Ross Fubini and Manish Patel of XYZ Venture Capital joins Nick to discuss The Power of Founder Mafias, Why Venture is Bifurcating, and Lessons from Good Strategy, Bad Strategy. In this episode we cover:
- The Palantir Mafia Culture
- Comparing Ramp and Palantir Cultures
- Building Successful Partnerships
- Google Alumni vs Palantir Alumni
- Navigating AI Trends and Value
- Underwriting Future Successes
- The Evolution of Venture Capital Firms
Guest Links:
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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0:19
Ross Fubini and Manish Patel join us today from the Presidio. Ross and Manish are Managing Partner and General Partner respectively at XYZ Venture Capital. Ross is a Midas Seed List investor and was an early backer of Anduril, while Manish joined Google before its IPO and has taught at Stanford’s School of Engineering and has been a VC for over a decade. XYZ has backed companies including Anduril, Peregrine, Apex, Cape, and Chapter and has backed 40+ Palantir-sourced companies, including 3 in the last quarter
Ross and Manish, welcome to the show!
0:58
Great to be here, Nick. Thanks for having us. Yeah,
1:01
it’s good to see you both, Ross. Let’s start out with you. So XYZ turns 10 this year. Give us kind of the quick two minutes on what was the original thesis and what part has survived the past decade.
1:14
You know, it’s all just overnight success every every day up into the right. No, you know it’s really been quite a sojourn, as you said. You know, coming up on 10 years. You know, most interesting. You know, the original premise of X Y Z actually ended up planning out as being correct. So back in 2017, if we had talked about X, Y, Z, and I would have been begging you, like, “Hey, you got 10 bucks. I’m doing a new venture fund. The premise would have been there is this little data company called Palantir. You don’t heard of it unless you lived in downtown Palo Alto, but it is full of the best, most talented young people in the world, and I’m going to back people coming out of that ecosystem, and that was the core idea. And the long story short of it is that it’s been incredibly successful, not just because you know Andrew, Peregrine, Chapter, Apex, Cape, others were all backed by Palantir Founders, but those folks really were the beginning of starting several really interesting waves of technology in the public sector, in defense, in space. Just these really, really transformative categories where those companies exist, and other companies like them have existed. So, it’s ended up being like a really, really successful, successful journey to go build out here. And we’ve just now, you know, over 130 companies, you know, billions of dollars to deploy, and a lot of fun in the way.
2:57
So, were you, you know, an early contemporary or friend of Peter Thiel, Alex Karp, you know they’re unique individuals. Kind of build companies in a different way.
3:11
Yeah, definitely. Definitely, Palantir was built in a very unique way. It’s one of the things that was most compelling about it is its culture. The history of Palantir was largely written by three people in the earliest days: a guy named Sham Sankar, he’s now their CTO, Aki Jane, their president, a guy named Bob McGrew. Bob later went on to be chief research officer for for Sam at OpenAI, and those three folks really ran the business along with Karp and the original founding team, and I introduced Aki Desham, and Palantir then and now was an incredible consumer of expertise, consumer of wisdom, and it was a real learning machine kind of culture, and I was just fortunate because I knew a couple things because I’ve been around in the valley while now a long while, and I would go to meetings with them, and we work on pricing, and like one meeting, the next meeting, show up second meeting, and they and the team would be like, “Well, we tried one idea, it’s great. We tried the other day; it sucks. We’re going to get to the third. What else you got? Like it was this constant consuming of like not more than insights of of ideas and and experiences from from outside, and that learning machine was what was really attractive. And so I got to be part of that, you know, quite happily as an advisor and later investor, and but it was that intimacy with the the company which only had all these talented people, because then and now Pounder is full of these young people that basically get this term for deployed was created there. What does that mean? Like. Take young, talented person. Maybe they were a student of Manisha’s who just graduated, so they’re you know eight years old. We’re going to take you out in the world and be like, great, you’re going to go to, you know, pick an insurance company, a bank, a part of the government, and go find a big data problem that Palantir’s foundry system is going to be really useful to solve, and try and do that in six weeks. We’ll see you later. It turns out that kind of culture is incredibly good. It’s just a crucible for creating entrepreneurs. So you get companies like Chapter. Chapter is a really boring, incredibly important company in the U.S. everyone over 65 will get Medicare. You’re my parents, people in the audience. Turns out that process is awful because figuring out how much to pay for drugs super complex, very hard data problem. The government itself doesn’t know what it pays for drugs. Okay, in comes Chapter. We’re going to organize all that information, and we’re going to do a great job of helping my mom decide who she should get her Medicare from, and that’s what Chapter does as a brokerage. Kobe, the founder of that former Palantir, and Kobe had a passion for this big, big, big, tremendously large. You’re spending a trillion-dollar kind of problems, and that this data understanding, and so in building chapter, he created a better brokerage for my mom, your mom, everybody that’s going through these decision processes, and that’s the kind of people that came out of the out of pound here, you know. Trite as it is, it’s really first principles of like, what’s the data problem? Why doesn’t it work? Where is it broken? How do I drive my product into existence? And that was true for them. Certainly true for Andro in the defense space. Certainly true for Apex in the space space. So that’s like that was the unique idea that existed back in the early days of XYZ, and rare but true, it ended up being correct. We’ve just built on that same network into other networks, defense companies into other defense companies, insurance into other fintechs, and that’s been the process of building out XYZ.
