Jon Callaghan of True Ventures joins Nick to discuss Spotting the Next Big Thing, Why This Cycle Is Different, Acceptable vs Unacceptable Risk, and Why Duration Is a Feature Not a Bug. In this episode we cover:
- Spotting the Next Big Market and Reverse Engineering Success
- The Role of Curiosity and Risk in Venture Capital
- Duration as a Feature in Early-Stage Ventures
- The Importance of Repeat Founders and Founder Referrals
- The Creative Process and Learning from Other Creative Endeavors
- Maximizing Risk and Long-Term Thinking in Venture Capital
- The Role of People and Teamwork in Venture Capital
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The host of The Full Ratchet is Nick Moran of New Stack Ventures, a venture capital firm committed to investing in founders outside of the Bay Area.
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0:17
Jon Callaghan joins us today from the Bay Area. He is Managing Partner at True Ventures, a leading early-stage VC firm that he co-founded in 2005. Over the past 20 years, True has partnered with more than 1,200 founders across 500 startups. The firm was among the first institutional investors in companies including Automattic, Duo Security, Fitbit, HashiCorp, Peloton, Swettgreen, Madison Reed, Pipedream, Aisera, Ernesta, and Ring. Jon, welcome to the show!
0:50
So good to see you. Nick, thank you. I was saying earlier, we’re, we’re big fans of the show. I love what you do for the industry, and it’s great and and we appreciate you.
0:58
Thank you. It is such a thrill to have you on So, so John, where did your entrepreneurial journey began?
1:07
Yeah, it’s kind of a, kind of a different path into venture capital. I was, my parents were entrepreneurs, so I was surrounded by entrepreneurship, really, as long as I could remember, and I was headed off to college, and I was enamored by this new sport of riding bikes on trails, and that this was a while ago. So this was, you know, 1986 1987 kind of time frame, 86 when I first started riding these bikes on trails, or really, 85 so before the sport of mountain biking was a sport, and I was headed off to college, and I had found a way to ask a bike shop to buy me a mountain bike to take with me to New Hampshire, because I was pretty into this thing, and it was really fun, and I loved it. And the owner of that shop promptly threw me out, kicked me out of the store, said mountain biking is not a thing. Never going to be a thing. I’ll sell you a road bike if you want, but otherwise, get the hack. But didn’t use hack out of my store. So I was 17, and I was like, huh, this, this is interesting. I’ve been, you know, riding these things, and it’s really fun. I think he’s is not seeing what I see for the future. So I had that insight really, really young about a market that I thought was going to happen, and I said, Well, I’ll just start my own. And so I did so with, you know, a lot of guidance and a lot of mentorship and a lot of help. I went into business and started a mountain bike store in No kidding, Wyoming, and did that during my college years, and then many years thereafter, brought my brother into the business, grew it. It was fantastic, and learned pretty much every lesson that I would later go to go to business school, but I had pretty much learned every lesson owning that business, everything, customer support, product, customer service, pricing, obviously, everything financially related. And I just loved it. I love being an entrepreneur. I love the creativity. I love seeing the market come into play. I It turns out I was right. Well, many people were, but let’s just say that the person who doubted the future of the mountain biking market was market was was incorrect. We did see a market before it happened. It happened in a very big way. And there were all sorts of reasons why there was a thesis on for even could use that word as applied to a to a future market state, anyhow. So that was, that was a very early entrepreneurial bug. I’d continue. I would go on and to start two other companies as co founders, and got introduced to the to the industry of venture capital from a college friend who recognized my entrepreneurial spirit and was trying to coach me on what I might want to do post college and expose me this wildly cool industry Which, by the way, Van was tiny, and I started my career at one of the two firms that would hire undergrads out of college. That was summit partners in Boston. Summit at the time, was incredibly small. They were on fund two. There are probably 20 people at the firm. Fund two was, I think, 230 million or something like that. And I learned the business from the founders of that firm, and met my co founder, Phil Black, who was also an associate at that time, my true co founder at Summit. And we learned the business from the best. And I was investing in software and media entrepreneurs all over the US. And I got really excited by this new technology in the late, kind of mid 90s, and my bosses at the time, the people were directing my work, said, don’t waste your time in that. It’s never going to be anything. The internet’s not real. Like this is creating no one, you know, it’s not for businesses, combines, project really. Oh yeah, the holy history did that. And, and, and I of course, spent. I’m in it anyway. This is pretty early days, so I went to grad school after a bunch of time at Summit and promptly dove into the internet. Started to come. Co founded a company in grad school with a with a classmate, internet, e commerce, business that was phenomenally awesome from an experience standpoint, and helped start at ventures, which was then cmgi, venture capital arm, internet only venture capital firm. So I very quickly, kind of what I’ve done throughout my career has been, you know, really, really early in future possibilities, future markets, or not even markets, future, future things that might become big, either trends or industries, and I’ve surrounded myself with just incredibly curious, talented people from all different sort of disciplines and skills and everything and and I’ve also from a career, and in no surprise at true I’ve I’ve always tried to take the most risk possible in we’re talking about a business context right of like market product timing, typically at true. We don’t take capital risk that’s very important to us to be in capital efficient markets. So that’s a risk we don’t like to take, and we don’t like to take people risk. So a couple of themes that’ll come out through our discussion around around, starting the firm at True. But in the case of my career, those were, those were lessons learned along the way. You know, being super early into something as seemingly inconsequential as mountain biking, but then later, being super early in the internet, obviously, at True. We’ve been incredibly early investors, initially in web two you mentioned WordPress, and there were many, many others. Obviously, we’re one of the first investors in in device and hardware. I in with Fitbit in 2008 we were called crazy. We were called stupid. We were told, No venture capitals aren’t going to make any money and hardware, in particular, small, early stage venture capitalists can never make money in hardware. And you know that would go on, we were very early investors in in the early days of the cloud, in capital efficient cloud, we did extraordinarily well in that segment. And just sort of one of the things that I love about true and my partners and my team is that we have stayed so insanely curious about things that are interesting to our founders, and we stayed so incredibly enamored with all that our founders are doing. And we just, we have a culture of curiosity and learning that we’re consistently early in these really, really important and big markets. And that’s just incredibly gratifying to be into the ground level of kind of whatever. And we started investing in AI, and think our first investment was 2015 but really in 2016 and beyond, very early in crypto, we did very well there, despite that market not being as big as a lot of us thought it was going to be. And yeah. And so the theme of of curiosity and possibility, and frankly, believing, I hope we talk a lot about what is really important for an early stage venture capital to get right. And I would say believing in in people is probably the number one. But anyway, so that’s my little bit of how I got into it and how we think about it today.
