E354: Why Most VCs Misunderstand Peter Thiel’s Power Law

So tell me about the last round interview you had with Peter Thiel right before you joined Founders Fund. I don't know if they still do this, but at Founders Fund, you basically go and you meet everybody who works there. There's not that many people who work there at any given time. It's around a dozen people. And then your last round interview is you go, or it used to be you would go and you'd have breakfast with Peter. I remember walking into his place when he was still living in San Francisco. Obviously, he's not anymore. And we had this. two-hour amazing conversation. And this is sort of after a decade of reading his stuff and being deeply engrossed in the Gospel of Peter. So this is an incredible moment for a young Eric, 28 at the time. We're talking about zero to one and founder psychology and different markets and being contrarian versus being consensus and the trade-offs therein, et cetera, et cetera. Very heady stuff. And I asked him some question. I don't remember what it was, but he's sort of just one of his textbook pauses where he just stops and thinks for around 15 seconds. And he looks at me and he goes, you know what, Eric, we're just trying to make investments. It's really all we're trying to do here. And that was an incredibly profound moment because I, like many other people in Silicon Valley, had been sort of operating under the premise that there is a magical way of selecting these unicorn companies. And that way of thinking about the world, those frameworks were unrelated from the fundamentals of the actual business. You read enough Paul Graham essays. You read zero to one. Maybe you get into the archives of Max Levchin's blog. I mean, Max is a great guy. You should absolutely read those blog posts. But you start to believe that you can have this portfolio of companies where 19 will go out of business and the 20th of your 20 companies will be 1,000x. That makes your entire career. And that was sort of the first time I started to think about this concept of, wait a minute, maybe what we need to do is return to the basics of investing. Double click on that. All of venture is driven by a couple premises that are true, but only in hindsight. The first premise is this premise of the power law. The number one driver of returns in your portfolio is sort of the only thing that matters. It's far more valuable than the next two or three companies combined. True in retrospect, it says nothing about how to select for that type of returning company. The second sort of premise that we all operate under is that the founder basically matters more than anything. There's a whole bunch of Twitter debate. I'm like, is it the founders, the market? The reality is it's both. Great founders wind up finding or creating great markets. Again, absolutely true. if you look on a historical basis, it says nothing about how to actually select for a founder who has what it takes to go the distance. Chris Stixen talked about this idea of this concept of an idea maze. And, you know, it's this concept that founders who truly know their space and are obsessed with their space can walk through sort of every possible scenario, thousands of iterations out into the future in ways that you or they never even thought they could iterate upon. And the reality is the most efficient way to navigate the idea maze is to think an awfully lot like a value investor and think about what are the modes of this business? What is your business model? What does the market look like? Try to really understand a little bit what the future looks like as far out as you can look. And through that process, two things will happen. One, you will quickly understand if you are impressed with this founder. 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The first to see wins. The rest follow. Learn more at alpha-sense.com slash how I invest. Two different ways to look at it. One is how do you build a good business, a sustainable business, maybe a business that compounds. Then there's the exact opposite, which is I would put the Mike Maples camp. So he doesn't even think great startups come from great businesses. They come from movements like Airbnb and Lyft. It's this central idea. And then the business model is built around that movement. Are these two ideas in conflict with each other? And if not, why not? I don't think they're in conflict with each other. I think they're fundamentally different ways of driving it sort of the same truth. It's sort of, you know, the blind men feeling different parts of the elephant, so to speak. Mike Maples has created incredible track record at the early stage because he has this way, like a lot of investors from sort of that vintage of early stage VCs of saying, hey, I'm going to have your back from day zero. and even like maples i would bet i've never sat in a pitch with him i've never met mike maples but i would bet previous podcast guys oh awesome wow i would bet that during his first one to four meetings with the founding team he's still asking the same fundamental questions what are you building why are you building it what makes you tick how are you eventually going to make money even if it's not for the next seven years you know he's still probably asking the same question because the only way to filter for somebody who can credibly build a movement is to ask them some very tough questions grounded in reality. To your point, he said that 70% of his best companies pivoted. So what do you do with that? When you invest, you're not investing in that business idea. You have to invest in the founder because if 70% of them will pivot, it's about the founder and not the business at the early stage. That might be a result of his strategy and his style of asking the screening questions. Like when I think about sort of the top four or five best investments I've made historically, I