7:22
I’m I’m glad you said that. Like the the first principles, the way of thinking. I was on a call yesterday, and somebody asked me, you know, why has why have haven’t there been more successes in Chicago, which is where I’m based? And the only thing I could think of is I believe the first generation of successes here, taught bad habits. I think the DNA was wired a certain way, which worked for a handful of individuals. But every time the spinouts from those companies come and pitch me, they want to raise 10 million bucks out of the gate, and I ask them how many customers have you spoken with, and the answer is zero. And so it’s very much like an “if you build it, they will come” set of spinout founders. So my question for you is like: We’ve seen these successful mafias, like PayPal mafia, etc. Like, do you see fragments or presence of this style of thought and this DNA in the companies that are spinning out of an anderol or a ramp, you know. Do they bring that DNA with them to their new company? I I think in spades. I think that’s exactly right. That that’s what’s what’s happening there. And like maybe I’ll just use those two examples because we backed a lot of people at Palantir and a lot of people actually had a ramp, so very different cultures, but also have really founder advantage cultures. The ones that we’ve seen, we already talked a bunch about this with Palantir. Is it’s really obsessed with access to the problem, like who is the person,
9:00
how are they feeling the pain? What is broken? What is what is the the what is the intention with with the customer or even like what the market is trying to do? And if you can get to work with the customers that have access to the problem, then you can understand it. You can figure out what’s missing, what to build, and then there’s a lot of like belief in yourself, like I can do it, I’m uniquely able, you know, all the confidence that goes with that. It’s part of founding. Once you’ve discovered that problem, and again, that was a deep and big part of Palantir’s ethos. Is like you’re going to do this thing that nobody else has done because you are so forward. Because you’re in the mess of it. You’re chewing the glass for whatever is the problem you’re going you’re going after, and there was joy in that joy in like I’m on the plane, you know, on the red eye to be on site, like all those ideas. Were really good experiences. Secondly, there was success in ultimately being able to solve those problems. Those problems being just big and scalable. So it wasn’t Dropbox and saying, “Hey, we are going to have consumer adoption, or Atlassian’s you know fast path to to go to market through developers is and said no. If you can work with people that have all the billions of dollars and solve problems for them, you can get paid hundreds of millions of dollars. And that that was an aspect of that culture. And then there is a bunch of learning attributes that were rare, entrepreneur attributes that were rare. A second one, just to kind of you know give another color, and we could talk about SpaceX and how it, you know, focus on verticalizing supply chains. But I think Ramp is another interesting one, where the Ramp team, in general, in general, the leaders and founders we see from Ramp, they are just revenue hunting missiles. It is like, where is their money? How do I get the money? Who has the money that I should be getting? Like send me some of those, Ross.
11:06
Send me some of those. I
11:08
mean, God bless, right? You know, and it’s just. By the way, there are two parts there. Where’s the money, and I am going to get the money. Like, and and you need both of those things, and that’s been a. It’s just been a really. It’s really been a really compelling rubric. Doesn’t mean every ramp company works. I mean every Palantir company works. But it’s that again. That’s not the confidence. If I’ve seen this, is like if I can figure out where the money is, I can run faster and and get and I can win. I can beat Brex. I can come into an established category and dominate it like that. That as as a rubric, I think is a ramp culture. And so you know we back companies like Nation Graph and folks like that that have come out of that ecosystem. And so again, to your point, Nick, I think a lot about these cultures and like, what are the cultures designed and wired to go do? And if you can find that pattern, you just want to keep backing people. It’s the reason now why we back three founders, and we’ll do another 30 as they come out coming out of Androll because we think Android has a lot of strength in understanding customer needs within the government and how to like move products into the government. So that’s make it one culture that creates another culture that’s also advantaged. So and well, if I could say one more thing, I think that’s just the whole path to venture is just kind of building these networks of networks that are advantaged, and Sequoia has done that, andreason’s done that, and then Word is doing those same kinds of things. That’s ultimately how you build and scale something that can win.
12:53
Love that. So let’s talk about firm building. And Manish, I’m going to put you on the hot seat. We’ve been friendly for a while now, so you know you nearly started this firm together with Ross once before. Why you know what changed? What made it the right time to do this now and join SYC?
13:14
Well, Ross and I have been friends I think since I had hair, so that was a long time. And we, you know, and I think the thing that’s so interesting in my live journey in venture capital, I was always a little hesitant to do things with friends because that whole thing of like don’t church and state don’t mix business with friends and all that sort of thing, whatever that rule is. And I think one of my learn live learn lessons in venture is that you know different operating company? That is exactly what you want. You want somebody who’s a partner, and partner is very different word than collaborator, coworker, etc. It’s somebody that is thinking about the best in you. When they say you know don’t do this deal or have concerns, that really weighs on you. Your your response back should not be like now I’m going to sell you into my deal. Let me tell you why it’s all everything’s A plus, and it’s going to be an amazing deal. You don’t get it, and I think that’s what happens a lot in venture. You know, Nick, you know this. You know, in some of the big partnerships, on it’s kind of a bunch of guys that meet on Monday and it’s a joint checkbook. They come back together the next Monday and are kind of horse trading on deals. Many ways to win in venture, by the way. I’m not saying that’s a bad approach, but I think some of the best, best partnerships-they’re actually is this idea of like a friendship and a trust where people push you. It’s very competitive, but they make you better. And so my own live lesson adventure over the last 15 plus years is, you know, with Ross, he’s brilliant. We’ve been talking shop forever, so I have no problem telling Ross to his face, well, that’s stupid. I don’t understand. And then he’s able to like have a conversation with me about it versus pulling punches. And I think that keeps the integrity of the conversation, and you get to the right answer in a deal. And when I was thinking about what do I want next in my career, I just ran towards this opportunity to be able to work with Ross because I felt like we had been working together for a decade. Plus, already talking about deals, doing deals together, just thinking about the world, and so we already had the shorthand built up, and so then when I was came into XYZ, it’s like you hit the ground running because you’ve already been doing the job, and that was super exciting for me.