8:22
So, I mean, you’ve mentioned spotting the next big market, you know, whether it be mountain biking or AI right right sides of the spectrum. Like, have you ever tried to right reverse engineer? Like, what is it? What is it about, maybe your own thought patterns, or the founders that you’ve backed that allows them to see the future in a way that manifests, as opposed to, you know, one of these trends that many VCs want to write about, but ultimately flames out.
8:50
So I think there’s for, first of all, let me say that like for all that we’ve gotten right, we’ve gotten many, many more wrong, and one of the one of the most important things to think about for any, anyone practicing venture capital or listening that wants to is like, Okay, we all say this is a business about being with this is what we say. We say this is parallel. Business is about being right. Just need to be right. You know, 5% of the time, by the way, that’s the number. It’s 5% it’s not 10, it’s not 20, it’s five, if you’re lucky. And that 5% you know, blah, blah, and so we just need to be right. But so that but so that focused on being on the righteousness 95% of the time. And it’s that, you know, you do make money on more than the five. So it’s the five that really knocks it out of the park. But so let’s call it, you know, another 10% of the So, 80 plus percent of the time we’re wrong. Like, wow. Like, it doesn’t work and, and that’s so when I, when I talk to students, or whatever, people that want to get into this business, and I’m like, you know, I always, I always say, like, you have to have a really, really good relationship with righteousness. And when I say good, I mean, like, you can’t. Have righteousness you can’t like. What’s far more important is, is it’s not even like being like humbler Aries. Not about that. It’s about this deep curiosity to learn something purely for the sake of learning, not because then I want to go make money and make invest no like you have to see every conversation as as just a path of really deep inquiry and learning about the people in this segment and what they think is interesting. And so, you know what we have found, what I have found throughout, throughout my life, is that, like, when I think about, we’ll talk a little bit later, I think about lessons, but when I think about, like, how to stay in the zones of genius, versus, like, all the other stuff. Like, my number one challenge is always to spend more and more time in that path of inquiry with really, really amazing people. And we would say our really amazing people are our founders. So when I to your point, when I kind of like, go back and say, How did this occur? It always occurred from that deep curiosity, and that sort of, like, stepping stone mentality, which is like, I’m not after like, a thing. I’m on the journey. And we talk with our entrepreneurs all the time and and regardless of fate, of stage or size, of of like, we’re just along a journey, like, and it’s, by the way, there’s gonna be a wild one. It’s gonna be like, we’re gonna have super high highs. We’re gonna have a lot of lows. Every single company has three or four Kill the Company moments like we just got to know that going in. And when you frame what we do as that sort of this, this this experiment to learn, or this opportunity to learn, and this opportunity to build things and and by the way, hopefully to build things that matter, we should probably have a whole conversation around purpose in our industry, which I think is always fascinating. But like then, all of these things continue to unfold and link to one another. And what you find we are in a creative space. I would say our industry is, you know, one of the most creative in the capital markets, uniformly. So we’re with these brilliant creators. And what you find is when you approach these decision making systems, or when you approach these analyzes, or when you when you try and say, like, how did we get to the all of these sort of stepping stones that unlock the next sort of Avenue or potential happen? Because we’re in that creative space. We’re in the mindset of creativity that is thinking about what’s possible, believing in someone’s talent and capability, that they can make something happen, or that they can actually ask just a question that illuminates the path, and then acting on it, like you got to act on that stuff, so in early stage, and I’m talking, of course, about seed in early stage, but like, there’s all this, like, oh, conviction. Like everyone throws that word around, like it’s like, it’s very important word in our business. But like to truly understand what that means, I think you have to have very much a learner’s mind and and sort of think about possibilities as realities, things that can be achieved.
13:02
Do you think some are just wired that way? Is that why some VCs continue to evolve and the categories change, but totally successful VCs persist and then just fade away?
13:13
Some of the absolutely, I think, some of the greats in our industry, just, you know, or who I’ve had the great luck to be in room being boards with, you know, be in rooms with whatever. I always find there’s this really interest. There’s a course tenacity. And everyone talks about a lot that that stuff does the obvious things, but it’s no it’s much more the it’s much more the ability to retain curiosity and the sense of the possible regardless almost of any situation you know, and retain the belief in in a team or in a market or in a future, and but it would be super judicious. Like, it doesn’t always work so and it’s okay, like, the whole like, if
13:54
you know the industry where that’s okay,
13:56
it has to be, I mean, otherwise you would never take any risk. And otherwise, like, and by the way, like, I you’ve listened to tons of your your episodes, and I love the I think it was, I think was Jeff busking or Paul who was saying, like, be really careful of the time a junior, a junior person that Kyrie spends. Because, like, it’s a truism that the companies that don’t perform as well will take all of your time and and the companies that are in that 5% require very little of your time. Require now, of course, our job is, if we could just make that 5% like, a teeny bit more successful. It’s like 3x more of the fund kind of thing. So, so it’s this really interesting thing is, like, if you can just help that, you know, those top companies a teeny bit, but what happens is, you spend most of your time on the companies in the bottom couple of quartiles that are having issues. And you know, that’s okay. It’s part of the job and all, I think sort of thing. But like, that is a great it’s just a great lesson that. Uh, that you know how you use your time and the mind space that you’re occupying in. I work with my partners all the time on this if, and again, invariably, we have problem companies. I do everything possible to take problems away from my partners, my best athletes, because I want them out on the field, working with those top, top companies that have this chance. And by the way, it doesn’t mean we walk away. We’re we’re in it for the long haul and all that. But like through clear and open communication, it becomes really evident. You know, when a market is working when it isn’t, when a product is working when it isn’t, and I think it’s the the investor, and frankly, I would say, is the team. The team has an even more higher opportunity cost. Their time is even more valuable. And one of the things we always work on with our founders when things aren’t working is like, what else could we be doing? Like, let’s let go of all the preconceived notions of like, we thought we were going to do this if we run into a market that’s really not happening, what else do you stay in the inquiry, like, what else is possible? And a lot of our crate, there have been some unbelievable, you know, pivot, but that’s that’s too hard to worry. There’s been some unbelievable creative moves that have happened in our portfolio over time, because the founders have very quickly recognized, yeah, this one’s not going to work. Or someone just came into this market that close it off. So what else could there be so again, staying open, staying like, early stage, is the part in the capital markets where, like we it’s messy, it’s supposed to be we can take these outlandishly crazy risks, recognizing that, you know, when we’re successful, it can, it can transform society and life and work, and most determine unsuccessful, and that’s what like we’re It’s the safe space in the capital markets for that. Like, that’s we’re supposed to do,
16:45
John, if we knew which ones were going to be billion dollar companies, we build portfolios of only unicorns, right? But decorns, but you’ve seen so many reps Now you talk about, you know, companies that are struggling and and you begin to cards start to reveal themselves over time, yeah, and if you think back, are there milestones at certain time periods where you start to get insight as to whether the companies can break out? Because some of these are very wayward, you know, some of them stay in this discovery mode for a while, and then all of a sudden, boom, yeah. So like, how do you think about, like, the evolution of development, and your insight as to which ones have what it takes to take it all the way to IPO?