don't think any of them have pivoted. And these are, you know, at this point, anywhere from sort of one to $60 billion companies. Some of that might be there are different archetypes of founders. There's not an infinite number of archetypes definitionally, but there are many types of good founders. And I think one archetype is this person who is fundamentally driven by starting companies. Jack Dorsey is sort of this persona. He was starting companies early on in his career. He started several that are famous and have gone on to great success. that is different from somebody like Palmer Luckey or Trey Stevens who, you know, have sort of a singular mission that drives them forward. And it's clear from day zero, you know, when Trey and Matt Palmer and Brian set out to start Andrill, they said, we are going to fix this problem. Come hell or high water. Like this is the most important problem to protect the West that we can think of. And nothing will come in our way of solving that. So you're a lot less likely to pivot if that is the case. So Energy, another great example. You could say they pivoted. Man, you know, I was there in those seed and series A pitch meetings. They were talking about AI from day zero. Now, we may not have believed them. We may have thought they were just like a cute little Bitcoin mining company. But it was in the pitch deck and it was explicitly said at every meeting. You know, this is the direction of travel. You were in the earlier days of Founders Fund. And last time you chatted, you said that every partner was completely idiosyncratic, completely different from every other partner and everyone from the team was fundamentally different. What did you mean by that? I joined, I think it was around a billion dollar fund. When I left, it was around a three billion dollar fund. By the time I left Founders Fund, Cyan Bannister had left, Ken Howrey had left, Kevin Hartz had left, Jeff Lewis had left, Luke Nosek had left. So it was a substantially different place sort of from the beginning to the end. I think everybody at Founders Fund has a completely different strategy for selecting for effectively what become the world's best startups. Give me an example of that. I could talk about every one of these people because they're all so awesome in their own unique way. Trying to think of who the most contrasted are. Let's start with Napoleon Todd. Napoleon, extremely analytical, extremely data-driven, has what it takes to probably be a managing partner at any growth fund in the world. That is a wildly different approach than somebody like a Brian Singerman had when I was there. Brian, I don't think he's ever looked at a spreadsheet. I say I don't think he's ever looked at a spreadsheet because that's what he told me. Or at least not, you know, he didn't look at a spreadsheet when I was there. But Brian has this incredibly impressive way of filtering for authenticity. He can sit down with effectively any founder and with an incredibly high bar, tell if this person is authentically driven in a way that will allow them to work on this for the next 50%. 15 years, not the next two years, not the next seven years, for the next 15 years. If there are any similarities within the founders and partners, it's twofold. You know, one, founders fund has never fired a founder. That's number one. That's sort of the core tenant that you have to believe. What does that mean? The quantitative way of explaining this is the best returning companies in the world are led by founders. And they're led by founders. They've never fired a founder from the board. Correct. correct they've never pushed a pushed a founder out i mean the you know the lore is and that's part of the pitch that is that is part of the name it's in it's in the name i mean that is sort of the the founding mythos of founders fund was there was a you know paypal max and peter and luke and ken started started paypal and merged with elonsx.com to create this big paypal activity there were some board shenanigans i'm not super familiar with what they are but i think it's extensively documented somebody tried to effectively fire peter and when they sold paypal Well, Peter and Ken and Luke got together and said, we're going to start a venture fund where this never happens because that would have been the most value destructive moment in the entire company's history. This is a company that had a ton of life and death moments. Venture capital is obviously this recurring game of game theory. It not just about the latest round the latest founder So it makes sense why not firing founders might make sense as a sustainable strategy You could use it to get into the next company If you took every deal in its own is there not times to fire founders And I'm not talking about fraud or sexual abuse or some obvious answer, but strategically, does it not make sense to fire founders? I think by the time you're having a conversation about firing a founder, you have made the wrong choice. You have not properly underwritten the deal. The vast majority of alpha in venture capital comes down to deal selection. And founders, what I have found, founders are attracted to VCs that are credible and have conviction. And don't fire them. Or at least have a track record of not firing founders. That's always a nice to have. Yeah, right. Well, it's a nice to have, And I think it's an imperative if you want to have one of the best portfolios in the world. I mean, even look at sort of the most valuable companies in the world right now. How many of them are still in some way actively run by a founder? I mean, obviously NVIDIA, obviously Meta, in some ways Alphabet. Although obviously they have a professional CEO, but they have an entire history of having a professional CEO. That's my razor for whether I keep my positions when they go public. Is the founder staying on? That's like 80% of it. Is the founder still