15:15
So, so Manish, we were just talking about networks and spinouts and ramp and Anderel, you know, you were at Google for a number of years. Do you think the contingent from Google that starts new companies? Do you think they’re different types of companies than maybe an Andoral? And what what does that look like? You know, what what’s the iconic Google founder good at?
15:38
Yeah, it’s funny because my so I was lucky enough to be at Google before the IPO. If you look at the cohort of people that sort of now have become legendary that I had the chance to work with, these are folks like Chris Sacca, you know, Hunter Walk, Gorajaram, all these amazing people. Eli Gill always used to sit around me at Google. Sundar used to sit behind me. It’s funny to always think like now he’s the CEO of Google, you know, a lot of those people became venture capitalists. It’s kind of a funky thing when you think about like the PayPal mafia, or even what Ross was saying about some of the Palantir mafia. Those folks ate glass in a very in a hard company, hard to build. A lot of the Google folks, weirdly of that era, became angel investors, company builders of a different type and venture capitalists, and so that network has paid huge dividends to me. But it was like I think a little bit of the lessons learned. Google was a very intellectual place. I think it got a couple things right right out of the gate that I think just amplified over time, and that had a lot of luck as well. And so when I think about the types of Google companies that have been started that I think are really brilliant, it was less of the you know like zero to one, but it was people that are thinking about big infrastructure problems because that was really Google’s secret sauce. You know, people that could think very very big, a little bit heady, a little bit intellectual, but could kind of see the surface area of a problem in a different way because they kind of lived on Mars, building this stuff at Google, and then brought it back to Earth. You know, because they saw problems way ahead of the curve.
17:03
Love it, love it. So, Ross, I’m going to go back to you. You know, typically on the show, we’re talking trends, we’re talking deals, we’re talking sourcing. But I want to start out. You know, if we zoom out a bit, I want to ask you what you think is critical to get right on the firm building side, right? We’re all trying to build a firm. We’re trying to secure the opportunity to do good deals for decades and build a legacy brand. You’re on that path, Midas List. You’ve done a bunch of you know fantastic deals. Talk to us a bit about you know how to build the firm the right way.
17:42
So, two things. The first is building on what Manish was saying before. I remember a discussion he and I were having before he joined, calling him one night and asking for some advice about this deal, and it was kind of a mediocre idea. Really good person, and I’m like, well, I’m trying to reason through, like, why is the mediocre, sorry, why is a good person working on this deal and all this stuff, and we’ve probably talked for like 20 minutes, keeping away from his family, and he’s like, well, what else are you working on, like, well, you know, our friend Bob McGrew, Bob was first employee at Palantir, chief research officer at OpenAI, did all this stuff, and I’m, you know, Bob. I’ve been iterating on ideas, and Manisha’s like, why the fuck we talk about these people? Why are we just talking about Bob? I want to be in the Bob train, but Bob Bob builds, you know, the billions, and I remember this so sick of like right right right. Manish is the correct idea. I have the wrong idea. We’ve been focusing the on the wrong thing for this entire conversation. Literally, text Bob like hey let’s get that next meeting going the next day and get on that. And so the reason I mention that is because sometimes you need partners that like get you to kind of pull your head out of wherever it’s stuck, to pay attention to what’s really important, and that can be in diligence. It can be that you love something. It can be that you’re you’re and you’re stuck somewhere, and you should do a thing or you shouldn’t. Like that’s what you like. That that’s what a working partnership looks like, and that’s what’s that’s what’s exciting. Period to build in our partnership, and it comes from our friendship and respect, etc. The second thing I want to tell you is I’ve been in a lot. I’ve been in a lot of partnerships. I built this one. I built Village Global. I’ve been at big firms before. Those firms are all great. Most firms very quietly, the people do not like each other, and they do not trust each other. More importantly, and because of that, you get a bunch of backup behaviors that are not good. An example of that is take reserve planning. This is like in the weeds, but this is you do an investment. You know this, of course, Nick. You do an investment. You get a pool of capital. You can concentrate into different companies. A problem there is if it’s you know you, me, and Manish. If Nick and I, if we don’t trust Manish, we’re like we’re gonna put all those reserve dollars, those extra dollars, and our things because we don’t know they’re gonna work, but we know Manish’s are not, and that creates a lot of backup behaviors that make bad decisioning.
