stick with it and say, “Don’t worry about it,” when they had great alternatives. It’s not that we didn’t lose anyone. We lost some people we didn’t want to. But if you look at the top executive team, we lost no one, and if you look at the engineering and go-to-market organization, maybe you lost 20% that you didn’t want to lose. But for the most part we were able to hold. This to me is the ultimate test of leadership. I think it’s world-class leadership.

Turner Novak:

How do you keep the best talent in a situation like that? Because if I’m a competing CEO, I could be like, “Your company’s dead. What are you doing? Your stock’s worth nothing. Just come over here and work for me. We have a great product.”

Oren Zeev:

So somehow he was able to inspire the confidence that it’s temporary, and we’re going to come out of it stronger. This is why I call it leadership, because I don’t know that I would have been able to do it, but he managed to. It’s a world-class feat to be able to keep the talent, because that was a real risk. If we had a weaker CEO, weaker leadership, I think they were a very strong group to begin with. They liked working with each other, that helps. We had strong culture. But at the end of the day, it’s the leadership, it’s the culture. All these words that you don’t think matter, but they do matter.

Turner Novak:

Do you feel like you could have sensed this, or picked up on it, back when you first met them?

Oren Zeev:

No, not really. Honestly, I knew them well when I invested, but at that point they had built a company to six people, the first company was sold when they had six people, before they had revenues. So to say that I somehow looked Ariel in the eye and knew that he was going to grow to a world-class leader would be stupid.

Turner Novak:

I mean, some VCs will say that, that they can tell.

Oren Zeev:

Some VCs would say that. I am not going to say that. I didn’t. But luckily, in this case, it worked out.

Turner Novak:

So what do you look for then when you’re meeting a founder and you’re trying to figure out, can they build this thing, go the distance? I’m going to give you a bunch of money.

Oren Zeev:

In their case, for example, and then I’ll generalize. In their case, I knew that Ilan was a world-class engineering lead, meaning he’s super smart on the engineering side, but he also understands business. So he can really build the technology that also makes sense from a business standpoint, not just technology for technology’s sake. And I knew that Ariel was an exceptional product person, and very driven.

So basically I had the two things that I care about at the early stage: engineering and product. Because sales and marketing we can get later, once you have something to sell. In the beginning, the most important thing is world-class engineering and product, and that I knew I had. Now, the other thing that’s super important, that I don’t know there is any way to know at this point, is whether the CEO can grow to be an amazing leader of a company of a few thousand people. That I didn’t know. But to me it’s enough: if I think the idea makes sense, and the team is great in engineering and product, that’s a good enough reason to bet. Sometimes it’s going to work, sometimes spectacularly well, sometimes in a modest way, sometimes it’s not going to work. That was an easy bet, because I had all these ingredients.

Now, the more general rule that I use is, I really judge founders by what they’ve accomplished so far. Or, if it’s a brand-new idea, then by what they’ve accomplished before. I’m not a psychic. I don’t believe in somehow guessing just from the way they speak how they’re going to do. At least I don’t know how you would. So based on what they’ve done, in their case, first of all, they started a company and sold it successfully. A small deal, but still, 99% of people don’t start a company and sell it for $15 million. Probably 99.99%.

And even before that, both were executives at an originally Israeli software company called Mercury Interactive, which at the time was the biggest that came out of Israel. Very successful, very strong, ultimately bought by HP for $4.5 billion. But before they were bought for $4.5 billion, they were worth $20 billion at some point, in the previous bubble. I had a lot of friends in this company, so I also knew them. I knew how they did at Mercury, I knew how they did at the startup that I invested in, StreamOnce. But of course I couldn’t have known that Ariel would grow to what he did, or Ilan.

And that’s the other thing. In the successful companies, one thing I can say is different, but only in hindsight, between successful companies and less successful ones. Let’s compare two companies that both accomplished product-market fit, because most companies fail because they never accomplish product-market fit. But within the ones who do, the real difference between the ones who become great and the ones less so, I believe, is whether or not the founders are the same founders you started with, or they have grown tremendously during the journey. And Ilan and Ariel are in the camp that they’ve grown tremendously. There is no comparison between Ariel today and Ariel when I backed him in 2013 with StreamOnce, or in 2015.

Turner Novak:

So how do you pick up on that? Because that seems like an important part, this ability to grow.

Oren Zeev:

Only in hindsight, I know. I can think of situations where that was not the case. If someone has a way to assess it, great. I don’t know that I do. I know it after the fact most of the time. Maybe I have good intuition about it, but it’s not foolproof.

Turner Novak:

And so we first started talking about Navan in the sense that it was a big chunk of one of your funds.

Oren Zeev:

Well, no. A chunk of multiple funds of mine, because I invest across funds.

Turner Novak:

And that’s something a lot of people say you shouldn’t do. “You can’t cross-invest like that.”

Oren Zeev:

I know. That’s another thing I do that others don’t. I do cross-fund.

Turner Novak:

So what’s the reason people say you should not do that?

Oren Zeev:

The reason people say you should not do it is because there is, or could be, a conflict of interest.

Turner Novak:

Because you’re propping up a previous portfolio company, and they’re not in that fund.

Oren Zeev:

Well, in both directions. Let’s say a new fund invested in an older fund’s investment and it failed. It could look as if you used the new fund to try to bail out the old one, and it failed, so you look bad. The other direction, let’s say it succeeded tremendously. Maybe you took advantage of the LPs in the first fund. So in theory, LPs can feel a conflict of interest.

And my answer to this, if someone raises it, is basically, trust me, bro. That’s my answer. Because if you don’t trust me, just don’t invest. There may be a conflict, but the counter is, listen, if there is something great, it would be stupid not to use the new fund. You have to trust me that I’m not going to use the new fund to bail out the old fund. I’m going to try to get the best deal for the new fund. The company, if they took the deal, it means it made sense for the company, because I’m not going to force them to take money from the new fund. So by definition, the interests of the old fund are protected, because the CEO of the company is going to take care of that. And the new fund’s interests are protected because I’m going to take care of that.

At the end of the day, if anyone, an LP for example, came to me and said, “It’s okay that you do it, but only if there is also third-party money on the same terms,” I’d say, no, I don’t want any rules. Most funds have a thing called an LPAC, LP Advisory Committee. I don’t. So most funds, to the extent that they do cross-fund, they need to bring it for approval. And they get the approval. But just the fact that you have this process already reduces the motivation to do it. So I don’t have this friction. And at the end of the day, LPs back me. They just trust me, and I’m not going to betray the trust. I’m not going to betray the trust of the LPs, I’m not going to betray the trust of the founders, because it’s going to be self-destructive. You can only betray other people’s trust once, right?

Turner Novak:

Yeah, and then they’re never going to trust you again. But I think you said something kind of interesting a little bit earlier in the conversation. You just invest like it’s your own money.

Oren Zeev:

100%.

Turner Novak:

So you’re just thinking, “I’m just trying to make as much money as possible. This is the best opportunity to make money. I’m just going to use the current fund to make money.”

Oren Zeev:

Well, first of all, it’s easy to treat it as my own money, because in many ways it is. Typically I’m close to 15% as an LP.

Turner Novak:

So you’re usually one of the biggest LPs.

Oren Zeev:

I’m always the biggest LP. Always. I don’t have a single fund where I wasn’t the biggest LP. And I have 30% carry. So between the two, I’m over 40% of the economics of the fund. So of course I treat it as my own money, because it is my own money.

That’s number one. Number two, another way to say it, which I sometimes say, is that all VCs are anywhere on the spectrum between, on one end, substance, and on the other end, appearance. When they make decisions, sometimes you make a decision that may be suboptimal because you don’t want to appear a certain way, or you want to appear another way.

The way I operate is 100% on substance. And by the way, it has costs. I’ll give you an example where I paid the cost. In the last two, three years, it became very, very important to LPs, extremely focused on DPI. Some LPs went so extreme as to say, “We don’t believe any of the TVPI. We only believe in DPI. Only DPI matters.”

Now, you can always generate DPI if you’re willing to. Assuming you have a good portfolio, you can always generate DPI. You could always sell secondary, for example, at a discount, just to generate the DPI. And I had, especially the early funds, they’re so good, the TVPI is so much higher than I would ever need for fundraising, that it’s easy to take the discount and trade it for impressive DPI. And yet, until a year or two ago, I didn’t have good DPI, because only now is Navan public, and Next Insurance. So for sure it hurt me. I know I lost LPs over this. That’s the price I’m paying for being true to what I’m saying, that I’m treating it as my own money, and I’m making decisions based on substance, not appearance. I’m not making decisions in order to improve the way I look to potential or existing LPs.

Turner Novak:

Any other examples?

Oren Zeev:

Another example: some LPs could, by the way it never happened to me, but I know it happened to other VCs, once a company is public, they have a good case to say, “We don’t pay you to hold the stock. Please distribute it, then we’ll decide if we want to keep it or not.” And in general, I actually agree with it.

But when the lockup expired on Navan, for example, I thought the price was stupid. Way too low. I thought the market didn’t understand the company. I thought I understood the company better than the market, which could come across as pretty arrogant to say.

Turner Novak:

You’ve known this company pretty closely, and the founders, for over a decade.

Oren Zeev:

Over a decade. But it still may be that my judgment is clouded by wishful thinking. But I felt so strongly about it, I didn’t distribute, even though it was still 50x on the cost. It would have been a good result even at the low price. But I felt it would be crazy to distribute shares. And by the way, the LPs, I’m doing them a favor not distributing, because 90% of them are going to sell, because they don’t know anything. Why would they necessarily keep this stock? So now it’s almost 4x what it was four months ago.

Turner Novak:

When you made that decision.

Oren Zeev:

And I still plan to distribute slowly, because I want to benefit. So that’s something that if it had gone the other way, I would have looked really bad. I took the chance because I thought it would be stupid not to. I thought it would not be in the best interest of the LPs. But I took the chance that I would look very stupid. Fortunately, in this case it didn’t materialize, but in other cases maybe it did, that I made a decision I thought was good, and in hindsight it doesn’t look good. And yeah, I’m willing to take it.

Turner Novak:

So there’s another company that you have, it’s called Decart. There have been some headlines about Decart. What’s the story with that one?

Oren Zeev:

I met them less than three years ago. One of the portfolio CEOs made the connection, which, by the way, is how pretty much 80, 90% of my deals happen.

Turner Novak:

That’s probably a big LP question, like, “Hey, you don’t have any associates, where do you get your deals from?”

Oren Zeev:

Yeah, how do you manage this? Most of the deals I end up doing are actually from other portfolio companies. So I immediately took the Zoom meeting. It wasn’t even an idea. The founders were just very smart, which they are, and had access to great talent, which they do. And they know how to program at a low level, GPU, CUDA for NVIDIA GPUs, for example. So they can really optimize all the inference algorithms. It wasn’t even clear at that point whether they were going to sell a product, or whether it was going to be B2B or B2C. It wasn’t a fully baked idea, but it was clear to me that the founders are exceptional. Clear as day.

And within less than a day we had a legally binding agreement. A week later I met them in person, when they visited, because this was only done over Zoom. That was three years ago. The funny thing is that in the three years they drifted here and there at some point, but in the end they got back to the original thesis, which is, we’re just really good at being vertically integrated, so we can run these inference algorithms orders of magnitude faster, and more efficient. And because of that, and because of where AI is today, they are an extremely coveted company, by many of the big ones.

Now, in the press, I obviously cannot say anything beyond what’s already there, but according to the press, they’re in the process of being acquired. There were all sorts of names being mentioned. Right now, the story in the media is Anthropic. I can say it, since it’s in the media. Right now the story is that it’s being acquired by Anthropic, for a lot of money, which, if true, is unprecedented in terms of speed. In less than three years, it’s unprecedented.

Turner Novak:

Zero to seven billion, based on the headline, in three years.

Oren Zeev:

Six, seven billion, yeah. And by the way, Anthropic stock might get a little extra kick here, hopefully. Now, again, it’s not necessarily a done deal. By the time this is published, who knows, I may look stupid.

Turner Novak:

We’re live right now.

Oren Zeev:

No, I’m just kidding. I didn’t say anything that’s not in the press, and I’m not confirming anything. But we’ll see. Whatever happens, right now at least they have something that is amazing, because the stakes are so high. It’s not just Anthropic. All the big guys, if they can get a real advantage by having this talent and technology, it’s extremely strategic. So I’m very, very happy about it, but we’ll see. It’s not done yet.

Turner Novak:

Yeah, I have a similar situation with Anthropic, where they acquired a portfolio company and I’ve got some Anthropic shares, and it’s kind of like, Jesus take the wheel. I’m like, let’s see what happens with this company at this point.

Oren Zeev:

The earlier you got it, the better, right? The earlier you got the Anthropic stock, the better.

Turner Novak:

Yeah, it was like the end of the year last year, so it was pretty nice. I think it’s up a nice amount.

Oren Zeev:

Is it before or after the A round?

Turner Novak:

It was the one before that. Like 4,100 or something.

Oren Zeev:

Oh yeah, so it already 3x’d.

Turner Novak:

Yeah, it was like an extra 3x. I’m seeing headlines of people saying it’s going to be worth two or three trillion with acquisitions and that kind of stuff.

Oren Zeev:

By the way, in the secondary market it’s already more than that.

Turner Novak:

Oh, is it really?

Oren Zeev:

Not more than two, three trillion, but more than the $1.2 trillion.

Turner Novak:

$1.2, I think I saw the other day.

Oren Zeev:

Yeah, something like that. Who knows? So, best of luck.

Turner Novak:

Best of luck to you too.

Oren Zeev:

And hopefully to me too. We’ll celebrate together.

Turner Novak:

So one interesting thing we could talk about, the Israeli tech ecosystem. Not just Decart, but a company like Wiz also was, I think in five years, zero to 30-something billion.

Oren Zeev:

$33 billion. Amazing.

Turner Novak:

So you’ve been part of the Israeli tech ecosystem for your entire career, almost. So what was it like back when you first started? Was there a lot going on?

Oren Zeev:

Very different. When I was a kid, the biggest export of Israel was oranges.

Turner Novak:

Are they still a pretty big export?

Oren Zeev:

I don’t know, but it’s dwarfed now. The brand exists, and maybe they did well since the ‘70s, but on a relative basis it’s insignificant. It first started with American companies starting development centers in Israel. For example, I started my career at IBM Research.

Turner Novak:

In Israel? What were they doing?

Oren Zeev:

In Israel, as a research staff member. I personally was working on, believe it or not, image and video processing, and then also chip design. But we were doing all sorts of projects. We had like five, six research groups, and each of us was pretty isolated, because each of us worked with a different group at IBM. So I don’t even know what the others were doing.

And similarly, Intel at that point already had a chip design facility in Israel, when I was a student in EE at the Technion in the ‘80s. And by the way, in all these cases, it wasn’t a decision by Intel or IBM to say, “Israel is an interesting place, let’s start something there.” And it wasn’t an acquisition either, in most cases. In most of these cases it was one really good Israeli person working for IBM or Intel in the US who, for personal reasons, decided to go back to Israel. The IBM guy, his name was Joe Raviv, he’s passed now. The guy from Intel, his name was Dov Frohman. And IBM or Intel didn’t want to lose this person, and they said, “We’ll let you work from Israel, and we’ll even let you hire two or three people.” And it grew from there. So it was very organic. That was the very start.

I should say that there were good universities and technical schools in Israel, good education, good talent, but zero understanding of market or anything like that. So that was the first exposure. And then sporadically there was one tech company here, one tech company there.

Turner Novak:

Were they related to IBM and Intel in some capacity?

Oren Zeev:

Not necessarily. For example, Mercury Interactive, which I mentioned before, started in ‘89 or ‘90. I remember it because I graduated in 1990, and two friends of mine from school got hired and became very big shots there.

But the real game-changer was, believe it or not, thanks to the government, which is shocking to anyone who believes in free markets.

Turner Novak:

Yeah, there’s like an oxymoron almost.

Oren Zeev:

Exactly. Like Reagan said, the scariest words in the English language are, “I’m from the government, and I’m here to help.” They made one brilliant decision. It was in 1993. They made a decision to kick off and start a venture industry. But the way they did it, they didn’t try to hire managers or put money in directly. What they did was very, very smart. They called it a program, they called it Yozma, which means initiative.

Basically, they said, we’re going to sponsor eight funds of $20 million each, where we’re going to contribute $8 million, and we’re going to give an option to the other LPs to buy our $8 million five years later at basically cost. So basically lever the investment. But the managers chosen to be the managers of this still needed to raise $12 million from LPs.

So they allowed the market forces to work, and obviously not everyone can. It’s not that the government decided you’re going to be a venture capitalist. People had to have the initiative to raise a fund, raise $12 million. They had the kicker of the leverage, the $8 million that you could buy, but they still had to raise $12 million.

Turner Novak:

It was still free market, but they subsidized it, kind of.

Oren Zeev:

It was a way to have a positive effect without distorting the free market. That was so brilliant about it.

Turner Novak:

So it’s probably like these eight would have raised maybe anyways, and it just gave more incentive.

Oren Zeev:

Maybe, or maybe they wouldn’t have been able to raise. Who knows? But you didn’t let some bureaucrat in the government decide, you’re going to be a venture capitalist based on whatever.

Turner Novak:

Yeah, like, my cousin likes computers, so he’ll start a firm.

Oren Zeev:

Exactly. There was no corruption involved. And this is the basis of the industry today. These eight funds, some of them still exist in some incarnations. And it helped that by the time they started operating in late ‘93, if you think about it, that was a great vintage, because they had all the time in the world to benefit from the bubble of the ‘90s and exit before the bubble burst. So it was a brilliant decision, but also brilliant timing. This cohort did really well, which allowed them to raise a second fund of $50 to $100 million, let’s say around ‘96, ‘97, this time without any government help. And basically the flywheel was in action.

Now, if you look back, personally I entered this industry in ‘94, and I was hired not by one of these funds, but by the first fund after this program, which was Apax deciding to start a global operation. They hired me and someone else to start their operation in Israel. In the ‘90s, the stereotype, which was correct, was that Israelis may be good in technology, but they have no idea how to talk to customers. Well, they know how to talk to customers, they have no idea how to listen to customers. They understand nothing about marketing and sales, even less so in consumer.

And the first success stories were chip companies, which were more about building technology than the psychology of the consumer. And telecom equipment, which was big in the ‘90s, and data networking equipment. The ‘90s were all about data networking, telecom equipment, chips, etc.

Turner Novak:

Just generally the companies that did pretty well in San Francisco too, like in the Bay Area.

Oren Zeev:

Fair. In many ways, I think Israel is an extension of Silicon Valley. What happens here happens there, and even the cultures at this point are pretty similar. So I see Israel as not isolated at all. The market is the same, the market dynamics are the same.

Over time, however, the other criticism of Israeli tech back then was that Israelis sell very quickly. They don’t build big companies. They’re good at starting companies, selling quickly, but they don’t build companies. That was true in the ‘90s, and maybe in the 2000s, but over time, every new generation of founders is so much better and more sophisticated than my generation, or even the generation before. When I look today and I talk to 26, 27-year-old founders, I scratch my head and say, wow, I was so clueless when I was their age. There’s no comparison.

And also the thresholds, because people are competitive. If you could sell a company in ‘97 for $50 million and be a hero of your town, of course you would do it. You would take the money. But today, if you can sell a company for 800, but the guy who sat next to you in the army or in another company already sold his for a billion and a half, you feel like a loser. So you’re going to shoot for more. Every time a Wiz happens, or a Decart happens, the bar keeps rising. It’s the same dynamic in Silicon Valley. The Valley is probably a similar story, 20, 25 years before. It’s a flywheel.

That’s why the Bay Area, so many times I heard about the demise of Silicon Valley as the center. One time it’s because of this, one time because of that, and now it’s because everything’s remote anyway. Before AI, people started saying, now we can start a company anywhere. Turns out the biggest value creation is still happening in Silicon Valley, by far, 10x versus anywhere else. And I think on a smaller scale, Israel benefits from the same dynamics. If this deal supposedly in the papers, of Anthropic starting their first engineering center outside the US, it really positions Israel as the most important country for AI outside the US and China. A distant third, okay, but still ahead of 200 other nations.

Turner Novak:

Yeah, there are a lot of others. I mean, Israel’s one of the smallest countries, so they punch way above their weight class.

Oren Zeev:

Oh, for sure.

Turner Novak:

And so you joined Apax to lead the Israeli office.

Oren Zeev:

Not lead. I was the junior guy out of two.

Turner Novak:

But then you actually moved back to Silicon Valley.

Oren Zeev:

Not back. Moved.

Turner Novak:

Moved, okay. You had never been in San Francisco, Silicon Valley, before that.

Oren Zeev:

Well, I visited. It’s fun, when I was in sixth grade I lived in Davis for one year, because my dad was also an EE professor, and he was on sabbatical. So I spent one year in the US as a kid. And maybe when I was a VC I visited here every now and then, but never lived here. And I always wanted to, because I always felt that when I was in Israel, Israel is great, but it’s not the major league. I felt that Silicon Valley, I wanted to be in the center, not in the periphery. And I felt that Israel, with all its strengths, is still the periphery. Not then, and not even now.

So when there was an opportunity, but by the way, it’s not that easy to move, because it’s not easy to get a visa. Basically Apax acquired what was called Patricof in the US.

Turner Novak:

Patricof? Is that the Greycroft founder?

Oren Zeev:

Yes. Alan Patricof is also the Greycroft co-founder. Patricof & Co. was a VC firm, well-known back then. At that point we were part of Apax Europe, and we acquired the US firm. And they were thinking it would be a good idea if someone moved to the US to help with the integration. It didn’t play out that way exactly, but I was like, “Hey, I would love to go if there’s an opportunity.” And that was the opportunity. So thanks to that, I got the L-1 visa, and I moved. This was 2002, so more than 24 years ago. And it was an interesting time, and I had a great time.

Turner Novak:

You don’t want to hit the ground during a bubble. Things had settled, where everyone’s like, “Oh, shit, it pops.”

Oren Zeev:

Oh, it was a nuclear winter. It was much worse than anyone who hadn’t lived it can imagine, because it’s not even close to what happened in 2008. It was a total nuclear winter.

Turner Novak:

Well, yeah, because 2022 we kind of just roared right back, versus four years later.

Oren Zeev:

No comparison. 2020 went two months that looked bad, no comparison. Back then there really was no comparison, and every VC was shell-shocked. And actually, my first deal off the bat was a great home run. It was Audible.com. And there were two reasons I was able to do it. One, everyone was shell-shocked, and any company that ended with a .com, you would look like a total idiot to invest in. The other reason it was a little bit easier for me is that when I moved, I also got rid of all my boards, because everything I did in ‘99 was shit. So when I moved, I got off all the boards. I didn’t have the mental burden of going into every board meeting and coming out depressed. Whereas I can imagine that otherwise, every single board meeting you go to is total depression, and it’s very hard mentally to muster the energy to invest in a new company.

So that was one advantage. The other advantage was that two of my partners were on vacation, because there’s no way I would have been able to get it approved.

Turner Novak:

Get this past the .com thing.

Oren Zeev:

Yeah. The two that would have blocked it were on vacation, so that was the other reason I was able to.

Turner Novak:

Were they pissed when they got back?

Oren Zeev:

No. It was behind us. But I bought 40% of the company. It was an amazing deal for nothing, and it was a very quick home run. And this is really what made me, because the first deal is the one that legitimizes you. The first home run is the one that legitimizes you. Because before that, even the exits that I did have in Israel, first of all, they were base hits and not home runs. Plus, nobody here cared about it or knew about it. So this really established me. It was a very important deal. And to this day I’m in touch with the founder, as a close friend. You never forget the first one, the one that made you.

Turner Novak:

And so I think it was like 2007-ish when you left?

Oren Zeev:

When I left, yeah.

Turner Novak:

So what happened? Why did you decide to leave?

Oren Zeev:

Well, I decided, but also Apax decided, so it was a mutual decision. Apax basically decided, and it was the right decision for them, to focus exclusively on mega buyouts and get out of venture altogether, and shut down California. So I really didn’t have a job. And they actually asked me to fire everyone else, and then myself, and find a sublease for the office, and clean everything up.

Now, unbeknownst to them, before I got fired, I had already decided I was going to leave. So I was actually really happy about it, because I got a better deal, thanks to the fact that they fired me. But when I left Apax, I actually thought I was done. I had made enough money, so I was financially independent, and I didn’t feel the need. And I was so worn out, because it wasn’t a nice environment always. It was a very difficult work environment.

Turner Novak:

You had a partnership and team also, we talked earlier.

Oren Zeev:

Very difficult partnership dynamics. So I was disenchanted with all this VC stuff, and I had no idea what I was going to do. So I took a year, 2007, pretty much, to figure it out. And I tried all sorts of things. For example, I taught math at a high school. And in 2008, I got drawn back to investing, but I was very committed not to do it the conventional way, because I was post-traumatic. It wasn’t a strategic decision, or an economic decision. It was a post-traumatic decision. Over time, I actually learned that there are all these advantages to doing it this way, including for the founders. But initially that wasn’t the drive. The drive was, I just don’t want to join a partnership, and definitely don’t want to start a partnership.

And for seven or eight years I did it on my own, but I was behaving as a VC. So I never called myself an angel or super angel. Every deal I led, every deal was seven figures. I only did like two deals a year, because I couldn’t afford more. But I did Navan, I did Tipalti, I did Houzz, other well-known names. So I had very good hit rates, and I was happy. Things were working. I didn’t want to change anything. I had an empty calendar, like today.

And then I had the random meeting with Peter Thiel. Total random, from my perspective it was just to get to know the guy and compare notes, and maybe I’d send him later-stage deals to Founders Fund. We talked 20, 25, 30 minutes, and after 30 minutes he asked me, “Why don’t you raise a fund?” And that in itself was not that unusual, because people had asked me before. I told him what I told the others: been there, done that, I don’t need the brain damage. I like my life as it is. I like simplicity, I don’t want to complicate it.

Everyone before him always said, “If you ever raise a fund, come back,” being LPs. Very nice. He said, “Why don’t you let me be your LP, and we’ll treat it as an experiment and see. Maybe you can have your cake and eat it too.” When he said it, I never even thought about him as an LP, because I didn’t know at the time that he also invests in other funds. So I didn’t think of him as a potential LP. I never showed him a sales slide or anything. And when he made it so easy, I said, “Wait, why not? Let’s give it a shot.” So on the spot I told him, “Okay, I don’t want any management fees,” because at that point I didn’t feel that I, I don’t want a 10-year fund, because I want to be able to stop it at any time. Only carry. And he immediately said yes. There was no negotiation. And I literally left the meeting with a fund I didn’t know I was raising an hour earlier. I didn’t even know I was meeting a potential LP an hour earlier.

Now, today he’s not involved, and he hasn’t been. First of all, his involvement was always just as a passive LP, no more. And today he’s not even an LP anymore. But I give him credit for giving me the push to start Zeev Ventures. That was my first fund. My first fund was just him, he was the only LP, and myself with my GP commitment. And then six months later, I realized that it’s working, in the sense that I can really continue to behave exactly the same, but have the leverage of other people’s money. And then I raised the next fund, and the next fund. Now I’m on fund 11.

Turner Novak:

Yeah, now it’s...

Oren Zeev:

Now it’s $2.7 billion later.

Turner Novak:

And so when you started to then raise from other LPs, you probably got, I mean, Peter Thiel’s pretty much just like, “I get what you’re doing.” But there were probably a lot of people who were like, “Oh, we need a deck, we need some slides.”

Oren Zeev:

No. So I joke that the second fund was 100 times, let’s call it, more difficult to raise, because the first one took me half an hour, and the second one took me 48 hours. Basically I added three LPs. All of them had known me for many years. All of them had told me, “Whenever you ever raise a fund, let us know.” And I didn’t show up with slides. I told them, “This is what I’m doing.”

Turner Novak:

You’re raising a fund now.

Oren Zeev:

And by the way, I didn’t even use Peter’s name, because at that point he asked me not to use his name, and I didn’t. I said, “This is what I’m doing.” And to their credit, I never talked to anyone else, as far as I recall, other than these three. I don’t remember getting a no from anyone for the second fund. I got many nos later, but for the second fund I don’t remember getting a no from anyone. I talked to these three, and I had a fund within 48 hours. And then every fund I added more. Some dropped over the years. Now it’s more normal, you have people. But that was the first fund and the second fund.

Turner Novak:

And so one thing I wanted to ask you about, you started a nonprofit called ICON.

Oren Zeev:

Yeah, I helped start it.

Turner Novak:

You helped start it. So what is that, for people who’ve never heard of it before?

Oren Zeev:

ICON stands for Israeli Connection Network. The original idea was to help Israeli companies within Silicon Valley. Help them with guidance, with connections, things like that. That was the original idea. And again, the best decision was to ask someone by the name of Yasmin to run it, because the very same idea would have had a very different outcome if we’d had someone else start it. She basically built it. That’s why, when I say “you started it,” she started it. I was the chairman, she was the CEO, she built it. I was a very hands-off chairman. I helped with advice and some connections.

But basically what we built is an organization that is actually very exclusive. This was important, because the intuition is you want to help the ecosystem, you want to help everyone, you don’t want to be exclusive.

Turner Novak:

Yeah, you should be open.

Oren Zeev:

You want to be open. And I actually felt strongly that, although this is conventional wisdom, when you try to help everyone, you help no one. Because there had been five, six organizations with the same mission before ICON, and they’re all very open and inclusive, and none was very effective. The reason is, when you are exclusive, you can really curate the other side too. Because what we’re trying to do is help them connect with the best investors, the best corporate executives, potential customers. If it’s inclusive, then it’s a lot of noise for these people. If it’s actually exclusive and curated, then they have an interest.

Turner Novak:

Yeah, so spend your time on this, and all the people in the group are amazing.

Oren Zeev:

Exactly. It’s going to be worth your time. So having a high bar, which is difficult to maintain, you’re trying to be objective. But the success has been great. We started with an annual event, which was a huge success. Over the years we were able to get amazing speakers like Peter, Ben Horowitz, Safra Catz from Oracle, many other amazing names who joined our conferences. And then we added theme-based events, an event for cyber, for marketing, for sales. And at some point we added a program we called SV 101. We get many applications, it’s like a YC, basically, except we don’t charge anything, and we bring them for a few weeks here, and we give them a lot of content and get them to meet a lot of people. And it’s a very bonding experience for them. There’s also the esprit de corps of these companies.

And now we have another program for the earliest-stage companies. There’s a lot of activity now. At some point a year ago, Yasmin handed the torch to someone else, who was also a very capable leader. And I’m still involved. I think technically maybe now Yasmin is the chairman, probably. I got demoted.

Turner Novak:

You don’t even know.

Oren Zeev:

I’m not even sure, but probably. Now that Yasmin is no longer the CEO. But I’m still involved, again, hands off. I’m not a micromanager anyway. It’s the same with the companies. I want to be as available to them as they want me to be. Not force my opinions on them, or make them spend time with me. If they want the feedback, great. If they want to spend time with me, great, I’m available. But I’m not trying to force anything. I don’t have a template that we’re going to spend an hour a month or whatever.

Turner Novak:

So one of my favorite things is asking people if they have a favorite founder, CEO, other investor, or historical figure that they’ve gotten a lot of inspiration from, or learned a lot from. Is there anyone like that for you?

Oren Zeev:

A historical figure. Unrelated to anything, but, you know who Anwar Sadat was? He was the leader, the president of Egypt in the ‘70s, and he’s the one who initiated the peace process with Israel. And it was really his initiative, so I give him 90% of the credit. I give the Israeli leader at the time 10% of the credit, but I give him 90%, because it was a super brave thing to do. It’s amazing how one person can really break a cycle of violence in one brave decision. By the way, which he paid dearly for, because two years later he was assassinated by a Muslim Brotherhood person. So he paid the ultimate price. But 50 years later, this peace accord still holds. More than 50 years. No, sorry, 46 years.

Turner Novak:

Maybe it’s like the courage to be disliked, to make a hard decision.

Oren Zeev:

Yeah. And I could have chosen also Nelson Mandela, also someone that, wow, or Churchill. Leaders that under very difficult circumstances took on missions that felt unwinnable and unfathomable. Nelson Mandela in South Africa. You can tell that I like history. And Anwar Sadat in the Middle East. These are definitely, I could probably think of other people, but these are what came to mind. Again, I didn’t come prepared. Maybe if you gave me time, I would come up with other people.

Turner Novak:

Well, it’s kind of, starting a company is one of those crazy endeavors. You go against some conventional wisdom, and you take a significant risk. It takes a lot of bravery, courage, to do it.

Oren Zeev:

Yeah, and make unpopular decisions, not be led. Too many politicians today base their opinions on polls. They’re basically polling the public, and based on that, that’s where they go.

Turner Novak:

So it’s like, people don’t like data centers.

Oren Zeev:

So they’re led. They don’t lead. They follow. 100%. And I think most of them, in this country and other countries too. So seeing leaders in other countries that actually led is inspiring.

Turner Novak:

Oh, well, talking about inspiring, this has been an inspiring conversation.

Oren Zeev:

Thank you so much.

Find transcripts of all other episodes here.

Related Episodes

He taught me why it’s so hard to buy a bank, how to do it, The Fed’s huge 2025 tech stack migration that no one noticed, and stories from the early days of Stripe, like their overnight build to turn on the first dollar of revenue, and why John and Patrick Collison used to sprint around the office.

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Timestamps to jump in:

• 0:00 Stripe's 1st employee bought a bank

• 1:38 Fixing the stone in his shoe building Stripe

• 7:59 Banking looks like 2010 payments

• 11:11 Merging two layers into one, just like Stripe

• 14:52 Why he finally bought the bank

• 16:26 How do you actually buy a bank?

• 20:20 The first bank that got away

• 22:04 Why banks can’t chase new fads

• 25:26 Compliance as code, from day one

• 29:46 Talking straight to the Federal Reserve

• 32:19 The Fed migration that nobody noticed

• 33:50 The missing last mile of banking

• 35:44 Getting customers to switch

• 38:23 The challenger sales model

• 40:33 What customers use Increase for

• 41:48 How Ramp's bill pay works

• 42:37 $500B a year with 33 people

• 45:31 Hiring for a high-empowerment culture

• 47:08 Growing up with the Collisons

• 50:27 150 test cases in one night

• 54:23 What really made early Stripe work

• 57:07 Why Patrick and John sprinted everywhere

• 1:00:00 “You're not in payments, you're in fraud”

• 1:02:31 Where AI hits a wall on fraud

• 1:05:08 Giving payment cards to AI agents

• 1:09:27 Use boring technology widely

• 1:11:37 You want your banker to be bored

Find Darragh on X / Twitter and LinkedIn.

👉 Stream on YouTube, Spotify, and Apple

Transcript

Find transcripts of all prior episodes here.

Turner Novak:

Darragh, welcome to the show.

Darragh Buckley:

Cheers. Thank you very much for having me.

Turner Novak:

Thanks for being here. So you were the first employee at Stripe, and you just bought a bank. What’s going on?

Darragh Buckley:

I did, yeah. The bank is now called Increase Bank. I run a company called Increase. Increase exposes US depository functionality by API.

So it’s having your machines talk to my machines to be able to orchestrate your finances. That’s things like opening accounts, sending and receiving transfers, issuing cards, balance and transaction reporting. Our users and use cases are things like payroll, bill payment, loan servicing, neobanking. Some of our more public users are companies like Gusto, which is built on top of us, and some of Ramp is built on top of us.

We do their bill payment, for example. To give a sense of scale, we do a little over half a trillion dollars in payment volume these days. And those users choose to use us because of reliability, transparency, and flexibility. They themselves are payments companies, or folks familiar with payments, who want all of the details and the capabilities. Increase is designed to expose all of the data and capability of US depository functionality by API.

The joke is always that Ramp does not need me in any way, shape, or form to explain ACH payments to them. They’ve got it. They just want all of the data and all of the capability in a way that’s composable into their own product.

Turner Novak:

So could you not do that five or ten years ago?

Darragh Buckley:

Well, if it’s okay here, I’ll speak to some experience from Stripe. While I was building Stripe, we built on top of a cohort of US banks that grew out to global banks, integrating with the card networks.