leaving it? Yep. Yeah. Pruittively makes sense because every business has sort of a stated market size. And that stated market size is tied to a series of products, just tied to a whole bunch of teams working really hard on those products. And if you want truly uncapped upside, you have to continuously reinvent yourself and create new products and create new markets. And the only way you're going to do that efficiently at scale with a level of aggression that you need to really dominate these markets is if your founder led. Founders fund at least position themselves or market themselves as we give money to founders and stay out of their way. For the most part, yes. You know, again, this is one of those things that it totally depends on the personality of the partner you're working with. Keith Reboy was there when I was there. Keith has a very different style, super hands-on. At least when he was at founders fund, you know, and probably today, I think he would still say He's never fired a founder, but he would select for a type of founder that wanted him to be very involved with the business. They wanted that active membership. They wanted him on the board. They wanted him as a thought partner, thinking strategically about a whole slew of issues that Keith could see around the corner for. what Scott Nolan would say and I've since adapted this into my own sort of elevator pitch for founders is if you think I can run your business better than you can I should not be investing in this company I want to invest in founders who have such conviction in what they're doing and are so well researched in it and this is the tough part they are so in touch with reality that everybody agrees I'm effectively here to be a sounding board to help them think through problems, but fundamentally not run the business. Is there an age aspect to that? I could see a 25-year-old founder that found himself running a $10 billion company might need some help versus a 45-year-old founder may have some tricks up there. It's a really good question. It depends on the tactical problem you're talking about. And most importantly, how good of a product and company you've built. because the best companies in the world are not necessarily the nicest places to work at and they're not necessarily the environments that are the most professional and doing things that seem really clean. They're oftentimes, I don't wanna say all the time because I don't know every company in the world, but they're oftentimes some of the messiest environments and they can afford to be messy because they have something else, a product, a distribution channel, a sales team, whatever it is. that is so good, it enables them to color outside of the lines and mess up pretty much everything else, and they're still going to succeed. People say good founder, and some people confuse good founder with good person, or good founder and nice person. What does it mean to be a good founder? I know it's the most basic question in the world, but what are some characteristics? I have this sort of ideal founder in my mind, and it's sort of my original mentor in Max Lepchin. and it's such a tough question because in some ways, every great founder is singular. There will only ever be one Max. There will only ever be one Steve Jobs. There will only ever be one Peter and Zuck, et cetera, et cetera. And yet there are these ways that feel like you can really easily make a 45-minute MBA lecture about. You have to be tenacious. There's some raw IQ element. You have to be good at convincing people to join your team. I do think these are all sort of obvious. And then I think the one thing that maybe is not obvious or at least more controversial is I do think you need to have a really good sense for product strategy. And effectively what that means is you can A-B test your way to a really good, really big company, but I don't think you will ever be able to A-B test your way to one of the biggest companies of all time. The biggest companies are category definers, which by definition means there is no playbook. Yes, yes. And A-B testing is effectively a reversion to the mean, which is an incredibly powerful tool and an incredibly logical thing to do. but it will more likely than not get you to a local maximum. I guess I've never thought about this, but A-B testing is the exact opposite. It's like this arc between A-B testing and first principles. They're opposite of each other, but they both get you to a certain place. But first principles is the one that actually creates the power laws. It creates the power law in the global sense. I think you can run a strategy where you invest in companies, maybe at early stage, certainly at later stages, certainly in private equity, you can run a strategy where your power lock company is like the best company in your portfolio, provides really good returns to LPs, but is not necessarily the next meta. To play devil's advocate on that, have you ever been involved in a lot of great companies? Have you ever seen 100X where somebody A-B tested or Uber for dogs or whatever this derivative idea and get to 100X? Is that even possible? I've never seen it. 100x, I mean, I don't have that many 100x's. I have a few. I've seen it once. Critically, they did not use A-B testing for the product. They used A-B testing as a tool in their tool belt. But I'll never forget this company. I invested, I did this around this company called Hugo Insurance. Keith was on the board. And they launched their beta test in California. This must have been 2019, I want to say. And they had, there was some magical number for CAC. I can't remember what it was, but let's just say it's $250 per user. The company for contacts is basically instant car insurance. It's on-demand car insurance. So you can get car insurance for a 24-hour period instead of signing up for a six-month cycle. It was like the original Metro Mile. It's