20:23
Sure, animosity. Yeah,
20:25
yeah, and so this is like culturally, what I believe is this deep set of like it is all this like understanding, respect, expertise, pace, intensity, all those attributes together. That’s trite but true. But it is like a marriage. You have to have like deep fondness for each other, fondness for people’s points of view, and that’s what you’re trying to build in. And it’s not because the other model doesn’t work, and there are a bunch of these firms that do work and do survive, and they’re great pride of that existence. But I just don’t think that they learn and execute in the same way, they don’t they don’t figure out that it’s Bob, not whoever else I was working on working on, and they don’t realize that actually Manish should get all the reserve dollars because my things aren’t the right things to be backing right now. But you have the humility of figuring that out together, and that’s that’s what I think you’re trying to uniquely get in a partnership is that learning machine, and then that the the excellence that comes from that, and that’s what we’re trying to build here.
21:32
Love that. So I want to double click on these deals that take a while to take shape. Right? You were talking about reserves, and it can be tricky figuring out where to put money. You’ve got this framework; it’s this, you know, non-consensus to consensus framework, right? We’re all trying to plow money into non-consensus deals, but at some point, you know, they have to work. They have to become consensus. So, you know, give us a breakdown of the framework, and maybe in the case of Andril, what was non-obvious in 2017 that is obvious now?
22:07
Yeah. So the the the idea is there’s two interesting deals to do, in my opinion. One is the deals that are non-consensus that become consensus, and the and then the others are the ones that are consensus that maintain that consensus. Why is that a good idea? Okay, in both those stories, the company is progressing. You’re making revenue, and when you go from non-consensus to consensus, the multiple that the next investor, the IPO, etc. is willing to pay, is is is going to jump up. So I go from non-consensus. My Andrew deal when it was first starting, definitively non-consensus. Literally could not get Sequoia to take a meeting in the radioactive.
22:56
Truly, for a bunch of reasons, 7% take rate from the large primes services had traded like crap. Just there hadn’t been a history of people selling to the government successfully, making money. All those things were huge negatives. Like just the category was completely uninteresting as a as a as a as an area.
23:19
Sure, forward deployed engineering not cool at the time, right?
23:23
Yeah, even for yeah, forward-deployed engineering is. I mean, now Polanders made so many of these ideas of the government and forward deployed so palatable, and it’s created words for talking about it. in the In the early days of Andro, the idea was relatively simple, which is I’m going to make products versus services. So I make products for the government, and I’m going to sell those products. But both those ideas were non-obvious. First of all, the government primarily bought services. It tells you what to build. You build it, and you get a 7% take rate. Sometimes you’re building, you know, a commissary for for the NASA cafeteria, and sometimes you’re building a new joint strike fighter. So the idea that that Android had is you could build figure out these products and build them, so you get paid product margins, and then secondly you could successfully sell them to the government. That also was anathema to most of what the value been successful. We’d seen Google, we’d seen Facebook, you know, we hadn’t seen go and get the money from the largest spender in the entire world, which is the U.S. government. Full stop. Healthcare, defense, in the world, and the Android team had a unique understanding how to hyper iterate and prototype and design a set of products, and then figure out that those products then could be sold to the government. The biggest thing that they understood that has now become more obvious is a small number of companies palantir among. Them, a few others, primer scale. They started training a set of people here in the valley about how to do go-to-market for the government, and that was a rare scale. In fact, I would argue that is still the limited resource in building go-to in building government-focused companies. It’s people that understand what’s called capture. So we don’t call it sales; we call it capture. And the reason is because there’s government dollars. We’re about to have our budget’s going to go through in the end of September here. Someone somewhere is going to get any given dollar that’s provided by the government. You have to go capture your dollar for your program for your effort, and that was a very poorly understood idea, and that you could be successful building a company out here in California at the time. But the thing that I knew is Brian Shimp, the CEO of Android. I’ve been working with him for years through his his Rise Up Palantir, and I knew Brian. Brian was going to be a master of this, and he built an incredible team, both that could build technology companies, and and this go-to-market motion. That’s what made Andrew so so so very successful, is being able to get on that that that change in awareness here in the valley, and it’s um it’s been thrilling it’s been thrilling to see because that success I think is begets so many other you know excitement for government companies and ultimately that’s what you want as a citizen is you want your government your defense and otherwise to run better and that’s what all these startups are trying to do
26:38
love it so while we’re Talking frameworks, Manish, I would I would love your insight on AI. Right, a lot of AI usage today is VC subsidized or it’s CIO mandated, and when usage numbers look identical, you know how does one separate signal from mandated usage? You know what’s the real stuff versus what’s forced. You know, how do you think of that as it applies to AI and invested investments you’re doing in the space?
27:08
No, it’s a great question, Nick. I think particularly in this moment where everything looks like it’s winning. You know, I think the VC subsidies make it so easy for people to buy AI or any kind of new product, and you see these velocities which are bananas in terms of adoption, but I don’t really, you know, one of the things I always think about in venture and in business, all revenue is not equal. It’s very, very different, different types of revenue, and I think the art of it is actually going behind the revenue and looking at well, why is somebody buying something, right? Looking at kind of the human behavior of it. I love to use this lens all the time, where whether it’s a consumer company or an enterprise company, why is something? Why is somebody using something in their daily life? Right? Does it go from a novelty to a necessity? Does it become a basic thing that I do every day? Because there’s only so much time in the day and so much budget in the day. And like, how much of this is making me as an individual, whether I’m a developer at a big company or a consumer, making me feel good, making me feel like I have superpowers, making me look cool-all these like messy human things. Those are those latent needs, and I think that’s the thing doesn’t get talked about enough in the current sort of AI bubble that we’re in, because a lot of people just talk about, oh, it’s just going to make you do things faster. You know these workflows, this automation. It’s like, what does someone even need that, right? I feel like that a lot of that is incremental thinking as people think about AI. A faster workflow is nice, but the real question is, should that workflow even exist, right? And I think people that start to think about that, I think that’s the AI native stuff. That’s like, oh, it’s not this like duct taped together thing that software patches up. It’s like wow, it’s a totally different way to do things, right? It goes back to that was that Henry Ford that you asked people what they wanted a faster horse or electric car, right? Like most people aren’t thinking about the electric car in this moment. A lot of the ideas you’re seeing are incremental. They’re that faster horse idea. So what I get excited about as I look at AI companies is like who’s really building the electric bike? Who’s revolutionizing something in a completely new way? Those are the companies I think that will be built to last.
