we're back yeah and here with gary tan
so we're going to be talking more about
vc stuff
because um i have a lot of friends who
say that ultimately they want to end up
being a vc investor totally is that how
we say a vc investor a venture
capitalist
sure a vc their reasoning is that
they don't really want to do the work of
building things but they want to
um advise people yeah you know think
about what would be a good product
and then bet on oh my god i guess i
would tell them don't do it okay
yeah because then you'll end up being
remember earlier in the in the episode
we were talking about
there are investors who lead and they
make up their own minds
and then there are people who just check
check check check the box and then
only want to you know invest when it's
absolutely a sure thing
right but i guess even okay let's just
say
they do want to and like they do want to
lead yeah right they still want to lead
right
i don't know if i'm um reeling their
messages
correctly but for me it sounds like uh
they don't really want to do the work
right they want to do the purely
intellectual thing yeah yeah which is
oh vc is so much work though that's what
i was thinking so can you
tell me about like your day-to-day work
yeah totally
um i mean vc done right is literally
like your schedule is like
you know 9am to 6pm or honestly
i have kids now so you know if i didn't
i'd probably be doing like literally
like 7am
till like 2 a.m you know just things all
day
right uh but now that i do have two
young children i have to actually cut it
back to like well
get to office at nine i have to leave by
five so i pick up my four-year-old right
um and of course i can get a few hours
in the evening but i better sleep
because you know my five-month-old is
gonna cry all night and so
honestly this job done right will
actually fill
uh any amount of space that you give it
and so it is a lot of work to do it
right
because uh every other day um
someone lost their best customer they
lost their director of engineering
uh you know someone somewhere in my
portfolio people are getting punched in
the face
and you know on that day when maybe the
company's gonna die
i have to pick up the phone i can't just
be like decline right
so what do you have to do like if a
company dies it's not like
you have it's not like you have a say on
what they they have to do so what do you
do to prevent that
yeah a lot of it is how do we find a
better person like if we're if it's
personnel like how do we recruit how do
we hire
get me on the phone with this person if
it's losing a customer like let's find
other customers let's make a spreadsheet
of a hundred other people
who could fill in that hole unless you
know we'll actually comb through all
uh nine partners at initialized their
whole networks and then we'll
we actually built software for this to
basically get customers and
hire people for our companies and so all
of these things are a lot of work like
we kind of
run it like a startup itself yeah i
actually had no idea that vcs were such
help
well we do it this way there are a few
other people who do it like that andreas
and horowitz is known to have
you know probably more than 100 people
who work as an operating company
on behalf of their founders that's
really cool yeah we have nine
so we're just getting started okay so
you call these operators
uh yeah operating partners but you know
every single one of our operating
partners also can
do their own deals and bring in
companies um they're not expected to
but you know we want them to learn how
to do the business
okay so what kind of people would be
would become good vcs yeah
honestly great founders are sort of the
best because
um those are the people who can actually
help like
when something happens it's just not you
know totally new
you know i don't have to call in a favor
from my network it's like oh when i
when i had that problem here's what i
did
and that's just more useful when you're
trying to avoid the landmines
and so the best version of that is
actually start a company
and even if it doesn't work out like
you'll have learned so much
the next best thing honestly is join a
fast-growing company
as it's you know sort of in hyper growth
here's a really useful
rule of thumb for your viewers you can
basically
if you wanted to evaluate any startup
the way a vc does
just figure out what the growth rate is
um and this might be
revenue it might be users
it depends on what the company is but uh
basically
for seed to series a if they're growing
3x a year
um that's pretty good like that's sort
of like a solid b
um anything 4x and above that's like an
a
like a 5 is like a plus it's like 5x a
year
really really hard to sustain and then
anything growing around 2x like
c plus c like you know and this is sort
of a measure of why startups are so hard
like literally startups are growth
and if you've ever tried to grow
something like buy 2
even 2x a year that's really hard um but
that's sort of how people can
evaluate as uh you know a non-vc you
know just figure out how fast that thing
is growing and
that'll actually tell you whether your
startup is living or dying
they're like sharks basically they have
to keep growing otherwise they'll die
they have to keep moving otherwise
they'll die
yeah so for engineers and pms currently
yeah if they want to go into vc
then the best thing they should do is
join a startup or even start their own
startup so that they can build empathy
totally startups that they will invest