17:36
Yeah. Well, I would say there is no one rule, not even close to a pattern, because I’ve had so many other patterns happen. I was, I was being pitched this morning by an entrepreneur that I used to know in the in the drone category, and we were very early investors in three to robotics, which was started by the brilliant Chris Anderson. It was just an awesome company, and it took off. And I’ll directionally, get some of these numbers wrong, but it was kind of like five to 7 million, 30 million, 100 million, whoa, annually, right? And you know, they had everything, the technology, and they had the team, and Chris is brilliant, and you know, all the money they needed, and blah blah. And you know, that market obviously got a lot of things happened to that market that took it away, regulation, competition from China, DJI in particular, you know, kind of the whole industry there was, I think there was one Christmas where we had sold in something like on the order of 100 million. I was like 80 million of the 100 year that was sold into the channel in q4 or something like that, some big number. And that was also the year that many competitors basically dumped on the market. So the prices were all, you know. So my point is, like, in that investment obviously didn’t kind of continue to progress where we thought it was. But I mentioned that because, like, I was, we were just talking about the way that industry developed this morning, and and all of the ingredients can be right. And then, of course, like, you know, things out of out of an entrepreneur’s control, can come in and make a market not happen. The opposite is also true, which is that, you know, you can be building a nice company. We’re insanely fortunate investors with Garrett Lord at handshake and we’ve been, you know, super pleased handshakes built a beautiful business in college, recruiting and job board, and they have something like 90, probably 95% or somewhere on that order, market share in colleges. And it’s been a great business. I think, I think we’ve been investors there for eight or nine years, and this year, this calendar year, Garrett decided to use that network because it would decide to deploy that network because they have such an incredible mapping of where PhDs and physics, and you know, all of the sciences are, and to basically turn on a reinforcement learning engine for for the models, using using humans in the loop, and using his humans, and that. AI. It’s a well known story now of his refounding of the company, but he spotted the opportunity. He had incredible resource to go after it, and that’s that’s like you look to Garrett’s x feed another because he’s often quoting the new AR numbers, which are just growing like crazy. But so I’ll go back when I say there’s no rule there kind of is only one rule, which is that our job is to back people like Garrett and like Chris Anderson and like James Park at Fitbit or Jamie Siminoff at Ring, who, by the way, ring brilliant success. Had so many tough moments, right? All hardware can fit it as well. I mean, some tough ones, yeah, yeah. Or Amy Aaron at Madison Reed, or Julie Bornstein twice now the second time with Daydream, we should talk a little bit about repeat founders and stuff. But um, so our job is to is to empower these creators early and throughout the way, to believe first, to believe and stay in the game and support them. Because, yes, you can have a situation where a market disappears in the drone space, but you can also have a situation in which a market completely opens up to you, and when that occurs, which it has for many of those companies. Madison Reed is just a phenomenal example of pay near me with Danny shader, another phenomenal example. And by the way, these are companies that are more than 10 years old. So we should also talk about duration in early stage venture and why duration is a feature. It is not a bug. Duration is a feature to our industry. And I think a lot of people have that somewhat confused in this very noisy, bubbly moment, and we should maybe talk about why and how. But so anyway, our job is to find these creators and build a we’ve built a firm to support them for their entire journey. And what that means is we have capital for the whole journey. We have, you know, large core funds, then we have select funds, and select funds can keep investing in companies. And of course, we’ve, as you said, we’ve had, you know, great success over 12 funds we have. We’ve invested with pretty much everyone in up and down the stack. So we’ve got great relationships with with other VCs. I think our portfolio raised well over a billion dollars this year, which is, you know, great. There’s all sorts of capital coming in to support our businesses anyway. So our job is to find and identify these brilliant founders and then do everything possible to support and empower their success, embolden their success. And we see our job is supporting that founder and getting everything out of the way that can get in the way of their creativity and that and what can get away their creativity well, like limiting degrees of freedom, if, if, if any of these companies had, you know, cultures or boards or whatever, that would say, like, No, this is your lane. We, we work really hard to not have it be anyone’s lane. Because what we’re trying to do is find, as fit with my co founder, Phil, would say, lightning in a bottle. And sometimes that lightning, you know, happens kind of late in the game. Sometimes it happens right away. And when that happens great, like, far the door, it’s an awesome, it’s an awesome. It’s great to be that, that slugger when you when you get home early, but most of the time, you’re really working hard to build something successful over a long period of time. And we need to be there as a system and as a firm for the entire time and be a source of support and strength.