29:08
So, so what do you think of a company like Whisper Flow? Right, it’s like a core part of my stack. I use it all the time, but it-I mean-it feels a little thinner, right? Maybe not as durable. Maybe not completely reinventing something that’s a necessity, but it’s certainly sped up my work a lot. Right, I just hold down a button and I record everything I want. Now I don’t have to type it. So, you know, how do you square the circle of like long term durability and necessity?
29:38
Absolutely. So I think Whisper Flow, great product. The question I have, though, is they’ve bought the chance to be a company that can be everlasting, right? If it’s just translating my conversations and transcribing them and doing summaries of them, nice but incremental. But they have the chance to do something with this user base, with the audience they’ve bought, right? So. The question I have is, what is the real long-term durability? What what is that team building towards? Right, if they’re building up a you know this data profile of a niche, then they create the avatar for a niche, so I interact in meetings in a completely different way. Is there some bigger idea there? So I think they you know clearly have great customer base and are growing, but the question is, what do you do with that, right? And I think a lot of companies are in this moment because venture is so easy to raise, easier than ever right now, based off even resumes and just there’s so much demand for these revolutionary companies. What are you going to do with this kind of chance that you’ve kind of bought yourself?
30:35
How are you both thinking about underwriting in this era, right? Like we’ve, you know, the what used to be a Series A, everything’s a trillion
30:44
dollar underwrite. That’s it. You know, everything’s a trillion dollar underwrite. That’s the baseline. You know, that justifies it
30:50
all. 100% You know, but where I’m going with this is like what used to be like a six on 30 Series A. I remember one of our first notable Series A’s wasn’t six on 30, and like I remember so many LPs saying this is ridiculous-the multiple on revenue that this company is getting. But now that’s like a very lukewarm seat, right? We’re seeing 30 to 40x, you know, trailing 12 months multiples, even higher, and in some cases, like Instinct just raised pre-revenue at a two and a half billion dollar valuation, which is you know more equity value than Airtable just sold for after 13 years. So would would love to to hear your perspective on kind of the cycle and underwriting that we’re seeing.
31:37
Yeah, I I we talk about this All the time, there’s maybe two big ideas that we’ve talked about. One’s Manish’s, so I’ll let him cover companies that are defining the ecosystem. I’m going to say something different, which is so many of the companies, and of which Whisper is a great, great example. They are so of the moment, and by that I mean like super interesting what’s possible now. It’s incredible what you can do with a model around you know dictation. It’s incredible what you can do you know with models about transcription in medicine right now. There are all these like the present moment is incredible. I’m pretty indifferent to the present. I want people to build things that are way more what if, like what if this was possible? That could be that could be what if I actually used all these stablecoin rails and created an alternative to Visa. That could be, you know, what if robots got adopted through the manufacturing process? Where normally that’s a kludgy, slow process, but ours is going to be fast. And here’s how our theory, but not just ambitious, like that’s a complete cop out. Everyone’s looking for ambitious founders, but people that have a really different view of what the future is going to look like, and it’s because the present is so interesting. But for because it’s so interesting, there are 50 people doing every single obvious iteration, and doesn’t mean some of them won’t work, but it just it’s starting to get less interesting to me, and so that’s the stuff that we’re mostly drawn to, and that could be in the fintech or enterprise or robotic space because all those have a lot of dynamism to them. But you’re looking for founders that then come to you with the unique attributes, that unique again that ground truth that they’ve they’ve found through customer discovery, and then those are the things we’re going to do. And yeah, in this market, that ambitious founder might get that done at 50 or God’s sakes, 100. Jesus Christ, like, and some of that’s the the the what’s on the field, but really you’re you’re looking for the shortages. I think great ideas, that that’s the big thing. And then some of those get really big, as you’ve talked about. Yeah,
34:12
I think you know the lens that I like to use sometimes is, especially in these moments where everything is so frothy. You know, having been through some cycles, looking at a company going back to basics, right? And it’s like, why should this company exist? And over time, will it be a fundamental part of our economy, right? Those are the big companies, right? Those are the sometimes people say, oh, is it 100-year company, that sort of thing? Will this company be part of our economy? Will it be something fundamental that’s necessary, kind of an infrastructure in some shape and form? Even if I think about my lived experience at Google, you know, from to the world, a consumer company, right? But it’s kind of infrastructure, right? It is how people for the last 20 plus years have accessed the internet and the World Wide Web, right? It became fundamental to the way we do something, and I think in this moment, where is it a trillion dollar? Is it a $2 trillion? No idea. Right, no idea what that means. Even I, I mean, if you’d ask me, I left Google in 2010. Is Google going to be a trillion dollar company? And then you’re out of your mind. That’s crazy, right? Like, so to the fact that it’s now whatever it is, two, $4 trillion. It’s like I’m a believer, but gosh, I wouldn’t have not expected that 15 years ago. And I think in this moment, it’s going back to like, does this thing become fundamental to how I do stuff every day. Is it infrastructure? If you think about that, I think it really cuts through a lot of the noise because honestly, I think it’s hard to conceive of what’s the difference between 1,000,000,000,005 trillion. I don’t really know the weight of that, right?