in right absolutely and then it's about
that story
like you know what did you do for that
company and you know
a lot of people jump over to vc because
they're the person
who they were the growth pm for
something that grew from like a million
users to 100 million users
and that's the kind of experience that
is like almost impossible to get and
those are the people who are deeply
sought after
in the world for their advice and so
you know that's why joining a
fast-growing startup sometimes is even
better than starting your own because
it's really hard to start your own so
imagine if they have all the skills
like how does it work in terms of the
money because i don't really understand
how the vc world works
so do you usually try to join a vc firm
and then
pay your stake so that you could be a
managing partner
or operating partner how does it work
how do you even join one
yeah absolutely i think there are kind
of a few different paths
the first one would be you know work as
an operator
maybe early in your career find some
sort of win like i was the person who
scaled like
you know this 10x at you know this fast
growing company
um and then early in people's career
they could join as an associate
at a venture capital firm and um usually
you have to find your way to networking
to
meet the person a lot of it is just
purely trust right if people
think you're smart and scrappy and
hungry
and you know they've met you like
sometimes they're just
gonna hire you like the next time they
have an associate the next level is sort
of
uh principles i mean these are people
who sort of start as vcs
um and then get promoted once and those
are people who start taking
more investing responsibility associates
tend to do
mainly sourcing so you know sometimes
going to events or
you know going into excel spreadsheets
or writing software to basically go
come through the internet and figure out
what's happening what are companies that
could be good opportunities and then
they'll work with you know the general
partner
uh or you know basically the investing
partner
to bring that to the whole team and so
you know the associate role is
not that glamorous but it's kind of like
starting out in any business it starts
out as you kind of have to do
like the skutt work and then as you go
uh associate
principal um sometimes there's a
managing director role
and then you know making partner is
kind of what it sounds like it's a
really big deal because only then do you
really get a significant part of
sort of the winnings from a given fund
we call that carry in the business
okay so only after you return the whole
fund
the partners tend to get 20 to 30
percent of
uh anything after you return the money
to your limited partners
nice limited partners are the people who
give you money to invest
got it okay so for example for
initialized capital
you and alexis you guys are the founding
partners
right and then you guys probably put in
your own money at first that's right
and then you guys have a bunch of i
guess
associates that maybe become principal
and then maybe a partner we just have
partners
you guys just have partners okay cool so
they have partners so they
put a stake in do they have to like pay
an amount to be in it or like invest
their own money
oh i mean we're basically investing on
behalf of some of the biggest
endowments and institutions in the world
so universities
you know when you watch pbs and you hear
about you know x foundation and y
foundation
uh there are large pools of capital that
are billions of dollars that are
basically run
uh often to support some sort of
non-profit or some sort of
you know university some sort of big
goal those are
pools of capital that have to grow in
order to actually support the mission so
uh you know harvard or stanford or any
university that has an endowment
they actually can't spend the money that
they have when you hear about harvard
having 38 billion dollars
they can't just take a dollar out of
that endowment and just uh you know give
someone a scholarship
they actually have to go and give that
to other investors
and those you know private equity or
hedge funds or
you know fidelity there's so many ways
to invest
and then venture capital uh is crazy
because it's only
you know something like one percent or
you know
all of venture capital is uh only a
hundred billion dollars a year
whereas the total amount of money going
in through the financial system is
easily in the trillions
and so uh everything that we talk about
with venture capital
it's basically this tiny moat of dust on
this vast ocean of finance
and there's more capital in the world
than people know what to do with at this
point
so which is like mind-boggling for me
like when if you told the 15-year-old me
that
there's more money in the world than
anyone knows what to do with i
wouldn't believe you um because we
didn't have money
and how you know and so that's one of
the core problems in society today it's
like
how do these giant pools of capital
actually put it towards
you know businesses that employ people
that actually are useful for society
yeah so that's why venture capital is
probably one of the most important
businesses and i'm you know i'm glad
people want to do it
but the best venture capitalists are
probably people who also started them
their own too so they can actually help
that makes a lot of sense
can you tell me a little bit of the
timeline for initialized capital like
how much money you've raised
and now like how much you've grown and