23:21
So tell us more about that, right? I’m going to bite you know, why is duration a feature, not a bug, and why is that especially important right now? Okay, so
23:34
good things take time. All of the companies that every venture capitalist wishes they were investors in right now, the opening eyes that you know and throughout all the big like those were, those were founded a long time ago. Those were messy, wandering path, right paths to to the successes that they are now, if for venture capitals in early stage. I’m not talking about late momentum, by the way, that’s where most of the dollars are invested today, in consensus momentum. That’s where the dollars are going. And I have issue with that too. We could talk about that too, but I think he’s, I think one of your prep questions was like, what, what conventional wisdom do you disagree with? And I think I said most, or something like that, right for ourselves, and when you’re an early stage investor, we are designed, and we succeed in a 10 year period. Okay, so if I look at, by the way, we’ve been in AI, as I mentioned, since, I don’t know, to 2015, somewhere in that ballpark, and very aggressively in the years that follow. If I look at where AI is going to be in in five to 10 years, I’m, I’m not really interested in investing in, not to pick on a sector, because I love it, and we have, like, the next vibe coding company right, which there’s tons of, and it’s like, like, or the things that are easy to see that are getting quickly funded all around us, like, that’s a those decisions are, decisions are being made to, like, catch the current shiny object that one of your guests. You know, another great piece of advice, don’t chase the shining. But, like, there’s a lot. And so the stuff you can see is not the stuff that’s going to be big in five to 10 years. And we venture capitalists get paid by our limited partners to return great funds. And funds are structured over 10 years, and the only way I know to return a great early stage fund is to build a portfolio of 30 to 40 companies that all have fund maker potential, that all have the ability, in 10 years, to be worth your position they’re in to be worth more than the Fund. And by the way, the only way to do that is to make sure that you’re a large shareholder in that company. And the only way to do that is to do it early, not to jump into a party round on an unpriced cat, you know, safe and like, hope that you get a markup by the way, like markups can be the worst thing that can happen. Like unrealized values can be the worst thing that can why is that? Because if you prematurely mark a company up, couple things happen. The first of all, the first of which is, like, the common stock gets really expensive. So, like, we’re supposed to be building these companies so that our employees can have, you know, incredible fortune and great, great upside. The other thing that happens is the degrees of service, or I should say, the aspects of opportunity become really narrow. So, you know, there’s a ton of we learned this. Here’s another interesting thing. We learned this in zurp, and we’re do as an industry, and we’re doing it again. So we’re celebrating every single day on x, the latest AI company that raises money at $15 billion post. And by the way, it’s private, of course, and you know, maybe it has a lot of revenue to cover them. Have a lot of revenue there. By the way, there are a couple of companies that are breaking out that absolutely deserve no question, but there are a lot of companies that are raising a very high valuations. And I think it’s a disservice to a couple different things, the first of which is the reality of the one of the path. It’s never a straight line, ever. So you need to have degrees of freedom in that plan, and possibly, if you raise enough capital. Of course, the dollars themselves can create degrees of freedom, but the valuation sure doesn’t. That locks you into you know, you’ve got to meet or exceed that or else all bets are off, and you’re not really doing a lot of justice to your to your common stock employees, right? Because interesting get, they get so I wrote about this, the tragedy, the call, whatever I’ve had a blog post about, about this issue. I mean, the valley was the valley came the valley because employees did really well on early equity, and that’s what attracted a lot of talent into into young companies. But if your young companies are valued at multi billions, billions of dollars, then you’ve got many, many more rounds, and you know, many more, many more years to go. Kind of tough to see that. The other thing about duration, you said it earlier, I have lived it. I mean, I have lived in this cycle, and was in the 99 cycle and and we have had, you know, our funds are distinguished by absolutely blockbuster companies, pretty much every single fund, a bunch of a few of them, some have more than others, where that company took, you know, eight years to mature, 10 years to mature. And you know, you sure as heck. I mean, the math just speaks for itself. But like you sure as there are certain investors that want to buy IRR early stage is all about multiple and so, you know, the value of a company in the those out years, when it succeeds, it goes up, up, up and fast. And so your ability to again, be in early and stay and be a part of the of the value creation process. You know, it’s critically important. And the other thing I would say is that I that I think needs to happen is we believe in dpi. Our funds are characterized by very high DPI. So money back to LPs, and that has been critically important to us since the beginning, unrealized valuation. It doesn’t really help anybody. Like, it’s it can’t eat, it doesn’t help your employees when it’s too high. And that all the talk in the industry right now is on, is on tvpi, which, like, it’s great, like, we have a ton of TV tailwinds are amazing without all these up rounds, right, etc. But, you know, our job as as investors is to is to actually realize liquidity within a particular window. So how
29:27
do you square that circle with DPI and duration? Right? Duration is a feature, but it’s so long cycle on these early stage investments. So you know, how have you been able to drive meaningful DPI when you know, you’re taking such long positions.
29:42
So I’d love to say that, you know, 10 years is enough, but the reality on most venture capital firms are structured for 10 years. But they, of course, have have extensions. It, you know, 10 isn’t but 15 is, you know. So like you. Very typically, what happens in our funds is we have a bunch of early successes that get acquired along the way. By the way, we had four exits in q4, three of them driven by repeat founders, three of them driven by of the four driven by AI tailwinds. These are in companies that were started in 20, in one case, 2015, kind of two cases there, and then a couple cases. 2018, so 10, year, eight year, you know, kind of like long journeys and really nice exits and a lot, you know, we, we, when these close, we plan to send a lot of that DPI back to our to our investors. So, but it’s like when you build a portfolio, how do you score the circle? You build a lot of value across a lot of companies, and you recognize that exit is your job and and by the way, you align with founders who, again, three of those four founders are repeat founders. We’ve had success with them in the past, and all of those companies had options to take capital at very they took, they raised capital along the way, but they never raised it at the highest price, because they’re experienced entrepreneurs, and that closes windows, not opens windows. So it’s really about alignment with, you know, between investor and founder. And look, we want, we want the biggest numbers possible, and we want to change the world too, of course, like everyone wants that. But there’s also just a way to build a company that I think gives you maximum degrees of freedom and maximum creative opportunity. And there’s a, there’s another way to build a company where it limits that. And I think, I think, I think too much capital, too soon, too much valuation, too soon. It also, you know, investor selection can be a problem. If you’re optimizing on valuation, you may be missing other things. If you’re optimizing on round quantum, you may be missing other things. By the way, this is so ironic, because, like, the number one thing that has fueled these all of the waves that you and I have participated in is capital efficiency. And every subsequent wave of you know, web, two, cloud, mobile, every you know, the the tools have become more powerful and and the costs have gone down. This wave is that, like times a million, right? It is so powerful to build
32:18
on these what’s most different about this cycle versus previous?