35:34
So, we’ve talked a lot about these consensus bets, kind of on one end of the spectrum. We’ve talked a lot about these formation bets, right? Finding these early people with an insight or a secret and something that you know has yet to play out. What what do you think happens to the venture firms that sort of play in the middle, right? They’re not doing the hyperscaling, crazy consensus stuff, and and they’re not doing the formation.
36:00
I mean, Nick. I think it’s so deeply hard, and my view of this is right now, and this is definitely talking our own book, and it happens to be all of our own books. Which is, I think, you’re either this a founder centric investment firm. What does that mean for us? It means you’ve been there since the beginning. You believed in whether it’s Chapter or Androll or Apex or Cape or pick your example of your own portfolio. You’ve been there early and you’ve realized through all the steps, it’s inflecting, and you could put more dollars in. You can be that closer partner the whole way through, and that’s an interesting journey to be on. I think in the other extreme, there’s basically the the platform players, and these directionally, not take away from anything here, but directionally, your power is brand and it’s access deals, and you can deploy lots of money whether it’s SpaceX at, you know, 300 billion or you know whatever trillion. You’re you’re still making money from there up, I think. But that’s the maturing of the asset class. I think those are where the two opportunities are. I think everything else in the middle, and I can think of a lot of names to name. They can be successful. It’s just really hard. And I think the honest thing we talked a lot about partnership at the beginning of this, I think a lot of them are fragile to that one or two good person in that firm that retires, or that great person you thought was going to work out, and they don’t, because they’re really they’re structurally disadvantaged if you don’t have early and intimacy and intimacy to the business, or you don’t have this brand where directly everything kind of comes across your plate. You can decide if that’s the one you want to do. It’s it’s it’s much more fragile. And again, I think this is less like we’re smart, we’re dumb. Other people are smart. Um, I think this is just the full the maturing of the asset class the same way you could like gaze into the public markets and be like, well these ETFs won and these quants won and everything else in the middle is fucking throwing darts and that is just facts and I think we’re going through a similar maturity in the venture ecosystem and that’s what it looks like right now.
38:19
Yeah, totally agree with that. I think that it’s such a the maturity asset class is driving so much of this, and I think you look at the size of funds and even in like driving these valuations. There’s all these unique things happening over the last five six years. The scary thing I think is, and I think about the asset class as a whole. There’s been so much winning over the last decade in the asset class, and not that much of losing and the learned lessons and the muscle memory a lot of these young investors are building is probably not the best, right? Nick, you’ve been around for a while. Ross and I’ve been around for a while. I mean, when stuff goes sideways, it goes really sideways, and I, I’m, I’m worried about that moment. Yeah.
38:56
See, I think the firms are going to be okay because I think at the firm level, there’s always another. It’s it’s it’s it’s uh it’s 2023. All your fintechs imploding, but you’re telling your LPs like I got this other thing coming. This is I feel like there’s always like ballast in the firm. It’s like another couple in
39:13
the future.
39:14
Exactly, you know, like yeah, like that ship sunk, but this one just went out. It’s gotta be great. The
39:20
2021 vintage is terrible for everyone. Let’s forget about that. Yeah, yeah. Though
39:25
that though, I mean, the part that does get missed there is there’s a whole 23 was a funny example because there are all these people that got pushed out of firms because it had to be somebody’s fault that we did all those deals. It’s like the firm’s good. Yeah, I’m good.
39:40
Scapegoating industry wide,
39:42
yeah, just like you know, it’s like scapegoating humans being humans, right? It’s tricky. So I think I think the venture firm keeps keeps going. Yeah, but but it’s it’s definitely more bruising for some than for others. Well, Ross,
39:56
if I’ve learned anything on this show, VCs are are masters of the. So, dude,
40:03
you know this. Don’t don’t tell anybody. The job is mostly sales.
40:08
Yeah, yeah.
40:09
Selling great founders you want to work with. Selling LPs. We’re in the influence. Join your companies. It just it’s 100% that. Now there’s got to be. We all know there’s got to be meat to the meal. Blah blah blah blah blah blah, but like all the execution is just it’s it’s sales and all these dimensions, and I took me a long that took me a long time to learn to understand.
40:31
I had to reshape my brain coming from like operator world to understand what venture was, and now I really define my world in two ways. My job is to sell money and customer service-that is it. You know, like I am always available anytime for the founder. That is the job. You gotta love that part of it. And it’s just like everybody’s money’s green. What is my special sauce that I’m gonna add? And who are my people too? I think I think a little bit of the realization of like not every deal is for me, and I’m not for every deal, right? And I think probably that’s maturing and sort of what it means to be comfortable as a venture capitalist. Like there are companies which are amazing. There’s like, yeah, I probably had no right to see that deal, and they probably should never talk to me, right? Like that, like I that that makes sense. But there’s this other class of things like I should go win that deal all day long. That is my people. I need to seek them out. Yeah.