stuff like that just to give some
numbers yeah yeah totally uh we started
off with a small seven million dollar
fund about seven years ago and uh
now we have over 500 million dollars
under management
um our newest fund is 225 million
dollars so
we will write checks of a million
dollars to five million dollars
uh in exchange for about 15 percent of
companies
um and so we'll lead and we'll do the
whole round and you know
if we if we write a really big check
we'll sit on the board um and that was
very different like we are
a true institutional venture capital
firm before uh
now but before we actually started kind
of like angels like we were writing
uh 50 000 checks 25 000 checks and even
then i was like that's a crazy amount of
money
um but we were writing them into
companies as the first check
and those companies became billion
dollar companies and so
you know that kept happening and we
realized well instead of sending 20 or
30 emails to all
everyone else saying hey this is a good
company you should invest in it
we just write one check the founder is
done and then we get back to work
right and that was sort of the evolution
of us from going
tiny checks and helping other people to
helping other investors to well we'll
just do the whole thing
so what were some of your biggest wins
personally
that you have rewarded yourself
financially the most
i mean honestly i've just been super
lucky like yeah for me
stanford was pretty crazy because the
people you got to meet i mean you went
to waterloo like the people you get to
sit next to
people who are going to go on and do all
kinds of insane stuff and when i was
there i had no idea
okay so i guess what i meant was like
what was your best exit
and how much did you make on it yeah
yeah so i've actually never talked about
this but we did sell posters for 20
million dollars
nice and how many co-founders uh two
co-founders
okay okay and did you have initial
investors
yes we did um i won't tell you how much
i actually made um
but i can tell you how uh as a vc i try
and figure out how much people made from
a given exit
so obviously you have the acquisition
price and then again going back to cap
table
you can kind of guess most co-founders
are probably close to equal
but not always assuming it makes the
math easier if everyone's equal
and then basically count the number of
funding rounds they've done
if it's an early round like a seed round
or a series a
sometimes a series b it's about 20
percent of dilution meaning
investors came in and bought 20 of the
company at that moment and then the
founders and the employees
would only own 80 after that funding
round so
if you had 50 and then after one funding
round you would have 40
yeah exactly um and then you can count
them up
basically the series c's c d e f like g
you know they go on for a while these
days um
those tend to go from you know 10 for
the b
uh down to sometimes just one or two
percent
for the much later rounds so almost all
of the dilution is actually
usually in the seeds series a and b oh
you see okay just mostly a and b so if
you ever wanted to do the math just
count the percentages
and then do the math and multiply it by
the acquisition price and that's how
much that person probably made
and um sorry for asking this question
but what about
being a vc how much can you make from
that given a success
i'll tell you how to do the math for
that too all right um
let's make the math easy say vc has a
hundred million dollar
venture capital fund so they raised a
hundred million dollars
from other people um and then a lot of
people often ask like how much does the
vc
usually put in so um it varies
it's sometimes as low as one percent um
you know sometimes it's as high as i
think um
peter thiel is putting in 20 of the
billion and a half dollar fund
that he's raising for founders fund or
has raised so it varies
so for a 100 million dollar fund the
people who run that fund might only put
a million dollars in total and then what
happens is
they invest that over usually two to
three years
and then ten sort of ten to 15 years
from from
that they're kind of expected to give
back
something like between surprisingly
a low number of like maybe 2x or 3x like
2x's 2x to 3x is basically
considered a pretty decent fund so
meaning
investors gave them 100 million and they
have to give back 200 to 300 million
dollars in the next 10 to 15 years
and then the typical carry for a vc fund
is 20 to 30 percent
and so uh all of the vc partnership if
they only
if it's only a 2x fund would make about
20 million dollars
nice section that's those really simple
numbers yeah but it is
an incredible job right that's right
finance is crazy
um so friends of mine actually started a
company with peter thiel in 2004
and i was 22 years old just graduated
um didn't know anything about money or
how
companies started didn't know anything
about venture capital i got my first
like full-time job with microsoft up in
seattle program manager yeah program
manager
uh for windows mobile weirdly enough um
you know two three years before the
iphone
uh ever came out and so i saw them just
kind of
try and copy designs like literally
copying like the checkbox mentality of
um
you know here's what rim does let's just
copy it but it was my first job i had
health insurance
uh you know i actually could have a
really nice apartment i ran out and
bought a new car
and um and then my friends called and
said hey you got to quit your job
we're starting a company with peter