32:22
Well, I would say it’s so I’ve always careful on that, you know, this time I’d say it’s the it’s the same, but it’s even more so. In other words, I’d say it’s the same pattern, which is that when we started web two, we started trues, the beginning of web two. And, you know, we funded Seth Sternberg at Meebo, right at Kyper Cafe, which is like a block away from where I’m sitting. Oh yeah. And I met Seth, I had known him from a prior company, from from a prior firm. And I said, Oh yeah, this new thing you’re building me. Bo, sounds great. He goes, Yeah, it’s three of us. He goes, he’s like, I don’t need to raise any money. But I really would like $50,000 to get these servers off of my credit card. And I was like, $50,000 and they were serving, I don’t know what the numbers were. They had maybe 100,000 users, but, like, a lot of users. And, and I was, like, done. Like, we could do that. Like, that’s awesome. Let’s go, you know. And, and so, you know, in those early years, we started true because, by the way, D HTML, which later became, well at first it was like HTML, html5, AGI, all these different technologies, basically that that, as you know, broke up the way that apps could be delivered in browser and and decrease the cost of development dramatically, and allowed people to build quote mashups, right, these new things that were a little bit of this, little bit of that. And then, of course, AWS. And before that, Yahoo opened up their APIs. And so, you know, kind of a game started there. But the result was that entrepreneurs could build these really interesting products and try them back to this creativity and experimentation mindset and learn a lot quick on small dollars. And that was truly why we I mean, that was why we started true. We started true 1005 there were very few seed investors. There was Ron Conway, who’s, like, amazing, and was wonderful to us when we started in a couple others. And then there was sandal road. And the smallest round from sandal road, you could raise five to 8 million bucks for 40% of your company. No kidding, plus the 25% option pool, maybe 20 if you got lucky, so you’re selling 60% of your company day one for five to 8 million bucks. And by the way, the bar to get and so like we weren’t the only ones. Of course, Josh started first round, and Brad and the foundry guys did their thing, and we were all very and still are very close friends, because in those early days we we also collaborated a ton. We were kind of the New Kids on the Block, and Mike Maples, of course, and we get together a lot and say, This is how it’s working. Let’s share deals and but capital efficiency is what broke it. Broke open the venture industry. And. Yeah, and it continued in the cloud, and you’ve seen all these great new funds, you know, since that time, and and now you don’t need, I mean, again, we’re like, the one person, one employee, unicorn, and all the stuff that we’re all talking about, like, you can build somebody with tomorrow, anytime an entrepreneur comes in. Actually, this happened the other day, and I was like, So tell me about the prototype. And they’re like, Oh, well, we haven’t hired a tech team. And it was just like, I could you and I could do one in the next half hour. We could build a prototype, and would it be perfect? No, but could we post it? Yeah, and we could learn a lot. And so the power of these tools and the speed and related the cost, I think is one of the most exciting aspects of of this current wave. And you know the irony, we’re so early. I mean, we’re not, we’re not even, like, I use, I know you use the baseball analogy a lot, like, we’re not even made for quantum we’re not even, like, making baseballs and baseball mitts and bats yet, like we’re but like, for AI, we’re kind of like, on the way to the game maybe, or on the way to the first practice, and we fully, and by the way, the concentration of private capital into so few companies is, I think, just an indicator that, you know, we’re not the market’s really narrow. Still, we’re not at the broadening where truly the application layer gets built on top of all this capex and that every other wave, if you study every other innovation wave, web one, you know, web two, cloud, mobile, the value of the application layer as a multiple of CapEx is somewhere on the order of five to 10x okay, So if we’re putting $5 trillion into the ground. That’s what Jensen just said, Right? Or, I think it’s McKinsey also estimates 5 trillion into the ground. Five times that number is an awful lot of value. Three times that number is an awful lot of value. So we get it wrong. So there’s too much cap. Two times that number is an awful lot.
36:58
It could be off by an order of magnitude. It’s still huge. It’s huge, and that’s the application layer. Is that the non consensus way to be investing in AI right now, because true is known for contrarian style, non consensus investing, like, how do you access AI in a way that’s not overpriced and bubbly and bloated?
37:17
Well, so two answers, the first of which is just data. So there’s something on the order of 1500 seed deals a quarter, ish, some some quarters. It’s like of mainstream seed that would be us kind of considered venture capital available, or like available to us as venture capitalist. Okay, so like, one to 2000 a quarter. You and I could sit here and talk all day long about, oh, did you hear the mega round and the this? And that’s but like, between us, we could spend this whole podcast, we, without using any of the tools, we’d probably get to 30 names this year. Maybe, like, I don’t know more than 30. I don’t know. Maybe you probably know a different 30. Let’s 50. It’s a tiny fraction of what’s actually getting funded and what’s actually getting built and so, and all the data that we see seed rounds are still roughly the same. It’s, you know, one to $5 million it’s sub 3040, whatever 40 is high, but whatever it’s like in the 20s plus minus. And some founders are, you know, it’s like, it’s not dramatically different than where it was, but the conversation and the FOMO behavior is distorted by what’s in the headlines. And the other great piece of advice someone gave you on your show several weeks ago. I remember who was, but I used to always say this as well. To our founders is, please don’t read the industry like, news on funding. Read the industry news of like, if you’re in a category, you got to know everything about the category. You got to every person, like, deep curiosity. But like, like, it’s all it’s all noise, right? You have no idea, like, who raised what at this and why, and it doesn’t matter. It’s not like, your your adventure. It’s not your mission. So I guess the first answer that is like the math is like most seed deals in AI, even in this white hot space, are still being done roughly in the parameters of what makes sense for most, for most seed investors, our core business is to write a one to $5 million check, kind of super early day one, and be a meaningful partner to the founders.
39:19
You You’ve brought up repeat founders multiple times, like, is there some insight on that that you’d like to share?