41:18
By the way, this is also true. Real quick, I wonder if this is true of your experience all the way to LPs. These are LPs, the people that invest with us. We had a during our our annual meeting, we were talking at one company, and unfortunately the company wasn’t successful. And it came up in the AGM on stage. It was like it was literally like discussion. Like this was so sad. Like it was like like I was disappointed. My partners were disappointed. We were like saying that to the people, and afterwards we had multiple LPs come up. Like that was so awesome because they’re so used to it’s all up into the right chuck chuck, and it was an inadvertent thing. But it’s part of I think us as a firm, and you know Chauncey and Art on the team, and everybody else is we’re very transparent, and that ain’t for everybody. There’s a whole other set of people where that doesn’t feel comfortable to them. The transparency is maybe worrisome, but they don’t want to hear about the thing that didn’t work, because then they have to report that, or if they have to say that, or have that in their head, and so that’s another thing that, again, finding your people I think is a big part of venture from the LP side to your your partners to then the folks that you want to work with, and then when it does work, it feels you know, it feels fun.
42:39
Absolutely, LP firm fit, firm founder fit,
42:43
the whole way through, right?
42:44
Yeah. When it comes to the LPs, like somebody was just asking me the other day, Nick, doesn’t it suck that you have to spend so much time fundraising from LPs? And and I said candidly, do I wish I could spend a little less time on that? Sure, but fundraising sharpens the spear. Like if you figure out why you’re here, why it matters, the product that you’re uniquely selling, and work for it, work your ass off for it, then you respect the money so much more, and you can pitch better to the founders.
43:19
Yeah, 100% I’ll give you two quick examples. This one is we have a late stage fund that piles in dollars of things we’ve already done. It has a really aggressive underwrite on it, five to 10x underwrite. And one of the reasons for that is because it means we go after our most ambitious companies. The other reason is because because that product that that’s a unique for our LPs versus something where they can go like hey I’m looking a two to 3x growth fund that’s what you should expect and that’s what they can get they get from a bunch of different people from KKR to some other you know growth team if we’re trying to do something more ambitious-that-that’s good, but also like that’s what the market wants, and then you got to go. That has to show up, but that-that’s the expectation. So that’s-that’s a part that’s been really helpful, really, really helpful.
44:15
Well, that you know the other
44:16
one, by the way, if I can-you mentioned like the role, the firm, and I actually that you have as a partner. I I had a lot of in my early days of being in venture. I knew a guy, I knew a girl, I knew somebody could hire. I had an opinion about product. I cannot like, I I’m I’m like you. I’m a founder. I had this awkward point in the middle of my career, where I just didn’t want to be a goddamn banker that had to show it, that happened to show up early, and I mentioned that to say now I know our job. Our job is to help the company raise its next round of funding, and what does that mean? It means the company, whether it’s a. Apex or chapter or someone just getting started, they’re always going to understand their business better than we will. But we understand the venture ecosystem, what it takes to unlock the A, the B, the C, now all the way the IPO, and can help that company plot that path. And a trusted person that understands the company and can do that, like that’s very rare. Like and that’s you don’t see it literally around the table, and so it’s a rare point. I see you nodding, and it’s. I think it’s probably the same thing you feel. It’s like that’s like you actually have a lot of value you can bring to that company if you can help them do that.
45:34
100% couldn’t agree more. I think that that’s at least from my standpoint, that’s the single most valuable thing we can contribute because we understand the venture markets better than any founder should, and they understand their business better than any VC should. And speaking of founders, you know we’re short on time, but I do want to wrap up with founder profiles, and you both seen a lot, and you’ve had success. Maybe we’ll start with Manish and Ross. I’d love to hear you weigh on, weigh in because you’ve got defense tech experience, etc. But, but Manish, do you think the profile of successful founders has changed in the past 10 years? You know, are the winning founders today? Do is there characteristics, whether they’re objective or subjective, that are different, that are required in this AI supercycle to succeed.
46:29
Yeah, I do think. I think. I think maybe two thoughts. I think a founder is a founder, right? I think there are people that are unique, special, irrational. All those skill sets, being able to recruit people and have them go on this crazy journey with you, giving up their million-dollar salaries at Meta and etc. That is all, I think, the same. I think the thing that’s different in this moment is like founder. I think founding has become much more performative. I think because of the media cycle and podcasts and all these other things, just getting your message out there, it’s become performative at some level, right? And that’s I think a little bit sometimes the dark underbelly of like people can like pitch their book, tell these stories, go on their TED talks all the time, but are they actually building something of value? And sometimes I think that gets lost, you know. And I think that is the danger of young people because that cycle now we’re past. It’s now it’s a learned behavior, right? I look at my young students at Stanford. Some of them could be amazing founders, but some of them just feel like they have to be so performative in the media all the time to build their product. And look, I’m guilty of this too, right? When I meet a founder that’s like maybe a big influencer or whatever, you’re like, oh, that’s interesting. Like, what are their thoughts on this? Versus somebody who maybe has no social media presence, right? Or you maybe don’t even connect to that person. So I think in this moment in time, founding and entrepreneurship has become very performative. I think the way we celebrate people in tech and CEOs-if I think about a Steve Jobs or Jobs or Mark Zuckerberg-who are brilliant people but have become like celebrities, right? It’s like the way young people kind of think about them versus like, well, they’re a CEO of a business, right? And I think those things are not great for the for founders because it’s such a distraction from company building. And company building is really hard, you know. That’s always been hard, but now I actually have to have my like Twitter feed and all this other stuff too, just to kind of you know like running to stay in place. I don’t like that part of it. Yeah.