thiel you know the guy i mean and peter
thiel was not a billionaire yet i think
he had just sold paypal
um he was probably worth like tens of
millions of dollars at that point which
was still like
insane and he said well come have dinner
with me i flew down to san francisco he
had just opened a french restaurant
uh the french restaurant was bad it was
terrible opening the french restaurant
yeah i mean it's one of those things
when you like sell a company
you know you buy the flashy car you like
open your own restaurant like
you know you get it all out of your
system that's funny it's called free
zone it was terrible the restaurant
closed almost immediately
but it was about the time he wrote the
500 000 check to facebook that made him
a billion dollars or it made him a true
billionaire and i had met him a bunch of
times i hadn't come to speak at stanford
so it wasn't like i
didn't know who this person was it's
like clearly a silicon valley legend
and here he was having dinner with me
the 22 year old
you know pro program manager he's like
gary what the hell are you doing at
microsoft you're wasting your life
um i'm so sure you quitting your job and
joining the startup is the right thing
he got out his personal checkbook and he
said um
i'm gonna write you a check for 70 000
which is my whole annual
salary in 2004 uh which is more money
than i'd ever you know i was probably
forty thousand dollars
in uh in debt um you know student loans
and credit cards and all that it's like
um and because because i ran out and i
didn't treat money like
um you know capital and time i treated
it as well i deserve this because i have
a job now
and you know job's really hard so i
should have nice stuff i
like basically fell into that trap of
being lulled into
like the physical having nice things you
know um and the problem was
i felt like i couldn't take the risk it
was crazy
right um i had her you know and so he
said
you know here take this check i'm sure
this is right i got on a plane back to
seattle and i said no
and that company became talenteer uh
which is you know worth 20 to 40 billion
dollars depending on who you talk to
yeah and so easily uh the equity from
that if i had joined at that moment as a
first engineer it would have been worth
probably close to 200 million dollars
and that's the kind of decisions those
are the kinds of decisions that people
have to make
when you're a maker it's completely
crazy um but it's commonplace you
spend any time in around here and you
just get run into people who
literally say no to the next facebook no
sorry
actually say no to actually google or
actually facebook actually
actually yeah but that's also kind of
the crazy thing about tech now it's like
we are touching
every part of society uh with software
and so
i don't know i spent a lot of time
trying to decide like why did i make
that
crazy 200 million dollar mistake
and um that it was just crazy
well i mean you're doing pretty well
right now so i think it's not that bad
yeah but um
if you did end up going you did end up
working for pound here
yeah i just joined a year later right a
year later so i mean i guess that's a
big difference in terms of like equity
percentages but
yeah totally uh but yeah so i guess that
was still pretty fruitful for you yeah
you designed a logo that was
cool that was fun and i got to see what
it was like you know what made me quit
was actually
seeing all of my friends who were way
smarter than me
uh quit their like i had a friend bob
mcgrew who quit his phd
at stanford and i said well you know
microsoft's a big deal but
you know phd at stanford is a bigger
deal and um
that's kind of what you end up finding
with a lot of these startups
i like to say that it's kind of like
packing a snowball
do you like 90s
90s obscure vintage video games like
for sony playstation i wasn't born oh
[ __ ]
okay okay there's this game called
katamari damacy
i think it might be like early 2000's is
it the phone the ball yeah yeah the one
yeah that's basically what a startup is
like actually uh you start out with this
tiny like in the game you're an alien
and you're about this high and you know
you're probably smaller than this
this cap right here you know i'll have a
prop here actually oh yeah
totally this is it's rolling around
and then the deal is um you're a little
alien rolling around a ball and anything
that
uh you are bigger than you pick up and
then it becomes
like a part of you and then you can pick
up bigger things
and anything that is too big and you try
and hit it uh you'll actually bounce off
and you'll get smaller and that's
basically what a startup is
all the time so getting a first customer
hiring your co-founder
hiring your first engineers raising your
first money
that's all you're doing like it's like
little bottle caps and things like that
sticking onto your ball and then you
know the funny thing about this game is
by the last few levels uh you know you
start picking up tables you pick up like
buildings cars by the end you're
actually picking up whole continents
and so that's kind of you know startups
are basically katamari damacy
and you know that's what you'll find in
these patterns it's like
hiring is really important raising money
is really important but then the most
important thing is actually
getting customers like that that telling
that story well will get you all of the
rest
you know you'll get people to drop what
they're doing and come join this thing
because hey this is a rocket ship
that's about to take off