more like the general. It's more like the general because they weren't saying – the gap they identified was basically saying, hey, there's a whole category of people who don't have car insurance. And a lot of them are working gig jobs. And maybe they need to drive for a three-day period, but they don't have their own car that they're just using every day. So economically, it doesn't make sense for them to sign up for a one-month or six-month period of time when they're just going to be using this thing for a few days. And they just want to stay within the bounds of the law. And sort of the flip side of that is you can price the risk much higher. And it's still a good deal for those drivers because they're concerned about the absolute dollar amount. They're not concerned about the, like, price per hour driving. That's Hugo. Really good idea. Like, that is an idea that you don't get to by A, B testing your way. You get it through sort of deep relationships with the customer really thinking hard, being super creative about what can we offer to this user base. so they launched this beta test and customer acquisition costs again i don't remember the exact numbers but it comes in way higher than the target it was like five to ten times higher it was you know multiple thousands of dollars we had this board meeting you know david ceo super cool head sort of presents the data says here's where the numbers came out i'm like looking at keith is on the board looking at keith i'm like oh man this these are like way over what we thought they would be. Keith and I are sort of like, hey, it's time to really think deeply about whether or not you guys have the right product. And David does not skip a beat, says, no, no, no, we have the right product. I am confident we have the right product. So this is the anti-A-B testing thesis. There are these seven parts of the conversion funnel and we just need to A-B test and iterate our way on each of them. and ironically that's first principle which is it may seem unreasonable but if 0.2 times 0.2 times 0.2 times 0.2 yes then the math works so therefore it is reasonable yes yes exactly keith and i are basically saying if you can do that great but you you will be the first founder we've ever seen sort of take something from such a super high cac to such a low cac and sure enough you know Three months later, next board meeting, CAC comes back and it's like 50% of what it was, but still way above the mark. And then three months later, it's 50% lower. And now it's 2x above the mark. And the next board meeting, it's just above where it needs to be, but not quite there. And, you know, long story short, it just hit sort of the target and just kept going down. When I look at that, I think moat. Who else is going to go through all these machinations to get to this low-cac? That's a great business. Yeah. You know what? I never actually thought about it like moat. I just thought about it like... It's hard work as a form of moat. Hard work and... Compounding as a form of moat. And this is the exact type of founder personality where I look at that and say there are all these points on that journey where I would have given up in some way. Perhaps I wouldn't have quit. I like to think I wouldn't have quit. But, you know, I would have pivoted. I would have tried to really aggressively change the product or go to a different state. I would have changed the team in all sorts of dramatic ways. And David just had conviction, knew what he was doing and executed like crazy. And that's why I think these whole founder attributes, the canonical founder, I actually think most people have it right. What most people don't realize is the degree, tenacity. When people think about what it takes to be a great founder, they're off at least by an order of magnitude of 10 in terms of persistence, tenacity. Yes. you can only see it. You must experience it either as the founder or as somebody next to the founder. You cannot internalize how much more difficult it is than your perception. So you're off by an order of magnitude of 10. Let's say you think it's 10 and it's 100. So now when you're at 25, you're like, I've done two and a half times more than like the greatest tenacity. No you four times off Yes So I think that the issue Same with IQ or maybe I would reframe it as first principles thinking How contrarian you have to be It a tealism Society is so mimetic that it takes somebody on the spectrum to actually be truly first principles. Like if you're not autistic or have, you know, any kind of neurodivergent, thank you. If you're not neurodivergent, you don't have what it takes to build the next $100 billion. That's the order of magnet. Like said another way, you have no chance as a normal human being with a normal mind. So I think canonical founder attributes are right. I just think people don't know the order of magnitude. Yes, the most unfair part of this game is you don't know what greatness looks like until you've seen it. And once you've seen it, it is super obvious and it will be super obvious to you for the rest of your life. But if you haven't seen it, you're kind of just feeling in the dark for it and you can identify it and it's harder to find, it's harder to seek out, it's harder to attract that type of talent. It's constrained to the neurodivergent filter, but that is a super powerful filter because it's one that everybody can understand. It's directionally correct. It's directionally correct. Yep. Let's say neurodivergent is 100. Yes, you could be 80. Yep. But if you're 12.5 and you thought it was 10. Yep, yep. By the way, immigrants are so successful. You think about it, first generation immigrants have raised at some point 50% of all venture capital. And then you think, holy crap, a lot of them can't even speak English without an accent. Like they have so many barriers and yet they still raise 50% of the capital. Why is