And the banking, as it was exposed to us, you could always tell that we were always a little bit of an awkward duck. You were always wearing someone else’s shoes. Something always felt a little off, be it the size or the scale.

Turner Novak:

So what felt off specifically?

Darragh Buckley:

So Stripe never did disbursements to merchants by wire. Stripe would receive a chunk of change from the card network, from Visa, and need to push that out to Stripe users. A very natural way of moving those large amounts of money is by wire. But Stripe was always hesitant to do that, because when a wire would fail, we would receive an email from the bank partner saying, “We were unable to deliver this wire. Could you please go repair it?”

And it’s just hard to build a product that you’re proud of on top of those kinds of manual flows. There are dozens of these examples. “Oh, that data element? Yeah, we don’t pass it through to you. Why would you want it?” So you always knew you weren’t in the right place.

You knew you were building on top of someone else’s product. There was a stone in your shoe, and you were trying to explain to someone why the stone in your shoe was super annoying.

Turner Novak:

But they can’t see the stone in your shoe.

Darragh Buckley:

Correct. So they’re just like, “Why are you so worried about your shoe? Just keep walking.” Very much a princess and the pea kind of problem. But you know you’re not in the right place. You know that this is not built for you, and no fault on it. It’s built for someone else. Products are built for their users. You just don’t happen to be in the target users.

And so Increase is the banking technology that I wanted while building Stripe, exposing all of the data and all of the capabilities by API. Of course you want to be able to originate the ACH by API, and of course you want to be able to handle the return of it by API, and of course you want to be able to handle the secondary and tertiary processes. In the case of ACH, this is hold harmless requests and so on, by API.

Turner Novak:

What are secondary and... I don’t actually know what those are.

Darragh Buckley:

It’s the dispute process that comes out at the end.

Turner Novak:

Oh yeah. I get emails from my bank sometimes. It’s like, “Someone just pulled an ACH. Do you approve the ACH pull that has already been pulled?” Well, actually, maybe you could have told me before that.

Darragh Buckley:

The train has left the station. Would you want it to have? Do you want it to come back? And no fault on that. But all of those should be exposed to companies that are looking to programmatically orchestrate their finances by API. The alternative is that you end up growing large manual operations teams, or worse, just not building that product.

Turner Novak:

So did Stripe do that for a while? Did you build around these weird capabilities?

Darragh Buckley:

Oh, certainly. You end up... I know Stripe ended up with a team at one stage with dozens of people on it for ACH return reconciliation. And the reason that was necessary is that there was a particular data element in the ACH file, called a trace ID, that didn’t traverse correctly.

And when you dug into the details, you could see why Wells Fargo was altering this data element. What they were doing was not unreasonable. It wasn’t like the engineers there built it badly. But it wasn’t built under the anticipation that you’d want to compose that within your own product.

Anytime you see a product that almost fits so close, and that we have such buildings built on top of it, one of us should surely go back and do a redo of the foundations. And that’s what prompted Increase.

Turner Novak:

So there have been these infrastructure providers in the fintech space, and it sort of sounds like some of them would solve some of these problems, right? Like, were they not fully solving it by not owning a bank? What was going on?

Darragh Buckley:

The short answer is yes. But let me give you a more interesting answer than the short one.

Turner Novak:

Yeah, we need this to be an interesting podcast. We’ve got like eighty minutes left to go. You cannot just say yes.

Darragh Buckley:

Modern banking has many comparisons to 2010 payments. In 2010 payments, so pre-Stripe and Adyen and similar, back in the day you’d go get what’s known as your merchant account. Your merchant account is your network-level identifier for you to be able to process transactions on the card networks.

Turner Novak:

This is like the equivalent of if you had a card reader when you swipe your Visa or MasterCard. Is that your equivalent of that? Your card reader would reference your merchant account?

Darragh Buckley:

Exactly. You’d get that from Wells Fargo Merchant Services or similar.

Turner Novak:

Weren’t there also some local, really regional sellers of these on-ramp type things?

Darragh Buckley:

Oh, very much so. There’s a whole industry called independent sales organizations, ISOs, which are the boots on the ground and the pavement pounders of the payment card industry. And it’s fascinating where they grew up, in different regions and jurisdictions, specializing in different things.

Turner Novak:

So did they ultimately evolve as a go-to-market function of the card networks back like fifty years ago, whenever they started?

Darragh Buckley:

Indeed, indeed.

Turner Novak:

I very much appreciate this depth-first approach to this question, by the way. Just a hat tip to that. It’s like, I’m always really fascinated by how things came to exist the way that they did. Because you’re like, “That’s kind of messed up. Why do we have all these layers?” There should be an API to just say, “Hey, send a wire,” and it just does it.

Why did that happen? Because then you know how to fix it if you understand how it works.

Darragh Buckley:

Oh, certainly. We’ll even take a step back and go, why is it messed up? That’s a fascinating trigger question for, “Oh, I’m about to learn something.” A solution is arrived at that I don’t understand. And the next question is, “Great, I must not be seeing a constraint. Where are the constraints that I’m not seeing?” That’s always a fun game to play. What am I currently blind to?

Turner Novak:

Yeah, what am I not seeing? The fun thing about the podcast is sometimes you have to hit people at different angles of the same question. “What do most people get wrong?” Or, “What was the most surprising thing you learned about this?” It’s kind of like poker. I’m like, “All right, the third attempt, I got him to finally explain this to us.”

Darragh Buckley:

Yeah, different views reveal different things at times, and fire different neurons.

Turner Novak:

So basically you get this merchant ID to get onto the card networks. But great, you now have this identifier. What are you going to do with it? You’re building your software-as-a-service company. You needed a way to programmatically interact with that.

Darragh Buckley:

You have your identifier. What are you going to do with it? We had our merchant identifier, and then you had what was known as a gateway. These were the things like authorize.net. So back in 2010 payments, what you would do is get your merchant identifier, bring it to authorize.net, and that would be how you’d be able to programmatically interact with the network.

Turner Novak:

And among the insights from Stripe was that these two things are not two separate things, right? Why are you talking to two companies here? This is one. So you combine them essentially.

Darragh Buckley:

Stripe combined them. That was at least one of the initial insights of Stripe. One of these things is not worthwhile without the other, so therefore you should bundle these.

And that’s what allowed, for example, Sunday night signups on Stripe. Everything was within Stripe’s control. It wasn’t like Stripe told you to go off and talk to Wells Fargo Merchant Services and come back when you had your identifier.

Turner Novak:

Stripe would just take care of it all. And would you almost be like a buffer layer between the rougher, harder parts? You’d do that inside of the Stripe back end, so it made it simple for people to do?

Darragh Buckley:

At times, yeah. You’ve got to be careful with those abstractions becoming leaky, but yes. What you would attempt to do is render the terms of the credit card networks into terms that were going to be more usable by developers and engineers.

Stripe creates these beautiful abstractions over all of these things. This is actually in contrast to Increase, but we’ll probably get to that in a bit.

Turner Novak:

Okay, so 2010 payments, you’re in this ecosystem of gateways and merchant providers. And Stripe verticalized that. Current-day banking ends up somewhat similar, right? You end up with these layers that are built on top of banks, and fundamentally you’ve got the bank, the Wells Fargo, running their own what’s known as bank core, their own maintenance of transactions and balances.

Darragh Buckley:

That’s what a bank core is.

Turner Novak:

I’ve actually never known that. I’ve seen the word many times.

Darragh Buckley:

There can be dragons with respect to bank cores, but I think you get a good first-pass model if you just count it as maintenance of balances and transactions.

Turner Novak:

Okay. So it’s almost like a general ledger, like a live, living ledger of the system of the bank.

Darragh Buckley:

Yes. It’s actually their client ledger. And so oftentimes you’d end up with a general ledger behind it. But boy, do I love my pedantic details. Happy to double-click on this anytime.

Turner Novak:

It’s probably good that you know all the details.

Darragh Buckley:

Well, I enjoy digging into these. It’s not like these come to anyone at birth. If your interests take you this direction and you keep swimming, you end up with these fun hobbies.

So current-day banking, when you end up with a technology layer or an API layer that’s talking to a bank’s core, looks very like 2010 payments. And my view is that’s probably wrong. What we need is a bank with a technology muscle. We don’t need to keep adding layers up on top of bank technology. We need to drop down a layer.

Turner Novak:

Now, I’m always pretty skeptical when someone says, “Oh, we need to rebuild that technology,” because usually that’s a bit of an odyssey.

Darragh Buckley:

But we’ve been building on top of banks’ technology successfully for 15 years. It’s actually worthwhile that we just do a double-click as to whether or not there are parts of it we should replace. So that prompted Increase.

Increase verticalizes that. Increase replaces both the bank’s core and the API that you use to talk on top of it, in much the same way that Stripe did this back in 2010.

Turner Novak:

And you started in 2020, but you just bought the bank within the past year. So what was going on during that time?

Darragh Buckley:

My journey into banking started with Increase in 2020, building the technology. The way in which we worked then, and we still do, is we have the technology with a series of bank partners. In particular, we built the core, but having that talk directly to the underlying network, so talking directly to the Federal Reserve for FedACH, Fedwire, Check 21, FedNow, and talking directly to Visa for our card-issuing products.

We’ve had that for years and years. And that was very necessary for me to build first. Increase built that first because that’s the part that’s very important for us as a company. As we grow, we get to know and understand whether it’s just me and my friends who are interested in this, or whether the appeal is broader.

Whether other people felt the same problem and wanted it solved. So the technology has been up and running for years and years, but the bank purchase completed maybe about a year ago at this stage. A small Washington State chartered bank called Twin City Bank. Fun fact, it’s probably the closest bank to my house.

Turner Novak:

I live in Central Oregon.

Darragh Buckley:

And we rebranded it about last month as Increase Bank.

Turner Novak:

So how do you buy a bank? What’s the process of doing that? Because not many people do that. I actually saw there’s an NBA player recently, I don’t know, Harrison Barnes. I think he’s retired, but he bought a bank.

Darragh Buckley:

I came across that when I was looking this up. So I guess some people do buy banks.

Turner Novak:

So how does it go?

Darragh Buckley:

Well, bank investment is actually relatively common. I recognize that bank investment to the stage of controlling a bank might be less so. But fun fact about banks around the US is they can publicly sell stock. They’re eligible for a Securities and Exchange Commission exemption that allows you to publicly sell stock.

Turner Novak:

So you could in theory just buy all the public stock of a publicly traded bank, and then you would own the majority of the shares?

Darragh Buckley:

Yes, in the same way that you could do so with any public company. But the fun parts are obviously when you run into various thresholds. In particular, banking has restrictions on who can control a bank. And there are control thresholds. The first is kind of a 10%, the second is at 25%. And to progress past those thresholds, there are various regulatory approvals that are required.

But how to buy a bank is a fun part about understanding different industry norms. How you might go about buying a technology company, or how you might go about buying the local printer, might be different than how you go about buying a bank.

In particular, banks can’t tell you they’re for sale.

Turner Novak:

Why not?

Darragh Buckley:

Because you end up with a drain of the loan officers from the bank itself. The folks producing loans within the bank would then be known to be on the market, and that would be problematic for the bank.

Turner Novak:

Because that’s how banks generate money. Generally you make a spread on the interest in lending out the capital to people, generating loans.

Darragh Buckley:

Very much so. It’s an asset for the bank. If you’re looking for a good first-pass model of the bank, it’s a lender. Don’t worry about the deposit side from the first pass.

Turner Novak:

Super simple.

Darragh Buckley:

So you can imagine now, if you’re in this situation where you can’t tell anyone that your bank is trying to be sold, what do you do? And so the industry has this humorously named conference called Acquire or Be Acquired. Let’s allow ambiguity. Oh, you might be here to acquire.

Turner Novak:

Yeah, we’re definitely here to acquire. We are not on the market. So everyone shows up. It’s kind of like one of those things, like every VC says they’re top decile or whatever. Every founder says, “Oh, I’m not raising right now.” Every bank that goes to this conference, “Oh, we’re definitely trying to acquire other people.”

Darragh Buckley:

“We’re not trying to be acquired.” And you can imagine, entering a new culture, you’re always going to wonder which social faux pas you’re going to make. How am I going to accidentally look the neophyte novice here?

Turner Novak:

Did you have to wear a suit to this thing? Was that the first time you’d ever worn a suit?

Darragh Buckley:

I’d actually worked in investment banking before, so I had the suit in the closet. But understanding these norms around industry acquisition takes a bit. Typically you end up working through investment bankers, and the investment bankers are the ones who know who’s looking in which direction.

Originally, back in 2023, I’d pursued buying another Washington State chartered bank called Washington Business Bank. We had gotten pretty far in the regulatory approval process, and the message back was, “Listen, you’re new to this industry. You seem nice and all, everything’s together, we’d like to encourage you.”

Turner Novak:

“You should sit on a bank board for a while, as a means of us getting to know each other.”

Darragh Buckley:

And so at that stage, I started sitting on bank boards. The kind of learning that you can get from being on the governance layer and seeing what happens is fantastic.

Turner Novak:

What all did you learn from that?

Darragh Buckley:

You’re learning things as broad and wide as, this is what you need to be looking at within your lending pipeline, and this is how long these deals are going to take. This is what we’re specializing in, and explicitly we are not specializing in these other things, and we’ll walk away from all of these.

Turner Novak:

So, like, we lend to farmers, or we do not lend to farmers?

Darragh Buckley:

You will have a specialization.

Turner Novak:

And it’s dangerous to wander too far outside your specialization?

Darragh Buckley:

Yeah.

Turner Novak:

Why is that? Because when you want to grow and diversify, it kind of sounds riskier technically to be really focused.

Darragh Buckley:

Oh, concentration can be a thing, and you need to watch out for that. What I’m saying is, don’t accidentally wander, as opposed to don’t wander. Choose your directions carefully and see where you have a differential advantage based on what you’re currently good at. So purposefully wander, but don’t just chase the next fad.

Turner Novak:

Does that happen too often, you think?

Darragh Buckley:

Yes, would be the short answer. We ended up with a bunch of banks in the 2010 timeframe, for example, chasing financial technology partnerships. A lot of community banks around the nation saw it as a growth mechanism and didn’t have the appropriate capability or capacity to be able to do so safely and soundly.

And so we ended up with a regulatory pushback against that, and I think quite a lot of that regulatory pushback was appropriate. I think there was skepticism that many of the smaller community banks, especially, knew what they were getting into. And it was also one of the reasons it took us so long to build out Increase Bank.

Turner Novak:

The acquisition closed north of a year ago, and it takes quite a while to put in place the correct capability and capacity. You can’t just slap an API on it and we’re good to go? What’s so hard about that?

Darragh Buckley:

Is the question whether practically you can, or whether safely you can? Because practically, you can certainly strap a jet engine to a go-kart. You will promptly find a wall.

Turner Novak:

So what’s the first wall that you’d be running into? If you strapped a jet engine to a go-kart, or if you exposed a bank by API? Maybe they’re the same thing, I don’t know. I’m assuming you built this API and pretty quickly were like, “All right, we’re good.” Was there anything you had to adjust for?

Darragh Buckley:

Yeah. I think this is where you get into the money movement side, which is very, very important. It’s important to get all of the details and the reliability and the transparency correct there. But how that interacts with compliance regimes is fantastically important.

And it’s very useful if that’s not a post-hoc tag-on. It’s very useful if you’re able to embed the compliance regimes as code early on, and that requires engineers being comfortable reading the source docs for the compliance regimes.

It also requires compliance professionals and experienced practitioners being comfortable jumping into the engineering details. If, for example, there’s a compliance regime that has to do with the data elements that need to traverse when you’re sending a wire, and they apply at a dollar amount threshold of $3,000, it’s called the travel rule.

And it’s very useful if you build that in from the start into your wire processing system, as opposed to when you’re going through your first audit, realizing that you need it and then tagging it on.

Turner Novak:

So it’s almost like you need to make sure that when someone goes to enter in that wire, there’s almost an extra box. “Oh, by the way, we just need you to fill this in also.” And anything else that’s going to get triggered is just part of the product in a way?

Darragh Buckley:

Indeed. If you’re able to build it into the product early, you can make life nice for yourself. There’s this time during an examination, and you may have had this experience yourself with respect to any audits or tests.

You get your list of data requirements. Can you pull these data elements? We’re going to sample from them. But can you pull them all for the time being, so that we’re going to tell? And even though you know that you’ve been doing everything correctly, even though you know that your processes are correct and you’ve got good organizational hygiene with respect to those things, when you see the data correct, there’s this sigh of relief.

Like, great, it all worked. And I think you should try to make that sigh of relief asymptote to zero. That sigh of relief should be as small as possible, and the way you can get there is by running the examination on yourself more frequently.

In much the same way, when we were building engineering products, we’d build a test battery around it. So there’s never any question when you’re rolling out the next version of the API whether you’re correctly capturing that parameter, because you know that it wouldn’t have deployed but for that test having passed. And if you can do the same with respect to compliance regimes, you can help yourself a lot.

Turner Novak:

And the way you get good at doing hard things is by doing them more often. This was kind of a lesson from engineering: how do you get good at the hard thing of rolling out a new version? You do it dozens of times a day. Whatever you do, don’t have any manual step in there.

Darragh Buckley:

And if you’re able to apply the same concept to compliance regimes, how do you get good at doing examinations? You do it on yourself multiple times a day. You run all of that same logic yourself multiple times a day.

Turner Novak:

That seemed kind of way too obvious that it was not a normal kind of thing. Because it just seems like, oh, it looks like one of our processes that we’ve built doesn’t really match what we should be doing. We should probably change it. Like any solution, when you look at it from the correct angle, you’re like, “Ah, that’s it. Cool, cool.” And that is the benefit of being able to look at things from multiple angles.

So one thing you mentioned was you talk directly to the Fed, to the Federal Reserve. I don’t even know how that works. I thought that... doesn’t every bank kind of do that? What’s the importance of that?

Darragh Buckley:

Yeah, in ways. Stripe built on top of Wells Fargo, and the way that Stripe would interact with Wells Fargo is Stripe would send Wells Fargo the messages that Wells Fargo was to send to the Federal Reserve. And if it gets passed through in high fidelity, all is good. If some things change in between, it’s very useful to know what changed.

Turner Novak:

So then you can adjust it to make sure you’re right in the future?

Darragh Buckley:

Correct. Or it helps you understand how things are going to fail. So Stripe was not talking directly to the Federal Reserve there, and that meant it was difficult for Stripe to expose that to others. If Stripe really wanted to expose some data from wires, and Stripe did not receive that from Wells Fargo, it fundamentally couldn’t expose it. It wasn’t Stripe’s gift to give unless it had been given that gift.

Someone else’s abstraction places a limit on what you can do, and that can be frustrating from a product standpoint. So Increase’s role there was to step down and talk to the Federal Reserve directly. The Federal Reserve is also a fantastically reliable and good service provider. I think this was one of the unknowns for me when starting Increase: how good is the fundamental layer?

Turner Novak:

Yeah. If you think, man, that thing was started like two centuries ago, you kind of question it. But...

Darragh Buckley:

Well, the Federal Reserve is later than that. The Federal Reserve is at like 100 years.

Turner Novak:

What year was it, 1907?

Darragh Buckley:

The Federal Reserve is many things. I don’t just mean at its regional banks level. I also mean that it’s got this division called Federal Reserve Services, which is its technology layer. So central bank, bank regulator, and technology provider are not fundamentally components that need to be placed together, but we have chosen to do so as a nation in calling them the Federal Reserve.

So Federal Reserve Services is the technology layer that we end up chatting with a bunch. And they have good technology.

Turner Novak:

And they’ve got fantastic technology?

Darragh Buckley:

And also they’re very good operators. The fun fact here is, about a year and a half ago, the Federal Reserve ran an update to its messaging specification to do with wires. The Fedwire system bumped over to an international standard called ISO 20022. No one knows about this outside of a niche group of interested people. But it required coordination across the financial institutions of the nation.

Turner Novak:

So it’s basically like at one moment in time, everything needed to be adopted for the new methodology?

Darragh Buckley:

Sunday night. Yep.

Turner Novak:

You’ve seen enough technology companies, right? So if anyone described a technology transition like that to you, you likely would do the same thing I do, which is head in hands, like, “Oh, please don’t try to do that. That will go horribly.”

Darragh Buckley:

Yeah, I mean, it’s kind of like Y2K. They were like, “The world is going to end at midnight when the calendar rolls over.” And the Federal Reserve was under constraints, and this was the one that made the most sense, that it was going to be a hard cutover. But they successfully operated that hard cutover through just good planning, good testing, and good operations for months and months prior.

And success here is defined as, you didn’t know about this thing. You didn’t read about it on the front page of the paper that wires across the nation stopped. So the fundamental underlying of the US depository networks is in fact great. We have real-time payments there.

Turner Novak:

We’re missing the last mile delivery of that, right? We’re missing the productization part, or the ability to productize that. So what was missing in that last mile?

Darragh Buckley:

Yeah, high-fidelity pass-through of the data and the capability.

Turner Novak:

So there’d be someone who’s sitting with all the technology and they have access to it all, but then they don’t expose it correctly?

Darragh Buckley:

Exactly. On the button, Ben.

Turner Novak:

Why don’t they just expose it correctly?

Darragh Buckley:

Oh, exposing it correctly isn’t trivial. This is the case where I’ll differentiate between product at Stripe and product at Increase. Product at Stripe is creating these beautiful abstractions. You’re a developer, you care about payments. You do not care about ACH. You do not care about Fedwire. You want this abstraction.

Product at Increase is, oh, this is the FedACH API. You want to know what that parameter is called? It’s called the exact same value as the network calls it. We do not try to be creative and create an abstraction there, because you want high-fidelity pass-through of that data and information. And that’s what I wanted while building Stripe.

Turner Novak:

So you’re almost building... the Increase product is built for the Stripes of the world, and Stripe is built for developers?

Darragh Buckley:

Very much so. Our users and use cases are those technology companies building financial products for others.

Turner Novak:

So I’m curious then, how did this go when Stripe’s a customer? You might have an inside track with Stripe. But with some customers, they may have already been using a product, or they built it all internally, and then you go to them and say, “Hey, you have this whole team, switch to Increase.” How does that go, convincing a lot of these companies to switch over?

Darragh Buckley:

Oftentimes there’s a moment in a sales conversation. Usually it’s someone from product or engineering who is the person interested in picking up Increase. And often there’s a moment in that conversation where they’re like, “Sure, I get that you have these APIs. But do you pass through the IMAD, the Input Message Accountability Data? And when do I get that?”

And you’re like, “Yep, you get that here and in this way.” And after three or four of these skeptical questions, there’s this sigh of relief and dropping of shoulders, which is just like, “Oh, I’m with my people.”

“I found my place. Great. I’m glad that one of us went ahead and did this.” I’m glad that one of us went ahead and dropped down to the base level and surfaced it all with no abstractions. Those are actually pretty fun conversations. Oftentimes there’s a high degree of shared experience.

Turner Novak:

Yeah, actually, the founder I was mentioning earlier that uses Increase, I know him, and he was telling me... I was like, “Oh, Increase, I don’t know if I’ve heard of them before. Why’d you go with those guys? Because there are other solutions on the market.” And he was like, “I don’t know. I felt like they were engineers, and everyone else I talked to was like a salesperson.”

Darragh Buckley:

Yeah.

Turner Novak:

And the Increase sales guy, I have no idea. I guess he talked to you. But he just felt like he understood the problem and understood the technology behind it. And so that’s why I went with them. I was like, “Oh, interesting.”

Darragh Buckley:

Increase is about half engineers. And it’s very, very important to have not just engineering within Increase, but I think everyone takes the same approach. What we strive for is kind of friendly competence. We are willing and capable to talk about the details with everyone.

You want to talk about the ISO 8583 standard for the card network, and you care about this parameter that’s in there?

Turner Novak:

Yep, I know why you care about that. That’s similar to the life that I’ve lived, of wanting to build that into my own product. Like, you probably want it in this way.

Darragh Buckley:

Yeah, great, yes. The intention of Increase is that you’re composing it into your own product.

Turner Novak:

And I had recently, I think it will have come out before this episode goes live, but I guess a peek preview of the future if not. I had Ron Gabrisko, who’s the CRO of Databricks, and he leads their sales team. He joined before they had a million in revenue, and I think they just announced they’re doing $7 billion in run rate or something. Maybe it’s bigger than that, I can’t even remember the number.

But he built the sales team there. And I think their thing is their sales team is very technical. They are not traditional, quote-unquote “salespeople.” They are people who understand the problems that you’re facing.

They understand the technology behind it, and then, how do they solve the problems that you have? And I know that’s always been my favorite way to think about sales. You grow up thinking, ah, sales guy, snake oil salesman, whatever, shoving something that they don’t need in front of them.

But it’s really, somebody has a problem, and if you can solve it, they’ll pay you money for it. So how can I solve your problems? That’s really how you should be doing it at the end of the day.

Darragh Buckley:

Yeah. And there are different modes of salespeople. I very much enjoy the salesperson who can be in a challenger sales model.

Turner Novak:

Oh, so what’s a challenger sales model?

Darragh Buckley:

My understanding, and it’s important to understand that this is not my own skill set, but it’s listening, exploring, sitting with the problem, but then being comfortable saying, “I think you’re doing it wrong. I think that you should be doing this instead.”

“I hear what you’re saying. I’m trying to understand the constraints that are not obvious from the start, but I’ve asked enough questions around it. No, you should do it this way. You should hold the product this way instead.” And it can be very trust-building.

It requires a lot of empathy on behalf of the salesperson. It requires a lot of technical competence on behalf of the salesperson, a lot of understanding. But then, having a trusted third party who’s familiar with the bank side being able to say, “No, you should probably do it this way,” is valuable. You’re not trying to be infinitely flexible. It’s okay that there’s a correct way to do things.

Turner Novak:

So what does a good Increase customer look like, or the average customer? Because the guy we were just talking about is just starting his company, he’s super small. You also have, I mean, I could say Stripe is basically at the scale of a public company. So what does a customer look like of Increase?

Darragh Buckley:

Ours very much tends toward the larger use cases, as opposed to the earlier use cases. I certainly hold many of the early use cases near and dear to my heart and want to continue supporting those. But it’s more for the at-scale use cases like payroll and bill payment, when you’re moving billions of dollars and it is very important to you that you’re able to do it with a high degree of reliability and a high degree of transparency. That’s where we do best.

Turner Novak:

So a lot of the customers you get, they’re probably already doing some of this stuff or using someone else. You’ve got to get them to switch over, either switch over, or if they’re launching a new feature that’s adjacent to something they already have.

Darragh Buckley:

If I was to give a recent example, Ramp’s bill pay is a great example. We actually have a case study up about this. Ramp uses us to pull in money from the payer and push out money to the payee, and we are their means of interacting with the Federal Reserve for that.

In particular, you originate ACH debits, the US mechanism for pulling money from someone’s account, and then how you do the funding to the payee, be it by ACH credit or Fedwire, or even checks, or more modern mechanisms like real-time payments or FedNow, or push to card, and being able to combine all of those nicely within one API. That can be valuable.

Turner Novak:

One thing I think is super interesting about Increase, you mentioned you’re doing over half a trillion in volume, and you have, according to LinkedIn, 33 employees. I have no idea how accurate LinkedIn is, but that’s a pretty high employee-to-volume-moved ratio.

Darragh Buckley:

Yeah. The point to emphasize beforehand is I would not do so with that amount of people unless it was safe to do so with that amount of people. But, preamble aside, it’s fascinating how much you can scale when you’re just building on top of the Federal Reserve, when you don’t have those abstractions.

A lot of the other operational team stuff in the general financial services space is adjusting for the abstractions. Figuring out how to get around them, or figuring out what happens when things leak through. An example from Stripe: ACH reconciliation, or ACH return allocation. You send a transfer, the transfer is not able to arrive at the person’s account, it gets bumped back to you from the receiving bank, and now you need to know which transfer got bumped back to you. Sounds like a trivial problem, right?

Turner Novak:

But of course, how could money just arrive back to you without you knowing why? It would of course be labeled, probably, right?

Darragh Buckley:

Yeah, of course. But it’s not labeled. The primary identifier, the one that you’re meant to use, is called a trace ID. And the trace ID is a numeric string of 15 characters. You don’t get all of those 15 characters, because some of that embeds the routing number, so you’ve got less entropy than you might expect. And so you’ll end up repeating these at pretty high frequency. They’re not actually a unique identifier for you.

And so you’ll end up also building heuristics. Okay, it was this transfer with this ID and to this account and routing number. Great, that allows me to uniquely identify it. And so you’ll build your heuristic mapping of this. That’s just fine. Stripe didn’t have that trace ID because of some systems issues with how Stripe interacted with Wells Fargo.

No fundamental fault on either group, but it meant we ended up using the heuristics very early on. And of course, then there are things that manually fall out of that heuristic queue, and so you build a team that’s responsible for those allocations.

Turner Novak:

So you’re kind of automating and making software to make up for the lack of capabilities in the original software.

Darragh Buckley:

Indeed. And that’s a reasonable thing to do, to a point. And at that point, the correct thing to do is go back and fix the fundamental problem. And hence, Increase.

Turner Novak:

So then how do you think about hiring and adding to the team? There aren’t very many people. How have you been doing that?

Darragh Buckley:

Yeah. I enjoy working in high-empowerment cultures, and I enjoy working with people who enjoy working in high-empowerment cultures. And for me, high empowerment means the ability to wander the world and affect the change that you need to, to build the product.

There are prerequisites for that. You’ve got to hire well, and you also have to trust the people who you hire, and trust that they trust you to go off and effect that change. It does mean that it’s very useful not to silo too strictly. You have to allow a compliance person to wander into engineering and an engineering person to wander into compliance, and more than just allow, you promote and expect them to do so too.

Stripe was very good at this for very many years. Stripe maintained it to a higher headcount than Facebook maintained it to. Facebook maintained it to a higher headcount than Google maintained it to. Google maintained it to a higher headcount than Microsoft maintained it to. So I would aspire and hope that Increase will maintain it to an even larger headcount.

Turner Novak:

But I think it’s what builds good product. It’s what builds effective organizations. One thing we talk about now, going back to Stripe. So you met the Collisons back in Ireland?

Darragh Buckley:

Yeah, we grew up in the same hometown.

Turner Novak:

This is like Limerick?

Darragh Buckley:

In Limerick, yes.

Turner Novak:

Is that a big city?

Darragh Buckley:

Limerick’s not all that big. At the time it was maybe 35,000 people, depending on where you draw the city lines.

Turner Novak:

So for the US, it’s not that big.

Darragh Buckley:

Correct. But it has a very forward-looking university, which I think is very influential on all of us, and it has a whole bunch of multinational companies, and that creates a different window of what’s possible. So we grew up in the same hometown, and spent more time together while at college and university in the US.

And then I ended up joining up with him in about 2010, as Stripe’s first employee.

Turner Novak:

You were kind of the banking guy, like they were, “Deal with the banks”?

Darragh Buckley:

Indeed. I’d worked for Lehman Brothers prior.

Turner Novak:

Oh, shame. Okay. So you had first-hand experience with the banking system.

Darragh Buckley:

Well, I expected that this is where I will show how early Stripe was in its journey with respect to what is a bank. Counting, you know, oh, you worked for an investment bank, surely that is a bank. And, oh, sweet summer child, no. It reminds me of the story.

Turner Novak:

I had Will Gaybrick on the podcast, and he told me a story about how one day Patrick texted him. I forget exactly the conversation, but it was like, “You know finance. Why don’t you be our CFO or something? Here’s this broad regime.”

Darragh Buckley:

John and Patrick, they have many superpowers. One in particular is learning. Their own ability to learn, who they learn from, how they learn. It’s fantastic.

Turner Novak:

And so you’re like, “Oh, this sounds like a good idea. I’ll go be the banking guy at this Stripe company. We, the Irish superheroes, coming over to fix payments in the US.”

Darragh Buckley:

Wouldn’t go that far, but yes. I joined up, and it was quickly evident that what was necessary was less banking and more engineering related to banking. And so that was the first thing that I jumped into. Some fun vignettes here might be... you have likely had this experience.

Like where you’re at a group project, and there’d be four people on the group project, and you’re all going to be working on this thing together, and you’re going to get to know each other. And so I arrive into Stripe, and the early group project is, well, it’s John Collison.

There’s Patrick Collison. There’s Greg Brockman. This is a very high-powered group to be able to learn and build with. And I’m very grateful for that experience.

Turner Novak:

So you were like the fourth, the other guy on the team?

Darragh Buckley:

Just the other guy.

Turner Novak:

So what did you learn working with the early Stripe team?

Darragh Buckley:

Yeah. I think one of the most impactful and meaningful for me was the amount that a small, empowered team can get done. If you’ll forgive a story. There was one night, I suppose it was an afternoon, we jumped on a call with a partner, and this was how Stripe was finally going to be able to talk to the credit card network more directly.

And on the call, the person in charge of certification was like, “Okay, great. The next certification date is six weeks. You’ve got a lot of things to do before six weeks, but you should be able to get it done.” And you can imagine, in startup world, when someone says six weeks to you, you’re like, “Wait, what?”

You might as well have just said 10 years from now. This is beyond our time horizon to contemplate. So someone pipes up in the call, “Oh, is there any time sooner?” “Oh, there is tomorrow at 10:00 AM, but you’re not gonna be ready for that.”

Turner Novak:

I just assumed there’s no way.

Darragh Buckley:

Yeah. And so there’s a meaningful look around the table of, “Oh, no. Sign us up for that. Great, we’ll chat to you then.”

Turner Novak:

“Sure, okay.” I’m just assuming you’re coming back in six weeks.

Darragh Buckley:

Well, yeah. “But sure, I’ll humor you.” Hang up the phone, look around. It’s like, okay, we’ve got 18 hours to get this, you know, 150 test cases done. I guess I know what I’m doing. One of us is starting at the top, one of us is starting at the bottom. Go for it. And you just work through the night.

What do you do after test case 36? You do test case 37. And just keep going throughout the night with this group. And it’s fantastic. Shared stress, strife, and struggle is great for building camaraderie. And that’s always fun.

Maybe at about 8:00 in the morning, in order to talk to the certification service, we needed to do a plain old telephone connection. So I had to run down to Fry’s Electronics store in the South Bay as it’s opening. Knock, knock, knock. Please, I need this part for this thing. Great. I’m now jumping back to Palo Alto.

Turner Novak:

Getting the call at 10:00, by maybe 11:30, “Okay, everything’s passed. Never in my years have I seen anyone go through this certification this quickly, but you’re good to go. You can run your first live transactions.”

Darragh Buckley:

Yeah.

Turner Novak:

So just turning on the first live revenue for the company?

Darragh Buckley:

Yes. The sigh of relief of a group that has achieved something that required just a sprint of effort and endurance is great.

Turner Novak:

Overcoming adversity is great. That’s kind of what drives much of the enjoyment of startups. It’s almost like, no one’s ever done this before, but we just did it. And we didn’t even know this was a thing. We didn’t even know this was a hard problem. We just were like, “All right, we’ll just get it done.”

Darragh Buckley:

Yeah, ignorance can be helpful, in certain circumstances. But it’s more to do with the group. Doing these things alone is fun and whatnot, but it’s more when you’re sharing this experience with a group that’s dedicated to empowering each other, dedicated to helping each other learn and grow.

Turner Novak:

Yeah, I value that.

Darragh Buckley:

And so carrying that forward into Increase was very important for me.

Turner Novak:

Is there anything about Stripe maybe that someone from the outside wouldn’t have seen, or wouldn’t have understood, about the reason that Stripe was so successful and the reason that it worked? Myths about the company that are incorrect, or that should be myths and no one actually knows about yet?

Darragh Buckley:

I think this changes over time. And it’s okay that a company’s story changes over time. I think probably what’s now common: a group of smart, nice, hardworking people who are relatively disciplined around thought and how to give support to each other in the correct ways. Those are useful.

Back in the day, differential characteristics were probably things like a long-form written culture of communication. Writing it down. That wasn’t as common. I don’t think it was as common in 2010 as it currently is. I don’t think I would call it a differential characteristic these days.