39:26
Yeah, so the majority of so when we, when we started the the firm, we said, like, our objective is to be the entrepreneurs the customer. First of all, like, every business has a venture is such a funny business. And please ask your friends who are in and partners, like, Hey, who’s your customer? And some and I remember, before we started true, I was in the I was in the venture capital business. I go around ask people, and some of the Smarties, like most famous people, would be like, my partners are my customers. I serve my and I’m like, Yeah, you know, I get or my limited partners. I was like, yeah, it’s. Feel right. And to me, it was always the entrepreneur is the customer like you provide a product and a service to an incredibly valuable customer for society in the world, and you got to make that product absolutely amazing. So they keep coming back, and they tell all their friends. And I’m a great student of brand, and I love brands that, of course, we could talk about how amazing blue bottle coffee is, or sweet green, or peloton, all these things have been but I also think there’s like, amazing brands in the world. You know, Toyota people love their like this is, and there’s a magic in in a customer loyalty relationship, because that that brand has earned it, and that brand has been tried and true for that customer. And we want to true to be that brand. And what it did early on is, in addition to our we founded the firm on values, in addition to, like, really, really wanting to have just an exceptional, enduring firm to support human creativity forever. We we really wanted to think about every customer touch point and get rid of all the other for lack of a better word, crap that typically happens in a venture capital founder relationship and so like incentives, but we have, we don’t have attribution. I’ve talked about this forever, but nobody really gets it until they experience it, which is that all of my partners, all 10 of my partners, five my venture partners, by the way, plus my other partners who are in big chunks of the operation, plus any associate, any principal, anyone on my team, can call any of my founders anytime they want, help them in any possible way and be of service to anyone in the portfolio. And so that we don’t get paid by the deal we do. We don’t like, you know, we don’t join that weird attribution thing. We don’t vote and need consensus. Usually, if there’s a vote that’s too easy as a managing partner, I’ll kill the deal because I actually the easy ones are too adjacent to us. They’re too like, again, this five to 10 years out, the hard ones are really hard to see. Like, Wait, you’re actually going to try it and build a brand new satellite company in 2015 like this is such a great example, by the way, this company is called Ice i, and it’s was just general catalyst. Just funded. It has been getting all sorts of great press. It’s an absolute monster, monster company. We funded two, two master students on on their thesis in Helsinki. We had relationships through one of our venture partners with that community, and so they were, they were outstanding. They were kind of our kind of founders, and we seen fun of the company at the time. We there was a line I used on on that I recently saw on a different publication, but we were deciding between Team bullying apps and satellites. And now, if you remember this era, they’re all these bullying apps, right? And they were so hot, well known VCs are funding them. We were just like, What is going on our industry? Here’s a satellite company that’s gonna, like, go change the world, like, and, and so, you know, that was just one of our markers back then, of like purpose and the long haul. And, you know, here we are, 10 years later, and that company is an absolute monster, an absolute fun maker, many, many times over, many, many
43:13
times over. I was there two weeks ago, and they were talking about this company constantly in Helsinki,
43:19
yeah, it is such a great story, and the founders are amazing, and they’ve built anyway. It’s just, it’s wild and
43:26
and so, and was this a repeat founder scenario or not? Yeah, that’s
43:29
in the context of the repeat. Sorry, we got off on these amazing kind of so this was in there, like, build a great build, a great experience for the customer. And so if every so back to that, we can have fun with editing. Because back to building the building the great, you know, partner and great brand for for today’s most creative entrepreneurs. So a lot of things had to fall out of that, and one thing that had to fall into that. So I talked about building our incentive structure so that our partners weren’t getting in the way of providing great customer service. We also invested very heavily in what we call platform, but that is, it’s our belief and and I’ve been an entrepreneur, being being a visionary founder is really hard. It’s really lonely. You can only talk to your significant other or a spouse or a brother or mom, so much about it, they kind of get tired. And by the way, for most of us, this creative thing we do is, I don’t know if what’s the right it’s a it feels like obsessive, in other words, like, when there’s a creative problem, it’s like, that is, it grips you. It’s all you and so, and if we’re doing our job right, investing in things that might be there in five to 10 years, there’s no right answer. There’s no here. Like, be like, Oh, how do you do this? Oh, I did this way. Oh, great. I’ll do it that way, right? I mean, certain things that don’t matter, like, how you run a step, like, great. That’s easy. And now all that’s in the models, but, but the real hard problems, there’s no one to talk to. So very early on, we recognize that truly cutting edge founders who are doing net new behaviors, net new things for the first time. Needed a peer group. That peer group for us is our founders. Are our existing founders. So we decided to invest very heavily in any way, technology systems, knowledge systems, events, but not like, you know, cocktail parties and schmoozing, but like real events. We built our own YPO forum model for many years, many of those forums are still operating for CEOs and founders and we and so we get our existing founders together, usually without us in the room, but we’re safe to have in the room too. We’re not looking over anyone’s shoulder. We just want them to have a safe space where they can ask the tough questions, and that has because of our values over time of collaboration and curiosity and believing in people that has become so insanely valuable, like, Absolutely, incredibly
45:49
valuable any, any you get the new founders to invest in that, you know, yeah, it’s really interesting. So because everyone’s being asked to join a Slack group or a virtual group, and it’s like, yeah, but that’s different than the real kernel of connection. And yeah,
46:04
it’s well. So what’s interesting is, by the time someone takes our capital, so you’d ask about repeat founders, so about 70% of the deals historically that we commit to have been introduced to us by our founders. We hear about deals from everybody, but the ones that rise so, like, it is a very high fidelity channel. And the reason why it’s a high fidelity channel is that we do spend so much time with our founders, and they get to know us so well. And every New Deal, typically even something that doesn’t come in, we’re like, oh yeah, we have, you know, a bunch of brilliant minds in quantum over here. Why don’t we get them involved in the conversation? Not because we want to, like, but like, we’re just really curious. What do you all think about this? You know, new technology or or in the context of AI, there’s, obviously, we have 85 AI investments, and in those, those those founders and teams are super close and are meeting, they’ve, they’ve created their own sub community completely without us, and they’re meeting, I don’t know, every two or three weeks and just hammering through the like most meaty topics of of the day for each of them. And so I think you have to believe, seriously, Nick, you just have to believe that if you set up that humans are good and good creative humans want to share, and if you set up a safe space for them to share, which means the VC is not looking over their shoulder like, Oh, I’m going to get you in the next board meeting. Because you said, like, that’s my time for that. Care about that when you’re on a mission to build, like, you know, the next generation satellite company, or this insane company called invader, which is also a monster, which we funded in 2020 Vishwa koru. He was founder of invader. He was introduced to us again by another entrepreneur, one of our existing entrepreneurs. And they had this wild dream to use AI in 2020 for basically faster and better drug discovery, to create medicines from biology, from the 97% of biology that is unsequenced and not understood, and Aveda has completely exceeded all of our expectations. And by the way, we’re super early in the journey, five years in, and it is an absolute monster and a rocket. And so like, we’ve got a lot of really insanely sort of deep people in these in these categories. And so whenever we’re doing something in the category, we we call Vishwa, right? We’re like, Hey, what’s going on here? We call the founders of base camp research, and they’re like, Oh, I’d love to beat that company. That’d be fun to get involved. Oh, by the way, here’s two other ideas. So we’re in this constant dialog. Why? Because we believe in our founders and we are deeply curious about the future of the world, not because we have a transactional relationship with them, not because we’re on their board, but because we’re all in this journey together, and when they connect, that’s the setup. The setup isn’t like, how do I get more valuation, or how do I get what do I need to worry about? We don’t care about any stuff. That stuff doesn’t make any money in venture capital, by the way, like terms and marginal evaluation has made me $0 over the course of my entire career. But being with the right founders, being with the founders, who can you can you know the vich was of the world, or, or Pekka, or, if I like, those are, that’s what you live for, partnerships.