that? Right. Because it takes that level of nonconformity where you are a true outsider to the society in order to have the ample amount of contrarianism to succeed as a founder. Yes. And this comes back to your age question. Does it matter how old the founder is because there's, you know, just the amount of support the VC gives the founder, is that connected to age in some way? And I struggle to answer it because if you're younger, you have all these things going against you. if you're able to break through and find product market fit, whatever it is that guide you to that point is probably so powerful that the other stuff doesn't really matter as much. Your accent, if you're an immigrant founder, does not matter if you are one of the best coders in the world. I'm going to say something a little bit controversial, but I've evolved massively in this direction. So when I started out, started my first company in early 20s, and I learned, I read books like early exits, like how to flip your company for 10, 20 million Like my family grew up in Section 8 housing, came here with $600. All I wanted to do was just to be financially successful, help my family. And I used to look at these VCs. They're like, oh, if you're not a billion dollar company, you're nothing. And I'm like, that is the most elitist crap I've ever heard. And now I've actually went to the opposite direction where when people pitch me these A-B tested companies that could get to 75 million, I almost want to barf. I'm like, that's so uninteresting. And I cringe because it's so elitist to look at it that way. And yet, dedicating your life, your time, your money to these two to three Xs, it feels like really not living up to my potential. And I guess my question is, do people at Founders Fund think like that? Or when you were there? There's a lot in that question. So let me meander a little bit here. The first question I have is, is that tactically correct? That's my first instinct. and where I would disagree with you is it's not elitist, it is memetic and where you get into trouble it's not when you're trying to push for more ambitious ideas and push for more ambitious founding teams it's when you have a model in your head of exactly what that type of elite founder looks like that memetic is based on last generation Yes. It doesn't come from anywhere. It comes from what worked last generation. I'm not even sure it's last generation. I think it's probably like from Twitter or something. Something way more, you know, it's from Twitter or it's from your cocktail party, you know, in South Park in San Francisco or something. To make your argument for you, you'd say it's sequential. It's great if you want to have a $100 billion company, but you need to, it's sequential. You need to build a real business, then raise $100 million, then build an even more real business. And it's sequential in nature. Like I said, the way to get these moonshots is not to try really hard to squint your eye and determine what's a moonshot and what's not, the best I have been able to do is understand what the 3 to 5x story is at that point in time. And that is never a cap on the size of business. In fact, if I really, really thought that was as big as a company could get, I would have that conversation with the founder. And if I walk away from that debate saying, yeah, I'm pretty sure I'm right, then you just don't invest. But most of the time, I think people are way better off. And certainly at Overlook Capital, what we're trying to do is spend our time just thinking about what is the next 3 to 5x? And do we really believe that company is intrinsically, will intrinsically be that 3 to 5x value sort of three to five years out? The reason we do that is it's just so hard to predict what the future looks like in 10 years. There's so many, like you say, sort of sequential points. Previous guest summed it up. no company has ever died for saturating market i think that's right i think that's right i think the best example of that is cardo henry ward yeah yep saturated this very small but highly strategic cap table now 10 billion dollar company and they just continue to build henry pitched um pitched us when i was still working uh for max and we totally got it wrong that and that was for that reason yes yes cap table management for startups how many startups are there pretty much all in San Francisco can't possibly be that big. That was, in retrospect, very clearly wrong. Now, I do think it's more, there's a trade-off here at later stages. Because at later stages, one, the valuations start to get richer. And therefore, you do need to have a sharper pencil on what market size looks like. But on the other side of that coin, there's more operating history, there's more metrics. You can actually verify whether or not these things are true. and at that point, the debates with founders about what the future of their company looks like and the conversations you have with them, call them debates or brainstorming sessions, sometimes a little of both, they become much richer, much richer because all of a sudden they have something to play with. You know, talking to Carta, when we talked to them, it wasn't even called Carta at that point. I almost wish I'd had the chance to look at the company again when it was around a billion dollar valuation because at that point, you have these tools to really talk about what the future looks like. And you're credible. You know, you have a jumping off point. Enough to have a sustainable, defensible moat, but small enough where you could take in a couple of different directions and build a really huge business. What matters more than size is probably, again, is it founder-led? Because it's about how aggressive you move and no further than Elon Musk, of course, to show how you can take a huge organization and move really aggressively. I've actually had some of the top public investors on