Turner Novak:

I mean, now you can just throw some prompt in Claude and get some AI slop and share it in the chat.

Darragh Buckley:

Yes, and you would get all of the value for doing that and none of what actually matters. If you’re using it as the thought partner to grow and develop yourself, yes. But the reason you had long-form writing was because it was helping you learn.

Turner Novak:

It was forcing you to put your ideas down in a legible way.

Darragh Buckley:

Falsifiable statements. And you were going to have to expose all of your logic to someone else, and someone else was going to be able to point out the parts that were more or less shaky.

Turner Novak:

And it’s not like you’re on thesis defense territory. You’re not being attacked for this thing. This is a group project of us all trying to come to the correct answer. But that’s a lot easier when there’s a culture artifact to look at.

Darragh Buckley:

Well, sure. But then it has a culture of everyone looking at the artifact together, and using the artifact to get to a point of learning or truth at the end. And you’re all there in support of the person who’s going to have to own the decision, and you’re going to get behind this decision this person makes.

Turner Novak:

So it’s like working together to get to the right decision.

Darragh Buckley:

Very much so. But the particulars of all of this matter. I feel like there’s nothing objectionable about that statement that we’ve made, and it’s probably not all that interesting until you get to the details.

Turner Novak:

Anything specifically that you learned from Patrick and John?

Darragh Buckley:

Yeah. There’s this fun story, forgive me for storytelling again. That’s more interesting to people, I think. So, as is the tradition of all startups who first get their office, you arrive into the office and the place is empty.

You’re like, “Great, what are we going to do?” IKEA trip. Jump in the car to IKEA, get six of the cheapest desks and cheapest chairs that you can get, put them back in the car, drive back to the office. You’re unloading the car. Pick up a box, put it down, you walk back to the car. That’s not what John and Patrick do.

They pick up the box, walk into the office, put it down, and sprint. And you, as observer, are like, did we park illegally? Did I miss something? Why are you running? They just always have this sense of urgency. There’s always a, “Oh, we can just do it faster.”

Turner Novak:

“Why would we not just do it faster?” Just run.

Darragh Buckley:

We run. And if you’re in an environment where someone else is running, are you going to be the one person who’s not running? Of course not. You’re going to run too. And not in an obnoxious way. Not in a, “I’ll race you, and if you’re slower than me, I’ll rub it in your face.”

Turner Novak:

It very much is in a, “No, this is just all of us here together doing this thing.” You just gotta get there faster. You can probably create an extra, if you’re doing a lot of traveling and movement in the day, the faster you move, the more time you save.

Darragh Buckley:

Well, yes. But I think that cultural prevalence of the importance of urgency, John and Patrick are fantastic at creating. And it’s not an obnoxious, “Why haven’t you done it yet?” It’s just like, “Oh, why wouldn’t we just do it now?” Given in a very friendly, pleasant, but boy, you’re going to want to keep moving, way.

Turner Novak:

And they’re very, very good at doing this nicely. Yeah, I think Patrick has a blog post about... I think it’s just called Fast or something. It’s like his name dot com slash fast, and it’s literally just a list of bullet points about how the Empire State Building got built really quickly.

Darragh Buckley:

Yeah. At times our expectations around speed are just misset, and we can in fact, when you have the right group of people with the right resources, and the right things out of their way, you can do things at unreasonably fast speeds.

Turner Novak:

One thing, going back to the podcast I had with Will when he came on. He said an early thing that you guys learned at Stripe was... it was a really high-up executive or CEO in financial services, and he didn’t actually tell me who it was. Maybe he did, I can’t remember. But something that they told you was, “You guys look all gung ho, like, ‘We’re building a payments company.’”

And he’s like, “Oh, you’re not building a payments company. You’re actually in the fraud business,” or something to that effect. I feel like Will actually told me, but I forget, and I’m interested in hearing it again. So why is it ultimately you’re not actually in the payments business, the money movement business? You’re actually in the fraud business. How does that work?

Darragh Buckley:

Yeah. I think, as you can imagine, cards in particular, but payments generally, are magnets for bad actors and in particular fraud. There’s a lot of money to be extracted.

Turner Novak:

I get emails every day with a fake invoice from some random company. And I’m like, “I guess some people get caught by this.”

Darragh Buckley:

In very unfortunate ways. And there are many things that we can do as an industry to reduce that.

Turner Novak:

Why has it been so hard to solve the fraud problem?

Darragh Buckley:

If you’re able to tell me how to properly solve the identity problem, I’ll be able to tell you how to solve the fraud problem. And I’m not meaning to unfairly throw it back at you. I’m just saying that we haven’t correctly solved online identity, with various versions of it, to reasonable levels of confidence. So the fundamental problem of fraud in payments is identity.

Turner Novak:

It’s identity. You’re pretending to be someone else at the end of the day.

Darragh Buckley:

At times. Now, there are other versions, which I wouldn’t actually chuck in the... or you may or may not count as fraud, like first-party fraud. You received a good and you pretended like you hadn’t received the good.

Turner Novak:

That’s not solved by identity.

Darragh Buckley:

But something that rounds to a correct definition, saying if you solve identity for me, you will vastly solve fraud for me, is correct.

Turner Novak:

And I know one of the things you did really early on was you would literally just manually look at transactions and watch them come in. What did you get from that?

Darragh Buckley:

Yeah. I think this is advice to any payment company who’s starting. You can try to design all of your fraud systems in the absence of data, and try to think deeply around it. But know that you’ll miss it.

The far more important thing is just watching the initial activity. And by initial activity I mean it’s not unreasonable to expect a person at an early-stage payments company to look at every transaction, up until there are like 5,000 transactions a day. You kind of have to do that. I don’t know how to build good risk systems without that.

You do all of the thinking beforehand, of course. Make sure you’re collecting all of the data, of course. But you’re not even going to know what the patterns look like until you start seeing the patterns. And you have a pretty effective neural net between your ears. You should go use it.

Turner Novak:

Does AI and LLMs kind of help with this nowadays?

Darragh Buckley:

I can imagine that there’s quite a lot that can help. I’d be surprised if you still didn’t want to do the person-sitting-in-front thing, saying, “This trucking company should not in fact be receiving this mortgage escrow payment. Something’s up.”

Turner Novak:

I think Will actually told me that Stripe has built their own kind of model internally, where when certain entities make a transaction, you can tell based on learnings over time where they might be grouped, and more chances of these happening. I’ll link a spot to click on to check out that part of the episode, because I’ll probably butcher the way exactly it’s done. But it was pretty interesting. Just like, oh yeah, I guess that does actually make sense.

You can essentially... the models will know, it’s probably not perfect, but they’ll start to pick up on these behaviors and things like this.

Darragh Buckley:

Yeah. Ghostbusters are fun. Like anything within an early company, it can be tempting to overbuild in that particular area. And it can be useful if, instead of coming up with an intricate data pipeline analysis tool, you just look at them at the start.

Turner Novak:

And one thing I think you like to do is you like to give cards to your agents. How does that go? Because a lot of people are kind of like, “Oh, it’s agentic payments.” So how do you do this practically? What do you do?

Darragh Buckley:

Yeah. I feel like I’m particularly grateful that I’m able to do that, perhaps not everyone is able to do yet. You have, similar to others, agents wandering the world doing things for me, but I want them to be able to economically interact. I want them to be able to pay.

Turner Novak:

What are they paying for right now?

Darragh Buckley:

I am currently traveling to San Francisco. I likely need to send a set of flowers home, thanking my wife for being with the kids today. And being able to set the agent upon that task is great.

Turner Novak:

So what are the limitations of that? If an agent goes to the local flower shop, jumps on their site, is able to stack up the checkout, etc., it would be useful if they’re able to complete that. But in order to complete that, they’ve got to have a credit card, right? They don’t need to be able to interact with crypto, right?

Darragh Buckley:

The flower shop already has a checkout. They need to be able to enter the 16 digits of the card on the site. Now I’m able to give my agents payment cards. My agents have their own bank account. And if they need more money, they ask me for more money. “I went through the $100 you gave me. Can I have more, please?”

And so you give them $100 more. And a difference here that I’m pointing toward is I’m not sitting within the synchronous approval process for a transaction. The point is that I’m not thinking about it. It selected what it was buying. It selected the instant coffee from the local grocery that it’s going to send me.

It would be broken for me if I needed to go in and enter the card details. Likely what would happen there is some sort of timeout, because I didn’t get to it quickly enough, and we’d end up in various loops to try to synchronize our schedules. But having the agent have an account, having the agent have a payment card, is great. And the control plane on that for me, the thing that stops it just burning a bunch of money, is it can only spend what’s in its account, and it asks for more money when it needs more money.

Turner Novak:

It sounds like it’s almost like when you have an employee that has a charge card. You can only spend this, these are the rules of what you can spend it on. It’s almost like applying the same principles to an agent.

Darragh Buckley:

Indeed. And doing things, this is what it can and can’t do. There are rules.

Turner Novak:

Yeah.

Darragh Buckley:

And in particular, what I’m pointing toward there is we don’t perhaps need to rebuild all of the checkouts across the internet. We don’t need to plug a bunch of crypto or stablecoin connections into these. It’s okay that we use the existing ones.

Societally, I hope we run both of these experiments. It’d be great to know which one plays out. But for the immediate use case, it’s very useful that we use the card with its known dispute process.

Turner Novak:

Do you have a favorite founder or historical figure that you’ve gotten a lot of inspiration from?

Darragh Buckley:

Oh, fascinating. I think this is going to vary based on different characteristics in different places.

Turner Novak:

Yeah, I mean, there can be 100 of these, essentially.

Darragh Buckley:

Sure. And I think in particular what you’re trying to do there is not overly romanticize the person, but that particular characteristic that you really liked from them. I’ve gotten some off-the-record answers to this question, like a dictator, and it’s because of, like, not what you would think. But it was kind of interesting. I won’t say any of the names.

Turner Novak:

It would be unfair for me to probe deeper on that particular question. But it’s kind of interesting. Like, with being fast and urgency, oh, I can apply that principle to myself. I’m wondering if there’s any non-intuitive, or maybe it’s super obvious, answers to this question.

Darragh Buckley:

Yeah. You know the way when you end up running a small mental model of someone in your head? You’re like, “What would this person do in this situation?” I feel like that’s always a sign of admiration. You’ve carried around this person as a heuristic for you.

One related to engineering, for me, if I’m allowed to go that way, and you can tell me my hobbies are too boring. Tom Brown, who’s one of the Anthropic founders, previously at OpenAI, has this remarkably impactful technical essay from early on, of just use boring technology widely. Don’t try to over-optimize for the correct tool for the correct job. Very much benefit from using a broad tool that can do many things.

And what you’re pointing toward there is the price of complexity. When you’re using the correct tool in the correct place, now you have many correct tools, and your ability to understand the correct tools is hard. So just be very careful about your complexity cost of what it is that you’re doing. I reach for that one maybe daily.

It’s okay to do something in the wholly uneventful way. It doesn’t need to seem bright or clever. It just needs to seem maintainable.

Turner Novak:

It’s almost like there’s sometimes the glamour of building and trying some new hard thing. There’s more social status internally. You get more joy from, “I figured out this really complicated thing,” versus sometimes it’s the beauty of the simplicity of not actually complicating it.

Darragh Buckley:

Don’t get me wrong, I can admire arduous intellectual pursuits. It’s okay that those exist. But we can do that by answering the hard crossword on a Sunday, not by obligating our team to maintain a thing for years. Choosing the uneventful thing, and I especially think this is true in banking.

Imagine if your friend is an air traffic controller, and they show up to meet you for coffee, and they’re saying, “I’ve had the most exciting day at work.” You’d be like, “No, I don’t want excitement from my air traffic controllers.” Like, “It was so boring. Nothing happened.” I will make the statement, I think you want the same from your banker.

I think you want your banker to have an uneventful day. I think you want your banker to, in fact, enjoy uneventful days. There to be a quiet satisfaction of that reliability, regularly getting the things done as expected. I think that personality works well in banking.

Turner Novak:

Yeah, because when I think about what are the biggest events in banking, they’re generally not something that you want to see happening on a daily basis. In much the same way that the underlying utilities of society, electricity or water, it’s okay that these things are uneventful.

Darragh Buckley:

It’s in fact good that they’re uneventful. It’s like any type of infrastructure, you want no events. It just works, as it always does, all the time. And operators and builders and maintainers who value that can be well suited.

Turner Novak:

Well, it’s been a lot of fun. Thanks for coming on the show. It’s been nice, I very much enjoyed it.

Darragh Buckley:

Thank you very much for having me.

Find transcripts of all other episodes here.

Related Episodes

In 2025 he left Lux Capital ($7B AUM) to start Red Glass Ventures and go all in on AI that touches the physical world.

We hung out for a few hours and he shared everything he’s learned over the past 18 years:

• Why hardware is still hard despite the current sentiment, and what has actually changed

• Why the deployment layer is the most attractive part of physical AI

• What he looks for in the founders he backs

• The 90% pay cut he took to leave Lux and start Red Glass

• How small funds quietly became outsourced associates for the big guys

• Why the “AUM as a moat” chants is a warning sign

• The math behind becoming a billionaire off management fees without ever returning a dollar to your investors

• Why consensus investing is a circle jerk

This one’s for anyone building and investing where AI meets the physical world, or who just wants more inside baseball on starting and running a venture firm.

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👉 Stream on Spotify and Apple

Timestamps to jump in:

• 0:00 Leaving $7B to bet on physical AI

• 0:51 What most people get wrong in physical AI

• 4:17 Why a startup has to become a business

• 11:31 Hardware is still hard, so what changed?

• 15:40 How government went from SBIR mills to real customer

• 17:48 Robotics goes from hard-coded to probabilistic

• 23:34 Where value accrues: full stack, then wedges

• 25:24 How Applied Intuition became a $15B company

• 28:03 The deployment layer is the real prize

• 32:22 OpenAI and Anthropic hint what will happen in physical AI

• 36:14 Why customers have all the downside

• 37:56 The best founders paint a picture and execute

• 40:53 Why it's called Red Glass (founders chew glass)

• 42:17 Every founder hates fundraising, even Travis

• 44:29 Red Glass's four core values

• 50:49 Why founders really take your call (the $250k effect)

• 53:28 What Bilal looks for in a founder

• 58:44 Why technical founders underrate fundraising

• 1:00:26 The Tiger Global era

• 1:04:02 From $10B to $100B, the goalposts moved

• 1:06:21 Is this a bubble? Portfolio construction

• 1:08:55 Building a firm that outlasts him

• 1:12:13 From Nobel-lab chemist to Zero-to-One investor

• 1:13:45 Are small funds just outsourced associates?

• 1:16:35 When AUM becomes the moat

• 1:18:34 How big funds choke off SPV money

• 1:21:24 The risk of VCs backing competitors

• 1:23:31 Why fund economics push everyone bigger

• 1:26:20 Consensus investing is a circle jerk

• 1:29:51 You can be a billionaire on fees alone

• 1:33:09 Equal carry and the right to win

• 1:35:55 Why good ethics in VC matter

Find Bilal on X / Twitter and LinkedIn.

Check out Red Glass.

👉 Stream on YouTube, Spotify, and Apple

Transcript

Find transcripts of all prior episodes here.

Turner Novak:

Bilal, welcome to the show.

Bilal Zuberi:

Thank you. Thank you, Turner. So good to see you, man.

Turner Novak:

It’s awesome to see you too. I’m really excited, because we haven’t really gotten a chance to sit down and have a two-hour conversation, I don’t think, ever before. So this will be fun.

I think probably the most interesting place to start is that you have been investing in what we now call physical AI for 18 years. You were at a pretty large fund, Lux Capital. I think they have, I think Claude told me, five billion in AUM.

Bilal Zuberi:

Seven billion.

Turner Novak:

Oh, it’s seven? Oh, $7 billion in AUM. You left to start your own fund. You know, it wasn’t necessarily the hottest thing in the world, but suddenly it is. People will not stop talking about it.

So as somebody who’s been doing this for a really, really long time, what do most people typically get wrong when they first start to invest in something that’s not just software?

Bilal Zuberi:

So number one, many thanks to Jensen Huang, who I think in January 2025 put up this chart that now people have seen many times, where he says there’s AI, then agentic AI, and then physical AI. And I was like, “Oh my God, the future is physical AI.”

You know, 18 months ago, when I was starting my conversations with LPs that maybe I should do a fund, there were many LPs who said, “We’ve never done investment in this area. This is capital intensive.” And then I tried to tell them, “No, it’s not, at least not the way I’m approaching it or the kinds of investments I want to do.”

But it was an uphill battle, because, you know, oh, this is probably only large funds can do this, where you can write big checks and hold onto your positions. That has completely changed in 18 months, and everybody wants to invest in it. The way Jensen describes physical AI, it feels like a little bit more narrow, around robotics and autonomy and so on.

The thesis of my fund is AI and the physical world. I think there’s tremendous innovation happening in AI. I think we all realize that at this point in 100 different ways. And I think we want to fund some of those fundamental innovations, but we also believe that AI is going to have a massive impact in real-world physical industries.

You know, things that we consume, this table, this glass, the food, the energy we consume, the industrially produced products that we have, and so on, defense and all that stuff.

What are the mistakes that people make? I mean, look, number one, there’s a lot of very smart people investing in this space, and they’re coming from different vantage points. Some people have been doing it for a long time, so clearly they bring that expertise. They also bring scar tissue to it. So sometimes their problem would be that they’ve seen too much, and they know 100 ways to fail, and that’s all they think about, so they sometimes miss the big idea, because they’ve seen something like it before, and they wouldn’t do it.

But for newer people, go to market in these industries is tough. Decision-making in your customers is much more complex. The incentive systems of your customers are not exactly aligned with you.

Turner Novak:

Really?

Bilal Zuberi:

They want better products, but they just want to protect their market share more than anything else.

Turner Novak:

Hmm.

Bilal Zuberi:

They’ve never seen rapid growth, and oligopolies or monopolies, that doesn’t really happen to them. They would love to push all the risk to you, and you as a young entity might assume all that risk thinking that’s what it takes, not realizing that there’s not enough at stake for your customer to be there for the long term.

So you end up sometimes investing in companies that feel like a big idea, but the practicality is missing.

Turner Novak:

Hmm.

Bilal Zuberi:

One of the things I talked to LPs about as I was doing fundraising was that, of course we want to fund big, important ideas, change-the-world ideas, and companies that can become very, very big, and hopefully the entire investor ecosystem will want to be a part of that at various stages.

So it’s not some niche fund. But I also said that we want to back founders who understand what it takes to turn a startup into a business.

Turner Novak:

So why is that such a big deal?

Bilal Zuberi:

Look, you and I can create a startup during this podcast, probably costs less than $25 to register, and we can call it “We’re Gonna Go Mine on the Dark Side of the Moon,” and likely get admitted into some accelerator and even get funded.

Turner Novak:

Yeah, I mean,

Bilal Zuberi:

Especially with you and my background. These guys know how to raise money.

Turner Novak:

Yeah, I can spin up Claude right now. While we’re talking, Claude can go and we’ll have a website and a product.

Bilal Zuberi:

These days people are saying, “Can these guys raise money?” And if you can raise money, great. People want to fund you, so we can do that.

But a business has customers who buy products. When they buy a product, they give you revenues, and the revenues are real only when there’s margin associated with that. And going through all those steps is non-trivial. It’s finding a customer on the other side that cares about your product enough to part with real dollars toward you, and in a way that’s not just real dollars while they know that you’re packaging a dollar with every product you sell to them, but you are actually generating margins and profits on the other side.

That’s a tough ask. And I think the greatest companies that I’ve been fortunate to be part of have figured that out. As their business starts to grow, they also start to grow their TAM. So they’re turning their startup into a business, and the business is becoming bigger and bigger on its own, expanding, and the opportunity set in which they’re building is becoming bigger.

Those are the businesses that I think are just the most amazing ones.

Turner Novak:

So it’s basically, you need to make sure on day one, or as close to day one, you can sell a thing profitably, you’re going to make money. Maybe the TAM in a spreadsheet or in a market report can or cannot be big, but it actually has to be large long term, whether or not the spreadsheet says it does. It has to materialize over time.

Bilal Zuberi:

It’s not so much that you have to start selling day one. You have to do real development, real product work, but you have to understand what it takes to sell. I met somebody earlier today, remarkably smart individuals building a research lab in a very important area. But when you reach the point of, what is your path to turning it into a product that people actually use, they just haven’t thought about it.

And they don’t see that as a priority, which is fine, because they’re researchers who are basically doing research that just happens to be inside a company, and in today’s climate they’ll get funded. But I think that cannot be your portfolio. There could be a shot on goal that you take in your portfolio. There’s room for something like that, but that cannot be the majority of your portfolio.

Turner Novak:

You mean as an investment firm portfolio? Okay. So it’s almost like you need to be commercial, like the founders need to be commercial and know how to get customers to pay them for the thing.

Bilal Zuberi:

Isn’t that the purpose of starting a company?

Turner Novak:

I mean, I think so, but

Bilal Zuberi:

Why do we start a company then? I don’t understand if we’re not trying to be commercial. I feel like, are we professors? Are we research? Are we basically saying nobody will give us money in a university, so let me create an alternate form of a university and do research there?

Don’t take me wrong. Vinod Khosla and others who funded OpenAI, it was not commercial. It was a non-profit.

Turner Novak:

Yeah.

Bilal Zuberi:

Vinod could do that, but Vinod can also give a billion dollars to somebody as a non-profit grant because he wants that to exist. That’s very different than necessarily an average VC who’s trying to do remarkable investments and make a mark on the world, to the extent that Travis Kalanick was saying everyone wants to make a mark on the world.

Turner Novak:

Mm.

Bilal Zuberi:

We’re trying to find amazing individuals who will create real value, who will create real products, who will improve people’s lives, and who will create products that have economic value in society. And that’s what we get paid for in return, because then society says, “Thank you for building that. We’ll give you a lot of money because I think you will continue to add money for a long time to come, and hence we will apply a multiple to it that will be pretty high, and you can cash out, and we will continue with the company going forward. Thank you very much.” And that’s what we call an exit.

Turner Novak:

Does that happen a lot, you think?

Bilal Zuberi:

I think so. I think so. I think a lot of VCs are motivated by commercial offerings. VCs are responding to the environment that they’re in. They know what their job is, but sometimes they feel like in the interim you’ve got to do what everybody else is doing, and if everybody else is funding research labs, then maybe I should have a research lab in my portfolio as well. And then some get carried away.

But I think VCs, investors generally, understand that their job is to invest in something that creates long-term real value.

Turner Novak:

Mm-hmm.

Bilal Zuberi:

And people may differ on how long it takes to create that value.

Turner Novak:

Hmm.

Bilal Zuberi:

That’s okay. You know, SpaceX is a very old company. Tesla is very old. It feels like a new company, but it is not.

I don’t think anybody has a 23-year fund. I don’t think my LPs are willing to give me 23 years. Now, maybe if it becomes, at the end of 12 years, if it’s starting to look like SpaceX, they’ll hold onto it. But otherwise these are 12-year funds. In fact, a 10-year fund plus two has become very common. Maybe they’ll become 15-year funds. But that’s roughly the timeline that you’ve got to make your mark on the world with that company.

Turner Novak:

So what’s happened over the past couple years? Because if I go back three, four, five years ago, I feel like the mantra was, “Hardware is hard.” So what’s changed that people are now all of a sudden really excited about the category?

Bilal Zuberi:

Hardware is still hard. I really encourage people to not let VCs tell you that hardware’s become easy.

Turner Novak:

Mm.

Bilal Zuberi:

It has not. In fact, it’s become, in some ways, harder. Supply chains in China have been cut off. If you designed a product here, you could go make it in China. Now you have to do everything yourself. You have firms that are having to basically reinvent motors and actuators, things that used to be bought in bulk in China, and we’re having to rebuild them here.

But put that aside. What has changed? A few things have changed. One is, the founder set that has been attracted to the hardware space is a founder set that Silicon Valley is more familiar with and understands, and that founder set understands how to build fast-moving companies.

Turner Novak:

Hmm.

Bilal Zuberi:

I’ve often said that while technology is a great differentiator for a startup, the real differentiator is speed. If you can move fast, you can do amazing things. You can do something that’s relatively commodity and build an interesting company, because the other players who provide that commodity are stale and are not going to move fast.

Turner Novak:

I mean, it’s like Uber. So there’s a car ride.

Bilal Zuberi:

Correct.

Turner Novak:

There’s hundreds of millions of cars around the world.

Bilal Zuberi:

Correct. Every photo-taking app could have created an app that also deletes your photos, but Snapchat did it, and they did it fast.

Turner Novak:

Yeah.

Bilal Zuberi:

Everybody could have added filters, but Instagram did it, and eventually everybody tried to, but Instagram had already established its lead and community around it.

But in hardware, 18 years ago when I entered venture, we had discovered, 18, 20 years ago, that there’s this whole world of deep tech, clean tech. Energy is massive. All of the enterprise software business is like three, $4 trillion of revenue. Just automotive alone is $4 trillion of revenue. Industrial is another 10, $12 trillion of revenue. Manufacturing is another. Construction is another. I mean, we’re talking 30, $40 trillion worth of economy that’s available for us to work in.

The problem was that because we did not understand these industries intimately as investors or as founders at that time, we said, “Who should we fund?” We said, “Okay, let’s find these guys who have 20, 30 years of experience at Shell and GE and BP who really understand oil and gas and energy and manufacturing, and let’s fund them.”

Turner Novak:

Yeah, that makes sense, because they’re the experts on the industry. They’ll know how to navigate it.

Bilal Zuberi:

But they’re not founders. They don’t have the founder DNA. They don’t have the entrepreneurial spirit. They don’t move fast. They can’t make it and break it. They do things the old-fashioned way. And hence they’re no different than the other incumbents.

So what happened is that because these industries take a while on their own, by the time they would get to market and the market would be ready for them to be there, the incumbents would be like, “Ah, the market is available. Let’s go.” And the incumbents would catch up. So you have to move fast, and you have to do things slightly more unnatural.

Starting with, obviously, Elon Musk back in those days, and then moving on, the founders of Nest, and then Palmer Luckey, who created Oculus, and Aurora, and then Applied Intuition, and Anduril, all these companies that we now know about. These are Silicon Valley folks.

Turner Novak:

Mm-hmm.

Bilal Zuberi:

They move fast. They hire fast. They raise capital. They deploy capital. They know how to bend the rules. They know how to do things that are not typical for that industry. Forward-deployed engineers in physical sciences has become a real thing.

Turner Novak:

Hmm.

Bilal Zuberi:

So the first thing that changed was the quality of the entrepreneur and the type of entrepreneur, and I think VCs became more comfortable with that. They were no longer talking to staid old guard.

The second thing that happened was that government was seen as an SBIR mill that would give you small grants that would help you do some development of some really big idea, but never became a customer.

Turner Novak:

Really?

Bilal Zuberi:

And I’m on record talking about this, that this was all bullshit. It was a job creation mechanism, and a few companies that became really, really good at getting SBIRs would get tens of millions of dollars, in fact hundreds of millions of dollars in SBIR dollars would just go to them.

Turner Novak:

These are startups, or these are like incumbent companies?

Bilal Zuberi:

These are, I call them SBIR mills. They were good at creating proposals and submitting them and getting, you know, there’s nothing to it. Just like, “I need to do some research. Give me some money. I’ll call it a commercialization effort, but there’s no real plan to commercialize. I’ll get my SBIR one and two, and then move on to another topic, and SBIR one and two, and just keep going.”

Turner Novak:

So that was actually the business model, getting government grants, essentially.

Bilal Zuberi:

Yeah. Kept people afloat for the longest time. And I think, thanks to the effort of a lot of founders over the last 10 years, and then frankly some VCs. I remember making early defense tech investments 15 years ago, and nobody was interested in them. And then often at these defense tech panels, there’d be the same few of us. Trey and I and a few others were always on these panels together talking about government needs to change its procurement policies and so on.

And so that started to change. That has now become, government’s become a massive customer. And it’s a direct customer, but it’s also an influencer on the incumbents to say, “You need to buy from these guys.” And that has created a very real market. I mean, the government budget is a trillion dollars in defense, but at least a big portion of that is now headed towards these companies.

Now, we need it to do a lot more. Trust me, it’s still small peanuts relative to the big budget. But certainly even the small peanuts is like big numbers for the startup industry.

Turner Novak:

Hmm.

Bilal Zuberi:

And then the third thing that happened was that in the world of robotics, everything was very deterministic. And by robotics, I mean broadly speaking. You had to almost hard-code what you would need to do for a robot arm to come in, grab this thing, how much pressure to grab it with, and move it here and put it down.

Turner Novak:

So like every single potential path that could happen was literally in the code base.

Bilal Zuberi:

In the code base.

Turner Novak:

It was almost like if-then statements or something like that.

Bilal Zuberi:

Relatively speaking. I mean, we’re not doing justice to it, but roughly that. And then it became probabilistic with AI, and now there’s real-time models that are looking at, there’s vision models that are identifying this and connecting it, and then there’s robotic control models, world models, VLAs, all kinds of stuff.

We’re just saying, “Okay, I now know that this is a glass. I also know that it needs to move there. I can take a path to get there. I can in real time figure out how to grab this so that I don’t crush it.” And all of that stuff became probabilistic. So it became much, much easier to not only solve more interesting problems, but to generalize that solution.

Turner Novak:

Hmm.

Bilal Zuberi:

So nobody wants to build a robot, or it’s not a startup idea, to build a robot to pick this up and put it there.

Turner Novak:

Yeah.

Bilal Zuberi:

Somebody needs to do that. Let’s assume this is a bottling company or a glass-filling company, but this is not a very big venture-scale business. But if I have a model that can do that, but it can do hundreds of other things, now you’re doing something very interesting.

Turner Novak:

Mm-hmm.

Bilal Zuberi:

And that is a more venture-like model. So I think that’s what you’re seeing, especially in physical AI, that people are like, “Okay, this is very interesting.” It is not that I can drive a car inside an airport knowing exactly where the lanes are. If you go back to Kiva Systems, the early robotics company that Amazon bought, it was literally markers on the ground that the robots were tracking and following and doing things. They weren’t super intelligent, but they did very good automation work.

But now when you think about robots, you’re thinking of robots interfacing with the world, interacting with people, hopefully not smacking people, not killing people, but able to do things literally in conjunction with humans. And that has become very interesting.

Turner Novak:

And then that has caused a lot of capital to come into the space.

Bilal Zuberi:

Correct. A lot of capital has come in because people realize that the markets are more accessible because of that. And you can actually build real revenues. And now the thing is, okay, can you become the dominant player? Can you get in early and create, whether you call it network modes or platform modes, something that everybody builds around you, including you, and you become the most well-known player, and then it’s harder to move away.

Large corporations who are customers, so if you are a large automotive company or a manufacturing company or whatnot, they don’t really have too much of a capability or talent base internally to build AI themselves.

Turner Novak:

Mm.

Bilal Zuberi:

The smartest engineer out of UIUC or Carnegie Mellon or MIT or Stanford is probably not saying, “My first job choice is working at a PLC company,” a robotics, actuator company. So these guys have to buy the technology from the outside if they’re going to use robotics and automation and AI in their workflows.

That has now become open, that hey, if we can become that entity that starts working with these companies, then these companies will trust us. And if they trust us, they won’t move off of us. And if they don’t move off of us, that means that we can become the most important player in that industry.

Turner Novak:

So then where do you think, if I’m building a company or investing in companies in the space, where do you think the most interesting place to be investing is right now? Maybe this is what you’re doing, advice to other people, etc. How do you just think about what I should be thinking about in terms of what I should be deploying capital into today? Where is the value going to accrue?

Bilal Zuberi:

So when you’re early to a space, any space, the early solutions that get built, in my opinion, are full-stack solutions. Because you’ve got to provide an end solution to the customer. Everything has to work.

Turner Novak:

So this is like SpaceX per se, or like

Bilal Zuberi:

SpaceX per se, or Tesla per se. You know, Elon Musk wanted to build the car, and the next thing you know, he was searching for the right door providers or the door latch providers in China. So you have to build a full-stack solution. Then as the customers start liking your solution, “Ooh, I never knew that you could do this. That’s very interesting. I like that. I like this electric car that has no sound. I don’t have to fill in the gas, and it goes really fast, and this is really cool.”

Turner Novak:

Yep.

Bilal Zuberi:

And so the customer interest grows in that area. Then you see the stack disaggregating. A stack evolves.

Turner Novak:

Mm.

Bilal Zuberi:

You say, “Oh, interesting.” So you can be at the infrastructure layer, chip layer, model layer, data layer, application layer, deployment layer, post-training layer, RL, all of that stuff.

Turner Novak:

Like the bigger a market gets, the more sliced the stack on a front-end versus back-end.

Bilal Zuberi:

Yeah, because we have more and more players willing to say, “I’m gonna do this and I’m gonna do the best job at doing this.”

Early, there’s Tesla, then came all these autonomous startups, autonomous car startups that were all building their own, like Zoox and Cruise and all of these companies. And at that point, you know, we’re gonna build a whole car and it’ll be our car. We just do it better than Tesla in this way and that way.

And then came the Auroras of the world, who were like, “We’re gonna build the entire operating system. So okay, you can build a car, but the entire intelligence will be ours.” And then came Applied Intuition, which is now already a $15 billion company doing really well. And it was like, “Yeah, all that is fine, but you see this thing around simulation? This is where I’m gonna go and become an expert at.”

Turner Novak:

Exactly.

Bilal Zuberi:

And yes, I will grow from there, but Applied Intuition was an autonomous car simulation company.

Turner Novak:

So what does that mean? What were they doing?

Bilal Zuberi:

When you are training models for autonomy, you need to collect data and feed that data into the models. If you’re a Waymo, you spend billions of dollars and have many cars that we have seen for the last 10, 15 years running around roads collecting data. They have the ability to collect real-world data, daytime, nighttime, in California and other places, when it’s raining, when there’s lightning strikes and all of that stuff. And they collect that data and feed that into the models.

But you can also simulate. So you can collect data on a road in San Francisco, but then you can simulate it a million different ways. Same road, but at night. Same road with a guy crossing. Same road, but there’s heavy rain, a downpour, and an eight-year-old child standing on the side. So one of your sensors is occluded. Now what happens? What are you seeing as a machine when one of your sensors has dirt on it or whatnot?

You can do millions of simulations, and this was non-trivial to do. Creating those simulations that were real physics, so it wasn’t like a gaming simulation, it had to have real physics involved in it.

Turner Novak:

Yeah.

Bilal Zuberi:

And then providing the platform for you to be able to store those simulations, share those simulations, run them into the model, and develop your model further. Applied Intuition was like, “Look, Waymo can do that. Maybe Tesla can do that. Maybe Apple can do that. But the major automotive companies around the world who really are the providers of cars, they don’t have the capacity, capability, or technical know-how to do this. So we’re gonna provide that to them.”

So that’s where they started, and then obviously grew from there, and now they have many products. They provide a full autonomy suite, they provide an in-cabin suite, they have solutions for cars and trucks and mining and drones and robots and all that. But you start on tools. In their case, they went to platform and then built applications on top of it.

So I think that stack evolves, and people start playing in the stack. Today, I see a lot of excitement about some of the most capital-intensive parts of the stack. I sometimes jokingly say, if Elon Musk announces that we’re gonna land on Mars, somebody wants to create a rocket that lands on Venus or something. Like, we gotta go further than Elon Musk goes. If we’re doing data centers in oceans, which is already like, how are we gonna do this? Let’s go data centers in space. And we’ve seen companies get funded who are doing that, and hopefully they’ll be successful.

But I fundamentally believe that while all these layers of the stack are very important, and we have invested across the stack across many industries, the most under-invested-in area, and I think the most interesting area right now, is at the deployment layer. It is actually putting robots in the field to do the work. It’s the messy part of the equation.

It’s also where the real-life learnings will come. There’ll be models that’ll get post-trained on the specific tasks and all the complexity. It’s a little bit like, at some point Waymo had to say, “We’re gonna build a car and we’re gonna drive.” Right now we have too many people who are at the sort of intellectual, academic layer. Not denigrating anybody, it’s just they don’t want to do the dirty stuff. They want to sit in good factories, good offices, do clean stuff.