49:18
Pun intended. I said totally,
49:21
totally, and so and so, when we get into these relationships, and Todd, sacred Adi, his company, pipe dream, was just acquired by workday in q4 we funded him with bright role in fund one. I mean, Todd is one of these just tenacious, brilliant leader. Like, absolutely what you see is what you get. Like, I just like, we have this, this ease of communication on the important things always. And he’s always curious about where things the world could go. And he’s super open, like, all the things I love and great founders, when Todd wanted to start his next company, pipe room, it’s like, of course, like, Absolutely, we want to be in business with you. So we’ve done that. I. Don’t know, close to 70 times. I think it’s more like 68 or 67 but it sort of depends. We’ve, we’ve funded a bunch of entrepreneurs more than twice, you know, three times. I think Kevin Rose. We’ve, we’ve been in four or five of his things, if you, if you include them all. And the why is because these are the most brilliant creators of our time, and we want to be invested and partner with them in everything they do like that. That is a phenomenal, phenomenal investment thesis, right? Yep, and they’re going to keep creating, and they’re going to be surrounded by other creators, and they’re going to introduce, this is great to great creators. And so we’ve built a business based on this and we call it a flywheel. And it’s like, it’s always, it literally, is we, we always say one of the founding principles was, like, work with people, you know, and always know new people. So the curiosity motion that we have in all these markets, we’re just always attaching more people to fly well and be like, Oh yeah, let’s, let’s jump into that thing together. And, oh, have you met? Have you met this company yet? Have you talked to the folks at base camp, you know, that are, by the way, building another monster company that we’re super fortunate to be involved in and and so repeat, founders are a key part of that. But so too is founder referral, and so too is, you know, engaging our founders in all aspects of our of our business, and never being too precious about, you know, we’re super curious about, you know this, there’s a there’s another advice to people in the industry is, be really, really careful with certainty. I talked about righteousness earlier. Be really careful with certainty. Because, like, that is not a thing, not a thing in early stage. And so, beginner’s mindset, what could we create? What could we learn? I’m wrong all the time. It’s what I love about this job all the time, right?
51:47
Even when you see a pattern that holds, like, across 30 companies, all of a sudden, one breaks it and it’s okay, yeah, and, and,
51:57
and I love that. I mean, I love that about it’s the world’s most incredible job. In that regard, if you’re designed to be okay with failure, and if you’re designed to be okay with being wrong a lot, and frankly, if you truly love and believe in people and the power of teams, that’s, well, it’s,
52:15
I mean, we live in the business of overcoming the odds, in just breaking consensus, right? Like the future is going to be different. And so you just see people, you know, pull off incredible things. You know, in a business context, it’s just unbelievable when you see people do this,
52:35
yeah, and you know the moment, right? And people ask me this all the time too, it’s like, how do you know when something’s true? You asked me a minute ago, on, on, you know, constrained signals. It’s, it really is a little bit of like there’s just something different. And I get really the right word is suspicious of both my own thinking and others when there’s a lot of other things, a lot of other things, biasing decision making, like, like, you know, headlines or, Oh, this is going to be big, or my competitor just once, or I just lost it, you know, like, and so you really have to have a almost like, a like, the fidelity is The word, but like, almost a careful cleanliness of thought and process. And, by the way, decision making across a team to very to, like, diagnose where biases could possibly be seeping in, and making sure you’re pulling that out of the decision. And you actually do know when something is so wildly weird and different and interesting. Not we, by the way, we both see a ton of weird all the time. That’s not it like, like, it’s, it’s that funny alchemy of like that might just like. It might work because not just one thing can be come true. It might work because these two or three really vague signals that you’re seeing out there may come together. And, you know, we’re spending a ton of time right now in different net new interfaces for data. Broadly speaking, we’re investors in sandbar, which just came out with their stream ring, which mine’s over here. And we’re spending a lot of time just in and around new interfaces for for sensors, data entry all that, because ubiquity is here, like, soon, like, every, I don’t know if you watch Pluribus or not, I do. Yeah, okay, we know what’s happening. Yeah, spoiling, but it’s like, is, like, there’s an interesting thing when the consciousness is ubiquitously aware of everything. And that’s going to happen. I’ve got like eight devices here in my office. You’ve got a we’ve got you’re going to go get into a, I don’t drive a car that has this, but like a Tesla, whatever someone gets in a new car that’s going to have sensors that’s going to pick up everything. It’s all going to be available to put into models. It’s all going to be available for intelligence. It’s all going to be available. Available for decision making. So I’m available for genetic things to happen that we give it permission to do, like super soon, very soon, and so early. We said, well, what is that, you know, next application wave look like? Intellectually, we can say, Okay, the next thing is the application layer. Great, we but intellectually doesn’t get you to contrarian thinking like, we know, the general space, right? But then entrepreneurs that come in, they say, Well, if these few things happen, then agents gonna be making these decisions on your behalf in possibly this way. And if that happens, then you might need this thing up here. And so really, kind of grounding ourselves in that thinking it’s not like, I want to say like, cleanly, because it’s sort of like, without all the bias of like, oh, I can’t worry that. So and So might do it. Or, you know, no one’s going to act like that. I actually have to have just basically principled investing to kind of follow the follow the possibilities of marketplace developing and and that. And when you’re with a team and a founding team, and you can do that together, it’s magic. It doesn’t mean you’re right, but it, but it’s absolutely magic, because you’re like, Okay, this is the journey where we’re going to go on, and we can do our part. We can provide you with, like, you know, capital, and, of course, this amazing network been doing this for a long time, and blah blah and all that. But hey, let’s agree we’re going to stay wildly, wildly curious, because this, this is a journey and adventure, and I’ve got all the capital in the world, in the world for exploration, but while your time is precious, because if you don’t do this, I want to fund you to do the other thing. And so let’s have a conversation that’s like, I don’t want you to, like, march to the to the death or any of these weird No, like, do it until it’s not worth your insanely talented team’s time, and at that point we should change and do something else. Net new, great new cap table. New, no problem. We’re designed to lose lots of times. That’s not an issue. But, like, keep the edge to go find the thing that is massively big instead of settling for, like, oh, some small thing, because, like, the creative entrepreneur is way too valuable for our society. It’s not