podcasts as well. And they actually think about it almost like venture capital, where they're making an investment and they assume that basically they become frozen for three to five years and then they wake up and is it valuable? And everything in the middle while the stock's going up and down, it's essentially noise. Volatility, it's noise. Yep. Who has the gumption to go through that noise and avoid the analysts and all these other frictions as a public company outside of the founder that either has very high stake in the business and sometimes even super voting shares where they control the business? It is structurally impossible to do that unless you have sort of those provisions in place with your equity. What I found is there's usually something driving the founder that is not incentive-based. Interesting. Whether it's a neurodivergent thing, it's a mission thing, oftentimes it's a religious thing, it's a chip on the shoulder, it'd go down the list, but usually there's something that is causing these managers to wake up and say, I'm going at full speed today. And I'm going to do that every day, no matter what, no matter what. The only other sort of modification I would make is it's not that these companies at later stages have moats. Oh, that is critical for underwriting sort of the space case and trying to get a sense for what changes or what doesn't change five years from now. It's also that certain businesses, by achieving a certain scale, unlock things that they didn't have available to them before. double click on that if you have a fulfillment business you're trying to you know ship boxes from a warehouse to a consumer's front porch you are going to benefit immensely from density and from having a physical network of different fulfillment centers throughout the country and throughout the world and for each marginal node in your network you're able to deliver more boxes and once you have a big enough network you can start to layer on other products that you wouldn't been able to do at a smaller scale, whether that's last mile or software services or whatever it is. You can look at the business on day 10 and say, oh, today you own a warehouse. That's great. And if you look at the business, let's say day 2000, and they have an entire network of warehouses, say, well, your market size for fulfillment was X. But now all of a sudden you can do last mile, which means you're now X plus Y because you've broken into a totally, totally different industry. One of the mental mistakes that a lot of VCs and LPs make is they don't realize the world is probabilistic. In your case of the fulfillment business, maybe there was a 20% chance that they were going to get from day 10 to day 2000. But once they got there, it became an underwritable business versus before maybe on a risk reward basis. Yes, it's Bayesian. Like thinking sort of in these Bayesian models. And everybody wants to say, well, you made a mistake not investing at the seed round, but maybe you didn't. Maybe they just got lucky. Maybe you didn't. And the bigger mistake, and man, psychologically, this is hard to do, but the bigger mistake is not realizing you were wrong and then investing at a later stage. So the mistake is not catching your initial mistake and then making the mistake of not investing again. Yes. Yes. It's a variation of Peter Thiel's biggest mistake. Peter Thiel says his biggest mistake was not doing the Series A for Facebook. He did the seed. He was on the inside. He passed on the Series A. Yes. That was his worst mistake ever. Yes. Yes. I don't know if founders want an exact portfolio, but I bet you would see a few repeats of that where most investors don't ever learn that lesson. And that's why they got their religion of concentration. I'm not sure about that, but I just think it's, you know, you're so present in those investment meetings that you're able to just say, is this a good investment today? Yes, we did the seed. Yes, we missed the A and the B, and now it's the C, but today's the C. It takes a lot of humility. I was right here. I was wrong here. I was right here. And now I'm going to be wrong not to do that. It not only takes humility, it takes a lot of mental capacity to be able to process all these paradoxes. Yes. Yes. Yes. And all might be right. You might've been right to invest in the seed, wrong to pass on the A, right to pass on the B, but wrong not to invest in the C. And all of them probabilistically could be. Yes. Yes. And that is a superpower. That is a superpower that they have, for sure. Raw mental compute. It's raw mental compute, but more importantly, it is the ability to focus on what really matters today. There's a lot of big egos in our industry, but when the chips are down and it's time to actually make a decision, the investors I admire the most are able to just say, yep, I was wrong. What matters way more than convincing myself I was right is making the right decision today. Tell me about what you're working on today. So today I'm working on a company called Overlook Capital. We are a capacity-constrained growth fund. So what that means is we are a relatively small growth fund We cut basically to million checks into companies that we think are the best in the world and clearly sort of category winners Internally my partner Roby Miller and I don't think of ourselves like late-stage investors, but that is what we are doing. And the reason we're doing that is the venture capital markets today have become incredibly concentrated. 10 years ago, top 20 funds controlled around 40% of the market. Today, they control around 75% of all capital. 