Turner Novak:

It’s almost like picks and shovels. We’re gonna build the tools for them to then go use.

Bilal Zuberi:

Yeah. They want to build models. They want to build the intellectual stuff. They don’t want to build the thing that works in the field.

The thing that works in the field is where you have real things happen. You have a beautiful robot, like this beautiful microphone, but if I had a five-year-old here, he could just go like this, and suddenly your sound engineer’s like, “Holy shit, what is going on?” Or everything is great, but I put a phone here and it’s vibrating. Or you have a beautiful model that does the screwing-in assembly, but a train passes by and this entire train shakes because this is not on a vibration-free table.

So dealing with all of that will generate real-world data that will make these models much more interesting and much more applicable and much more real and more accurate and more efficient and so on. And I’m certainly investing in that space, and I think we will see more of that. Everybody wants to build the models, but nobody wants to actually put them in the field, like Chef, the company, to do cooking. Or like Foundry Robotics, to do manufacturing in the field, or do cleaning, or do logistics, or whatever it is. And I think that’s gonna be very, very interesting.

Turner Novak:

So why is it, do you think, people are not doing that? Is it not fun? Is it hard? Is it perceived to not be valuable? Is it perceived that investors don’t want to fund it, so I won’t build this thing? What’s causing it?

Bilal Zuberi:

One, it’s hard. It requires you to understand the business, the end customer, well.

Turner Novak:

Okay.

Bilal Zuberi:

Most VCs have no idea about the customer set. I mean, where you live, you have real-world industries around you. How many VCs do you think are walking the shop floor there and understand what’s going on there?

Turner Novak:

I mean, I don’t even do it enough, so when I go there,

Bilal Zuberi:

It’s like, VCs, everybody has friends who work at Amazon and Google and Dell, and we hang out with the CIOs and the CSOs and the CTOs and the CEOs.

Turner Novak:

Yeah. It’s easy to just send a text to your friend and be like, “Would you guys use this?” And they say, “Yeah, it looks great.”

Bilal Zuberi:

Yeah.

Turner Novak:

And then that’s your diligence really. That’s super easy to do.

Bilal Zuberi:

It’s easy if somebody’s building a fundamental model around manufacturing or robotics or something, you ping somebody at Berkeley or Stanford or MIT, and they’re like, “Yeah, this professor is very well known. This work is really interesting. It’s cutting-edge work in this space.” And you’re like, “Wow, maybe we should be funding this fundamental lab in this space.” This grasping model or some other model. And very much, we need to do that. Don’t get me wrong, we need to do that.

But then you say, “Yeah, this is all fine, but now we need to deploy robots in the field that pick up...” Think of just laying the roof on your house, the roof tiles. When your roof tiles are laid, 10, 20 people show up, and all day they’re doing repeat work. But now you take a robot to do that, you can create a lot of efficiency, do it really fast, create a great company doing that, but you’ve got to be up on the roof with a robot.

Turner Novak:

Yeah.

Bilal Zuberi:

Or doing any other kind of construction work, you have to be in the field doing that, and I think few people want to go that far, and I think that will change. I’m investing in it, and I’m sure others will invest in it, and we will start to see deployment.

You know, five years ago, you could be a research lab, OpenAI and Anthropic, and not care much about revenue. Who cares? We’re building the most amazing thing in the world. We’re building the AGI. Who cares about revenue, dude? We will build whatever revenue. Today, every day we wake up, Anthropic is now at $67 billion in revenues, and last June it was at $40 billion or whatever it was, and everybody’s like, “No, we have real businesses.”

Should Anthropic also become a legal AI company? Should OpenAI become that? These companies are getting into physical AI because they feel like there’s gonna be large markets that they can open up there.

Turner Novak:

Yeah.

Bilal Zuberi:

So real businesses need to be built. The same way that we saw in the LLM world that research labs had to start worrying about real dollars and cents and real business and real revenues and margins, the same thing will happen in the physical AI space, not just robotics, but broadly, that you have to think about real revenues, real margins, real customer traction, real churn. All of those things are going to matter, and that’s gonna be at the deployment layer.

And it’s not just about putting machines in the field and doing services. It is most important that this world requires data. You have to collect data in the field.

Turner Novak:

Mm.

Bilal Zuberi:

Even for simulation engines to work, you have to have enough data in the field to be able to have good physics and good simulation models that can then take that and multiply it manyfold. And I think companies that have that will accrue a lot of value.

Turner Novak:

So is that largely not happening in a lot of cases, the actual collecting of data on some of the new technology that’s being deployed, being applied? Are we not going through those motions in terms of how customers are using it in a real sense, in terms of what needs to be done and what’s not happening?

Bilal Zuberi:

No, we’re not doing it enough. Not nearly enough. I mean, let’s just take robotics, and I don’t want to just harp on robotics, but let’s take robotics. How many demos have you and I both seen of folding laundry, making coffee, shutting doors? It’s all fine.

Turner Novak:

Yeah, I mean, I see the videos of them all the time.

Bilal Zuberi:

Yeah. But these are all demos. It’s the same demos. It’s like benchmarking or benchmark-maxing or whatever that word is.

Turner Novak:

Yeah. That was one of my favorite things, that every week a new model, they made up some new benchmark that they’re number one on. You’re like, “What? We just made this up.”

Bilal Zuberi:

Well, look, and robotics is harder, and I think some of these benchmarks are... There’s no good evaluation models in robotics. There’s no good benchmarks in robotics. So everybody has to just see what I’m doing. Recently there’s a company, Dyna, that came up with, oh, a scaling law that, “Hey, when we get one million hours of data, we start to see real scaling happen.” Oh, that’s interesting. A lot of people started to pay attention to that. It was just in the last week or so, but then a whole bunch of companies are like, “Well, this has already been done, and we’ve shown it as well,” or whatever. Or, “This now has compute requirements that are very high,” or whatever.

But this is all very important work, but it’s still, in some ways, researchy work.

Turner Novak:

Mm.

Bilal Zuberi:

And what needs to happen is somebody needs to take it into the field. Now, let me do a little advertising for Red Glass. I said, to do what I do, investing in AI meets the physical world, you need to understand AI and all the things that are happening in AI at an extremely fast pace. Every day we wake up to some new thing happening. Some new model has dropped, and open source is now better, or cloud inference is better. But now you can actually have these small models that operate like large models but run on your own private GPUs. And so we have to keep in touch with all of that and be at least fully aware of it, if not an expert at it.

Turner Novak:

Yep.

Bilal Zuberi:

In my case, you also have to understand, in the physical world, these industries. What are the problems in those industries? How do you sell into those industries, have relationships, trusted relationships into those industries, and be able to help founders who are building in those companies by creating those networks and relationships?

Okay? Founders have to do all those two things, which Red Glass does, and on top of it, they have to go deploy it in the field. They have to be answerable to the customer, and the customer is like, “Yeah, I like all your big things, but this is what my problem is.”

I was just with a founder earlier today that we’ve recently funded, and I was reminding him that you start a company and, when you started the company, you had 100% equity, and you thought by the time the company goes public, you will own still, I don’t know, 20, 30% of the company. Hopefully he owns more, but who knows? And the company will be worth billions of dollars, and you’ll be worth billions of dollars, and your product will be used by everybody. And that’s your motivation set. Change the world and make a lot of money.

Now, you hired the first 10 people, and those 10 people you’re giving maybe a percent, half a percent of equity, and they also believe that, “Oh my God, if this becomes worth $10 billion then I’ll make, I don’t know, $20 million, and my life changes, my family’s life changes.” But by the time you’re hiring employee number 400, 500, this is like another job for them. There’s some amount of equity and compensation, don’t get me wrong. But they’re not joining this as, “I’m gonna become Insta-rich in the next two, three years.”

Turner Novak:

Yeah.

Bilal Zuberi:

Now think of your customers. They’re sitting there, they’re like, “There’s no way in hell I’m making any money off of this.” Like, “I am a senior engineer at an automotive supplier. All this hype that these guys have, dude, I just get paid to do my job. Does this do my work better? Does this make my work better? I have all the downside to worry about, but very little upside.”

So you have to deal with that and pay attention to that. And I think a lot of founders don’t want to do that. And those founders that do, do really well. They’re close to the customer, their ears and eyes very close to the customer, understanding what the customer wants. Their product roadmaps often evolve with the customers. They’re not just trying to be prophets. They’re not just trying to make grand statements about what the future of the world looks like.

Turner Novak:

Mm.

Bilal Zuberi:

To some extent they have to do that, but they also understand execution really matters. And the best entrepreneurs in AI in the physical world, or deep tech, or whatever you want to call it, are the people who’ve done both. Elon is, for all his faults, and I have lots of issues with him, but he’s able to paint the big picture and then he’s able to execute. Sometimes he’s off by the timing a little bit, but doesn’t matter.

Turner Novak:

Yeah.

Bilal Zuberi:

That’s a second-order issue. But he’s able to execute. Many people can paint big pictures, but they can’t execute. Or they’re people who are too stuck in the weeds and they can’t help people see the bigger picture of why what they’re doing is really important. And the best entrepreneurs are those that can do both those things. Few, but they’re there, and they’re the ones that we should all chase.

Turner Novak:

Mm. I feel like one way I’ve been kind of distilling down how to think about that and describe it is being very commercial. You can sell it, you can execute on it, deliver to the market, which is maybe also part of painting a picture. So you’re very commercial, you know how to make money, in a sense.

Bilal Zuberi:

Yes. Commercial, it’s also, look, if you’re building something that’s gonna take several years to get to market, something that’s gonna require a lot of capital to get to market, then you have to be able to sustain the interest of your investors, your employees, even your customers for a long period of time.

Turner Novak:

Hmm.

Bilal Zuberi:

And you have to have the ability to do that.

Turner Novak:

So is this like a very underrated aspect of this that a lot of people don’t think about?

Bilal Zuberi:

Very underrated. But also equally, those people who are very good at it are not very good at execution sometimes. They paint a great picture, but they haven’t shipped anything in 10 years, and they keep telling one hoopla after another, one hype story after another.

Look, Moses was followed in the desert, if you’re a believer, or whatever, at least the story, for 40 years. People followed him until they reached the Promised Land. You would think at year 39 somebody would have said, “This dude has no idea what he’s doing.” But people kept following him because he was a prophet. And how he spoke to the people and the message he brought to the people and the belief that people had in him allowed them to follow him for 40 years.

And I think entrepreneurs are like that. People have to be able to follow them. But they have to also know where they’re going, or at least have the ability to execute on what needs to get done. Because I don’t think we would be singing the story of Prophet Moses if he hadn’t reached the Promised Land. It would be a little bit of an awkward story, that for 40 years we wandered in the desert and then the story ends.

Turner Novak:

It is actually kind of an amazing story. And then, the land of milk and honey, I think they call it. And he literally parted the Red Sea, and they walked across.

Bilal Zuberi:

Across the sea. You did unnatural things. Founders do that.

Turner Novak:

Insane.

Bilal Zuberi:

Look, the Red Glass name, it’s sort of funny. Like, I named it after my glasses, but actually I didn’t name it. My children named it, because I couldn’t come up with a name, and I was struggling with all these boring names that felt like VC gobbledygook. So my children were like, “Just call it Red Glass.” And I asked some friends, and they’re like, “Dude, that’s pretty cool.”

But here’s the thing. Red also is passion and courage. Red is also the color of good luck in Asian cultures. And glass is transparency and clarity, which are really important values to me personally and to my fund. But also glass is molded into beautiful objects, like that beautiful glass you have. I have the plastic one.

Turner Novak:

I offered you the glass one. It’s okay. I want to put that on the record. It’s all right. It’s all right. I did say you could have the nice one.

Bilal Zuberi:

Glass is also molded in fire. And that’s what founders kind of go through. You have to go through the fire.

Turner Novak:

You have to go through fire. Really?

Bilal Zuberi:

There’s no easy way. It all looks very glamorous from the outside. There’s a lot of VCs who like to call themselves founders of every company they end up investing in early. I never do that.

Turner Novak:

Do people really do that?

Bilal Zuberi:

Oh, all the time. All the time. I won’t name anybody, but there are some people who have, you know, haven’t founded a single company really, but they’re like, “I’m founder of these eight companies.” Bullshit. I mean, whatever. Just because you’re an early investor doesn’t make you a founder. You’re a founding investor maybe.

Turner Novak:

Yeah.

Bilal Zuberi:

But the founders chew glass. This is not easy. No founder will tell you that they love fundraising. Even Travis Kalanick, who’s like one of the most successful fundraisers in the history of venture maybe, wouldn’t tell you that he loves fundraising. In fact, he shits on VCs every day these days.

Turner Novak:

Yeah. He’s been going on a tour lately.

Bilal Zuberi:

He’s just getting it out of

Turner Novak:

some bangers. Yeah. He said some really excruciating... He’s crucified some people lately with some of the stuff.

Bilal Zuberi:

You know, he’s getting it out of his system. And, look, give credit to him for having built what he built and then kicked out of it. But also, there’s an effort to rewrite history. Winners get to write history. And he wants to establish himself as a winner, and he’s actively rewriting history. Because back then when he was let go, the prevailing consensus among all VCs, I would say, or many, most VCs, and community in general, was that the ship had gone astray, off the target, and needed course correction.

But that’s okay, it doesn’t matter. Look, it doesn’t take anything away from him. He built it with blood, sweat, and tears, and he’s doing it again. We’ll see how that goes, and hopefully it’s successful.

Turner Novak:

Yeah.

Bilal Zuberi:

But the point I was making is that these guys, founders, go through an excruciating journey, and I don’t think most people appreciate that. And I’m hoping that, as a fund, we can be appreciative of that.

Turner Novak:

A little bit more of the Travis thing. It was pretty interesting, he also kind of dug A16Z a little bit, which they did end up leading the round of his new company, joined the board. He’s kind of like, “Yeah, you guys fucked up big time.” I don’t know if you saw that.

Bilal Zuberi:

I’ve seen some of these interviews. Look, man, every VC needs getting dunked on.

Turner Novak:

Yeah.

Bilal Zuberi:

VCs have too big an ego. We think we are very powerful. A God complex is very easy to get. In fact, if anybody understands the God complex, it’s probably Travis. Didn’t he have the God mode on his app at one time, where he could see every car everywhere that was moving around and taking people to places?

Turner Novak:

Mm-hmm.

Bilal Zuberi:

You know, when I started the firm, before I had a name, an office or anything, I had four core values. I really sat through and thought about what are the values for the firm?

Turner Novak:

Yeah, I was gonna ask you.

Bilal Zuberi:

Most VC firms don’t have values.

Turner Novak:

Hmm.

Bilal Zuberi:

Most VC firms have, like, if you ask them, they’ll give you some statement. But if you picked up a random guy at a VC firm and said, “Wait, what are the core values of your firm?” I think you will hear some pretty random blah blah.

Turner Novak:

Just like, “add value to our company” or something.

Bilal Zuberi:

Add value, be nice, whatever. I don’t know. Something.

Turner Novak:

Make money for LPs. Or for ourselves maybe. Maybe that actually might be the more correct version.

Bilal Zuberi:

Yeah, some people do both, but most often they don’t. There’s many, many things that a VC accomplishes. Having a beautiful office might be an accomplishment.

Turner Novak:

Yeah, that could be a value.

Bilal Zuberi:

Right? That could be.

Turner Novak:

Some of those offices are insane.

Bilal Zuberi:

There’s too much money, man. There’s too much money in some VC firms.

But my core values for the fund, and every employee hears it at least once, it’s curiosity, intensity, integrity, humility. We have to be curious. What is happening in the world is phenomenal. What is happening in the world of technology is still underappreciated. I don’t think most people appreciate what is really happening. And I’m not just talking about the general world or the rest of America.

Turner Novak:

I feel like in tech, I feel like the average person in tech still is just like, “Oh, this robotics hype is all hype and it’s a bubble and it’s gonna die.”

Bilal Zuberi:

Everything is a hype until it’s not. So I don’t pay too much attention to that. I think if you just look at fundamentally what’s happening in technology, some incredible minds working on incredible things and incredible progress being made on a daily basis. So we may be off by 10 years, hopefully not, but we may be off by 10 years, but man, we’re moving in the right direction on making technology accessible and available and intelligent, such that we can solve the most important, pressing problems in the world.

Turner Novak:

Like, you can literally pick up your phone and just ask Claude, like, “Hey, I want to learn about this thing,” and then just go and do it for me, and you can come back in 30 minutes and it’s just learned it all. It gives you... You can read something for two minutes and understand most of it, and then it accomplished the thing and did it for you. And it’s insane.

Bilal Zuberi:

And as we are talking, these are basic cases. Last night I was doing a pro rata calculation on a company that I’ve invested in, and typically I would sit with Excel and create a model and whatever, and I went to Excel and I wrote like seven lines. “Hey, I invested at this price this much. This is the round that happened after that. This is the safe note that happened after that, this much warrants, this many. Create a spreadsheet that gives me my pro rata if I was to maintain the same ownership post Series A,” or whatever.

Turner Novak:

Yep.

Bilal Zuberi:

And it created a beautiful model for me. Now, even just a year and a half ago, at Lux, I would probably take all of this and just send it to the CFO, “Hey, can you just create a model for me?” I mean, I know how to do it myself, but I’ll just push it off to the CFO. And she would do that. But now Claude can do that for me in like a minute and a half.

Turner Novak:

And that’s like a basic example, too.

Bilal Zuberi:

These are basic. This isn’t even a crazy thing. I mean, people are solving cancer with this. Or at least trying to solve cancer with this. This is basic shit.

So that’s curiosity. The second is intensity. Work hard. I was at a dinner at a famous VC’s house a few years ago. Some of our common friends were there, and one of the things he said that stuck with all of us was, “This is the greatest show on Earth, and we have front-row seats to it.”

Turner Novak:

Hmm.

Bilal Zuberi:

What else could I be doing? Imagine you have the opening show of Hamilton, tickets, front row. Are you gonna sit there and do fucking emails? You’re gonna be like, “Oh my God, I am seeing history happen.”

Turner Novak:

Yeah.

Bilal Zuberi:

That’s what’s happening in front of us. So 20 hours a day is not enough.

Turner Novak:

Hmm.

Bilal Zuberi:

And I can survive with at least four hours of sleep is necessary for me, but there’s just not enough hours in the day to do what I need to do and learn and get execution underway. But those two things together can make you a good VC. Curiosity and intensity.

Turner Novak:

Okay.

Bilal Zuberi:

Where we live in the world today, and the impact that AI is going to have on society, it is going to require us to be good humans as well. We are deciding the fate of humanity. We’re deciding literally where bombs get dropped and people are killed. AI is going to be doing that. AI is deciding what healthcare you get, what medicines you get, what coverage you get, what loans you get. AI is doing all of that. We are really changing people’s lives in very, very meaningful ways. We better have humanity in all our decision-making.

Humanity comes, in my opinion, from the last two core values, which are integrity and humility. You’ve got to be able to stand for the ethics and the values that you care for and are willing to give up some asset, some value, some upside for.

Turner Novak:

Mm.

Bilal Zuberi:

And humility is understanding that if I sound smart to you, sure, I’m sure my IQ is not terrible, but it’s because really, really smart people come and tell me incredible things all the time. In some ways I’m regurgitating. I’m analyzing. I’m like Claude.

Turner Novak:

You’re like a voice LLM right now.

Bilal Zuberi:

I’m a pre-trained LLM that’s getting a lot of real-time reinforcement learning happening.

Turner Novak:

Yeah.

Bilal Zuberi:

So I think that’s important to understand, to have the humility of founders doing the real work. And not just founders, but every single person in that company, even those that are not gonna become super rich, they’re just doing a job. They’re doing the real work. They’re going frustrated at home at night that either their project didn’t work, or their sales didn’t close, or their boss was unhappy with them, or the politics in the company, or whatever.

That’s really understanding where the value is, and I think VCs tend to attribute way too much value to themselves. Which is because we have money, we have power, we have access, so we feel like we’re on top of the world.

Turner Novak:

Yeah, it’s kind of like this weird dynamic where people just want to be friends with you, and they are nice to you, like overtly almost. It can kind of get to your head. You’re just like, “Man, I’m kind of the shit, ‘cause everyone wants my...” People just want your money, really, isn’t it, at the end of the day? That’s kind of it. So it’s this weird dynamic where I try not to think about this, but, is this person just my friend because they want my money?

Bilal Zuberi:

Look, this is my take on myself. I just had lunch with a CEO I funded, and it was a very competitive round, and I ended up getting serious allocation in that company. But here’s the thing. I said, “When I met you, you were talking to a lot of VCs. You took a half-an-hour call, but then you called me back and you said, ‘Can we get on the phone again?’ It’s because you probably thought I had some smart things to say and interesting things to say, because you were talking to a lot of top VCs. And then after the second and third call, you were still willing to talk to me because, clearly, you’re not calling me because I’m good-looking. You’re calling me because I’m telling you things that you find useful for your business that’s just getting off the ground.”

Turner Novak:

Yep.

Bilal Zuberi:

So you value my intelligence and perhaps my knowledge base about this industry and my networks or whatever it is. But if I came to you and I said, “Hey, for all this intelligence that I’m gonna be parting to you every now and then, why don’t you pay me $250,000 a year?” you’re probably gonna say, “Bug off. We can hire people to do this. We need full-time. We don’t need these part-time consultants charging $250,000.” So I can’t get paid for that.

So I have created a business model to get paid for that. My business model is that I go to LPs and I say, “Give me money so I can give money to these guys.” And that’s how I get paid. I get the fees, and I get the carry, and you take the money. So instead of me asking you for money for sharing my knowledge, advice, insights, connections, and all that, I actually give you money that comes with all of these things to hopefully increase your odds of success and increase the magnitude of your success, which then results in carry on the other side that feeds me.

Turner Novak:

Yeah.

Bilal Zuberi:

So I had to create a business model, and that’s what VC is.

Turner Novak:

Yeah, that’s a fair way of thinking about it.

Bilal Zuberi:

And so what I sell to the founders is not my money. Money is a fungible commodity today. Any amount of money I give you, somebody else has more money than that. They have cheaper money than that. They have maybe easier money than that. Their money comes with maybe other fancy things, private jets and fancy dinners or whatnot, that I don’t do. But I try to become a partner to the founders.

Turner Novak:

What are you usually looking for when you’re meeting a founder for the first time? Because today at Red Glass, you’re kind of formation through Series A, which to different people means different things. But what are you specifically looking for when you’re meeting and talking to someone? And this is maybe help for other people that are also getting into investing, maybe it’s helpful for founders, like, what is an investor looking for when I’m meeting them?

So what’s your general arc of a conversation in a meeting usually look like? What are you trying to do?

Bilal Zuberi:

So I invest in the earliest stages, ideally the first check in, whether you call it pre-seed or seed or whatever it is. Sometimes they take pre-seed and seed from friends and angels or whatever, then they call this an A, so it doesn’t matter what the title is.

I look for, first and foremost, you’re investing in the founders, and everybody will tell you if the smart founders or whatever. I look for conviction and mission. Do they have a missionary zeal towards this idea, this needs to exist? Do they really firmly believe that this is important? And then I probe why, and sometimes they’re off.

Turner Novak:

Hmm.

Bilal Zuberi:

They have a belief system that is not based on any fundamentals, just a belief system.

Turner Novak:

Hmm.

Bilal Zuberi:

But they have to have that missionary belief in what they’re doing and the field that they’re in and the necessity of the solution that they’re gonna be building.

Turner Novak:

Any examples of that, like from investments you made in the past that people might be able to, like Applied Intuition?

Bilal Zuberi:

Yeah. Applied Intuition was very simple. They had the fundamental belief that, while everybody in the industry was saying that all these automotive companies are screwed and they should just be metal benders, and we’re gonna build the next automotive company in Silicon Valley and whatnot, they had a fundamental belief that, what are you talking about? These automotive companies run the entire economies of countries. This is not going anywhere. It’s an extremely complex business.

They had a missionary level of belief that these companies are going to continue to exist for a long time to come. And our job as entrepreneurs, founders, is to provide technology to them so that they can get to the next phase. And the next phase is digitizing their solutions, electrifying their solutions, automating and providing autonomy to those solutions so that they can do superhuman work. What humans could not do sitting inside those machines.

Turner Novak:

Was this their Series A when you first invested?

Bilal Zuberi:

Series A was their first round of financing.

Turner Novak:

Okay.

Bilal Zuberi:

Yeah. And you talk to Qasar then, and he would tell you that. Qasar and Peter, both of them, they grew up in Detroit, Michigan, came to Silicon Valley, clearly saw that this is really important to build.

Turner Novak:

Mm-hmm.

Bilal Zuberi:

And they had many other... I mean, I’m sure Qasar could just go become a general partner at a big VC firm. He’s like, “Don’t need to do that. What is that? Why would I do that? That’s like a shitty job compared to what I’m doing.” He’s loving what he’s doing compared to doing a sales job like mine, selling to other founders.

But he had real belief in that. So I look for that, that belief and that conviction.

Turner Novak:

So the missionary is number one.

Bilal Zuberi:

And then the second thing is, are they prepared for the job that they’re taking on? So if you’re taking an extremely technically complex thing, do you have the technical depth required to do that, or can you accumulate the technical depth that is required on your team?

Turner Novak:

Mm-hmm.

Bilal Zuberi:

You’re taking on something that’s gonna be very capital intensive. So it’s a little bit of saying, do you have the foresight to see what it will take, and then do you have the ability to get that?

Turner Novak:

So the capital intensity, you may think, “Okay, do we think they’ll be able to capitalize the business appropriately to do this?”

Bilal Zuberi:

Correct.

Turner Novak:

Or they’re selling to an extremely technical customer, will they be able to understand and meet those customers and have those conversations and build the product that they need to get there, or hire the right kind of team?

Bilal Zuberi:

I can say in my sleep, “Oh yeah, it would be really nice that I don’t have to see a doctor, just an AI can do everything that a doctor can do.” Easy said. The technical complexity of it is pretty serious, and technical complexity includes working through the regulatory frameworks that exist, working through the trust issues that are implicit in this, and so on.

Turner Novak:

Hmm.

Bilal Zuberi:

So do you know how to do that? Like, you can’t just launch something and be like, “Ah, we’ll see.” You have to have the understanding, or discovery of a new drug or new class of drugs. You have to understand what is happening there and have a point of view and technical understanding of where it can go, enough breadth in that space and depth in that space.

And the second part of that, as I said, is, if you need capital, do you have the personality to be able to raise capital?

Turner Novak:

Mm.

Bilal Zuberi:

Do you know what it takes? Are you a good storyteller?

Turner Novak:

Yeah.

Bilal Zuberi:

Um,

Turner Novak:

That’s something I learned from Gaurav at Afore. It was my first job in venture, and I thought it was really weird that he said that, like their ability to raise capital in the future. I’m like, “Oh, that’s kind of dumb.” Like, why do you need to fundraise? It’s just about making a business. But fundraising is actually super important and kind of hard, like we talk about.

Bilal Zuberi:

You and I have to fundraise all the time.

Turner Novak:

Yeah.

Bilal Zuberi:

It’s not fun, it’s not easy, but those who do it well are often those who realize that this is an important part of the job, and then they strive to become good at it.

Turner Novak:

So that’s a good topic. Has there been anything you think that sets apart the founders that check all the boxes except fundraising, and/or crossing the chasm, like, getting to becoming a good fundraiser? Is there something specific that typically people tend to do differently? Or is there a change people tend to make that ends up kind of unlocking that superpower for them?

Bilal Zuberi:

I think, in technical... I usually invest in companies that tend to be fairly technical.

Turner Novak:

Yep.

Bilal Zuberi:

Technical founders, even if they’ve had business experience, often tend to think that the solution will speak for itself, and all they have to do is just provide a little bit of color around it, and then the product will speak for itself, or the solution will speak for itself, or our customers will speak in its favor in a way that will sell.

Turner Novak:

And the investor’s just like, “Oh my God, this is a trillion-dollar TAM,” just based on using the product. Like, “I can just tell.”

Bilal Zuberi:

Look, if the investors were sufficiently technical and knowledgeable about that particular industry, maybe. But most investors are not. So they need to be convinced, and that convincing depends on the investor. Some people live in a FOMO world. They spend their entire careers and build great careers in FOMO. Some others are like, “I want to know if this is gonna be a massive industry.”

Like, I remember when the word unicorn was invented. It wasn’t even that long ago, was it? Aileen Lee was like, “Oh my God, we have these things called unicorns.”

Turner Novak:

Yeah.

Bilal Zuberi:

And I was with a VC two, three weekends ago who was telling me that last year he led $5 billion investments. Like, the investment going in was $1 billion.

Turner Novak:

Like, the amount of capital

Bilal Zuberi:

that he invested. The amount of capital he invested in those companies was $1 billion. How far have we come? How fast?

Turner Novak:

Yeah, that’s insane.

Bilal Zuberi:

He’s a great investor, don’t get me wrong. I’m not saying it in a negative way. I’m just saying that capital has taken a different shape. And to be honest, I think it’s a moment in time too, by the way.

Turner Novak:

Hmm.

Bilal Zuberi:

We’ve gone through these cycles, just not that big. I remember when Tiger Global was, during COVID, writing checks on a daily basis.

Turner Novak:

Yeah, I think there was, like, someone did the math. They did an investment per day, basically.

Bilal Zuberi:

There you go.

Turner Novak:

For, like, a year.

Bilal Zuberi:

And you know, they did not invest in a single of my companies, and I don’t think they invested in a single Lux portfolio company.

Turner Novak:

Oh, really?

Bilal Zuberi:

Okay? And I can tell you that, I can only speak for myself. I won’t speak for Lux anymore. I used to, but I won’t anymore. I speak for myself. I used to wake up, “What am I doing wrong that fricking Tiger’s investing in everything but none of my portfolio companies?” Like, maybe I’m doing something wrong. Why is my company not getting marked up by Tiger or SoftBank or whoever of that moment?

Only about a year or two later I was like, “Thank goodness that did not happen.” Right? ‘Cause most of those companies are, like, I don’t know.

Turner Novak:

I think, on a net return basis, the fund will probably meet LP expectations maybe if we just go far enough out. But in the moment, I think it was kind of a rough time.

Bilal Zuberi:

I mean, dude, there were all kinds of companies where people were building pizza companies and thinking that’s gonna be, like, the next SpaceX.

Turner Novak:

People, this was like pizza robot, like restaurant thing.

Bilal Zuberi:

A bunch of them. Not only one. Like a bunch of them, there were pizza robots. And people were trying to convince each other. By the way, they’re all well-meaning guys, so don’t get me wrong. Some of my companies probably look idiotic to others, too. But people were trying to convince me, “You don’t understand, Bilal. When you get the pizza in six minutes versus 15 minutes, the taste is completely different.” I was like,

Turner Novak:

I could see that actually, yeah. It could taste so much better, yeah.

Bilal Zuberi:

I can totally believe that. I just don’t think I got into VC, or got a PhD and built a founder career and then VC, to solve that problem.

Turner Novak:

Yeah, that’s fair. Yeah, actually, it was like during that time during COVID, I think Tiger had invested in a bunch of my companies. Like every company that raised follow-on rounds, they had tried to. And they really liked that about my fund. Like, “We love your portfolio.” And it was a really... It was weird, because at the time, you’re like, “This won’t probably end well,” right?

Bilal Zuberi:

Look, this is hard against Tiger. It’s hard to dissect during this time. Many of my friends are doing this now, and to some extent one could argue that maybe some would say even you’re doing that. So it’s not against Tiger. It’s time. They believe that there’s a rising tide, and if you do a portfolio approach, then all you need is a few success stories and

Turner Novak:

Yeah.

Bilal Zuberi:

it will wipe off all of your failures. Like you said, it might actually end up becoming an okay fund.

Turner Novak:

Yeah, ‘cause didn’t they invest in like OpenAI early?

Bilal Zuberi:

I don’t know.

Turner Novak:

I think I remember seeing

Bilal Zuberi:

I haven’t followed them so closely, man. But I can tell you that today it’s the same thing that’s happening. Remember, not too long ago we were talking about there’s this thing called unicorns, and oh my God, how amazing would it be that we build companies or unicorns.

The first unicorn, if I remember correctly, in Lux’s portfolio was a company called Desktop Metal. And I remember waking up one morning and

Turner Novak:

They’re a public company now, aren’t they?

Bilal Zuberi:

They were a public company and then they got sold. And they went public at a very high valuation, and their valuation went down significantly, and then they got sold. But that was the first unicorn, and it was just a few years ago.

Turner Novak:

Hmm.

Bilal Zuberi:

In Lux’s portfolio now there are many unicorns. I invested in like six, seven, eight unicorns that have become unicorns in the Lux portfolio. But unicorn’s such a quaint word now.

And now often I hear my friends talk about, you know, this company could be worth... Three, four years ago it was like this company could be worth $10 billion. And I remember people telling each other, “If you’re not investing in a company that could be worth at least 5 to $10 billion, you shouldn’t even be investing.”

And I would ask them, “How many $10 billion companies have you invested in, that you invested early that became $10 billion?” Zero. It doesn’t matter. The prevailing logic is that everybody says $10 billion. Now $10 billion, who the fuck cares about $10 billion? Now it’s $100 billion.

Turner Novak:

Yeah.

Bilal Zuberi:

You know, we are building the next Stripe, the next Databricks, the next OpenAI, the next Anthropic.

Turner Novak:

I mean, that’s trillion-dollar territory right there.

Bilal Zuberi:

If your entry prices are like $2 billion, $5 billion, $10 billion, and interim markups look like there are many companies that are hitting 10, 20, 50, $100 billion numbers, maybe this will all work out. I don’t care. My thing is, at the early stages when the founder starts building a company, they may talk about $100 billion or a trillion or whatever. The reality is they have to hire co-founders, they have to hire technical employees. They have to build a product. They have to raise capital. They have to convince people to join them in person, if they have families, move them over and come join them. They have to think about their first product.

They have to think about pricing. They have to think about go-to-market. This founder that I told you was a very competitive round that I invested in, conversations were around go-to-market, and the lessons learned from Applied Intuition or Nominal and others, and how do they apply to their particular world.

Turner Novak:

Hmm.

Bilal Zuberi:

That’s the help and advice they get. Now that they have money, more money cannot solve this problem for them.

Turner Novak:

Hmm.

Bilal Zuberi:

Like, okay, we gave them money, but if at this point we walk away, he still has those questions. He has to go somewhere to ask those questions.

Turner Novak:

Yeah. So I feel like there’s an implied thing in what we’ve been talking about, like this didn’t end well in the past, and is there also, it won’t end well this time, or is it different? Like, is it okay that it’s going on now, do you think, or?

Bilal Zuberi:

I think if you... Look, the ‘21 vintage is not the best vintage in the VC world, so who knows what the ‘26 vintage will look like.

Turner Novak:

Yeah.

Bilal Zuberi:

That said, there will be some companies that are going to be just amazing.

Turner Novak:

Yeah.

Bilal Zuberi:

Like, amazing. I really hope so. First, I hope some in my portfolio, but generally in venture, I think there will be some amazing companies created, because incredible talent is coming in, solving incredible problems, technology supporting them because of the speed at which it’s developing, and capital’s available for them to move fast, and speed becomes more available to them.

But not everyone.

Turner Novak:

Hmm.

Bilal Zuberi:

And because it’s not everyone, there will be lots of losses. And every VC thinking that they are playing the entire landscape and something or the other will work out, and hence let’s just roll the dice and see what happens, is not the right way to do this. You have to be very thoughtful about it. You have to do what I’m sure you think about too, like portfolio construction.

Turner Novak:

Yeah.

Bilal Zuberi:

You have to think about, what’s my early batch, what’s my middle stage, late stage, how am I playing this? Is there something in my portfolio I’ve invested in that could potentially become very large but very high-risk, but can only be one or two in the portfolio? Something you invest in, you’re like, “Look, I have such conviction on these founders and the TAM associated with the market they’re going after, or the opportunity set that they’re going after, that I’m willing to pay a very high price.” But you can’t say that for every company.