57:02
worth it. That’s not worth it, and especially on our 10 year journey. Yeah, especially now, yeah. So John, earlier in that chat, you mentioned good risk versus bad risk, right? These different risk centers. You also mentioned long term thinking versus short term and frameworks around that, like, can you just give us a couple insights around these topics risk and duration of decision, yeah, and think so
57:29
the risks we maximize at true are product risk. We invest there’s no product, hopefully, market risk, although it’s funny, you can prototype now. So even that is like getting kind of easier, but I would say the real products in Iowa market risk, if you’re doing it right. Like, I don’t know what a market looks like in five let alone 10 years, but that’s kind of what I’m aiming for, right? So the ultimate in market risk, and then timing risk, you know, I can’t tell you what, what open AI is going to build in five months, let alone five years, or Apple or Google, or any of the hyperscalers. So timing is a problem from a competitive dynamic standpoint. We timing is a problem because you need money to go along all that we accept all those risks. What we try not to do is, is take capital risk, as I mentioned before, like it’s really hard as this early stage venture capital firm to build battleships. It’s really hard as an early stage French capital firm to go build a new GPU, and, you know, all this. So we stay in capital efficient things, and then people. And we talked a lot about that in terms of, like, really using our networks to understand the lineage of people, where they’ve been, what they’ve done their you know, curiosity, capability, teamwork, all that. And so we spent a lot of time on on people. And it’s because our belief is that people are everything in in in a creative endeavor and and in the creative economy that we live in today. And so that’s our framework. But what it does for us is it just allows us to objectively say, like, by the way, are we taking enough? We want to maximize risk, not just like. Take risk, maximize like. So if a market is pretty easy to see, we’re kind of like as a team. We’re kind of like, is that maximum risk? Like, really? Wow. Is there? Is there some other iteration of that market that we should aim for in if so, how so? What it does is it grants our conversations as a team into Are we really striving, like, are we really trying to build fun makers in every single check that we write? And it cuts out a lot of a lot of, you know, deals that are okay for one or two reasons, but they may, just may not, be the invaders of the world. They may not be the eye size of the world, the base camp research, you know, or historically, the pelotons, the Fitbit to do is all that. But the one thing I would say to for, for just a message in general, is like, just know what risks you’re taking. Like, and if you’re pretending to yourself or your partnership that you’re not taking risk, that is failure. Like, absolutely you will fail, because that means. You’re not understanding the like, I always talk to my partners or any which I’m like, I don’t care what like, I just want to know what they are. And then if we know what they are, let’s Max them out. Let’s not try and make it Oh, it’s a little better, because they’re going to build something that looks a little bit like this thing Google. I forget. Where do I want to compete with Google? I don’t want to be a no no. I want to be like, way at the other end of the spectrum. So what could be possible? So it allows a framework to talk about what we’re comfortable and what we’re what we know and what we don’t know, right, the known unknowns, which is what we need to kind of truly, truly aim for.
1:00:35
John, if we could feature anyone here on the show, who do you think we should interview and what topic would you like to hear them speak about
1:00:43
you do a great job of having, you know, industry players venture capital. Like I your guest list is awesome. And you know, other guests have said like, oh Warren Buffett or Ray Dalio. And I’d love any of those people that think or talk about venture capital. But my honest answer is, I would love to hear more about the creative process for artists, for musicians, you could have Tom York from Radiohead on your show, here all day long. Well, here all day long, anyway, but I think there’s something in the creative process that we all can learn from other adjacent, adjacent creative endeavors. It could be film production, it could be art, it can be it could be music. I’m a huge music lover, and so there’s something when I, when I see that happen, you know, when you see a John Mayer do what he does, or you see, you know, there, there’s a lot of preparation to stay in that creative mindset, that that these incredible performers are artists, I should say artists too. And so my honest answer is, I think a little more of that in our thinking would be very powerful.
1:01:51
I love it. My favorite book is the creative act by Rick Rubin. So absolutely he would
1:01:58
be the exact like that to me, is like, yeah, gospel, right. We really need to understand
1:02:05
that, John, do you have any habits or behaviors that are a secret weapon?
1:02:10
I talked a bit about it earlier, this whole notion of zones of genius and understanding what I need to stay open and creative and curious, and in this relationship with time and keeping a lot of space around, because when something, when something strikes, an idea, an exploration, time just disappears. And we that we live for that that is like, those are precious. And you know, the kind of like, running from one thing to the next is not that precious. Those are another days are going. You’re gonna remember. And the other is, I truly love people. It is really, really fun for me to explore a topic with a team of people and like, there’s just kind of nothing better. So, yeah, staying in the zones is probably the secret weapon is I probably think way too much about it, but I look at each day, and I look at each minute and I’m like, Okay, how many you know? What is? What do I need right this second to stay there?
1:03:09
And then finally, here, John, what’s the best way for listeners to connect with you and follow along with true?
1:03:14
Yeah, so you know LinkedIn x less, so we do a lot of posting on LinkedIn. That’d be great and social. I’m John at True Ventures. J O N, we want to be accessible and available, so reach out any way possible. We’d love to hear from you.
1:03:30
He’s the legend. John Callahan, the firm is true. Thank you so much for doing this. This is like a bucket list item for me, so
1:03:36
I appreciate Well, we love what you do. Thank you. Love it.
1:03:39
Take care. See ya. All right, that’ll wrap up today’s interview. If you enjoyed the episode or a previous one, let the guests know about it. Share your thoughts on social, or shoot them an email. Let them know what particularly resonated with you. I can’t tell you how much I appreciate that some of the smartest folks in venture are willing to take the time and share their insights with us. If you feel the same, a compliment goes a long way. Okay, that’s a wrap for today. Until next time, remember to over prepare, choose carefully and invest confidently. Thanks so much for listening.