50% of all venture dollars in 2025 went into around eight companies. Those are for good reasons. Those are going to be some of the biggest, best companies in the world. And man, if you have an opportunity to invest in Founders, Run, or Thrive, I would certainly take that opportunity. So these companies will continue to do well, and these funds will continue to do well. But the externality of that is there are all these companies that fit the profile of founder, market, stage of company, our ability to underwrite to what this thing looks like in three to five years. And they are economically invisible to the big platforms. If you have... Because they can't return the fund, they can't return a meaningful multiple to drive these $10 billion funds. I think most of it is structural in that exact way. if you have a hundred million dollar fund and you cut a ten million dollar check well that thing 10x's knocks it out of the park you return the fund if you have a six billion dollar fund it no longer matters you know that that ten million dollar check should either be put into a series a where there is a non-zero chance because you have access to the best talent in the world that that single investment will be a hundred two thousand x or more. So you put in $60 million and it has some percentage chance to return 100x. Or you should be investing $500 million at a time into companies that are proven to be category winners. And if you're sort of anywhere in between there, you wind up with all of these sort of dislocated market dynamics. When these funds are investing $500 million, is it, you phrase it this way, is it a consensus, high expected value investment and then they're just like warring against other venture firms or is there contrarian plays versus non-contrarian? there are definitely consensus plays. But Overlook Capital, you obviously avoid those. So you're not just doing smaller checks. You're going into fundamentally different businesses. What are you looking for? To clarify, we will definitely look at those deals. And what we've noticed is every once in a while, there is a super consensus company that is a category leader. And we think even at nosebleed high prices, it's actually a discount to the future. And this thing's going to compound for a really long time. We should get access. and there we rely on the size of check. That'll probably be- You could get in through the edges of the five, $10 million check. Yes, yes. It's very rare. What's the pitch to the founder at that point? The pitch to the founder for a five, $10 million check is effectively, hey, we're going to be here and be helpful when we can be, otherwise we'll stay out of your way. And these rounds are always indicated out. So there's always some room at the table. It's just, you're not precluded because your minimum check size is $100 million. So that's how we get into How do those rounds come together? Is there a general cadence where it's like the lead or the two leads or obviously every round is slightly different but what are some of the patterns of these super hot rounds? How do they come together? Super hot rounds. Extremely white hot center of the circles of Anthropocene AI. Founder decides it's time to raise more money. They send, I don't know, six text messages. They've got five term sheets within two weeks. These are worth talking about, the $100 billion plus round. Yeah. What about the $5 to $10 billion round, super hot company? They're raising a billion dollars. How do those rounds? Honestly, they come together the same way a $500 million valuation company would have come together seven years ago. It's just the numbers have gotten so low. How much is the lead typically putting in? Depends on the round size. You know, I think minimum 30%, maybe 25%. If it's less than a billion dollars, I have to imagine 30%. 30% is sort of the base there. And you're still going out. And plus then you have another sort of 30 plus percent that's accounted for by existing investors. Presumably you've given up 25, 30% of the company. Then you have the rest to sort of fill out. And that basically only flexes up. So if the lead investor is putting in 50, 75%, all of a sudden the margin for somebody else, it starts to get pretty tight. How are the founders choosing the non-lead, the non-current investors? it's different for every founder but my philosophy again comes back to conviction and credibility those are the two biggest things you can look for is this somebody who truly truly understands my business and what i want to do with it and strategically why it makes sense and are they credible or are they just gassing me up because they know i'm chasing momentum and you're the hot commodity right right exactly which is which is easy which is easy to do it's easy to do you know Oh, you're perhaps a dumb question, but why is somebody that has conviction important on your cap table? And what are the second order effects of that? Reputation matters immensely. Conviction without credibility, people look like idiots eventually. And so you don't want somebody out there who is effectively a fool talking about how great your company is, because all of a sudden people will just pattern match the fool element, not the great company element. They won't even do the diligence for the next round. They're like, if they let this guy in, I'm shorting the company. I can't technically short it. Even if it's totally not true and the company is exceptional. And then obviously credibility without condition, those are cowards. And they're probably not going to invest anyways. The other element here is we were talking about the most consensus, most mimetic companies you can imagine. As soon as you go sort of one company below that and sort of the most valuable companies in the world. So, you know, company number 25 or 30 or whatever, whatever that number is, the dynamics for those rounds are completely different because you are usually oversubscribed, but you're not oversubscribed within two weeks. You have time. You have time. And those founders we have discovered are more than happy to build a relationship over the course of two to 12 months. Make sure that they trust us, that we're