Turner Novak:

Yeah.

Bilal Zuberi:

Because that can’t possibly be true. For every company that you see, it’s like, could be a $100 billion company. That doesn’t make sense. And there are others that are like, “Look, I can’t... I can see that this is an important problem, but I don’t know how big this gets. But I really want to work with this founder and help figure that out.” And that’s your early incubations or hatches and EIR types of situations, and you take some ownership in those companies and help them build.

Turner Novak:

Yeah. So you’re almost taking different types of risk, and you make sure you have a basket of quite a couple different risk profiles to make sure that if there are spikes on any existential risk that happens across the portfolio, you still make money. Right? Where the risk is balanced out, where it’s different types of risk.

Bilal Zuberi:

I’m trying to build a firm. I’m not playing YOLO. I’m not saying, “Hey, I just left OpenAI. I have a lot of friends who are leaving OpenAI. Give me money, and I’ll just invest in a bunch of these guys, and let’s see what happens.”

Turner Novak:

Yep. And it might all be exactly the same type of risk that you’re taking really at the end of the day.

Bilal Zuberi:

I’m sure there’s room for those investors in the world. And that’s not me. That’s not what I’m building. I’m building a firm that should last a very long time, that should last past me. That should be the legacy of that firm, the incredible investments we made where founders saw us as real partners to them at the earliest stages. And we did it with humility, and we did it with being nice.

Turner Novak:

Mm-hmm.

Bilal Zuberi:

I think all of those things matter. And when you do that, you have to think about portfolio.

Turner Novak:

Yeah.

Bilal Zuberi:

And you have to think about, there are various ways that the world could play out that I do not control. I don’t control interest rates and the flooding of capital, or capital getting pulled back.

Turner Novak:

Oil, I feel like oil prices has an insane... Oil prices and, like, geopolitics has a way bigger impact on

Bilal Zuberi:

I don’t control war. I don’t control elections. You know, yesterday I was talking to a founder who was like, “Crypto is screwed.” Today I was talking to a founder who said, “I built my last company in weed, and weed is screwed.” I mean, everybody told me crypto was the next big thing. I don’t know what happened. I’m not close to it, and never was close to it, so I don’t know.

But other things will happen. I can’t control that. But as a portfolio, managing money on behalf of families and endowments or foundations, or fund of funds, or sovereign wealth funds, and also in my case, we are trying to return their capital and then some, and we’re trying to do that by investing in these companies at the earliest stages so that we can have the most ambitious ideas that get funded so that they can become big, and they can have a positive impact on society.

Turner Novak:

Mm-hmm.

Bilal Zuberi:

That’s the job, and it’s a job. I love doing that job. I’m trying to hire people who love doing that job. And along the way, by the way, you make good money. We’re decently compensated. I took a 90%-plus pay cut to do this job when I left Lux to do this.

Turner Novak:

Hmm.

Bilal Zuberi:

But I really firmly believe in it. I told you earlier that I look for being missionary about this and having conviction, and I had to find that in myself before I started this. I feel this is a mission I’m on. I refuse to believe you have to be an asshole to be successful in that industry. I just refuse to believe that. And so I’m gonna do my darnedest to show that you can do that.

I refuse to believe that you have to be loosey-goosey on your ethics because the world is too complex. No. I think it’s a line of Hamilton, like, “If you don’t know what you stand for, what will you fall for?” Or something along those lines.

Turner Novak:

I haven’t heard that, but that’s... I like that line.

Bilal Zuberi:

Right? And then the idea that, if we can do what we’re doing, we will impact human lives. Like, I grew up with posters of scientists in my room. I thought I would become a scientist and a professor. That’s why I studied science and did a PhD with a Nobel laureate and all that stuff.

And what I discovered while I was going through that process, and then in the PhD, was that what I really enjoyed was reading about how their discoveries changed lives. How my PhD professor’s discovery of the reactions in the stratosphere and polar stratospheric clouds were leading to destruction of the ozone layer, which was leading to cancer on Earth. And then you could create alternatives to chemicals like Freon and others so that you would not destroy the ozone layer, so that you would not have cancers in the world. And it required you to do the chemistry to create Freon, first understand the physics of what was going on,

Turner Novak:

Yep.

Bilal Zuberi:

then create alternatives to the Freon, and then do the political work that was necessary to get the world to stop using Freon. And that led to massive impact in the world. So I realized that’s what it takes, and I said, “I’m gonna dedicate my life to doing things like that.”

And I built a company, and as I was building a company, I realized that what I loved most was the early stage. The negative one to zero, where you’re ideating and thinking about the problem and how to think about the problem, and zero to one. And when it got past that, I was like, “Okay, that’s nice, but not enjoyable enough for me.” So that’s where I decided that I want to become an early-stage investor.

Turner Novak:

I think there are a couple other things I really want to hit on, and it’s maybe related to being an early-stage investor right now. It almost feels like a lot of being an early-stage investor, being a small emerging manager fund, you’re almost like an outsourced associate in a way. I think this is your words, but I kind of resonate with this.

Bilal Zuberi:

Somebody said that to me.

Turner Novak:

Okay. I mean, I feel like this is almost like a... Many people sort of have this sense right now. So what is going on where a lot of new and/or small funds are essentially outsourced associates for someone else?

Bilal Zuberi:

Number one, I don’t think everybody’s an outsourced associate. A lot of people are dedicated to the art and the craft of doing this. They’re building firms. They may be starting small. They may remain small. They may remain a $50 million fund like our friend Semil, who has 50, $70 million funds, and he can raise bigger money, but he’s staying there, at least for now. Benchmark was like that. Union Square Ventures has stayed that way.

So, some others may have ambitions to become mega funds themselves. But there is a lot of capital available in the market. There’s a lot of people who’ve discovered that you can make a lot of money here, and perhaps lasting money. You can actually put money into SpaceX shares and hold them for the next 25 years. I know people who are doing that, who are creating programs to just buy SpaceX shares for the next 25 years and not sell any bit of it.

Now there’s a lot of money available, and that money wants to go direct into companies for many reasons. It’s fun. They think it’s great to meet founders and be directly invested versus being money managers.

Turner Novak:

Yeah, it’s awesome. I mean, that’s how I love doing that. It’s like,

Bilal Zuberi:

But there’s a lot of LPs who also want to do this because it’s better economics. You don’t have to pay as much in fees, carry is reduced or whatever. So what they’re doing is they’re finding people who have access to deal flow and saying, “Hey, I’ll give you a little bit of money so you can put a little bit of money into these companies, but then bring them to me as if raising downstream rounds, and I will do SPVs, and if your fund was two and 20, I’ll do one and 10 or whatever.”

Turner Novak:

Yeah.

Bilal Zuberi:

I don’t know the numbers, but it’s an access game. And if you have access to those companies, great, and if I have to pay you a little bit of this in your fund that will return 3x, 4x, 5x or whatever it is, fine, we’ll do that. But what I really want to do is go direct. Your $2 million, $5 million that I put into your fund is noise to me. What it is, is a 25, 30, $500 million check I can write into these companies as they become big and growing.

Turner Novak:

Is that okay? Or do you think it’s something you just have to accept as sort of what’s happening right now in the market? Or

Bilal Zuberi:

I think there’s a lot of that going on in the market right now, and I’ve no problems with that. I actually think that there’s a... So when I moved from Boston to Silicon Valley 13 years ago, I was a VC in Boston and moved to Silicon Valley. One of the things I noticed was that Silicon Valley works like a cabal. There are multiple cabals. Groups of investors who do things together.

Turner Novak:

Oh, 100%, yeah.

Bilal Zuberi:

It was like, we always invest together here. There’s a bunch of defense tech investors who are all supporting each other’s companies, and a bunch of others. And I have a feeling that some of these cabals are now money-hungry large AUM funds. Again, nothing wrong with that, but that’s who they are.

Turner Novak:

Hmm.

Bilal Zuberi:

No amount of AUM is big enough for them. So they want every dollar flowing into startups to flow through them. They’re not about multiples, they’re not about... They’re just like, my power is the amount of money I have. You will take my money because I have the most amount of money available.

Turner Novak:

Mm.

Bilal Zuberi:

And because the most amount of money may have ancillary benefits. Like, I have access to corridors of power because I have money available, or I have access to certain companies because I’ve invested in so many that I know the CEOs of half of your customer set or whatever.

Turner Novak:

Yeah. So I can introduce you to customers, I can introduce you to a politician, I can influence what those people think, policy, and yep.

Bilal Zuberi:

You know, I was just reading on my way here that the largest contributor to the elections this quarter was like Andreessen Horowitz, in terms of donations. It wasn’t some other PAC or whatever.

Turner Novak:

Oh, I would’ve guessed it was like a... I would’ve guessed like OpenAI or like a big tech company or something.

Bilal Zuberi:

At least according to this report, it was Andreessen Horowitz. But even if it’s not exactly right, they’re up there. But nothing wrong with that. They have every right to do what they’re doing.

Turner Novak:

Yeah.

Bilal Zuberi:

But,

Turner Novak:

I mean, it’s smart strategy. I think it’s a smart strategy for them to do it.

Bilal Zuberi:

It just creates value for their portfolio companies. Sure. Why not? Hopefully it creates value for my portfolio companies too, if they get money from Andreessen Horowitz down the road. But certainly General Catalyst is a great investment firm. They’re doing this, they have global reach in policy circles around the world. They do less politics, but more policy, but that’s okay.

But what some of these cabals will actually do, or could do, is they could start restricting their portfolio companies from accepting SPV money.

Turner Novak:

How would you do that?

Bilal Zuberi:

So you’re a seed investor with another big investment firm. Your portfolio company’s now raising $500 million. So you were like, “Dude, I can write a $30 million SPV into it, and if that becomes 5x, I’ll make a lot of money.”

Turner Novak:

Yeah.

Bilal Zuberi:

That lead investor could say, “We’re not gonna allow any SPVs to invest in this round,” even if they’re your SPVs.

Turner Novak:

So it’s like it’s part of the terms in the term sheet or something like that.

Bilal Zuberi:

Yeah, in the terms in the term sheet, be like, “No.” Or

Turner Novak:

Or just as a board member. You’re just like, “Hey, by the way, I’m on the board, and I say we don’t do this anymore.” And the founder’s like, “Okay.”

Bilal Zuberi:

Yeah, and the founder’s like, “Dude, I love you, but I’m not gonna piss off this big fund partner to get an SPV from you.” Let alone an SPV from somebody who’s not already on the cap table.

Turner Novak:

Yeah. ‘Cause if they, ‘cause that big investor’s probably gonna give him a lot more money, so you want to keep him happy.

Bilal Zuberi:

Yeah, but also those guys are basically saying, “Why am I letting all these other LPs who want to invest in the company come through Turner? If they want to invest in companies like this, they have to come through me. I have 17 varieties of funds that you can invest in. I have a residential fund. I have an energy fund. I have a debt fund. I have a growth fund. I have a defense fund. I have whatever fund. Why don’t you invest through me?”

Turner Novak:

Mm.

Bilal Zuberi:

Why should they give that 1-in-10 economics that you’re getting, why should you get it? Yeah, I should get it. And all they have to do is just politely... And I actually know of one case where a great investor who would’ve been very helpful was recently told that, “Sorry, our board, or the powers to be, have decided that they will not allow us to take any SPV money.”

Turner Novak:

Wow.

Bilal Zuberi:

So that could happen too. So then I don’t know what happens to all the... If the business model of some of these funds is, “I can’t survive on a $10 million fund, but doesn’t matter, ‘cause I’ll raise $50 million in SPV.” I don’t know what happens there.

But this is all noise. This is all important to our industry if we’re talking about the mechanics of our industry. But at the end, from a founder perspective, what they care about is, I want money, but I also want advice and help. I don’t want nonsense. I don’t want you to invest in competitive companies and fuck me over later. And that is some of the bad behavior that we’re also starting to see in the industry.

Turner Novak:

Really? I mean, and they probably just like, they just want you to not mess anything up. It’s just like, that’s a lot of it from what you hear, is like, if you just don’t do anything to make things harder for them, it’s in like the top, I don’t know if the number is 10, 20%.

Bilal Zuberi:

I mean, I don’t know, man. I’m not an expert at this, but I don’t know how I would feel if I was at OpenAI and Anthropic. I mean, if I was a founder at OpenAI and my big investor also had money in Anthropic. Now at this point they’re both operating almost like public companies, so maybe it’s different. But if you are a smaller company, if you are a $2 billion, $5 billion company, how would you feel about that? Or if you had a defense company and you had competing investments in those spaces?

Turner Novak:

What do you think the pitch is like to pull that off, where it’s like, I’m an investor in five big AI companies, all compete, and I’m coming to the sixth one. How do you think they convince them to let them take their money? Is it just not really brought up, and there’s all these other things they can do for them that’s

Bilal Zuberi:

I don’t know how they pitch it, but I can imagine them not being very open about this.

Turner Novak:

Huh.

Bilal Zuberi:

Or they’re so big that it’s like, I’m Fidelity and I invest in every company that goes public, or at least above a certain market cap or whatever, and I have an index fund or whatever. I’m not sure it should be seen by founders as the top-quality capital, but that’s my opinion.

You don’t want to be the stepchild. You built, with blood, sweat, and tears, a $5 billion company. Holy shit.

Turner Novak:

Yeah,

Bilal Zuberi:

that’s insane. You know how hard it is to build a $5 billion valuation company?

Turner Novak:

Yeah,

Bilal Zuberi:

really hard. And hopefully the underlying has a business too. And then somebody comes in and becomes a $20 billion company, and suddenly they’re the top dog. The most important intros are going to them, the customer conversations are happening with them. The board member is spending more time there than with you.

Turner Novak:

And also the board member knows what’s going on at both, and knows how to strategically help the other one, you know?

Bilal Zuberi:

Or the board member’s like, trying to get you to sell your business, ‘cause they’re like, “Hey, why don’t you just merge into this other company and then we’ll together take it.” And you’re like, “I don’t want to merge this company. I want to build my own company.” “No, but, you know, like if one and one will become three.”

Now, again, I don’t think VCs do this because they’re bad people necessarily at all. I know most of these, many of these guys. A lot of the senior partners, I’ve worked with them, known them. I’ve been in the industry long enough to know most of these people. I think it’s the incentives.

Turner Novak:

Yeah.

Bilal Zuberi:

Just follow the incentives.

Turner Novak:

And it’s, the more money that you touch that flows through you, the more money you make, so you want to deploy, pass through as much funds as possible through your fund.

Bilal Zuberi:

A big VC, if you’re a $2 billion fund, you’re a pretty profitable fund. People are looking to buy management company shares because it’s like a nice annuity you get for the next 10 years, and then it compounds, ‘cause every three years you raise more money, or two years you raise more money. Now you’re that fund and you’re like, “Hey, I’ve got seven employees, six investors, two other people, some staff, whatever. It’s good, and I get nice money into my pockets. I take $10 million home or whatever.”

And then you raise another $2 billion. That generates $40 million annually of fees. Do you think the VC expenses go up by $40 million?

Turner Novak:

You might hire a couple more people, but

Bilal Zuberi:

You might spend $2 million more. $5 million more. Maybe. Actually these days, investment funds, the size of AUM is increasing and funds are shrinking.

Turner Novak:

Mm. Yeah, we’re all using AI.

Bilal Zuberi:

We’re using AI, but also, power is consolidating in a few people. Like if I’m not giving a lot of advice to you and I have to make a decision on $100 million, I need a couple of junior associates to do some analysis to tell me that this voice recognition company is better than this voice recognition company, and then that associate is not gonna write that check. I’m gonna write that check, so I just go do it. I don’t need a lot of in-between people.

Turner Novak:

Yeah.

Bilal Zuberi:

So the point is that net new $40 million annually in revenue you got is probably going straight into the managing partner’s pocket.

Turner Novak:

Hmm.

Bilal Zuberi:

Mostly.

Turner Novak:

I mean, why do $2 billion? You should raise a $5 billion fund.

Bilal Zuberi:

Exactly.

Turner Novak:

So, too, yeah.

Bilal Zuberi:

So that’s what’s happening. If they could raise five, they would raise five. If they could raise 10, they would raise 10.

Turner Novak:

So then you have

Bilal Zuberi:

I mean, there’s only a few people in the five and 10 category, but certainly you can do this for a $500 million or a billion-dollar fund, a $2 billion fund. You have people who are raising separate funds. We have an early-stage fund, we have a growth fund, but we also have this thing, an energy fund, or we have a clean tech fund or whatever.

Turner Novak:

And as a founder it’s like, that’s more money for you. That’s potentially awesome. There’s more money that’s being deployed towards your theme or company. That can be an awesome thing.

Bilal Zuberi:

Yes, absolutely, but it’s also more money available for, if you don’t have alignment on incentives and ethics, to your competitors. Funding noise in the system, forcing you to take more money than you need to, forcing you to skip exits when you needed to because you should go bigger. And all kinds of stuff.

Turner Novak:

Yeah.

Bilal Zuberi:

Um,

Turner Novak:

I know you feel this way, but there’s kind of like a circle jerk almost in sort of like tech media.

Bilal Zuberi:

You mean consensus investing.

Turner Novak:

Consensus. Consensus investing. That’s like a more polished...

Bilal Zuberi:

It’s a total circle jerk.

Turner Novak:

Yeah. So what’s going on, and what do you think is a solution to navigating through this as an investor and maybe a founder too?

Bilal Zuberi:

So I’ll tell you. At Lux, we used to, for a number of years, every year, we would write, just within our portfolio, what are the top five companies that we think will be the biggest fund returners. And then everybody would write their five companies, and we’d aggregate and we’d come up with a consolidated, “Oh my God, 2021, we think these are the top five companies in our portfolio from a meaningful-returns-to-the-fund standpoint.” This is just inside the firm.

Turner Novak:

Inside the firm. Everyone would do this? Okay.

Bilal Zuberi:

And so, inside the fund, consensus, finding consensus within the firm.

Turner Novak:

Okay.

Bilal Zuberi:

And then we do it again next year and then again next year. And the thing we learned in that was that most of the companies were different every year.

Turner Novak:

Okay.

Bilal Zuberi:

And certainly the positions changed a lot. So it’s the flavor of the year a little bit. If somebody recently had a nice financing at a big price, you’re like, “Whoa, this company’s hot.”

Turner Novak:

Yeah.

Bilal Zuberi:

And the company, they’re like two years long in the tooth and hasn’t grown very much since then, like, eh, it was really hot then, but now it’s coming down. And it’s real. It happens in every portfolio. Nothing special to Lux. We just did it to try to be more quantitative and qualitative about our own internal assessments on this.

The same thing is happening at the industry level now. Every year, or every month, or every week these days, what are the companies that everybody’s excited about? And then we listen. Everybody just runs into those companies, ‘cause the idea is, to some extent it’s like, is this company at least worth the liq pref that they’ve raised? The company’s raising money at $25 billion, but they’ve only raised $500 million. Is this company at least worth $500 million? So yeah, then my downside is relatively protected. Let me play for the upside.

The founder, on the other hand, is now raising money at $25 billion and has taken on significant liquidation preference, so he has to clear that before he gets any money, or she gets any money, or they get any money. This starts to become a problem.

The biggest issue right now is that you’re seeing what becomes consensus. It would be one thing if it became consensus because it built a real business. So there are some businesses that are growing really fast, and that’s fine. But you’re also seeing consensus which is like nothing has happened in the business. They’ve registered a trademark maybe, and boom, the valuation jumps. Why? Because three other top investors have invested, so boom.

And a lot of founders are also figuring out how to game the system. I’ve had friends who I’ve known for a while who are researchers in AI who are like, “Dude, how do I structure my shares that after a year I can actually do some... ‘Cause when my price goes from, you know, $500 million to $5 billion, I’d like to get some equity out, but I’d only be a year. I think I can get it to high prices within a year or two. Do I get founder preferred shares, or what structure should I strike? Do I need it in the documents that I’m allowed to do a secondary of 10% of my shares?”

Turner Novak:

Mm.

Bilal Zuberi:

“What if the board blocks me?” People are starting to think about all that nonsense, right? Because, again, follow the incentives. We are creating incentives for people to be distracted by all this bullshit. And all this bullshit looks good on paper and whatever. VCs in the meantime keep raising bigger funds, creating a lot of fees and getting rich on fees. You can, if you do the math and you’re in one of the big funds, you can become a billionaire just on fees alone.

Turner Novak:

Just the management fees?

Bilal Zuberi:

Just the management fees alone.

Turner Novak:

That’s crazy. It’s crazy. I guess I didn’t know. I’m trying to think of how... So I guess for people that don’t know, basically, for each dollar that you raise in your fund, you roughly get 20% of it in fees. Just roughly speaking.

Bilal Zuberi:

So if you had a $10 billion fund that you raised, like

Turner Novak:

$2 billion in fees. 200 million in fees.

Bilal Zuberi:

Well, $2 billion

Turner Novak:

over the course of the 10 years.

Bilal Zuberi:

$2 billion over the course of the 10 years. Exactly. So you generated, by raising, going out wherever around the world you went and raised a $10 billion fund. There’s not many people who can do that. If you could, you just generated $2 billion in fees over the next 10 years.

Turner Novak:

And the interesting

Bilal Zuberi:

Guaranteed income.

Turner Novak:

Yeah, I was gonna say the interesting piece of this is you’ve raised the money, and you locked in

Bilal Zuberi:

Your $2 billion.

Turner Novak:

which is... So the incentives

Bilal Zuberi:

So you hire a team and whatnot, and over the next 10 years I’m gonna spend a billion dollars on them. I’m the sole managing partner and spend a billion dollars on all these people, on my events, and all the things that will happen over the next 10 years. Here’s my budget for the next 10 years, and the other billion dollars is mine.

Turner Novak:

Hmm.

Bilal Zuberi:

You can be a billionaire without having to show returns, ‘cause you raised one $10 billion fund.

Now, I’m not... You have to do a lot to get to that point. Mere mortals can’t go and raise a $10 billion fund. You and I are not about to go out and raise a $10 billion fund. But, you know, if I raise a $150 million fund like I did. Look, it’s not lost on me. Yeah, sure, it generates $3 million annually in fees.

Turner Novak:

Mm-hmm.

Bilal Zuberi:

And I’ve hired a bunch of people. I have an office. I have lawyers who are bloody expensive, but they’re very kind and nice.

Turner Novak:

You have a nice suit. And you have... You got nice glasses.

Bilal Zuberi:

I don’t have a suit, but it’s definitely there. It’s a jacket.

Turner Novak:

It’s a nice jacket.

Bilal Zuberi:

It’s a nice jacket. But the thing is, over 10 years, you have $30 million in fees. Now, what I do know, however, is that the $3 million annually I make in fees is less than my compensation in the last year I was at Lux.

Turner Novak:

Mm.

Bilal Zuberi:

So you have to take huge pay cuts to be able to start this. But if you become big, and this is why I see a lot of people wanting to become big AUM, it’s because the fee is really enticing. And then come the other associated benefits. Look, if you have a lot of money, you’re floating around in circles that are more powerful. You get invited to all these cocktail parties, and then you get invited to billionaires’ homes for dinners because they think you will support the political campaigns or the charities that they care for, and you have excess money, so you can give to that. Your circle of power grows.

Turner Novak:

Yeah.

Bilal Zuberi:

And you convince yourself that all this is in the interest of the company. Maybe.

Turner Novak:

And the contribution margin is pretty high when it’s like, okay, a $125, $150 million fund. You do... Nothing changes, but you raise a $300 million fund. Nothing really changes on the cost structure. But you raise a billion dollars. Like, just pure cash flow into your pocket.

Bilal Zuberi:

Yeah. This is where, you know, a lot of people struggle with succession and so on. And

Turner Novak:

Because you’d have to give that up.

Bilal Zuberi:

Because you have to give that up, you have to give the economics up, and so on, if you want to retain the best people. Now, you can let the best people go and just keep hiring young people to do the... That’s not what I’m building. By design, I don’t get rich on fees. I’m hiring people. People have joined me, left, leaving, you know, other big funds to join me. The two other people I hired had offers from other big funds that joined me. So I had to give competitive salaries. They have great equity in the firm. They will grow their equity. It’s very standard what they will grow to.

I want the fund to eventually be five general partners equivalent, and everybody has equal carry. It’s very simple. Keep it simple, stupid.

Turner Novak:

Yeah.

Bilal Zuberi:

And what our right to win is, is not the amount of money we have. Our right to win is you should come to us because you care about getting the advice and support and help, and the love for your industry and you, that we bring to the table.

Turner Novak:

Yeah.

Bilal Zuberi:

If you’re just looking for capital, there are many sources of capital available. People think that the cheapest capital might be, “Oh, go to the big fund. They have a lot of money.” There’s always, for every big fund, there’s a big brother out there.

Turner Novak:

Hmm. Yeah.

Bilal Zuberi:

Everyone has a boss.

Turner Novak:

has a boss.

Bilal Zuberi:

If you think Andreessen Horowitz is big, there’s PIF out there. If you think General Catalyst is big, there’s QIA out there. Everybody has a boss. I don’t know who’s QIA’s boss or PIF’s boss, or Singapore Temasek’s boss, but there’s always somebody else who will give you money, and maybe even at a cheaper price.

So the minute a bigger boss gets involved, then people start talking about, but look at the value we bring to the table. Look at the partnership and the investment expertise of this guy. And I’m just doing the same thing at the smaller end when I’m saying, “Take $3 million, $5 million from me. You can get it from 1,800 other places, but the reason you get money is so that we can help you build the business. And oh, by the way, the most important thing that people don’t tell you is I’ll be there through thick and thin.”

Turner Novak:

Mm.

Bilal Zuberi:

Let me tell you, I’ve been out of Lux now coming up on almost two years. I mean, at least we announced it in December. I left the middle of last year formally, but I’m still on many, many boards for them. I’m not getting compensated for them. I don’t have equity vesting or salary or anything. But I care about, yes, I care about my partners at Lux, and I want to be supportive of them, but most importantly, I care about these founders.

Turner Novak:

Yeah.

Bilal Zuberi:

Through thick or thin. And of course I’m on Applied Intuition’s board and whatnot, but I’m also on companies that are struggling, and they take up a lot of my time, but I’m doing that because my reputation matters.

Turner Novak:

Mm.

Bilal Zuberi:

And the pledge I made to those guys when I was trying to win their investment back in the day was, “You are buying yourself a partner. And I want to be that partner. And if I am not there when the going gets tough, if I replace myself with some young associate who’s sitting on the board, I’m not being fair to you. I’m effectively lying.”

Turner Novak:

Hmm.

Bilal Zuberi:

And I don’t want to do that. We need good ethics in VC. There are a lot of great people in VC. Hopefully we can promote that more, and I think we can also do a better job of aligning incentives. So the founders, the VCs, and the LPs have similarly aligned incentives.

Turner Novak:

Yeah. I feel like there’s a lot more we could talk about. We could probably talk for another hour, but we are both significantly late to this dinner, and I know people will... Some of them listen to the podcast. They’d be like, “Dude, that’s why you were late? Are you kidding me? You were recording a podcast with Bilal and you were 25 minutes late because of this?”

Bilal Zuberi:

Oh my God.

Turner Novak:

Well, this has been a lot of fun. Thanks for doing it.

Bilal Zuberi:

We can always get together again, man, and not on a podcast, but

Turner Novak:

We should just bring these mics, just attach them to the table at dinner. I’ve actually thought about that. People have been like, “Oh, we should do, like, a group thing.”

Bilal Zuberi:

Yeah. Imagine if we did a roundtable dinner and everybody had a microphone.

Turner Novak:

That would actually be interesting. I don’t know if it’d be listenable, but

Bilal Zuberi:

I think it’d be great, because, look, I used to do this falafel dinner, falafel ventures, with Nabil and Semil and Avidan.

Turner Novak:

I’ve seen those.

Bilal Zuberi:

And there was no holds barred, very open conversations. And we thought about, for a second, doing it in the COVID days when we were depressed at our homes. We’re like, “You know, maybe we should turn it...” And then All-In came, and we’re like, “Hell no. There is no way we’re doing this.” Get out of the circus. Like, I don’t want to become a circus clown.

Turner Novak:

Yeah. Well, man, maybe we should do that. I should figure this out. And people are gonna hear this, and if I don’t do it within the next month or two, people are gonna be like, “Dude, why did you not do that dinner podcast series?” But anyways, this has been a lot of fun. Thanks for doing it.

Bilal Zuberi:

So fun. Always fun to talk to you. Thank you for being you. Thank you for being funny. Thank you for being real, and thank you for pushing the entire industry to do a little bit better.

Turner Novak:

Well, thank you. Yeah. That’s my job, I feel like.

Find transcripts of all other episodes here.

Related Episodes

A few weeks ago I flew to LA and hung out with Jamie for a few hours. We talked through building a consumer hardware business from scratch, constantly operating on the verge of bankruptcy, why founders should always be going all-in on the next thing, inside Ring’s $1.15B exit to Amazon, why he came back to lead Ring again, how he’s operating differently the 2nd time leading the company, and how AI can make neighborhoods safer.

A great listen for anyone building consumer hardware or curious how a Shark Tank reject became a household name.

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👉 Stream on Spotify and Apple

Timestamps to jump in:

• 0:00 Leaving Amazon, coming back with fresh eyes

• 7:49 Deleting every useless meeting

• 10:21 Zero-based time budgeting

• 15:31 Bubble, or the golden age of AI?

• 19:50 $480M to “over 10x more” revenue

• 23:48 Lessons on obsession from MrBeast

• 30:17 The AI vision for Ring

• 34:05 The $10k feature he can't ship yet

• 38:50 Building apps on top of Ring

• 40:03 Building in his garage, the Kickstarter ban

• 44:45 The pre-sale, and the fear of getting copied

• 47:59 How he talked his way onto Shark Tank

• 49:24 Three dead units backstage

• 54:04 Threatening Shopify's CEO before air

• 55:23 The Christmas Ring almost died

• 58:59 The midnight fix that saved the company

• 1:01:22 Raising from True Ventures, the "ass hat" email

• 1:05:04 Hiring gritty “new to business” people

• 1:07:15 Missionaries, not mercenaries

• 1:10:13 Building an authentic brand people trust

• 1:12:49 Buying Ring.com with the last $175k of cash

• 1:18:11 “We were always on the verge of bankruptcy”

• 1:19:12 Betting $1M on TV ads when the board said no

• 1:22:43 Why TV ads actually work

• 1:25:26 Richard Branson, and doubling mid-raise

• 1:28:46 Closing Shaq, how to do authentic celebrity endorsements

• 1:33:27 Selling to Amazon for $1.15 billion

• 1:35:16 Being paranoid to lose people's money

• 1:36:38 Mentors, and never meeting your heroes

Find Jamie on X / Twitter and LinkedIn

👉 Stream on YouTube, Spotify, and Apple

Transcript

Find transcripts of all prior episodes here.

Turner Novak:

Jamie, welcome to the show.

Jamie Siminoff:

Thanks for having me.

Turner Novak:

Yeah, thanks for doing this. So you sold your company to Amazon, you left, and then you came back. That doesn’t happen that often, so what happened?

Jamie Siminoff:

I mean, a few things happened. I sold... I did stay for five years, so it wasn’t like I...

Turner Novak:

Which is long. That’s actually very long.

Jamie Siminoff:

Yeah, it’s long. So I didn’t just peace out, sell it and go. Almost in some ways I’m jealous of the founders that can do that. It’s just not in me. I love what I built.

Turner Novak:

You’re wrapped up in that thing.

Jamie Siminoff:

I do. I love it almost in a human way, not just in a business way. I really do think about what we built there, and I do love it. So after five years, I had built it... we really crushed it, got very profitable. So I felt like I left it having just won the Super Bowl, and I’m like, “I’m gonna retire now.”

I did it. This is a good time to go out on top, hand it over. It sort of felt like it had more linear growth going from there. So when I left in 2023, that’s how I saw it. Okay, it’ll still grow, but more in a linear fashion, so give it to the professionals to take over.

I’ll go do something else. Then AI hits, and I’m just basically like, “Holy shit.” There’s so much more to do with the foundation of what we built, and there’s so many exciting things we can do, and my brain was just firing off.

Turner Novak:

Mm.

Jamie Siminoff:

And on the outside, I would say I wasn’t seeing the innovation overall in the industry that I had basically built, including Ring. And I was fortunate that Amazon was... it’s incredible, I’d say, how it reflects on them to allow me to come back.

You can make your own decision on me coming back, on how that reflects on me, but I did wanna come back and sort of have my second at bat with it to see what we could do. AI overall was what made me wanna come back, just because of the speed of development, the features we could do. And our mission’s always been around making neighborhoods safer, so there was a lot we could do around that in general.

Turner Novak:

Were you like texting the team at 1:00 AM, like, “Hey, you guys gotta try this thing. Check this out”?

Jamie Siminoff:

So I actually tried to, and I think it was maybe healthy. These are always... they’re like relationships, so when you leave, you... I tried to leave the team alone when I left. I did try. Because I think it’s easy to be this agitator on the sideline. So I basically went back to the heads of Amazon and said, “This is what I wanna do.”

I tried not to infiltrate the Ring team and do that. Which was kind of funny, because when I came back, no one actually knew. The day I announced it, I literally came in the office and I’m like, “I’m back.”

It was almost like a TV show. It was like walking down the Shark Tank thing again. It was interesting because literally no one knew I was coming back.

Turner Novak:

Oh, wow.

Jamie Siminoff:

The announcement was when I was there. And so I was like, “I’m back.” And it has been... if you look at the KPIs of what we’ve done since then, it’s been pretty cool. We’ve just multiplied everything, on what we’ve gotten: new products, invention, features, just impact, the business overall.

I just feel like we’ve done a... Pretty proud overall of what we’ve done. There’s always more to do, but...

Turner Novak:

Yeah. So what was it like coming back for the second time? Because a prior guest to the show, his name’s Eoghan, he’s founder of Intercom. He left in 2019, came back at the end of 2022.

He kind of said he had these fresh eyes on the business. He basically was a founder again, but then also kind of was rehired as the professional CEO. And then they actually just sold the company to Salesforce a couple months ago, so it seems like overall a pretty good outcome for them.

So how did things change coming back the second time? How did you see the business?

Jamie Siminoff:

I do think there is something about... when you leave... When you’re in these businesses as a founder, I think you do get these blinders that form around you just from working in it, being in the trenches.

When I left Ring was when I realized the impact we were truly having. Obviously I saw it. I was, you know... But when I truly left, when I no longer had any connection to it, when I was out, that’s when I really had the most, “Wow, this thing is crazy.”

What we’ve done here is crazy. Because when you’re in it, you’re fighting through it, you’re trying to invent new stuff, you know what the problems are, so you’re just in this daily grind. By leaving, I had such a fresh set of eyes. I felt like a Marvel superhero coming in.

Turner Novak:

Mm.

Jamie Siminoff:

Because I feel like my decision-making was 10x better.

Turner Novak:

Really?

Jamie Siminoff:

My speed was 10x. Everything was 10x’d, because I had been able to cut all of the things that had built up over time, all these blinders that had come in. I kind of blew them off.

And so I did feel this superpower of coming back. It has been exciting. When you take fresh eyes with all of the experience that you’ve had from the business, and you put those together, I think, just like Eoghan was saying from Intercom, it’s amazing.

Turner Novak:

Yeah. What’s the biggest example of something that you did differently the second time around?

Jamie Siminoff:

I would say, definitely, around people. There were people that I think we probably were not allowing to fulfill their full potential. Giving them more room to fulfill their potential was something that was fun and exciting to do.

Even around product development and process, there were processes and things that... What’s interesting is everything usually starts with good intentions. Like a recurring meeting. Typically, a recurring meeting that’s going on that people... If you ask anyone who works at a big company, they’ll tell you they’ve got a couple of those.

Turner Novak:

Got a couple of those.

Jamie Siminoff:

They’ve got a couple of those, and they suck, and they’re useless. They’re useless meetings. But if you go back to the beginning, that meeting was usually set up for a real reason that needed to solve a problem at the time. And no one has had the awareness or the fortitude to cut it at this point.