48:19
Any thoughts on that, Ross?
48:22
Yeah, I I just think it’s you gotta have so much grit to start and run these companies. I just think that’s that that’s the big attribute because it just like also this stuff takes 10 years, and I mean I know Nick, you know when the bond market is going to turn. Don’t tell us. Don’t tell us. I know, but it will, or something else will, and it’s going to get really hard. And your point, it’s not going to matter how popular you were on Twitter or how catchy your thing was. It’s going to be like, well, are these people going to stay in my job, do I find something when my market gets cut in half because all the startups in defense tech went away? They’re going to go away. Don’t know exactly which ones. That’s the hard part. Those kinds of structural changes you just got to be resilient so way through and just so so so so driven to make those companies work, and I think that’s going to be the measure of the people the whole way through. And I think that’s just what we’re always trying to figure out. In addition to like you know, can they see the matrix of the company that we talked about before about what to build? It’s that that that human element is very very tricky, very very tricky to figure out.
49:44
I love it. I love it. I’ve done a couple deals now with a firm called Altos and sit sit on a board with Honam, and he wrote this article called “Foxes and Hedgehogs in Silicon Valley, and I I still feel like it’s one of the most valuable things I’ve read.
49:58
They they are amazing. By the way, they are. Example of like in that firm because we have a whole podcast. It’s a love fest for Altos. On one hand, they are the Sequoia of South Korea. They see every deal, operate a brand unchallenged in that country, and then they also do this intimacy early combo. So they’re they’re they’re sneaky good at both of those things. So you know. Look, you know, one day X, Y, Z is going to be big in Indonesia. We’re just be like, yeah, we got we got both sides of this coin done. No, they are they’re amazing. Yeah, really, really good.
50:30
Awesome. Couple quick wrap ups here, guys. If we could feature anyone on the show, who do you think we should interview, and what topic would you like to hear them speak about?
50:38
I mean, you should get Elon Musk to come in here and talk about his views about society. Let me call him now. Yeah, I like that
50:47
one. That’d be good. Go for it, Dick. Yeah.
50:50
All right. Do you guys have a book, article, or video that you would recommend to listeners?
50:54
Oh, I’ll tell you. One of my favorite books is a book called Press Here. So I have a young daughter who’s three. It’s a book. It’s a written by this French author, which is basically like a brilliant sort of mind trick of like you touch the pages and they do things, but it’s just paper. So I love that book. I give it to like anybody who’s like thinking about building anything because it’s just so beautifully written and so simplistic.
51:18
I I actually have a full on business book and I read basically no business books. Got bad at my job. There’s this one book that’s old called Good Strategy, Bad Strategy, and the basic premise is you should do things that you can do that cause your competitors to have to spend 10x, 100x the dollars to compensate for, and I think it’s relevant if you’re building against Andro or you’re building against Nvidia right now, or if you’re the U.S. government, you know, building against you know global adversaries. This idea of not like I’m going to be 10% or I’m going to get the upper hand, but like no, no, I’m going to invest in machine in submarine baffling and make my subs really quiet, so the Russians have to spend, you know, a bazillion dollars to every dollar I do to find those subs. It has the equivalent just business stories in a really good-natured, you know, engaging way that really resonated with me, and I think it’s an idea of very much at the time.
52:21
Do you have any habits or behaviors that are a secret weapon?
52:25
Paranoia. Like deep-seated
52:30
insecurity is pretty, you know, pretty good. Trying hard to earn mom’s love.
52:35
Yeah. Would we be here without it?
52:38
It’s the only motivator. I do think one thing we didn’t talk that much about sourcing. I know you do in a lot of the other podcasts. Something we do. I mean, Manish is a big deal at Twitter. I’m not. I’m not on the socials a lot. Instead, what I do is I just go to my best founders and be like, John, Brian, Ian, who have you, Phaedra? I can’t meet anybody as good as you. What the hell am I doing wrong? Who is the person that we couldn’t hire? You think is amazing, used to work with, and I just go spend time with them. I kind of shake the founder tree to find more founders, and it’s. I think it works incredibly well for finding the next person to back. Also, is a good strategy for recruiting as well. If you’re trying to build up your engineering team, just spend more time shaking the shaking the greatness out of great people around you.
53:30
All right, guys, and then what is the best way for listeners to connect with you and follow along with X, Y, Z?
53:37
You can always find me online. Just look for Ross Fubini and LinkedIn is usually easiest. That’s F U B I and I. Also on Twitter and Instagram, but a bit tougher.
53:48
Yeah, and Manish Patel. Yeah, as you start as Manish Patel at Stanford. Or sorry, X Y Z. That works too.
53:56
Perfect. Ross Fubini, Manish Patel. The firm is X Y Z. Guys, this was a great ride. I had a lot of fun today, and appreciate you joining me. Thank you so much.
54:05
Thanks so much. Thanks, Nick.
54:12
All right, that’ll wrap up today’s interview. If you enjoyed the episode or a previous one, let the guest 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 overprepare, choose carefully, and invest confidently. Thanks so much for listening.