going to be good spokespeople for that business. They're obviously willing to take a bet on us because we're an emerging fund. And they're betting that one day it will be a great signal to have Overlook Capital on your cap table. But critically, we can enter those rounds. And even though they're competitive and they have multiple term sheets, they're not 5x oversubscribed within two weeks. I guess I'm embarrassed because I obviously understood the value of a lead investor and a large investor. I never thought about the credibility importance of the smaller investors, how they're also mouthpieces in the marketplace talking about the company building credibility. I don't think this is something that makes or brings the company. You hear oftentimes about value add. You don't hear about kind of the reputation of the company through the small investors. I think it's probably the biggest way in which investors can add value. Reputation. That's what Naval Ravikant said. Naval Ravikant has now invested in your company. This is my value add. Yeah, I think that's... And it's true. It sounds arrogant, but it's true. No, I think that's about right. Obviously, trying to be humble about this, it's not like we can say, oh, definitively, Overlook capital is the highest signal you can possibly get. But at the end of the day, the biggest alpha comes from deal selection. I don't think it comes from a team of business development people or recruiters. Those things are all nice to have, but they are marginal. And what are you thinking about as CEO? You're thinking about how do I recruit the best people? How do I raise the next round? What is the best way to enable those things to happen? Signal. and who has put the most skin in the game next to employees and founders, it's investors. Leverages capital and people and obviously technology, but if you don't have a good technology, you shouldn't be raising or hiring. There's one piece of advice you'd give a younger Eric that just started your career that would have either accelerated your career or helped you avoid constant mistakes. Early on in my career, I think I was very hesitant to make investing mistakes. and the reality is i'm confident in overlook capital in large part because of some of the mistakes i've made in the past because i know what to avoid being there's value in being aggressive early on in your career when the stakes are lower um that compounds in a really big way that being said you know i started a company in college graduated went to run that company ran that company for around 12 or 18 months out of college, didn't work out. And then reached out to Max Levchin, started working for Max and Nelly Levchin. And I probably learned more in the first six weeks of seeing how it's done with Max and Nelly than I did through the entire period of my, you know, at that time, very short career, but before then. Seeing what greatness looks like. Seeing what greatness looks like. It doesn't even need to be greatness. It's just seeing what it takes to win is significantly more valuable and will compound significantly faster than trying to learn this stuff all on your own. It comes down to selecting for good teams more than any other criteria early on in your career. Flip side of this, which I wish I had known, is the seat really matters. The seat really, really matters because it's especially in investing. I mean, it is impossible to decouple the individual investor from the team. And by that, I mean, what were the investments you were able to make and not able to make? Which investments do you really get credit for? Which investments were you a supporting role in the team for versus the lead? All these things effectively get thrown into a blender and are just poured into this gray soup of your LinkedIn. On one hand, what matters the most is being with a great team, which I have been incredibly fortunate. sort of to work with elections, to work at Founders Fund, to work with ADC. But the flip side of that is when it comes to building a track record over 15 years, you need to be very sharp about what you're going to be able to do in that seat. And that's not just investing, it's also operating. Skills and attribution. One is making sure that you're around greatness. Another one is making sure that you're able to use your skills and also you give credit to those. Use the skills is the most important part. I think the credit, I mean, this is one thing that I've done right. I don't care about credit. I just want to win and be on teams that win. But the seat you're in matters for being able to win. Going all the way back, being with Max and Nellie Leftchin, one of the things that seeing greatness does, what does it practically do? It solves two things. One is it is achievable. Going down to that 100 points, it is humanly, it does not break people. It does not kill people. It does not break the laws of physics. And two is if you're around them and doing it, I am able to achieve those things. Yes. and those two things can never be unseen. Yes, yes. The, I can't remember, I don't know who has this quote, or this trope, but it's like, what would you do if you had 10,000 times the amount of agency you have today? Or what would you do if you knew you weren't going to fail? And that is a really interesting exercise when you don't actually know how to succeed, but when you couple that with people who actually do know what they're doing, it can supercharge your career. And that's certainly what happened when I first went to HBF, which would become Sci-Fi VC and started working with the legends. On that note, thanks so much for jumping on and sharing your wisdom and your career. And I'm looking forward to doing this again soon. Sounds great. Thanks so much for having me. If you found this conversation valuable, please click follow how I invest so that you don't miss the next episode with the world's top investors.