Turner Novak:

Mm.

Jamie Siminoff:

So I think there were a lot of those things that I now looked at and I’d just be like, “Delete.” I mean, just deleted everyone’s recurring meetings. Just basically nuke stuff that I’m like, “You know what? If it doesn’t have value, we’re gonna just kill it.” And so I do think we freed up a lot of time on the product development processes.

There was stuff that I probably even created the process for originally, like a QA thing. But now with AI, there’s other ways. We had, let’s call it, arbitrary... to get a product out, you had this four-week testing period. That’s how long you test for.

And we just kept doing it. Now, when that was started, there were things that took a certain amount of time to test because that was the cycle. If you go now with AI, there’s probably things we can test in hours, not even days or weeks. But we kept doing... we kept the same amount of time in places because that was the process.

The process is to have this many weeks for this many things. And so I would just, with a fresh set of eyes, I’m like, “Why? Why? Why? Why?” And then it was like, “Oh, actually you’re right, we don’t need that time.” Well, you take four weeks out of a process, and now the cycle times get faster.

Cycle times get faster, innovation goes up, new products come out faster. And this is, if you look at what Jensen’s done at NVIDIA, the reason NVIDIA is so far ahead is because their cycle times are shorter. They just spin chips faster than everyone else. Chips basically make chips, and so now they’re just way ahead.

Turner Novak:

So what’s a way to do that without leaving and taking a couple years off and coming back? Do you just... Is it like every... Do you look at your calendar? Do you look at all your work process documents of how things are done? Is there a way to do it without actually leaving?

Jamie Siminoff:

Yes. I think there are two mechanisms that you need to do. The two mechanisms are zero-based budgeting, so every year... And again, I think because the world is changing faster with AI, AI is enabling us to do things faster.

Zero-based budgeting at least every year is important, to say, okay, what are we here to deliver? What customer service are we here to do? What products are we here to deliver? What are we here to support? What do we want to build? And then just look at, if you were doing that again from scratch, what would that take to do?

And then you overlay that on your business, and you look at... By the way, you might have a deficiency in some places, you might have too much in other places. So zero-based budgeting is one, and then just first principles, which is really just asking why. Continue to ask why, empower your team to ask why, so that it has more leverage to it.

The two are obviously connected, but making sure that you are, with the least amount of movement, accomplishing the most. And then I would say, overarching on that, have people feel empowered.

Turner Novak:

So how do you do that? Because there might be a company where people have gotten fired for bringing up the wrong idea, or they get demoted for it. So how do you build a culture of empowered people?

Jamie Siminoff:

That is human nature, I’d say. We see it at almost every big company. Even Ring, that I think was a good company. As these things get bigger, I think human nature takes over.

I think it’s hard. I think you just have to fight it, because I do think the best people still somehow, it’s like a Darwin thing, they just become more around that. And also, good ideas are typically dumb when they are formed. The best, most innovative things usually sound pretty stupid when you’re creating them, and so that’s the problem: how do you get people to still innovate?

How do you get people to say, “We can do this. Instead of doing a four-week process, we can do it in an hour,” and someone’s like, “That’s crazy”?

Turner Novak:

Mm-hmm.

Jamie Siminoff:

Because it sounds crazy when someone says those things, and usually you don’t get promoted for that. So you’re absolutely right. How do you create the incentives to breed those outcomes? One thing we’ve done is we’ve changed internally. Our engineering is all... they’re all called builders now.

Turner Novak:

So that’s the official title?

Jamie Siminoff:

Builder. You’re a builder. And what we realized is, with AI... I mean, it used to be, if you were a firmware engineer, that’s because you mastered the knowledge around firmware. That was a specialty, around chips and all this stuff. You had to be... We needed that person to stay on that and not be also doing apps and back end and whatever else.

Today, the firmware engineer can also be building a feature, can be doing mobile, can be integrating it in. So we don’t want that person to feel like they’re pigeonholed into that. We want them to be a builder, that they can do anything. Now, obviously there are still specialties a little bit, and we want people to know where their area is, but you also want them to feel empowered. So the incentives breed outcomes. If you’re a builder and not a back end engineer, you feel more empowered to go across things.

Turner Novak:

You might come up with a feature idea even though you’re just the firmware engineer.

Jamie Siminoff:

That’s exactly it. And that’s the problem: brand does matter. It matters in titles. It matters internally. It matters externally. Words do matter, and so when you say you’re a back end engineer, if you go and say, “I have this idea for doing this thing in the app,” people are gonna be like, “You’re a back end engineer.”

Turner Novak:

Then you don’t know what you’re talking about.

Jamie Siminoff:

Yeah, you don’t know what you’re talking about, or you’re a product this, or all these titles. And I do think with AI... AI is democratizing intelligence in a way that is superpowering all of us.

Turner Novak:

Mm.

Jamie Siminoff:

And so my job is to get the most out of our team, and we want everyone to be superheroes while still having some focus on knowing the area that they need to focus on. Because if everyone’s just running around building everything, probably nothing will get done.

So there’s always a balance to anarchy. But I want the back end person to say, “I can do this,” and then mock it up. And maybe they even actually build the thing all the way through. We’ve seen people now build features literally all the way through.

We’ve seen people fix... they’ll see a bug, and instead of the back-end engineer putting it in as a ticket that then goes through this whole system, they’re like, “I found it, I did it. I’ve fixed the end-to-end bug.”

Turner Novak:

Hmm. So what’s the state of Ring today? I know when you sold it to Amazon, it was a billion dollar kind of price tag. What’s the state...

Jamie Siminoff:

Well, $1.15 billion, but it’s...

Turner Novak:

$1.15 billion, yeah, no big deal. I’ll give you the extra 150.

Jamie Siminoff:

I mean, the 150... But back then it mattered. It’s like... Now it’s like a...

Turner Novak:

That’s like a...

Jamie Siminoff:

It kind of mattered.

Turner Novak:

Yeah. Now you can just go out and raise $150 million bucks like no big deal.

Jamie Siminoff:

Yeah, no, I always say... It’s funny. It’s only funny because of people that are in the world of raising money now. Because, like I said, we sold for a billion when a billion was actually a big deal.

Turner Novak:

Yeah.

Jamie Siminoff:

It is crazy that... there are just, on paper, startups that are raising... A billion dollars is actually not a crazy valuation for a startup today, which is... When I sold Ring, it was one of a handful of billion-dollar companies that were built.

Turner Novak:

What do you think is the change? Is it just purely hysteria and we’re in a bubble, or are people actually able to build bigger companies faster and more efficiently?

Jamie Siminoff:

The answer’s probably in the middle. Because if you look at the other things that have happened like this, yeah, out of the internet did come companies that we had never seen before. Amazon is a sort of child of the internet age, of this bubble of the internet. And it is a company that’s worth multi-trillions of dollars, so it did actually achieve its... You know, if you look back at the crazy valuations that people said it had, it did actually not only achieve it, but it was a good investment.

So I think it’s in the middle. I do think, physically, you can’t have this many companies have these kinds of values, this kind of money being spent this fast. I would say, if you wanted to look at how you parse this... when companies spend money quickly, historically that has never been something people have done well.

Turner Novak:

Spending money quickly.

Jamie Siminoff:

Quickly. Yeah. So the places where you see the... Amazon, if you look at Jeff, yes, they had a crazy valuation on stuff, but they actually were very smart about how they spent their money even back then. They were not just blowing it in every direction. If you actually look, they were spending their money pretty frugally.

So I think the companies that will come through this are the ones that could raise money, could have big valuations, it doesn’t matter, but that make sure they don’t too quickly build these infrastructures that they can’t get a handle on, because everything just keeps getting bigger and bigger and multiplying.

In all of these times this has happened, usually the companies that kind of overnight are too big just can never get a handle on themselves. And so having the discipline, I think, is really important. I do think there’s gonna be incredible companies coming out of this.

I do think this is like the golden age just started. I think AI is going to enable us to build incredible things, incredible value. I think it’s gonna be incredible for humanity. I’m very positive on it, and I think it is the time to embrace it, especially young people who I talk to and who are so scared about what their future’s gonna be.

And I’m like, “Man, your future’s gonna be bright, but you also do need to embrace it, because if you don’t, it is gonna be tough if you are not an AI-native thinker in five years, if you’re in the job market.” That person, I think, is gonna have it tough. And I worry that this anti-AI talk is going to push people away from it, which is actually gonna hurt them in the value that they can take from this, because it is a transition that’s happening.

And transitions... historically, if you look at any transition, if you were sitting there with a hammer, doing steel, and manufacturing was coming out, you wanted to be part of Henry Ford’s kind of new model. You didn’t want to be a blacksmith. So you do wanna be part of these transitions, and you wanna be on the other side of it.

Turner Novak:

I heard, I think maybe you said it at the venture summit, a rev number. Is this all private, like you’re not public about how big things are?

Jamie Siminoff:

Yeah, I mean, Ring is... So when I sold Ring, it was doing just under five. So in 2017, when I sold it, we closed out the year just under $500 million. It was like $480 million...

Turner Novak:

Mm.

Jamie Siminoff:

...in sales. It was still losing a ton of money.

Turner Novak:

Mm.

Jamie Siminoff:

But on a per-customer basis, the economics of a customer were fantastic. It just was subscale. The company needed to be a couple billion. We knew in the hardware space we needed to be a couple billion to be profitable, but we also knew the economics on a per-customer basis were very good. It’s just the overall business was still growing so fast and adding so much.

And so our revenue went $330 million, $170 million...

Turner Novak:

$480 million. And this with a hardware business where you gotta order parts.

Jamie Siminoff:

Yeah. You gotta order parts. It was crazy. When I sold to Amazon, this thing was barely sticking together. To go from, in 2016, we did $170 million, and in 2017 we did $480 million. To go from $170 million to $480 million in hardware, I had to order, while we’re doing basically $10 million a month-ish, call it in the summer of ‘16, I have to order, in essence, $480 million worth of product when we’re doing $100 million a year in revenue.

Now, you’re projecting growth, but if the growth didn’t happen, I’d be sitting on hundreds of millions. It’s crazy. If in 2017 we did $250 million, or even doubled, if we did $340 million, we probably would’ve gone out of business, because we would’ve had an extra $100 million of inventory just sitting there.

And you’re buying that stuff. It’s not like you can go back to the store and return it. So it was a crazy growth rate going into Amazon. Part of why we sold it was we needed to be part of a bigger balance sheet and spread the risk allocation out over a bigger balance sheet, because we just had to raise so much money.

And at that time... the capital markets today would’ve been much easier, because people started writing bigger checks into private companies later. At that time, you didn’t see that. You didn’t see this billion-dollar sort of Series D or E rounds coming in.

Turner Novak:

You probably needed Masa, basically.

Jamie Siminoff:

We needed SoftBank, yeah. And SoftBank was just starting to kind of go, I would say, 2016, ‘17. They were doing some checks, but it was, again, very small numbers. If you looked at... I mean, I don’t know, my guess is that companies that had over a billion dollars of value that were private and raising big checks, you would count them on your hands.

Turner Novak:

Yeah.

Jamie Siminoff:

It wasn’t like hundreds. Now it’s like...

Turner Novak:

Every day.

Jamie Siminoff:

Every day there’s one. And also remember, there’s now bankers that specialize in that, so there’s an industry around that. Yes, that did happen every once in a while, but I didn’t have the relationship with anyone to raise three, four... I mean, at Ring, in ‘17, if we were gonna continue to go, we needed to raise like $300 million probably to get ourselves to velocity of profitability, IPO, that kind of thing, and we just didn’t have the... I just didn’t have the relationship to do that. And so Amazon ended up being a great place, in terms of what it took to invest back in it to get it to profitability.

And now, I’ve well over 10x’d the business since it’s been at Amazon.

Turner Novak:

Oh, wow.

Jamie Siminoff:

Profitability, yeah. So it’s multiple billions of dollars of sales now, and it’s a healthily profitable business. It’s a good business. It’s a growing business still, innovative, has an impact. Ring has checked all the boxes.

Turner Novak:

Yeah. You said $480 million the year before you sold?

Jamie Siminoff:

Yeah.

Turner Novak:

So it’s fair to say at least $4.8 billion in revenue?

Jamie Siminoff:

I think that’s fair, yeah. Maybe five?

Turner Novak:

I’ll go with five for the title. Okay, perfect. Get the clickbait.

Jamie Siminoff:

Perfect. There you go. I guess you gotta get a little clickbait. I can appreciate that.

Turner Novak:

There’s actually some inside baseball: you wanna do non-exact numbers in those, because if you say $4.869 billion or whatever, it’s not a round number. People are like, “Ooh.” That’s real. That must be real.

Jamie Siminoff:

That’s exactly right.

Turner Novak:

Yeah. Versus if you say five billion, people are like...

Jamie Siminoff:

Yeah. Never round anything off.

Turner Novak:

Yeah. The psychology of getting people to click on content and watch it is never-ending. You can never win it.

Jamie Siminoff:

I spent some time with MrBeast.

Turner Novak:

Oh, nice.

Jamie Siminoff:

With Jimmy, and the sophistication in that is something... And again, it’s an area, obviously it’s not my area that I think about all day. But you sit with someone who thinks about that all day, it’s incredible. It’s like, this is why you specialize, why you do something that you’re good at. Because every single thing... there’s people that kind of sort of do it and are never successful, and then there’s the people that are just like MrBeast, Jimmy, who’s just...

He is a ninja. The guy is like a surgeon on this. He is so focused and so good at this, and just understands every single thing that he does and how it works. It’s amazing.

Turner Novak:

Yeah. And I never thought I would be an influencer, because I was trying to get a job in VC 10 years ago, and people just started following me on the internet, and I kind of kept riding it. And I’ve sort of fought it the whole way. I don’t really want to just make content and be a content creator and be an influencer. But to the point where it’s like, well, I guess I’m pretty good at this, so why would I not do it?

Jamie Siminoff:

But again, in any business, authenticity is what matters. So the fact that you like it... I think that’s what people miss with influencers. If you look at most of the influencers, and there are always gonna be examples of whatever, but most of them, when you look at where they came from or what they did, it is authentic.

It was what they liked. It wasn’t that they wanted to get the numbers or be out there. It’s that they actually were authentic about what they were doing. That got picked up. That became the thing, and now they are influencers. So the people that... you’ll hear a kid being like, “I want to be an influencer,” and it’s like, no, you should want to be a VC, and then it turns out that wanting to be a VC, talking about it, doing this, then it was actually interesting for people.

So then you become an influencer, which then you’re fighting every day probably, but it’s fine.

Turner Novak:

Yeah. I’ve kind of embraced it at this point. It’s probably 50/50, in terms of 50% of the time is just, quote, unquote, “marketing.”

Jamie Siminoff:

Yeah.

Turner Novak:

And when you really think about it, that’s what most other investors are doing anyway. It’s just they’re doing, you know...

Jamie Siminoff:

AI slop, right?

Turner Novak:

Right.

Jamie Siminoff:

I would just say the platform changed, and so I think people think that... they think influencer is like... Influencer definitely has a derogatory tone to it at this point. But that’s BS. It’s where the platform is, and it’s where the people are. And so I think any business, any whatever, should be where the eyeballs are and where the people are. So you don’t fight it.

Now, I’m sure there’s older people in the industry that are like, “Oh, that’s... they’re an influencer.” Well, that’s where the people are. By the way, as an investor, you’re supposed to be investing in the new stuff, not the old stuff. So if you’re investing in concrete plants, don’t be an influencer. But yeah.

Turner Novak:

There’s actually some people that would argue that that is the play. If you’re doing dirty, blue collar type industry stuff, there’s less content for it and there’s less competition, especially when you have the more sophisticated banker investor type that would be buying a concrete plant. So if you create the content to source those opportunities and lay the groundwork, there’s actually an opportunity to do it.

So I think maybe the takeaway is just there’s so many things it unlocks. It’s basically just marketing. People don’t wake up and read the newspaper anymore.

Jamie Siminoff:

It’s...

Turner Novak:

They wake up and look at their Instagram or Twitter or LinkedIn.

Jamie Siminoff:

That’s what I... I do think it’s funny, because if you go to a coffee shop, someone will say, “Look, everyone’s on their phone.” And it’s like, yeah, but 20 years ago everyone would have a newspaper out. And no one said, “Wow, everyone’s on the newspaper.”

Turner Novak:

Yeah.

Jamie Siminoff:

“Look at these idiots. Most people on their phone...” I mean, there are some people who are just going on TikTok, and their brains are slowly being turned into mush, algorithm mush. There’s a lot of people that actually learn. I learn stuff on Twitter and these areas, and it’s incredible the knowledge that I’ve been able to gain from this.

And then with AI... I don’t know if you do this, but I love it. I’ll see an article on something, whatever, and then I go into AI, and I become an expert. I dig so deep with my team, as I call it, of researchers. I love it. I can have a full team go research something that I’m like, “Wait, I’m interested in this.”

And so, yeah, I sit on my phone in a coffee shop, but I’m actually running a team of researchers from there and learning.

Turner Novak:

Yeah. An AI army doing your bidding.

Jamie Siminoff:

Yeah.

Turner Novak:

I guess today, inside Ring, you’ve grown about 10x since you sold to Amazon. What is the vision of everything around AI? You mentioned there’s a bunch of opportunities. So have there been new products you guys have launched?

Jamie Siminoff:

Yeah. I’ll say, the vision around AI... I think we should look at AI like electricity. I wasn’t around when electricity came out, but it’s almost like I feel like AI has become this thing where you say, “Where do you use AI in your business?” It’d be like, “Where do you use electricity in your business?” It turns out you use electricity in a lot of places in your business.

Turner Novak:

No, we actually use candlelight.

Jamie Siminoff:

Yeah, you’re a candlelight VC. But for most VCs, they use electricity all over the place.

Turner Novak:

Mm.

Jamie Siminoff:

So I think it is, wherever you use AI, that’s the thing. To be AI-native, which means it’s every part of the business. It’s from inception of product, to product development, to literally everything. How we talk to our customers, how we interact with our customers, how we build features, what features we can build. So I think it just really should be in everything we do, everywhere we’re doing it.

And from the customer side especially, I don’t want them to think of it like, “Oh, this is AI, this is not AI.” I just want them to be like, “This is...” You know, our job is to make your home and your neighborhood safer. So I just want people to be like, “I feel more peace of mind in my home.” They shouldn’t know why. Not that we’re hiding it, but they shouldn’t know why, in terms of, “This feature that came out because of AI makes me feel safer.”

It should just be like, “Yeah, with Ring, I love it. We get smart video descriptions now.”

Turner Novak:

So what is that? Actually, it might be interesting... I’m assuming most people know what Ring is, but quick 10 seconds: what is Ring for people who’ve never come across it before?

Jamie Siminoff:

Ring is a mission to make neighborhoods safer that has mainly been known as our doorbell cameras, floodlight cameras, alarms. We have products around the home that come together, that you can watch from your phone and keep your home and your neighborhood safer. That’s really Ring in a nutshell.

But we have this thing, smart video description. So instead of... It used to be, when we came out, you had to get motion alerts, and then you get a motion alert, and you’re like, “Oh, I’m filming a podcast, but I have a motion alert at my house. Let me look at it and see what’s going on real quick.” It’s not a great thing to do. Now we have smart video descriptions, so you get this thing that says a person is mowing the lawn. You’re like, okay, I know what’s happening there. And you don’t need to look at it.

Or you get someone’s walking around your yard, and you’re like, wait a second, no one should be in my yard, give me one second. So you have now more context with that. It turns out that... the hardest thing about AI to consumers, at this point, is not what you can do, it’s delivering that at a price that is reasonable to people.

If you just have all the tokens, and you wanna just rip GPUs, you can deliver incredible... you can go crazy with what you can do right now with AI. The problem is it’s gonna cost you thousands to tens of thousands a month for that feature, and obviously people aren’t gonna say, “Oh, I’ll pay to see what my Ring camera’s doing. I’m gonna pay $10,000 a month.” It’s not gonna happen.

And so it is, how do we take that $10,000 a month of value that someone wants, and how do we deliver that for single dollars a month? That’s one of the hardest things we have internally, the thing that we have to work on: how do you streamline this stuff so that you’re giving the value to people and getting them the technology? Because there is a constraint around price, and AI is expensive. These GPUs, it’s a lot.

Turner Novak:

Is there anything that you wanna do but you just can’t yet because of the cost equation?

Jamie Siminoff:

What I want to do is, I want every customer, every... We call them neighbors, our customers. I want every Ring neighbor to feel like they have a security team that has worked at their house for 30 years. So if you had a house and you had full-time security there, and not just overnight, but if they’d been there for a long time, so they knew everything about your home, how you live, what you like.

Some people probably would be interested if there was a bear walking down the street that morning, and some people wouldn’t. So it’s, like, truly knew your preference. Because it’s not just security in that I’m keeping your house secure, but it’s also, how do you wanna live in your house? What do you wanna be notified by? Maybe some people wanna know when their wife comes home in the afternoon, and maybe some people don’t. Same thing with their kids.

And so I wanna deliver that feeling of a full team at your house 24/7 that knows you. And we’re getting there in pieces. To deliver that full thing right now probably is too expensive. We have a thing called Virtual Security Guard. That’s $100 a month, so that’s an expensive subscription. That is delivering as close to that, but it also still uses humans. So someone walks on your property, there’s an AI that says, “Person on the driveway, you’re doing whatever,” and then it clicks over to a human if it needs to.

Turner Novak:

Mm.

Jamie Siminoff:

So it’s still a little bit kludgy. It’s a little bit expensive. It does the security job. Where do I wanna go? I want that at $20 a month, so that everyone can have it. To me, I wanna democratize. I always like to democratize everything to everybody. And it’s part of Ring’s thing, to be a high volume, low cost supplier of democratized security.

Turner Novak:

Yeah, I could see even my wife’s grandma, she’ll always give us these updates when she’s walking through the neighborhood, like, “Oh, the Joneses got a new dog,” or something.

Jamie Siminoff:

Yep.

Turner Novak:

So you could even get, like... Or, “Mrs. Williamson did not walk past today, and she walks past every day. Might be worth checking in on her, seeing if she’s okay.”

Jamie Siminoff:

Yeah, so I love those examples I like, which is the intelligence behind the example. It’s not a hard-coded thing of, “Tell me when this happens or tell me that happens.” It’s taking multiple things together and being like, wait a second, it’s not a holiday, it’s not... Here’s all the things I’m gonna, as a human, think about.

One of the examples I give the team is, if people have gardeners that come on, call it, Tuesday. If it’s Tuesday, and it’s 4:00 PM, and they usually come at 11:00 AM, and it’s not a holiday. Instead of saying, every week, “The gardeners are here. The gardeners are here,” it’s more like, “Hey, it’s 4:00, and just FYI, they didn’t show up, and it’s not a holiday.” And maybe you can get more knowledge over time, but I don’t have any reason to think they shouldn’t be here.

Turner Novak:

No email receipts.

Jamie Siminoff:

Yeah, there’s no email receipts, no gardener emails. And I’ve looked. “Do you want me to...” And then it’s, again, smart. “Do you want me to call them? Do you want me to ping them?” And by the way, it might even come to the point where it should be... “I did it. I’m your assistant. I called them, and they said they’re gonna be here.” Yeah, the gardener showed up. “They said they’re gonna be here tomorrow, just FYI.”

So that’s the stuff, if we can... Owning a home is the greatest thing you can have. It’s probably your biggest investment. It’s also a hassle. It takes a lot of mental cycles to own a home. There’s lots of things happening in there. There’s things breaking, whatever. The security side of it. And so I think we can take our piece and focus on that. It would be really cool.

And then, yeah, in the neighborhood, you can do great things to bring everyone together. So that’s where we wanna go with it. And then the other thing we’re doing, which we also launched, a little bit off of this, is an App Store. Because it goes into things like... my mother-in-law lives alone. So if I can buy an app that watches her when she’s walking outside of the house, and, is she limping today versus yesterday? Did she not leave the house this morning for five hours?

And so, Ring, we don’t wanna build these long tail, super specialized verticals, but I think there’s lots of, again, with AI, there’s lots of groups that can build these very specialized apps, that then someone could be like, “Yeah, I wanna put this app on my mother-in-law’s home.”

Turner Novak:

So I could build a Ring app if I wanted to?

Jamie Siminoff:

You could build a Ring app today, yeah. And we’re kind of figuring it out, because it is a new concept.

Turner Novak:

Hm.

Jamie Siminoff:

But we have, you know, there’s tens of apps now in the App Store, and they’re like...

Turner Novak:

Tens of apps. Okay.

Jamie Siminoff:

Tens. So pretty, pretty... It was figured out. We launched it. It’s growing. We’re kind of figuring it out.

Turner Novak:

Yeah. And then, so why would someone build an app on it? Because it sounds like only 10-ish people... it doesn’t sound that popular. How many customers can you potentially hit by doing a Ring app?

Jamie Siminoff:

So that’s why you build a Ring app. And that’s why we think it’ll become... Again, start humble, get bigger. But you have tens of millions of homes and businesses to be able to... that already have invested the money.

So think of a coffee shop. If a coffee shop uses Ring as security, they’ve already invested the money in the infrastructure of having all these cameras. Now you can build an app that says, “Okay, when you have a line, I’ll tell you.”

Turner Novak:

Oh, interesting.

Jamie Siminoff:

So it just rides over. Versus if you wanted to build a line-checking thing for a coffee shop, you’d have to say, “Oh, and buy this hardware.” Now it’s just already there.

Turner Novak:

Mm. So you said tens of millions. Is it closer to 10 or closer to 100 million of installed base?

Jamie Siminoff:

It’s definitely way above 10.

Turner Novak:

Way above 10. Yeah. Okay. So what’s been, like, the most...

Jamie Siminoff:

I mean, I think we’ve announced there’s over 100 million cameras out there. So I think we’ve announced that.

Turner Novak:

Oh, interesting. That’s a lot.

Jamie Siminoff:

I think.

Turner Novak:

When you first started it, did you think it was gonna be that big?

Jamie Siminoff:

I mean, I...

Turner Novak:

You almost choked.

Jamie Siminoff:

I almost spit my coffee all over the microphone. I almost ruined this thing. You know, I didn’t think... When I first started, I was in my garage and I couldn’t hear my doorbell.

Turner Novak:

Well, because you tried making a bunch of different products, right?

Jamie Siminoff:

Oh, yeah. I was like... This was not an aha moment. It wasn’t like I invented lightning. I was just like, I can’t hear my doorbell, I’m gonna build something. So the first thing was, I’m gonna fix my own problem.

Turner Novak:

Mm.

Jamie Siminoff:

Then I did a pre-sale with it, and I’m like, “I hope I can sell enough to build these.”

Turner Novak:

Didn’t you make a crowdfunding custom website or something?

Jamie Siminoff:

I did, yeah.

Turner Novak:

Why didn’t you use, like, a... Were there not any when you launched, or...

Jamie Siminoff:

So I was building a bunch of other... I was in my garage, trying to do inventions.

Turner Novak:

Okay.

Jamie Siminoff:

I’m more of an inventor.

Turner Novak:

And you call yourself the chief inventor of Ring, and not the CEO?

Jamie Siminoff:

Chief inventor of Ring, yeah. I like the idea of invention and inventor. That’s more of where my focus is. I was in my garage, literally building stuff, couldn’t hear the doorbell, built this thing.

At the same time, Kickstarter was becoming very popular, and they had just recently thrown off... You couldn’t go on there with a hardware product anymore.

Turner Novak:

Really? Why not?

Jamie Siminoff:

It’s funny, because you gotta go back now, but Kickstarter started, it was growing very fast. All these people came on there with hardware projects. None of them shipped. Kickstarter was like, “Uh-oh.”

Turner Novak:

And that’s not gonna...

Jamie Siminoff:

So they did a moratorium, a “We’re not...” Like, “You can’t go on here with a hardware product anymore.”

Turner Novak:

And that’s what you were making. You were making a bunch of hardware products.

Jamie Siminoff:

Hardware products. We were like, “Uh-oh, there’s no place for this.” So I saw it firsthand as the inventor in the garage. I just lost my distribution. And so then I basically was like, “We should launch a Kickstarter for a product.” We called it Christie Street, which was the street that Edison’s lab was on in New Jersey.

We were gonna launch it. We needed to put a product, obviously, Christie Street needed a product to launch. And so we ended up... What product should we launch? I was actually doing it at a friend’s conference in Paris called LeWeb, Loic Le Meur, and I’m talking to Loic and I’m like, “Which product should we do?”

I had all these ideas, it was Snap Guard and all these ideas, and I get to the doorbell and he’s like, “Ze Doorbell.” And so he was like, “That’s the one.” And so, at that point... gosh, I was like, “Whatever.” I honestly didn’t care.

Turner Novak:

So you thought that the crowdfunding site was almost the big product?

Jamie Siminoff:

Oh, the crowdfunding site was the business.

Turner Novak:

And it was like...

Jamie Siminoff:

In fact, I don’t think people even know this. Charles River Ventures... I don’t think we’ve ever... It’s not crazy, it’s not controversial, but I actually raised money from Charles River Ventures for Christie Street.

Turner Novak:

Oh, wow.

Jamie Siminoff:

They were the seed check in that. And Saar Gur, who’s at Charles River, still a good friend...

Turner Novak:

Yeah, I know Saar pretty well.

Jamie Siminoff:

So he writes the first check in. I go and pitch him on it. He’s like, “Sure, here’s, like, whatever,” like a hundred and something thousand bucks I guess, seed check. And pretty quickly we launched Christie Street at LeWeb, and it was Ze Doorbell.

Turner Novak:

Yep.

Jamie Siminoff:

And we launched it, and all the people wanna talk about is the Doorbell and not Christie Street. And we realized that Christie Street was probably a terrible idea, or we just weren’t gonna do well with it, and that the Doorbell was the thing.

And so I went to Saar and I’m like, “Hey, dude, really sorry, this thing...” And Saar’s like... I love great VCs. Saar’s like, “All right, it’s fine, do the Doorbell.” He meant, do the Doorbell. Like, “What I put money in didn’t work, it’s fine.” And I’m like, “No, I’m gonna roll you into DoorBot,” which was the name of it at the time. And Saar was like, “Don’t worry about it.” He wasn’t flippant like that. He was like, “It’s fine. We didn’t invest in that, it’s fine.” And I’m like, “No, I’m gonna roll you in.” So he actually became the first money into DoorBot.

Turner Novak:

Hmm.

Jamie Siminoff:

Which, that return on that investment was extremely good, looking back.

Turner Novak:

Thankfully for him, even if he would’ve said no, I think he’s had some other pretty good ones, too.

Jamie Siminoff:

Saar’s fine. So Saar and CRV are both gonna be fine. So anyone who’s out there worried about Saar, he’s okay. But he’s also just... It’s nice when people are just good. It’s nice to see good people also make it. He’s a good, founder-backed person who was like, “No, I put money into this, that’s not what I put money into.” So I went out and tried to do it. It wasn’t like we didn’t try to do it. And I was like, “No, we’re just gonna roll your basis into Ring,” or... At the time, DoorBot.

Turner Novak:

Which...

Jamie Siminoff:

Did not look like it was that successful either.

Turner Novak:

So how did that pre-sale go?

Jamie Siminoff:

It went... It was good enough. It was actually almost... It was bad. It sold enough that we had to build the product, but it didn’t do tens of millions. At that time you had... What the hell was that thing called? Tile came out, and Tile was this little tracker thing, like a Bluetooth tracker tile.

Turner Novak:

I actually have one. They got acquired. Did they get acquired by...

Jamie Siminoff:

They were acquired by Life360. And so Tile... Tile looked, for a minute, like they were gonna be a trillion-dollar company. And they did like $20 million.

Turner Novak:

Wow.

Jamie Siminoff:

So we weren’t the biggest out there. And there was a bunch of hardware companies raising money that were the belle of the ball at that time. There was this helmet for motorcycles that raised like $40 million or something. There was a lock company that raised a lot of money. There was a whole bunch of stuff in San Francisco that was the... And we were a solid tier below that.

Turner Novak:

You basically were the thing Kickstarter did not want, where you...

Jamie Siminoff:

Oh, we were...

Turner Novak:

You wouldn’t actually get to launch, because you didn’t raise enough money.

Jamie Siminoff:

Yeah, no, we were totally what Kickstarter was worried about. To be fair to Kickstarter, they were not wrong. And so, yeah, we basically sold enough. We’re like, “We have to build this thing. Shit.” And so we scraped together to build it.

And the first DoorBot was tough. It worked, but it just barely worked. It was not a...

Turner Novak:

Did it have a camera on it?

Jamie Siminoff:

Yeah. It had no motion detection. But it was a doorbell with a camera. You have someone ringing the doorbell, you talk to them through the DoorBot, and they had a camera into your phone. But the Wi-Fi was super challenged. Everything was tough on it. It worked, but I’ll say it worked-ish. It definitely was not... It was a few people in a garage building a consumer electronics product. It turned out it was really hard.

Turner Novak:

And were you nervous that someone was then gonna steal the idea, because it was public?

Jamie Siminoff:

So, I wasn’t nervous. When we put it out there, I wasn’t nervous. I didn’t think anything of it. We went on Shark Tank.

Turner Novak:

Okay. That was pretty soon after this?

Jamie Siminoff:

Actually, Shark Tank was... We launched the web in December of 2012, and then we went on Shark Tank in November of 2013.

Turner Novak:

So over a year later. Well, was that...

Jamie Siminoff:

Basically a year later.

Turner Novak:

Okay. And so, were you basically still figuring things out? Had the market taken off yet?

Jamie Siminoff:

So when we went on Shark Tank, we were two weeks away from starting to ship the product.

Turner Novak:

Oh, okay. This is when you recorded it or when it went live?

Jamie Siminoff:

Recorded it September 11th, which, you know, a date you remember, of 2013, and then we went on in November of 2013.

Turner Novak:

But you were shipping around Christmas time?

Jamie Siminoff:

That time. Which ended up being, from a sales... If you could be on Shark Tank, if you could have your 12-minute commercial on ABC right before Christmas, because Shark Tank was the top-rated show. I think at the time it was the number one rated show that year. And so, if you could pick your time, that was the time, and you were about to start shipping.

Turner Novak:

So how did you get on Shark Tank? Because that was probably a hard slot.

Jamie Siminoff:

So there were like 30,000 people that applied the year I did. They were saying that they wanted a little bit more complex businesses on there. So they wanted stuff like a DoorBot, something that was a little bit more of a tech and product, a little bit further along than... They were getting a lot of stuff like people baking something in their house kind of thing.

Which is fine, but they wanted, I think, to mix it up and have a little bit more of these almost mature-ish businesses. And so they were looking for that. They had emailed some people in LA, and one of the people I was talking to said, “Oh, you should email this producer. They’re looking for stuff like yours.” So I emailed the producer, and an hour later they’re like, “Oh yeah, you should be on Shark Tank.” And it ended up being way more complex than that. But that was the initial thing that got us on there.

And Shark Tank was probably one of the most critical things in getting us to survive, because, again, you need to scale. We had all of these DoorBots coming in that I couldn’t even pay for, and I go on Shark Tank, and now we were basically selling them immediately, able to literally pay the factory to start shipping them, to release them, so that we could do it. And so the Shark Tank thing was just critical in terms of timing and also credibility, awareness, everything. It really let us go.

Turner Novak:

But then what happened backstage at Shark Tank? Because it wasn’t the smoothest, was it?

Jamie Siminoff:

Nothing in my whole thing has been smooth, but yeah. So Shark Tank says you have to do a live demo. And I’m like, “Yeah, of course we should do a live demo.”

Turner Novak:

Did the product work at that point?

Jamie Siminoff:

Uh.

Turner Novak:

No? Okay.

Jamie Siminoff:

Eh.

Turner Novak:

It was close?

Jamie Siminoff:

Ish. Eh, you know? So the producer, “Jamie, gotta do a live demo.” Of course, 100% we’re gonna do a live demo. But I think we should record something, blah, blah, blah, and play that. They’re like, “No, we think we should do a live demo.” I’m like, “100% we’re gonna do a live demo. But why don’t we...” I literally kept trying to be like, “But here’s a better idea than a live demo.” Which is not a live demo, which is something that we can put in a can and just shoot it and throw at them. So they forced me to do a live demo.

Turner Novak:

So this was happening backstage or before you went out there?

Jamie Siminoff:

Well, so we’re getting the stages... They do like eight episodes a day they film.

Turner Novak:

Oh, really? I didn’t realize that.

Jamie Siminoff:

And they film them back to back. What you see in the episode on TV, each vignette is filmed separately, and they just mix them up. And it depends on how they come out. So who films before you and after you, when you’re out there, is not necessarily gonna be on your episode. So they’re switching the sets very quickly. And so you have like 15 minutes to get set up before they start shooting you.

And at that time you had to build your own set, and so we build our own set. We bring it in there, we’re setting this thing up. It’s like a front of a house. And Mark Dillon, who’s my CTO and the tech guy, we had three or four of our five DoorBots in there. That’s how many we had produced total, not just with us, that was it.

Turner Novak:

You brought the entire warehouse.

Jamie Siminoff:

We brought the entire set of DoorBots we had. So we bring them, we’re testing them before we go out there. We’re in this little trailer in the Sony lot, and we’re testing them. And they’re working... Again, it wasn’t perfect, but we could get them working.

So he goes out there, and Mark was a fidgety, kind of a nervous little fella anyways. One of those engineers who likes working late at night when no one’s around and it was dark. He was that kind of engineer.

Turner Novak:

Yep.

Jamie Siminoff:

Great guy, but a little bit nervous. And so I’m getting set up, “Okay, this is where you stand. This is what you do. This is the camera you’re gonna look at,” whatever, right? And I keep seeing, over in the corner of my eye, Mark, and he’s like... Every time I look over, there’s more sweat on him.

Turner Novak:

Mm.

Jamie Siminoff:

To the point where I look over and it looks like he’s still in a pool. I’m like, “Uh-oh.” So I’m just like, “Okay, um, wait, one second.” Very quiet. “Hold on one second.” So I go over, “Mark, everything okay?” I’m trying to, like, looking around, doing thumbs-up, and Mark’s like, “No, they’re not working.” I’m like, “Okay. Well, get it fucking working, Mark.” Very nice and calm, and Mark just looks at me. I’m like, “Get it working.” And so then I have to go start the shooting of this thing.

Mark’s behind the house. If you look at the Shark Tank episode, literally Mark’s sitting behind there the entire time, behind this house. There’s nowhere for him to go.

Turner Novak:

Mm-hmm.

Jamie Siminoff:

And he’s trying to get things working. I literally have to do my whole song and dance, and at the end of it, I had to hit the DoorBot button and show the phone. And that was live. It was either gonna work or not work. I didn’t know if it was gonna work. So I’m out there. I hit the button. The thing comes up. It’s the best picture we ever had on a DoorBot. And I’m like...

Turner Novak:

Oh, like, highest quality?

Jamie Siminoff:

Highest quality. It was amazing. I’m like, “Oh my God, this thing freaking worked.” I’m like, “Holy...” And so we smashed it. It worked, but the first three he put up literally just would not work. So he keeps installing new ones, and I don’t know what actually... I don’t think any of us know what actually happened, because we weren’t smart enough to even know what the product was doing at the time. It was almost like luck when it worked.

Turner Novak:

Yeah. And then didn’t you get an offer, but you turned it down?

Jamie Siminoff:

Uh, yeah. It was a Mr. Wonderful offer that was kind of, I would say... Part of that is part of the TV, to make it a good thing, so he gives me an offer. He certainly would’ve done the offer if I had done it, but it was such a bad... from a business side, it was a kill shot.

Turner Novak:

He always does a revenue share, doesn’t he?

Jamie Siminoff:

The rev share, and it was a kill shot. You couldn’t take that offer.

Turner Novak:

Yeah.

Jamie Siminoff:

But...

Turner Novak:

I’ve never met the guy, but...

Jamie Siminoff:

We didn’t either, but... And then of course now everyone’s like, “Well, you’re so lucky you didn’t take the money. Of course you didn’t take the money.” And I’m like, I needed... We were out of money when I was on there.

Turner Novak:

So why’d you say no then, if you needed it?

Jamie Siminoff:

Because it was a deal that the business wouldn’t... You couldn’t have survived that. They just would never get ahead of it.

Turner Novak:

So then it went live a couple weeks later?

Jamie Siminoff:

Yeah.

Turner Novak:

Okay. And then...

Jamie Siminoff:

Which, again, another funny story is, so Shopify, this is 2013. So Shopify’s pretty... They’re out there as a company, but they’re not huge. And so I called Tobi, who’s the CEO founder of Shopify. Again, it’s not that big of a company, so calling him was like... Now it’s like a hundred billion dollar business or something.

Turner Novak:

They weren’t public yet, were they?

Jamie Siminoff:

No, no, no. This is when they’re like a startup. Like us. I mean, he was probably a little bit ahead of us, but they weren’t huge. And so I basically threatened his life. I’m like, “We’re going on Shark Tank. This thing cannot go down.” And he’s like, “Man, we have...” And it’s actually on email, this... We both laughed about it recently. He’s like, “We have millions of dollars of equipment. Don’t worry.” Millions. Now Shopify has literally tens of billions, it’s so big. And so it is just so funny, looking back, I’m like, “No, man, but seriously, there’s so much traffic. If you go down... I’m gonna drive to Toronto and get you.” And he’s like, “No, no, I have millions of dollars of equipment.” So he’s like, “Two small startups,” and Shopify did not go down. It was amazing. It was a very cool thing. But it is just, looking back, it’s a long time ago. It’s 13 years ago.

Turner Novak:

But I think, was that the Christmas that you almost went bankrupt?

Jamie Siminoff:

So then we started shipping DoorBots.

Turner Novak:

Yep.

Jamie Siminoff:

And, again, like I said, it wasn’t that they weren’t working. It wasn’t a product that didn’t work. It just had a lot of challenges. And then we were going so fast, we’re trying to get them in from the factory, and we’re sending them out. We’re literally sending them out from our little place we rented in Santa Monica with a garage. And so we’re taping boxes and shipping them out. And so we were way behind.

People are like, “I’m gonna cancel my order if I don’t get it for Christmas.”

Turner Novak:

Mm.

Jamie Siminoff:

We’re seeing that, so we’re like, “Uh-oh, that would be bad.”

Turner Novak:

So you were having delays, and people were like...

Jamie Siminoff:

Delays with stuff coming in, and people were like, “If I don’t get it for Christmas, I’m out.”

Turner Novak:

Mm.

Jamie Siminoff:

And so I’m like, “Uh-oh.” And I don’t think it was that people necessarily wanted it for Christmas. I think that was kind of their line in the sand. So we got a big shipment that was being produced, and we had a new engineer, and he put code to fix the camera to make it even better, put it on there.

Shipment comes in, and, again, looking back, it’s so stupid. We don’t test the product. It comes in, we send it out. We’re so behind, we’re just like, “Ship it, ship it.” So I started hearing people emailing me. My email’s on the box.

Turner Novak:

Yeah. Still is today.

Jamie Siminoff:

Still is today. And they’re saying, “It’s not working,” and they’re showing us pictures that are like... I’m like, “Oh, this is different than before.” So I started taking ones out of the boxes that are in the warehouse, next to my desk basically, and testing them. I’m like, “Uh-oh, something’s really wrong here.”

So we figure out that this new engineer we had had put basically just junk code onto this chip for the camera. Sadly, that camera chip, you couldn’t upgrade. You couldn’t over-the-air upgrade it, because it was not the way we had built it, which was a mistake, but just happened to be that that one chip was not in the line to get over-the-air upgrades.

And so we basically had shipped out like a thousand, maybe 10,000, I remember it was thousands of cameras that were just broken. They didn’t work. And so we figured this out Christmas Eve Eve. So all day Christmas Eve Eve, the day before Christmas Eve, I’m literally trying to figure out, is there any way to fix it? Is there some way we can OTA that chip? Is there some way we can, whatever.

And we end up getting to that night, I’m out to dinner with my wife and my son, who at the time was, like, six or seven. And I’m like, that was a fun run. This thing was interesting, but it’s done. Because if they were all broken, we couldn’t afford to replace all of them with a new unit. Just the process of buying new units, sending them back out, we would... We didn’t have enough. We barely had any cash to even stay afloat, let alone to change out 5,000 units or something. Not even close.

Turner Novak:

Had you raised any more money since that $100K?

Jamie Siminoff:

We had not raised at that point... We had raised up about a million dollars up to that point.

Turner Novak:

And that’s to your inventory problem, right?

Jamie Siminoff:

We needed like $5 million more kind of thing. And, by the way, you’re not raising money saying, “Hey, just FYI, I need money because everything we sent out was broken and we need your money to fix the issues.” So it’s very hard to raise money on that also. And so we were like, “This is really bad.”

Turner Novak:

So how’d you get through this?

Jamie Siminoff:

So I’m driving home from dinner, and I was actually calm in a weird way, kind of almost like it is what it is. At some point, you’re just like, I can’t fight it. We’re just gonna have to shut down. And it was very... I was very sad, but I was kind of calm.

And I called Mark, the sweaty engineer from Shark Tank. And I’m like, “Mark...” We had been using a licensed thing in our cloud for doing the video encoding, a licensed software, and then we switched to an open source one, because it was obviously a lot cheaper, as we were building stuff out. But the licensed one was always better. The open source one worked fine, so who cares?

So I said to Mark, “Remember that licensed one we used?” He’s like, “Yeah.” I’m like, “Do you think somehow it could figure...” Because we didn’t even know what was coming out of the camera. Something was coming out, but it was showing up on the phone as junk.

Turner Novak:

So it wasn’t even the actual camera feed?

Jamie Siminoff:

The camera was sending basically a bunch of bad bits and stuff. And so the encoder we had just saw it and basically crapped out.

Turner Novak:

Mm.

Jamie Siminoff:

And I’m like, “Do you think the paid one would, in essence, figure out what’s going on and basically be able to do this?” He’s like, “I have no idea. It’s gonna take me like eight hours.” And this was now he’s in New York. I’m driving home from dinner, so it’s probably 8:00 or 9:00 at night. And so he’s like, “It’d take me like eight hours to switch it over.” I was like, “Okay. Start.”

Turner Novak:

You might as well.

Jamie Siminoff:

“I’ll start the clock right now.” And Mark’s the kind of guy who was like, “I’m starting it.” I knew he would do it.

Turner Novak:

Yeah.

Jamie Siminoff:

And so he calls me. He wakes me up at like 6:00 AM Christmas Eve. And he’s like, “It fucking works. It fucking works,” screaming. And Mark was not a screaming guy. But I start looking. Not only does it work, it’s the best picture. It actually was amazing picture. It was great.

And so that was still our favorite Christmas at the Siminoff house, the Christmas of 2013, because not only did we fix it, but then, we’re actually doing good, they were selling. So then you could go raise money, which is what we did. And you could then build the next product. So it allowed us to sort of... But if that had happened, it would’ve been the kill shot.

Turner Novak:

So then did you just send one email and raise a bunch of money like people do nowadays? Or what was that like, raising at that time?

Jamie Siminoff:

No, raising money was still a slog. I actually got introduced to True Ventures. So, Om Malik... I don’t know if you know Om.

Turner Novak:

Oh, yeah. Yeah, I’ve actually met him.

Jamie Siminoff:

He just passed away. Which is very sad. But a great guy. And so I got introduced to him, and I told him, “I have this mission to make neighborhoods safer. This is what I’m doing,” whatever, and everyone kind of thought I was crazy. And Om was just this classic guy, and was like, “No, I think this is good.” And he introduced me to his partners at True Ventures, and this guy Adam D’Augelli, who’s one of the... He was just brand new out of college, not even a partner. He was just an associate.

Turner Novak:

Yeah.

Jamie Siminoff:

Kind of like, they gave it to him, and Adam ended up coming in, being on the board. He’s done phenomenally well. He’s now a partner at True. And so Adam really had a passion for it and helped us raise our first, that was our first A round that we raised. And True Ventures was the big sort of thing behind it. And then there was, I’d say almost, you could almost, of that vintage of VC, almost every single VC had some part of Ring.

Turner Novak:

Wasn’t there an email that got passed around to people where you kind of told someone off or something? I forget exactly what happened.

Jamie Siminoff:

Well, there was a group out of the East Coast, and they’re like, “Oh, we’re a bunch of founders, and we’re founder-friendly,” and all this stuff. And they were basically in, and then right at the last second they backed out. And they backed out because they said, “Yeah, we think you have a great business, but we’re worried that you’re in Los Angeles, and that if you try to raise the next round, you won’t be able to do it.” And so it was a very un-founder-friendly...

Turner Novak:

Classic East Coast early stage VC, honestly.

Jamie Siminoff:

Yeah. But to say you were founder-friendly and then do that... just say you’re a hedge fund jerk and be who you are. Don’t say you’re founder-friendly and then write the standard jerk finance person email.

Turner Novak:

Yeah.

Jamie Siminoff:

And so I kind of called them out for it, and then that got passed around. And so then I was at dinner with one of our VCs, and they’re like, “Oh, I didn’t know we’re all ass hats,” because I used “ass hat” as one of my examples of who they were.

Turner Novak:

Yeah.

Jamie Siminoff:

And even some other, even choicer words. And I was like, “Uh-oh.” But it’s kind of... Looking back, I was under so much stress. It’s not like a... Now it’s kind of funny, and it’s a little bit of a badge of honor, I feel like, doing it. I think at the time, what a dumb thing. Why? Don’t poke the bear. There was no value in it. But it’s kind of also my personality, I guess. I’m just like, you can’t take the whatever out of the something. I don’t know. There’s some saying there.

Turner Novak:

Yeah. I feel like if you’ve ever raised money before, you kind of go through that. Someone’s like, “Oh, yeah, this is awesome. I’m in.” And then... I mean, that happened to me in 2022 when I was raising my second fund. I had a ton of people who kind of pulled out when I was doing the close, and, fair, it was the summer of 2022. That was not an easy time to be raising money. But so I was kind of like... I could have said more things than I said. But I was kind of like, whatever. It’s just...

Jamie Siminoff:

It is what it is. It is tough. It is emotional. People are always like, “It’s just business.” And I go, “It’s not just business. It’s your life.” This was my life. And so, yeah, I was... But the email has definitely aged well, now that... Thank God I made it. So I’m okay now. If I hadn’t made it, it would have aged much more poorly, because... But it was, yeah, so it’s pretty funny.

Turner Novak:

And so, what... Yeah, I think you hired a bunch of people off Craigslist, right, when you got a bunch of money in the bank? You’re really ramping the team. How did that go? Because in 2026, hearing somebody say, “I hired people off Craigslist,” I’m like, what are you doing? So this was probably a couple years ago.

Jamie Siminoff:

Yeah, and I think that is something that’s gonna become, again, how you build successful businesses: finding these... I’ll call them “new to business” people. So they’re eager, gritty, wanna work hard people that you find that are not necessarily getting the attention of the world. They’re not the pedigreed resume, whatever. And with AI, I think that’s democratizing intelligence.

So you don’t necessarily need someone who’s gone to Stanford to do your thing, because Stanford is now in the cloud, and you can access it. What we found is these... We hired the person in the shipping department who... And I mean shipping department, meaning the person putting tape...

Turner Novak:

Just packing boxes.

Jamie Siminoff:

Putting tape on the box. And he came to me and said, “Jamie, we don’t have enough whatever. You’re not buying enough screwdrivers for the boxes, to pack.” And I’m like, “Dude, I don’t freaking know. Why don’t you order them?” And so I just said, “You figure it out.” And then it was, we weren’t buying enough door bots, whatever, and I’m like, “Then you figure it out. I don’t care. You go figure it out.” He still runs all our procurement today for the entire business.

So I think, give people opportunity, and find these great nuggets, these diamonds in the rough. And I think businesses today... if I was starting something new, if I was looking at transforming a business, that’s what I’d be looking for: how do you get these new AI-native thinkers that are not the resume, long-term, that haven’t formed too many of the blinders, going back to what we said about coming back in. I want these fresh eyes that come in that can just rip through with what we have available to us today.

Turner Novak:

So what might one of those undercover gems look like? If you’re trying to figure out... Because a lot of what people do when they’re hiring is real quick look at the resume. Does it match something? Maybe I’ll give him an interview. I’ll ask him some canned questions, and then we’ll make a decision. So how do you run one of those processes, and what do you look for?

Jamie Siminoff:

So I’ve always tried to... Our mission’s to make neighborhoods safer. Are you passionate about that? Let them talk. Let them go through it. Obviously, as you get bigger and bigger in a company, now you have to hire for more specific things. But when you’re smaller, you just want these Swiss Army knife type people that can do multiple things, believe in what you’re doing.

And now I’m also like, “How do you use AI in your life?” If they’re like, “Oh, I use it like I use basically Google. I search things,” I’m like...

Turner Novak:

Hmm.

Jamie Siminoff:

“That’s interesting.” But a lot of them are like, “I built this app for my family, to reorder bathroom supplies, because we were arguing about the...” And you see what they did, and you’re like, oh, okay, you’re in a world where you’re realizing that you can just unlock anything. You can do anything. I want that unlocked brain, that person who feels like there are no constraints anymore. They can do anything.

And then passion for what you’re doing. There still is an authenticity there. You don’t want coin-operated people. You want missionaries, not mercenaries. Because no matter what you pay someone, money always becomes boring quickly. Money is a terrible motivator in the long term, because whatever you have, you want more of it. And, by the way, people should have money. I’m not anti-capitalist. But I do think that we misunderstand, when you hire someone, that if you give them a bonus or whatever, all that does is reset the floor for them.

In six months, you’re now making whatever that is, even if it’s double what you were making before, well, that’s your new floor, and now you wanna do more than that. So if you’re driven by that, you’re just gonna want to have more. And if you’re driven by, “I wanna make neighborhoods safer, and I’m excited about the products we’re working on,” then yes, making more money as you go and become more successful is good, but it’s not the main thing you’re showing up for every day.

Turner Novak:

Yeah, that’s right. You wanna make sure you can take care of yourself. Having money is great.

Jamie Siminoff:

Yeah, like your family. This is it. I appreciate that people need it, that they should grow with it, but if it’s what you’re doing the job for, you’re usually never satisfied. And you’re usually at your best when it’s that, unless you’re literally at a hedge fund. The job is making money. That is the job. That’s great. You’re good at making money because that’s what you do every day, and that is the KPI. But at Ring...

Turner Novak:

Mm-hmm.

Jamie Siminoff:

The KPI is making neighborhoods safer. So if you focus on that and that excites you, and then we get more successful and, because of that, you end up growing in your career, then both things happen. And that’s great.

Turner Novak:

So then how did you think about building the brand? Because I know you were kind of the face of it, in some sense. You’re on Shark Tank. People say, “Oh, that’s the Ring guy.” “The doorbell guy.” How did you think through building that intentionally over time?

Jamie Siminoff:

If you look at most brands, they come from humanity, trust, authenticity. These things are true to the brand when they started. Big brands over time become their own thing, and they lose that need. But it wasn’t that I was the best person to be part of a brand. A doorbell itself, that we made, was PCB boards and plastic. It turns out people don’t get very passionate about PCB boards and plastic.

But when you talk to them about making their neighborhood safer, and you humanize it, and you put your email address on everything, and people can talk to you, and you’re accessible, I think that’s how the brand becomes something over time. It’s also how you become a better brand, because you’re also listening, you’re out there, you’re adapting to that.

So I think in every way, Ring today has become one of the big brands of the last decade. Not century, decade. Maybe century, but definitely the last decade. One of the bigger consumer brands that has formed. And I think a big part of that was me being out there, and not necessarily me being me, but a person being attached to it, so that it wasn’t just selling PCB boards and VGA or HD camera, whatever feature thing that was out there. And a part of that was my email. My real email’s on every box.

Turner Novak:

Well, even, I think, the name, too, Ring, and having a domain like ring.com. That’s pretty...

Jamie Siminoff:

All of that matters. The four-letter domain name feels credible. Ring turned out to be a great name, because it just felt warm. There was something nice and warm about it. There was something you could brand around. But, yeah, all that stuff matters. And so I think building a brand is basically impossible, which is why they’re so... You don’t see them get built.

Turner Novak:

Yeah.

Jamie Siminoff:

And it is lots of little things, but certainly it’s very hard to find. And there’s always examples of this stuff. But I’d say most brands, if you look back, they were usually built with authenticity...

Turner Novak:

Mm.

Jamie Siminoff:

...at their core. There was authenticity, people, humans, things. It mattered. There were reasons why they made decisions, products. They didn’t just put stuff out there.

Turner Novak:

Yeah. How did you get ring.com?

Jamie Siminoff:

So the name came, uh, Upfront Ventures was one of our investors, and one of their partners, Himay, I was in a thing pitching them, telling them all the... what we’re doing, an update, and I said, “We’re looking for a new name.” This is when we were DoorBot. Because DoorBot was a terrible name.

Turner Novak:

Talking about, like, human and the personality...

Jamie Siminoff:

Exactly, because it’s a robot. When we branded, I was literally building a thing for my house in my garage. It was a DoorBot. Door robot’s funny. But as a brand, it was a terrible brand. And so I said, “We need a new brand.” And so Himay said, “You keep saying rings of security and ring of this,” and I kept using the word ring. I didn’t actually hear myself. He said, “Why don’t you just call it Ring?”

And I was like, “Eh.” My first reaction was not like, “Oh, my...” Epiphany, like, Ring. It was like, “Hmm, I don’t know. Would Ring actually be a good brand? Maybe.” And so then I think he looked, or I looked, and ring.com was available, meaning there wasn’t a company. It was for sale.

Turner Novak:

Mm-hmm. What was the price tag?

Jamie Siminoff:

It was over a million, I think, was the initial offer. From them, it was over $1 million.

Turner Novak:

Okay.

Jamie Siminoff:

We ended up getting it. I had $187,000 in the bank when I was negotiating for the Ring domain. I ended up agreeing to a million dollars, and then at the day of closing, I said, “Listen, the board decided that we couldn’t do it.” Now, the board was just me at the time, but...

Turner Novak:

Was this right before Shark Tank?

Jamie Siminoff:

No, this was after Shark Tank.

Turner Novak:

Oh, so you went on Shark Tank as DoorBot?

Jamie Siminoff:

DoorBot, yeah.

Turner Novak:

Okay.

Jamie Siminoff:

This was after Shark Tank. This was basically four months after Shark Tank, as we were trying. This was before True Ventures came in, but right around that time.

Turner Novak:

Yep.

Jamie Siminoff:

And we’re in this process of about to raise money. We’re gonna need to rebrand. We realized that DoorBot was gonna be a bad brand. And so I told the guy, which is true, the board did say I couldn’t buy it for a million dollars. Or maybe it was 750. We had it for $750,000, we had an agreement. And I said, “The board said we couldn’t.” I was the board. It was a small board. I said, “But they did allow me to do $175,000 today, and we’ll do a million dollars total paid out over two years.”

So I actually raised the price, but lowered the upfront, and the guy basically was like, “F you.” He yelled at me a bunch, and then right before he hung up the phone he said, “Fine, wire the $175,000.”

Turner Novak:

Oh, and he did it.

Jamie Siminoff:

Yeah, and I did it. So it turned out it was a good way to... I don’t know if it was the most upfront negotiation, but yeah. I just didn’t have the money. I’d obviously thought we were gonna raise the money, we just weren’t raising the money. I didn’t have it.

Turner Novak:

So then you had $12,000 in the bank after this, essentially.

Jamie Siminoff:

Yeah. And then, so then True Ventures was coming in, and I had to then tell them two things. I basically had to admit that I bought this domain name, which I had not told them yet, because I didn’t want them to know I bought a $1 million domain name when they’re putting a couple million dollars in the company. Obviously, a major part of it’s going out to the domain name. And so I had to tell them before they wired, which was a little bit difficult.

Turner Novak:

Had you already signed all the docs?

Jamie Siminoff:

We had signed the docs.

Turner Novak:

Okay.

Jamie Siminoff:

And so they were about to wire. And then I kept being like... They had all our stuff, but VCs are actually surprisingly lazy on digging through the finances of these companies. I think because they know they’re so messed up that they don’t even care.

Turner Novak:

You almost just don’t wanna know.

Jamie Siminoff:

Yeah. Exactly. So I’m like, “Oh, the wire’s coming on Tuesday.” And I’m like, “Okay, any chance it could come Monday?” And they’re like, “I think we can do Monday.” I’m like, “Okay, great, just because I have our finance person’s in the office on Monday, and so it’d be easier to accept.” I’m literally just talking, whatever. They’re like, “Okay.” Well, Tuesday’s when payroll got pulled.

Turner Novak:

Mm.

Jamie Siminoff:

We didn’t have enough for payroll.

Turner Novak:

You would’ve missed payroll.

Jamie Siminoff:

Would’ve missed payroll.

Turner Novak:

Which is illegal, right? If you miss payroll, that’s...

Jamie Siminoff:

Well, yeah. It’s not...

Turner Novak:

As long as the employees... Because there’s sometimes you can, the employees can agree and stuff like that.

Jamie Siminoff:

It’s not good, I’d say. It’s not good. Missing payroll is bad. We actually never missed a payroll. I had to bridge the business a few times. And we were starting to get big enough where I couldn’t... When your payroll’s, if it’s $25,000, not that I had a lot of money, but I had enough to scrape $25,000 from my brother or whatever. You scrape it together quickly. When it’s now $100,000, you’re like, “I can’t just scrape that together by asking people.” And so, luckily, True wired in, payroll happened, domain name kept going, launched Ring in October of 2014.

So basically less than a year after being on Shark Tank, we completely rebuilt the whole thing. And then once Ring, it just hit. You could feel it. Definitely, maybe not as successful... When you’re in these things, it’s hard to see how successful they are. But looking back now, the brand, everything, really hit from day one. You can kind of see how it just kept going. Massive struggle all the way through, but it really, that’s when the momentum really started.

Turner Novak:

How many times would you say you were at that kind of verge of bankruptcy, if you wanna call it that?

Jamie Siminoff:

I think there were like four main ones. But I would say we were kind of always on the verge of bankruptcy, because we were a hardware business.

Turner Novak:

Yeah. Because you were just taking all the money and just buying inventory, and if you didn’t sell it, you died.

Jamie Siminoff:

That’s exactly right. That’s when it would... If the sales had slowed down... Because if we had been growing slower, you would’ve been less top-heavy, because you would have the profit coming in. You’d have more cash flow. But because you’re growing so fast, your cash flow is so upside down that if it went from growing at 300% to 200%, the difference of that from a cash flow, you would’ve been dead. So we were basically always fully at the edge of this thing. It was definitely the shuttle with the tiles falling off as we’re coming through the atmosphere, and we barely made it through without blowing up.

Turner Novak:

And I know you were talking with the board earlier. Your discussions with the board. I know there was a couple times where, especially on the marketing side, I think one... you wanna spend a million bucks on TV ads, which, like...

Jamie Siminoff:

Yep.

Turner Novak:

That’s a pretty big commitment. How did that conversation go, and why were you so gung ho on buying a bunch of TV ads?

Jamie Siminoff:

Yeah, one of my mental models was with Ring, and I think it’s a good one for a... If you’re VC-backed, if you’re taking venture capital money, and you’re doing what Ring was doing, I think going for it is actually the right thing for everybody. It aligns everybody. I think a lot of times you start to try to de-risk stuff at that point, and that’s bad for everyone.

Because a venture capitalist needs a big outcome. They don’t need you to build a $5 million a year doorbell business that’s barely making it. And so we had about a million dollars left at the time. We were growing, but we weren’t shooting up. You asked earlier, did you feel like someone else was gonna copy you and take it? I could feel the pressure of competition coming in.

Turner Novak:

Really? What was the competition at the time?

Jamie Siminoff:

At the point that I wanted to do commercials, that was in 2015. In January 2015 at CES, there was at least 30 people that launched a competitive product to Ring.

Turner Novak:

So they were at zero.

Jamie Siminoff:

They were at zero. And we had launched... Remember, we had kind of DoorBot, we had all this stuff, but we had only launched Ring October of 2014.

Turner Novak:

So you’re like a year in.

Jamie Siminoff:

So we had luckily, from the press or whatever, established ourselves as this, but we were not established. We weren’t doing crazy sales.

Turner Novak:

Were you doing a million a month yet in revenue?

Jamie Siminoff:

No. We were probably going into January $500,000 or $600,000 a month or something. So we were maybe a... But in consumer electronics, doing less than... doing $100 million a year in consumer electronics would be small. So the market, I’d say, was still very open in ‘15.

Turner Novak:

So if I would’ve had a company and I’m like, “Fuck it, I’m gonna spend $10 million on TV ads,” I could have probably...

Jamie Siminoff:

You would’ve crushed us.

Turner Novak:

Crushed you.

Jamie Siminoff:

Would’ve crushed us.

Turner Novak:

So your thinking was, I just need to get out there and...

Jamie Siminoff:

Someone’s gonna take it. And I would say, our office was in Santa Monica, and I said, “In Santa Monica, if we go out of business, I want the hole to be so deep that it can never be filled.” I don’t wanna just, like a lot of these VC-backed companies over 20 years go out of business and they just kind of squeak out of business. I wanted to be a massive explosion if we were gonna go out of business. I wanted to blow a hole in the ground.

And so we have basically a million dollars left. We’re selling, so we’re not just ripping through cash, we’re selling some product. And so I’m like, if it’s a million dollars, I wanna jump to the next level. And a friend, this company GoodRx, had just launched. It was at soccer with my son. The son of one of the founders of GoodRx is there. We’re talking. Again, we’re both super small companies. And he’s telling me, “Oh, yeah, we just went on doing TV, and this is the results we’re having.” And it’s unbelievable.

So I tell my wife, at the end of the soccer game, “I’m going to the office. We’re gonna do TV.” And she’s just like, “I don’t even know what you’re talking about.” I’m like, “I’ll see you later.” And that was a Saturday. I came home, like, I didn’t come home. I’m figuring out how to do TV. And so I go to the board, and I’m like, “I wanna basically spend, we’re gonna blow a million dollars on TV.”

Turner Novak:

So why are TV ads so good? Because a lot of tech people would say they’re unmeasurable, you don’t know where the money’s going. So why was it such a good idea?

Jamie Siminoff:

Well, I could see what GoodRx was doing. And I did feel also that, to this competition thing and seeing what... One of the companies that I tried to mimic was Dyson. If you look at how James Dyson did his ads and the authenticity, and you go back to when he started Dyson. He’s no longer on the ads, so people don’t see it. But for a long time, it was like James Dyson was on our TV being like, “I spent 300 years trying to build this thing.”

And so I’m like, “We need to be the James Dyson, the Dyson of home security, in our own voice.” And so I felt like TV was the way to do it. I’m seeing this company having success with it, and I’m like, “We should just drop the hammer, and let’s get this.” And we had a board meeting, and there was definitely a bunch... The board overall, I’d say, was like, “If you think that’s good, let’s do it.” There was one person who was like, “That’s... You’re insane. At your size, you can’t do TV.” This goes to your Silicon Valley question. Which I always think Silicon Valley’s funny. It’s a place that you’re supposed to be the most creative, yet they have so many rules. It’s like, “Oh, you can’t do TV until you’re 100 mil-” He said, “Till you’re doing $100 million in sales, you can’t do TV.” And I was like, “I can do whatever I want.”

And so we did TV, and it is actually very hard, and it is hard to measure, and it’s also... It usually is like a rubber band where you pull and pull and pull and nothing happens, and you’re like, “Oh my God, this isn’t working,” and then all of a sudden the back shoots forward. So it did for the first couple weeks. Sales were basically the same, and you’re like, “Uh-oh, this isn’t good.” We had this Google tracker, this Google sheet, that we were tracking the sales and putting in how much we spent every day, and it’s like, oh, this is... And then all of a sudden the sales start climbing.

Turner Novak:

And you think it was the TV ads?

Jamie Siminoff:

At that point, it was all we were doing. We were doing a little other, but you could definitely see it materially doing it. You could see the brand awareness coming up. It all started to come up. And then, of course, instead of me being like, “Okay, let’s just stay at that spend,” I’m like, “Okay, double the TV spend. Triple the TV spend.”

And then we went from, like, $500,000 a month or whatever in January to a million a month. We started raising our B round in, call it, end of spring, early summer of ‘15. And I’ll never forget this. Richard Branson was one of the big investors in that. When I talked to Richard in June, we were doing about a million a month. And growing. And our projection was to be, like, basically two million a month by the end of the year.

And we ended up, by the time we closed the round in the end of July, early August, we had already doubled. We went from a million to two million a month by that time. So during the round closing, we doubled. Our revenue was growing so fast at that point that we couldn’t even track it ourselves. Our projections were off. So it was wild. And obviously that round was like, people were like, “Okay, I’m glad I invested,” because we basically priced it off of numbers that were just... It’s very rare you close a round and the company’s like, “Surprise. We’re doing twice as big as we thought we were.” And they’re like, “No way.”

Turner Novak:

Yeah. A lot of times what you see is they time the fundraise at the optimal...

Jamie Siminoff:

Exactly.

Turner Novak:

...time to price it.

Jamie Siminoff:

And we just were like... It was out of control. The bad part was, the costs were out of control a little bit too, because we were just... When you’re growing that fast, customer service, you’re just hiring people. You’re just trying to get ahead of these systems, because systems are breaking daily. A $10 million run rate company and a $20 million run rate company are almost two different companies. And then we went from there to three million a month, four million a month. So it just kept compounding.

Turner Novak:

What’s the hardest part to get right? Or what was the biggest thing that would break at that point?

Jamie Siminoff:

I think the hardest part is that people think that fixing something means it’s fixed. The person running customer service of a $10 million business is very different than the person who runs it of a 30 and of 100. All of that happened in 12 months. And so you finally get customer service, you get the person in there and it’s good, and the systems, and you have the location in Scottsdale now because that’s more scalable. And you turn around to fix the next thing, and you already suddenly realize customer service is broken again.

Because it’s now doubled again, and there’s no space, and the fire department came and told us that we couldn’t have all these people here. So this is before remote work was easy. And so the problem was, you didn’t even get to fix things, because you’d fix something, and then it would break again, because you just were scaling so fast. You’re jumping through too many gates too quickly. Company size-wise, the people that are able to do these things, very few of them can scale from zero to... And there are, there’s Dave Savage, who runs our procurement, the person who was doing the boxes, still with us today.

There are definitely people that are able to scale all the way through. But I’d say a lot of them did not have that same ability. It sort of escaped their capability at that time, or whatever it was. But maybe it was us too. It’s not an indictment on them. But for whatever the reason, they weren’t able to keep handle of that area. Finance, a person who’s used to doing finance for a $20 million a year business, probably not the same person for a $100 million a year business that’s growing fast. Again, less than 12 months.

Turner Novak:

And I know you did some really good athlete, celebrity endorsements, partnerships. That can also be a disaster sometimes. So I think one you did that worked out really well was with Shaq. So how did that come about? And then how did you work with him in a way that was very effective for the business?

Jamie Siminoff:

So Shaq, again, go back to authenticity, right? Shaq was... He’s a celebrity, so that’s good. But why did we want Shaq? Because Shaq was a police officer.

Turner Novak:

Oh, was he? I didn’t know that.

Jamie Siminoff:

Exactly. So Shaq was a cop. He became a reserve officer in Los Angeles while he was at the Lakers.

Turner Novak:

Mm.

Jamie Siminoff:

So Shaq was very connected to security, neighborhood security, caring about that, caring about what we cared about. So it was authentic to him to be part of this. So that was, for us, a great thing. How we got him was, I started thinking about, at the end of ‘15, we’re spending all this money on TV. I’m like, “We should do a Super Bowl commercial.” Now...

Turner Novak:

Mm.

Jamie Siminoff:

That’s crazy, because there’s no way we could’ve afforded it. But it just made me start doing the exercise of it, and I asked an agent in LA, “How do you hire celebrities to do commercials?” I literally didn’t... I kind of knew you had to pay them. But I didn’t know who you talk to. And they said, “That’s what I do. I’m an agent. That’s what I do.” And so I was like, “Great.” I’m talking to him about what we’re doing, and Ring was starting to get out there. And Shaq’s people... They do these calls with agents, and they were talking about stuff. And Shaq said, “You know, I would like to get in touch with the Ring company. I just bought their stuff for my house. They’re better security.”

Turner Novak:

Oh, wow.

Jamie Siminoff:

And the guy’s like, “This is insane. I just talked to them. They wanna do stuff.” And so they put us... The guy calls me. The agent is like, “Shaq would like to meet you.” And I’m like, “Oh, okay.”

Turner Novak:

Like, “Happy to meet Shaq.”

Jamie Siminoff:

I’m like a kid from New Jersey. I’m like, “Sure, I’m happy to meet Shaq.” And so we end up meeting at CES. He comes to our booth at CES, which was crazy.

Turner Novak:

And was this a planned, scheduled meeting, or he just walked up?

Jamie Siminoff:

Well, they scheduled it. They said, “He’s gonna come to your booth at,” whatever, noon on Thursday. I didn’t tell anyone, because there’s no way Shaq’s showing up, so I don’t wanna... If I tell the whole team that Shaq’s showing up to our booth...

Turner Novak:

Yeah.

Jamie Siminoff:

...and he doesn’t show up, I’m gonna look like an idiot, so I don’t tell anyone. At the time, my head of comms, this girl Yassi, is still with Amazon, and she was the biggest Lakers fan in the world. And so all of a sudden, Shaq’s walking down. She’s like, “Oh my God, Shaq.” And I’m like, “Yeah, and he’s coming here for a meeting.” “No way.” I’m like, “Yeah.” So that was fun. I’ll never forget her face. So Shaq came, we started talking. I told him about, we care about neighborhoods and neighborhood security, and this is what we’re doing.

And Shaq’s like, “I wanna work with you.” And so I’m like, “Oh, okay. I wanna work with you, Mr. O’Neal.” And I said to him, “Well, I don’t know how this... Do I... What do we pay, or...” And he just puts his fingers in his ears. And this guy is like... I mean, Shaq’s very large. We’re in this little tiny room that can barely fit Shaq and me, because it’s in our booth, and he’s just going, “La, la, la, I do not talk about money.” And the person with him is like, “Yeah, well, you’ll talk to me. Shaq likes to only do things that he cares about.”

And so that’s, again, why is Shaq such a great brand, and what he’s done, is because he stayed authentic. And so then we ended up working together. He said he’ll take his fee in equity, which ended up being great for him, which is great, because he was a huge benefit. And Shaq became a great spokesperson with us. Really helped us, again, part of building that authentic brand. So it did work.

Turner Novak:

You FaceTimed him during board meetings, I think.

Jamie Siminoff:

Oh, we’d have... Yeah, Shaq’s a big FaceTimer, so you’d FaceTime him or he’d FaceTime you. I still talk to him a little bit, not as much, just because, when we were working together, obviously you talk to someone a lot more. And it would be funny, because I’d be somewhere and, we were growing the business, I wasn’t that big of a thing, and I’d be somewhere and Shaq would be FaceTiming me. Of course, I’d be like, “Oh, look who it is.” It’s Shaq. I’d be like, “Holy shit.” It’s Shaq.

Turner Novak:

Shaq’s just FaceTiming this guy.

Jamie Siminoff:

Shaq’s just FaceTiming me. He’d be telling me stuff.

Turner Novak:

Did you end up doing a commercial with him?

Jamie Siminoff:

Oh, many.

Turner Novak:

Really?

Jamie Siminoff:

Many. And even my favorite one, I did one, my son was probably eight or nine or something, and we did Shaq and Go Seek. So we had this thing where Oliver, like, Ring was so easy a kid could use it.

Turner Novak:

Yeah.

Jamie Siminoff:

And so we had Oliver, my son, basically, on the phone with a camera being like, “Shaq, I see you.”

Turner Novak:

Yeah.

Jamie Siminoff:

And he was like jumping up and jumping down, and it was a really fun... That was one of my favorites, so that was cool.

Turner Novak:

Yeah. Well, and so you sold the company to Amazon. What was that like, selling? Because you were continuing to just scale, and you obviously, again, you needed money, you realized you need $300 million bucks. How did that conversation come about and happen?

Jamie Siminoff:

It was definitely a crazy time for the business. We had been working... I’d say the one thing, and this is like everything in life, is be long term. We were working with Amazon. We’d been talking to them for years. They had Alexa. You were probably a big...

Turner Novak:

A seller on the platform, I’m assuming.

Jamie Siminoff:

Seller, but also we were working with Alexa. And for the right, good intentions. We weren’t just talking to them to sell the company or to have a relationship. We weren’t trying to have a relationship. We had a real relationship, we were actually working with them and doing stuff. And I always think, get out there and create these real relationships. Don’t just be transactional. This is the missionary versus mercenary.

And so at some point, yeah, Amazon then was like, “This is a part of the home and what we’re doing, and we see that Jamie, with the mission to make neighborhoods safer.” And so they ended up finally saying, “Yeah, let’s do this,” and they came to me, and at that point I was definitely ready, I’d say I was ready to sell. Just because it was so... I really wanted to... And I was ready to sell, meaning I still wanted to be at the business. I wasn’t ready to sell to get rid of it, but I needed a partner to come in.

That’s what I really needed, someone to come in and help me, because I actually did wanna stay, I just couldn’t take the emotional ride anymore. It was just killing me. So it was the point where... And I knew Amazon, if you look at other founders that had sold companies to Amazon that had stayed, like Audible, and like Zappos and Tony Hsieh. And so I was like, they’ll let me sort of do what I wanna do.

Turner Novak:

Yeah, I feel like you were kind of... From what I know, you were kind of nervous the whole way, like, “This could just blow up at any time.” Like, “I don’t wanna lose people’s money.”

Jamie Siminoff:

That was... Yeah, that was definitely a weight. That does weigh on you at some point. And the more money you get. And the risk was getting worse, not better, because the bigger we were getting, the smaller number of people that could bail us out. When we were doing... that year when we did the B round with Richard Branson, if things had changed then, if the growth had slowed, you would’ve been off by, call it, even $10 million, which is not nothing, but you can get Richard Branson to give you another 10 million if the business is good. I could’ve called Richard and said, “Listen, we’re off by this, but here’s what’s going on. Can you help us?” Might’ve cost us a little bit of equity, but you could’ve raised that money. True Ventures probably. You could’ve raised that money.

When you’re doing $480 million and you’re going to a billion, if you’re off by a couple hundred million, Richard’s not like, “I can wire you a couple hundred million.” True Ventures is like, “I can’t.” So, in a weird way, the bigger it got, the riskier it got, because there was just less people that could bail us out. A small mistake became a much bigger blemish.

Turner Novak:

Do you have any founders or CEOs, or maybe people from history, that you’ve gotten a lot of inspiration from, or that you’ve learned a lot from?

Jamie Siminoff:

The company grew so fast and became a different business, there were people at different stages that I really... When I was first about to ship a product, this guy Jim Hyman helped me, because he does safes in Los Angeles. Makes safes. Literally...

Turner Novak:

Like locking...

Jamie Siminoff:

Like locking safes, a safe to put your jewelry in or whatever.

Turner Novak:

Okay.

Jamie Siminoff:

And under the Honeywell brand. And so he helped me with, how do you insure a product? How do you get it here? How do you pay tariffs? I don’t know how to do any of that. I didn’t really know how to do anything. But then all of a sudden our business was doing more than Jim’s was, and so then it was like... I mean, still a great friend, but from a mentor side, I kind of jumped it.

There’s Sky Dayton, who’s the founder of EarthLink.

Turner Novak:

Internet connectivity?

Jamie Siminoff:

Internet connectivity.

Turner Novak:

Was that dial-up back in the day?

Jamie Siminoff:

Dial-up back in the day. He’s one of the founders of dial-up, and he’s done a ton of...

Turner Novak:

Is it still around?

Jamie Siminoff:

No, he sold it. He founded it when he was like 16 or something. But he’s a great investor and local LA tech person, and still a mentor today. He’s one of those people who grew with me the whole way and really helps me.

Turner Novak:

I think we all had that as a kid.

Jamie Siminoff:

We all had dial-up.

Turner Novak:

Trying to remember. Yeah, AOL and EarthLink were the two big ones.

Jamie Siminoff:

Yeah.

Turner Novak:

So my mom... We would move every year, and my mom would sign up for a new, free for six months internet.

Jamie Siminoff:

That’s hysterical.

Turner Novak:

And that was the trick for getting internet, yeah. We definitely had EarthLink at one point.

Jamie Siminoff:

Next era. Yeah, it was... I see different people at different times, and then even, you know, James Dyson doesn’t know it, but he was my mentor that I used. And I think you can also do that. In some ways it’s funny, because people think they have to meet their mentor. It’s like, you can also look at a company. The trick is, you don’t copy. Copying usually doesn’t work well. But I looked at, what did Dyson do to build this brand that people love for what it is? And then I’m like, “I wanna build a brand like that for my area.” What translates, and how do I translate it to my voice, to what we do, to what’s authentic to us? But I definitely saw a lot of patterns in what they did. History doesn’t repeat itself, but it does rhyme.

Turner Novak:

Yeah.

Jamie Siminoff:

And so...

Turner Novak:

I’ve also heard that, don’t meet your heroes. So maybe just get inspiration from them, learn from them, but you meet them and you kind of hate them after or something like that.

Jamie Siminoff:

I think that is definitely a... I still would like to meet James Dyson. I think he’s probably awesome, but...

Turner Novak:

Yeah.

Jamie Siminoff:

But yeah, never have, so he’s like a superhero right now.

Turner Novak:

Interesting. Okay. Well, cool. Well, this has been a lot of fun. Thanks for coming on the show.

Jamie Siminoff:

Thank you so much. Yeah, thanks for having me. It was great.

Find transcripts of all other episodes here.

Related Episodes

(Note: not the typical $83M * 12 months, but $1B in realized revenue over the past year)

We also get into what their internal data says about AI’s impact on small businesses: a 10% increase in AI exposure increases revenue by 2%.

We go deep on how Gusto builds product, from obsessing over customers to shipping Gusto Cofounder with AI in eight weeks, surviving COVID, the manual world of payroll before software, what his dad’s 40-year clothing store taught him about running a business, starting Gusto out of YC, and how Gusto thinks about making acquisitions now that it’s crossed $1B in TTM revenue and how AI has changed its M&A playbook.

A great listen for anyone building products for small businesses or curious how AI adoption is trickling through the economy.

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👉 Stream on Spotify and Apple

Timestamps to jump in:

• 0:00 Obsessing over small businesses

• 10:09 Building Gusto Cofounder in 8 weeks

• 13:57 What AI is actually doing to small businesses

• 19:52 COVID and "the end of small business"

• 27:42 Why running a small business is so hard

• 32:21 SVB and why payroll can't be late

• 36:29 How GTM changes after 500,000 customers

• 39:27 Running payroll manually before Gusto

• 46:19 Why payroll and compliance are so hard

• 49:14 What his dad's clothing store taught him

• 54:00 Are we regulating small business out of existence?

• 58:04 Starting as ZenPayroll in 2012

• 1:05:02 Getting the first customers

• 1:07:28 Minimum Lovable Product vs MVP

• 1:11:28 How AI changed the way Gusto builds

• 1:15:58 Gusto's M&A playbook

• 1:22:52 Shimon Peres and "no room for small dreams”

Find Tomer on X / Twitter and LinkedIn

👉 Stream on YouTube, Spotify, and Apple

Transcript

Find transcripts of all prior episodes here.

Turner Novak:

Tomer, welcome to the show.

Tomer London:

Good to be here.

Turner Novak:

So Gusto is about 15 years old. You’re doing over a billion in revenue. You have over 500,000 customers.

I’m curious how the product has changed, how you build things inside of Gusto has changed, over the past 15 years.

Tomer London:

Yeah. Well, okay, well, there is a lot that has changed, for sure. But I’ll tell you what that, what did not change.

Because I think there’s that’s the secret sauce and the thing that really makes Gusto special, in my opinion. And that’s just the obsession with the customer and understanding, building empathy towards the small business. Have a true understanding of how their day-to-day looks understanding their pain points, then going and building real solutions for them to just build a better business- Mm...

For them to... We talked about it earlier, right? Everyone has an entrepreneur inside of them?

Yep. Some people, go and build, technology startups, some people go and build, whatever, a baking business, some people go and build something else, and some folks, have this dream in the back of my mind, of their mind that one day they’re gonna go and do it. Yeah.

And what we’re trying to do with Gusto is to make that dream come true make it Mm... For folks to take that dream, take that idea, and then go and build a whole business, behind it. So when we build products, we start with really focusing on the customer.

Now, I think I heard that expression when we started the company. So we started the company in YC, Yep... Y Combinator, and, I remember talking about “Hey, it’s so important to focus on customers.

Don’t forget to focus on customers.” Yeah. I remember just thinking “This sounds such an obvious advice, Yeah.... How can you not focus on the customer?”

Turner Novak:

I also think it’s hilarious. So that’s, it’s become a meme almost, but it’s so simple, and it’s actually really hard.

Tomer London:

Exactly. So why is it hard, though? Yeah.

Why is it hard? And I think when you work at a larger company, you understand that because what happens is you launch something or you build something, could be a pricing, you’re, you’re changing your pricing of your product, or you’re developing a new feature, or you’re building a marketing. There’s so much going on inside the company that just distracts you and takes your mind space every single day-

Turner Novak:

Mm...

Tomer London:

That you just sometimes the prioritization of the time that you end up spending on the customer just goes smaller and smaller and smaller over time. Yeah. It’s think about it as a small business, right?

If you’re let’s say you’re selling, I don’t know you’re selling lemonade in the street, right? Yeah. And it’s just you, and you have your little lemonade stand.

What do you do? Well, you talk to the customer- You talk to customers all day, right? Yeah, you talk to them all

Turner Novak:

Day, yeah.

Tomer London:

Exactly. But now you have a huge, now you it’s 10 years later, look at you have 5,000 employees and you’re still, your lemonade business now is this huge industry. It’s huge you have multiple plans across multiple places in the country.

Yeah. Well, what do you spend all your time on? The operations, right?

The machines and the financing and the people and all that stuff. You forget about the customer.

Turner Novak:

Mm.

Tomer London:

I think that’s one thing that startups are incredibly high potential in, is hey-

Turner Novak:

Yeah

Tomer London:

Focus on the customer, build great products for customer. And then the challenge is to, is how you do it, not just when you’re three people, out of Y Combinator, or when you’re just starting, but how do you scale it when you get to 2,000, 3,000 people?

Turner Novak:

Yeah. Well, and it’s, it’s almost at that point your customer is the coworker that you’re working with on your team, or your boss, or the vendor that you work with and whatever. It’s not the end consumer of the product.

So you still talk to the quote-unquote customer, but it’s not the customer in the same sense that we think about when we describe this.

Tomer London:

Exactly, yeah. You’re in the... You’re not in the lemonade stand selling to the customer and asking them, “What do you think?

Is it too cold?” Yeah. Or do you... Or too sweet.

You’re inside the office talking about with your coworkers about how do you make the next OKR meeting successful.

Turner Novak:

Yeah. Do... H- Have you been able to resist getting pulled into that world?

How do you guys stay focused on just building things that the customer, that the small businesses that run on Gusto actually need?

Tomer London:

I think it starts by just setting an example as a leadership team and just spending time with customers. And there’s, in the company us, with a product us that, ours that serves again, hundreds of thousands of small businesses and millions of employees at this point, it’s not that hard actually to find a customer. - I can walk around with a Gusto T-shirt and people do say hi, and Mm...

They tell us, they talk with us, or talk with me about their experience. Or on social media and things that. So it’s not, actually not that hard to find a customer.

Not- Mm... Talking about your internal resources and everything. Mm-hmm.

So it’s really just you deciding to prioritize that time. And, one thing that we do, for example, in our, product meetings is just a simple question of “Raise your hands, if you if you talked with a customer in the past week.” And, if you have not raised your hand you gotta... You’re feeling some pressure here.

“Hey, Mm-hmm... Oh, crap,” Okay... “I’m probably not doing my job here.”

Turner Novak:

Yeah.

Tomer London:

And product managers need to, in my opinion, need to be the closest advocate for the customer. They need to bring in the voice of the customer- Mm... Every single day to what they do, and they need to inform everyone.

And then it’s not just “Hey, my, a customer told me this,” or, “Hey, here’s some research,” and 10 quotes and some data analysis. It’s, making it lively, making it real. And, but that’s often actually taking videos obviously with permission- Oh, yeah...

Or bringing the customer in the office and have them speak with your engineering team. And, it’s incredible how, I would say inspiring it is for people across, no matter what function it is, to Mm... The actual customer and say, “Hey I remember I remember Tomer said that when we talked with him, and Yeah...

Let’s go work and fix this because it’s gonna make a big difference for his life.”

Turner Novak:

It’s super interesting the whole raise your hand if you didn’t talk to customer. You put people on the spot of you force them-

Tomer London:

Yeah...

Turner Novak:

To do it.

Tomer London:

Yeah.

Turner Novak:

I, when I think a lot some of the bigger companies I’ve worked I don’t know if I ever actually talked to any customers. Mm-hmm. I was just a low man on the totem pole.

My job was to update a spreadsheet or something? Yeah. I was an intern, and you don’t actually talk to any customers.

Right.

Tomer London:

Yeah.

Turner Novak:

There’s a whole different side tangent of you’re just a cog in the machine-

Tomer London:

Right

Turner Novak:

Versus at a startup. But also there’s just no there’s no structures and incentives around “Hey, make sure you guys are talking to the people that actually use our product every day.”

Tomer London:

We start every... So we have an all-hands meeting every two weeks. Every all-hands meeting starts with a conversation with a customer, whether it’s a live conversation or a recorded video talking with us about their business.

Again, it’s important not just to understand how they use your product, but also how they live their lives. Mm. What’s important for them?

What are the big challenges? How are they feeling about the economy? You just need to be able to be in their shoes a little as a part of this.

So that’s just one example. The other example is when you hire people, you gotta... You need to see the motivation, around small businesses.

And it’s interesting, but everyone has something to do with small business whether someone who’s running a small business or works at a small business or someone or your family or just you just have a favorite small business down the street that you walk to and go get your coffee or whatever that is. Yeah. People have small businesses in their, in as a part of their lives, and what we’re looking for when we hire people are people who are just genuinely interested in small businesses, in the entrepreneurial journey and in that day-to-day and that type of customer.

These are people that are not mercenaries. They’re missionaries. They care about the mission.

They wanna help small businesses succeed in the US. So, that’s also a part of how you maintain that culture over a long time.

Turner Novak:

O- one thing we were gonna talk a little bit about how Gusto has incorporated AI into the product to go faster.

Tomer London:

Yeah.

Turner Novak:

You have this thing that you made recently that you launched, it was called Gusto Cofounder.

Tomer London:

Right.

Turner Novak:

I think there was five people on the team, launched in eight weeks. So what is Gusto Cofounder and how did that go launching this? Yeah.

And why did you do it?

Tomer London:

So I think AI represents a bunch of opportunities to do the job we’re trying to do better, right? Mm-hmm. So again, our goal, what we’re trying to do, is to make life easier for small business owners, for entrepreneurs starting their businesses.

We want them to be more successful. And as a part of that, again, we’ve been doing this for 15 years, and over the past 15 years, there’s been a lot of new technologies coming in, and every time a technology comes in, you need to ask yourself, “Okay, cool, what does this how does this enable us to solve the problem for the customer better,” right? And AI is a, obviously, a fantastic example, and there’s a bunch of ways, right?

Mm-hmm. So our Cofounder is one particular way, which is around a new type of interface with the customer, right? So we have capabilities, and you have interfaces.

Mm-hmm. Capability would be, for example, that we help people instead of building their time sheets, for their employees in a manual way, you can click a button and boom Gusto already using AI, figures out the optimal time sheets for you or can rejig or things for you and things that. Just an example of a capability.

An example of a, an interface is Cofounder. So Cofounder is this idea “Hey, what if instead of logging into gusto.com, you never needed to log in?” For real. And you could just text Gusto and run your whole back office through texting.

-

Turner Novak:

It’s all in SMS

Tomer London:

IMessage? So we can do it on iMessage, you can do it on, use it on Slack, you can use it on WhatsApp, you can use it on... You could actually still log into CoFoundr and -

Turner Novak:

Mm...

Tomer London:

Text over there. But the idea in general is, to have a new interface for Gusto that’s based on text, and then what does that actually mean? Because there’s so many things that actually text is not a good fit for.

Mm. So with that comes a lot of, again, new concepts. So for example, this idea of proactive, messaging towards you, right?

So in the old SaaS world, you had to log in. You got, you have, there’s a navigation, you need to click on the right navigation items first navigation- There’s multiple layers

Turner Novak:

Of

Tomer London:

Exactly to,

Turner Novak:

Find the one thing.

Tomer London:

Exactly. Primary, secondary, tertiary. You get to it, there’s a modal, you gotta do some work, save this whole thing.

Turner Novak:

Yep.

Tomer London:

But in this new world of AI again, the concept here, the idea here is well, what if it was just, Gusto was just a person you can just text, “Hey,” “change this person’s salary. Hey, run a bonus payroll. Hey, pay contractor,” or “Help me figure out my time sheets, and approving PTO,” right?

Turner Novak:

It’s having a co-founder and be “Hey, Tomer fix this thing that’s, that just came up.”

Tomer London:

Exactly. And the co-founder that’s most helpful is not someone who’s just sitting there waiting for you to text them, but Mm they do stuff proactively for you and they ask you questions.

Turner Novak:

Mm-hmm.

Tomer London:

What kind

Turner Novak:

Of stuff?

Tomer London:

One of the things that we do, for example, is a co-founder wakes up in the morning and they’re obviously within that data center somewhere,... Looks over your account and asks itself, “Okay, what’s, what’s, what can I do to help, really,” right? So it could be things “Hey you have seven PTO requests that you need to approve before this payroll.

Those five look totally ordinary, so I’m going to approve it for you, but those other two I need your input from.” all that happens over text, right? So that’s the proactive experience. But it could also be something else, which is “Hey payroll’s gonna run smoothly.

We got your benefits. There’s a new a new employee joining, onboarding is ready, so we’re all good to go. But I noticed that you started hiring more and more engineers and those, and, but you’re not claiming any R&D tax credits.

And these R&D tax credits is something that can save you $15,000 next year. Do you want me to go set this up for you?” “All right. Sure.” It’s a good thing, sure.

Turner Novak:

Sounds good. An extra 15K per person.

Tomer London:

Yeah. Exactly. And again, that’s the stuff that if that co-founder was a human, you would say, “Ah, this is a pretty good employee, pretty good person on my team.

I’m happy that Yeah... Brought this in because I didn’t know about it.”

Turner Novak:

I think you guys have some interesting data around AI adoption by SMBs.

Tomer London:

Right.

Turner Novak:

I think the number, you can correct whatever I get wrong here, but I think the number is a 10% increase in AI, I think, exposure. I’m actually interesting, interested in how you define this, but that leads to about 2% increase in revenue every month.

Tomer London:

Yeah.

Turner Novak:

Yeah, so what’s the data showing you about AI adoption by small businesses?

Tomer London:

Right. I have a, I have actually a post about this.

Turner Novak:

Okay.

Tomer London:

All right, so check this out. So in July, so there was a, the national jobs report came out, and the economy shed 23,000 jobs. It was very disappointing.

We lost 23. We lost 23,000 jobs in July, the whole, the US economy. Across the

Turner Novak:

Whole country,

Tomer London:

Okay. Which was major disappointing when, which, disappointment. There was a bunch of revisions downwards.

But when we looked at our picture, again, small businesses, the picture was really different. There was actually net growth of 32, 38,000 net jobs in July. And that’s across every region, every sector, every company size and all that stuff.

Mm. And when you look deeper I think there’s a good case to be said that actually AI is a big contributor to this, because what we’re seeing happening is that companies who, small businesses who end up using AI with, as they start their business, as they operate their business, they end up hiring more. They end up growing faster.

They end up being more successful and res, more resilient. So-

Turner Novak:

Mm...

Tomer London:

There’s a case to be said here that when you’re a small business, AI can be you can get the impact of EM, of AI much faster, and for larger companies, just much more complicated to implement AI, and as a result of that, small businesses actually benefit tremendously from AI. And we’re seeing it in numbers, in the economic numbers, so that’s pretty interesting.

Turner Novak:

I think you currently have about, I think it’s 9% of all SMBs Right... The country that use Gusto.

Tomer London:

Yeah.

Turner Novak:

Of that 9% that you see and touch, they added the 38,000 jobs? Is that what you said? Versus the 23 that were lost across

Tomer London:

The whole economy. No. So what we do is we do this economic reporting.

Oh, got it. So that means statistically we look at all the customers on Gusto, we look at specifically a representative set, of the whole economy, we de-dupe, and then from there we project the economic numbers for the whole economy. Oh, got it.

Yeah. That’s the same way of people do surveying methodologies in general.

Turner Novak:

Yep.

Tomer London:

Yeah. You survey 1,000 people and that can tell you how the whole-

Turner Novak:

Yep.

Tomer London:

Okay... The whole nation’s gonna vote for something, for example.

Turner Novak:

The average small business, you’re saying, in general, was adding jobs-

Tomer London:

Exactly versus the average. And it’s across sectors- Yeah... And it’s across geographies.

Oh. And again, with that additional set about a knowledge about AI-

Turner Novak:

Mm...

Tomer London:

That’s quite interesting.

Turner Novak:

Yeah. And,

Tomer London:

And it I don’t think, don’t think people talk about this enough.

Turner Novak:

Yeah, ‘cause a lot of people, I feel the headline is, “AI is stealing your job.”

Tomer London:

Right.

Turner Novak:

That’s, that’s the sound bite.

Tomer London:

Right.

Turner Novak:

But it’s super interesting in terms of if I have an SMB if I wanted to hire a marketer-

Tomer London:

Right...

Turner Novak:

Or if I wanna hire someone to do something, it’s a fixed unit of labor and you need to support someone’s life, so you can’t say, “Oh, I’ll pay you $100.” Yeah. You have to pay them a livable wage. Right.

A unit of compensation that they can pay for rent and housing, and maybe they have a family.

Tomer London:

But- Yeah. These are serious businesses. If you end up using payroll and actually paying Yeah...

Yeah, it’s a serious business. You’re you’re responsible for a livelihood for your Yeah... Even if it’s a team of one or two.

Turner Novak:

Yeah. And so you, if you hire someone even on the low end you, ‘cause there’s a lot of taxes and everything you’re probably committing 30,000, 50,000 at a minimum of cash outlay for the business, versus if you wanna use a AI product to make some Instagram posts or something you might pay $2 to get that.

Tomer London:

Yeah. Yeah.

Turner Novak:

It’s not the same commitment. So you, the accessibility of using AI to increase your productivity is actually, Pretty interesting from that side of it’s actually very accessible-

Tomer London:

Right...

Turner Novak:

For SMBs who don’t have a lot of capital- Yeah... To test the Right... And use it, and if it works, they’ll make...

They’ll Right... Revenue, they’ll get bigger, and then they can invest Right... And spend even more, either on hiring people or Right...

More AI tools.

Tomer London:

I think about it as two different profiles, two different moments, okay? Mm. So first you have the entrepreneur who is, again, has this dream in the back of their mind.

They wanna one day start a business.

Turner Novak:

Yep.

Tomer London:

How can AI help them? Mm. Actually, it’s super helpful.

Whether it’s the compliance stuff, so registering your business much faster than ever before, getting a bank account much faster than ever Mm... Paying yourself, figuring out get, getting up, setting up and going. Yep.

Getting a website much faster than before. Getting your customers through marketing automated marketing, posting, all that stuff, much Yeah... Than before.

So again you... Every part of starting a small business is now faster and easier to do-

Turner Novak:

Mm...

Tomer London:

Using AI. So that’s, for that particular audience, great. We’Mm...

We’re, we’re making it easy. If that’s a funnel, right? Of some what it takes from just having an idea and an ambition to all the Yeah...

Of okay, I’m running actually a business. That funnel, we optimize it a little bit using AI, right? Mm.

So that’s first, audience. The second audience is oh, you’re already running a business, right? And then to your point if you look at all the different functions of the business, each one of them is already being...

There’s a bunch of tools out there to be accelerate, to accelerate using AI, whether it’s, again, it’s making marketing more efficient so you get more customers- Yep whether it’s service to make a service more efficient, whether it’s upsell additional products you wanna sell to your customer. So I think also AI improves, survivability, and I Mm... That’s why we’re seeing it across sectors.

It’s Mm... A sector specific thing. It’s not just whatever, just tech or just HVAC.

Turner Novak:

Are we gonna see more small businesses? ‘Cause it sounds it’s generally, it generally helps them. Is there gonna be almost a resurgence of the small business across America or across the world?

Tomer London:

That’s what we hope, and that’s what we’re seeing.

Turner Novak:

Yeah.

Tomer London:

I can tell you one thing that wasn’t always the case, that it was... I would say at this point the, they say the numbers tell the story of small businesses are becoming more and more important part of the economy, as well as, I would say, just the sentiment of you’re seeing small businesses around you. Yeah.

But it wasn’t this every single day. I remember in COVID- Yeah... For example, there was I, one of the most one of the major newspapers, I think it was Wa- Wall Street Journal, read with this headline, front page, was the end of small business.

Turner Novak:

Really?

Tomer London:

Yeah. And because with COVID, everything is closed. You see that picture- Yeah...

Of everything’s blocked with whatever, So this was,... Pallets in place...

Turner Novak:

A couple weeks into COVID type of a timing of this headline?

Tomer London:

Exactly, whenever, and ev-everything- Wow... Was shut down. And, that was before the PPP loans or when people were talking about the PPP loans.

And- Yeah... That whole period, there was a period of at least call it nine months where, lots of major analysts and people out there were the consensus was small business is going to shrink and Mm... And shrink.

Because again, if you’re a restaurant, how are Yeah, it’s, it’s, it’s an obvious thing for a restaurant. If you, people can’t show up because- Yeah... They’re stuck at home, how are you gonna, survive?

And, I’ll tell you that this was one of the craziest moment for us at Gusto as a company, not just because, okay, we all had to 1,000 people now had to go work from home, but just the very focus, our entire reason for existence as a company and our heart is focused on small businesses and how can we make them successful. And all of a Yeah... You see this headline in Wall Street Journal and you’re talking with people, and they’re, they’re freaked out.

So anyway, that was a difficult moment.

Turner Novak:

What happened over the course of March and April externally with your customers inside of Gusto? How did that go just the, throughout the going into COVID, the depths of it, coming out, what was series of events? Anything interesting that was showing up in the data initially where you’re “Oh, wow, something is going on”?

Tomer London:

Oh, yeah.

Turner Novak:

So what was the, that roller coaster of events?

Tomer London:

Well there’s a bunch in there, but I’ll say, okay-

Turner Novak:

I wanna hear all the events...

Tomer London:

Data.

Turner Novak:

Okay.

Tomer London:

We look, we have an economic dashboard internally into Gus- in Gusto, and we see things hiring, we see things wages, we see PTO. We really see how they, how employment, works-

Turner Novak:

Yep

Tomer London:

In the world of small business in the US. And you saw, the rate of terminations just jump to at a rate that you’ve never, we’ve never seen anything even close.

Turner Novak:

Really?

Tomer London:

The rate of new hires dropped to all times low by far I don’t know, it was five or eight times worse than the worst times. -

Turner Novak:

Was this by the end of March this was already showing up, or even before that?

Tomer London:

I... It was for sure by the middle of the year, but I, it’s hard for me to know exactly when it was, but call Okay... By June, I know that we definitely saw this.

Turner Novak:

It was within a couple months of COVID- Mm it was very clear in the data.

Tomer London:

Right. Exactly. Exactly.

Turner Novak:

Okay.

Tomer London:

And then, we similarly when we look at people’s cash flow, you can see also, we can see cash flow issues. We have access to understand that as well. So, all the economic indicators were quite bad in those first few months.

Yeah. But again, it made sense. Not surprising.

It’s not you open the data and you’re oh my gosh, it was... This, you see this every day when you walk around, if you walk around or if you open the TV. So- Yeah...

That’s the first thing. Second thing is as a company- It was really interesting moment because, again, we were 100% in office and then we had to all move, all go home. So that’s work from home.

That was interesting that not, we’re not the only ones there. We were around 1,000 people, I want to say at that point. So it’s not a small change.

But the other thing is, we just finished a planning cycle. And again, sounds big corporate thing, but actually it’s quite important. It’s you decide what are the big efforts you’re gonna do this Mm...

What are the new products you’re gonna release? How, what’s going to be your, where are you gonna put your energy as a team, right? And then COVID happened, and, we looked at this and we looked at the world and we just threw the whole thing.

We just threw it out, into the trash can and we asked ourself, “Okay, what do customers need right now?” And what customers needed when you spent time with small businesses, what they needed is this guidance. They needed reassurance. Mm.

They needed to understand, okay, so what do, what’s the playbook here, right? Mm. What’s the playbook?

There’s Yeah... There’s a, there’s a national or actually a worldwide pandemic. What’s the playbook?

And there isn’t a playbook, but we’I was

Turner Novak:

Gonna say, yeah But- It’s probably not happened very many times before.

Tomer London:

Exactly. So we tried to build a playbook for it. Oh, really?

We tried to say, “Hey, here are the things the best practices across all companies we speak with, across our conversations with the with different government agencies. Here’s the best resources available for you right now. Let’s make it really easy for you.” So there was a bunch of new I don’t know if you remember, but there was a couple of weeks period or a few weeks period where every other day there was a new regulation or a new type of program that was launched by different states or the government in order to try to help people get through this.

So there was Okay... Furlough program of how do you maintain people through furlough? There’s a tax incentive program to keep your employees if you’re a small business.

And then there was the PPP loans, and each Yeah... Of those we, of these we went in really seriously and, we actually changed our-- We talked about left navs earlier in the conversation, right? We changed our left nav and the first item, was not run payroll anymore.

It was actually COVID-19 and what to do with it. Mm. So you click on it and then there was all these programs ready for you.

We try to be super proactive “Hey, listen, in your state right now there’s this new tax credit. Click here. We’re gonna, we’ll automatically fill out the form for you, fax this for the government- Yeah...

Get the answer back and make sure you got the funding that you need.” And then with PPP we spent incredible amount of time with banks, Mm... In order to quickly, take the requirements from the government and make money available for our customers and, I feel incredibly proud of that work ‘cause, ‘cause we were... I think it’s, it’s...

I think we were able to save quite a bit of businesses, quite a few businesses from, shutting down.

Turner Novak:

It sounds so you productized a lot of these pretty complicated things that were happening and just made it as simple as possible-

Tomer London:

Exactly

Turner Novak:

For your customers to access and get to them.

Tomer London:

Instead of you going to the government, the US government website, downloading a form, slowly filling it, trying to figure out from your data you Mm... Try to justify the size and the impact of the PPP loan. Mm.

Take that to your branch, talk with a teller, hope that they will do the right job, and then wait until they’re, them giving you a response and all that stuff. You can just in one click, we pre-filled all this information for you. There’s a couple questions that you had to answer on the spot.

You click a button and you’re, you should get access to the PPP loan very quickly. Mm. So It’s something that we’re really proud of.

And interesting in product land, we use NPS a lot over the years, and net promoter score. It’s a number that we care a lot about less about the actual number, we in a, in an absolute term, and more about the trajectory, right? And the reading in terms of where’s the momentum going, up and down, obviously.

Mm. What are the comments? So people who are promoters you, what promoters you, what are the comments and what are detractors say?

And then also segment it according to different type of customers. So that’s how we use NPS. Something really special happened, we didn’t expect it at all or in retrospect it sounds obvious maybe, but -

Turner Novak:

Yeah... NPS

Tomer London:

Just jumped up to I wanna say 88, 89, and stayed there for a very long time. And by the way, in our industry, if you have a positive NPS, meaning larger than zero, you are, you’re ahead of the curve. Okay.

So -

Turner Novak:

This is in payroll?

Tomer London: