Jason Calacanis 18:17
So I, I have a lot of thoughts on this is where I’ve spent maybe the last couple of years of my career, really honing things because we are, you know, deploying larger amounts of money. We have a bigger team, and have to train that team. And I was a solo Jeep right now I have a partner, Mike Savannah, who’s a GP and president of the organization. And then we’ve got managing directors, principals, associates, researchers, analysts, a bunch of people, 21 people in total. And so we had to really think about how does the seed stage and the precede stage work? distinctly different than Series A, certainly much different than growth stage BCD. And so we, we looked at what venture capital firms need to do in order to succeed. And I asked a lot of people on my podcast, and there’s all in, which has been going for 175 episodes this week. And then there’s this Week in Startups, which has at 1900 episodes, and I’ve been doing that for 1213 years, which you know, all in was kind of built on the back of that team, my producers, editors and all the lessons I had, when Jamal and I started all in and then brought Freeburg and Saxon, very quickly to sort of round out the Quartet. And what I learned about venture capital firms where there are really the three Ds that I look for deal flow, you are a function of your network and the deals you have access to. So deal flow is critically important. Somebody like Y Combinator or Sequoia, because they’re so well known, well branded, had been around for a long time and have a track record. They don’t have to fight for deal flow, the deal flow just comes to them. And I am lucky because of the podcast to be in that same position. We think we’ll have about 20,000 applications for funding this year. And we’re not trying to get more applications. I’m trying right now to build up my team size. So I can review all the applications because honestly, the benchmark is so high right now. And I think we may only meet with, you know, let’s see, if we are averaging about 50 introductory meetings per week, it’s about 2,500. And I think we’re probably at 20,000. We’re meeting with about 10-15% of the companies, maybe a good week, 20% of the companies that apply for funding. So we, you know, we’re very selective in even who we take a first meeting with, let alone invest in, we’re investing in 100 companies a year or 20,000 applications, you know, it’s 50 pips is one and 200. If the investment I think that’s probably a really good number. So deal flow is destiny. This is what I tell young venture capitalists and new solo GPS that I invest in, you’re a function of your deal flow, and how many meetings you can do will determine your success ultimately, and they think that’s crazy. But I know it’s true, because I watched Y Combinator, Ron Conway, Chris, aka, myself, navall, we all just out hustled and just did more meetings, and met more founders. So let’s just say deal. Flow is number one, we’ve got a big checkbox, we’re an exclamation point, there’s very few, I think we might be in the top three or four in terms of the number of applications coming in of any investment firm in the startup space. Okay, number two, decision making, how thoughtful and precise and considerate is your decision making process? Most VCs, their decision making process is their gut, their previous success, and a bunch of biases. Oh, these people went to Stanford. Oh, these people are developers. Oh, these people dropped out of Harvard. You know what, whatever it happens to be and you know, oh, you made all your money investing in Airbnb. Okay, so now you have a bias towards brilliant designers, like Brian, and Joe. Oh, you invested in Uber. So you’re into people who understand network effects and are hard charging like Travis Oh, you invested in Larry and Sergey, sir, into thoughtful people with PhD research at Stanford who really think things through and you know, our cerebral, you can become a victim of your biases. So you got to really think about decision making, I just have a lot to say dressing down. But I blew a gasket the other day, because I was like, with my team. We’re some weird stuff. We’re all the weird companies that we don’t understand. Where are the companies that don’t make sense, but we love the founders. And they’re like, ah, and I’m like, You guys are bringing me all the safe stuff. Where’s the weird stuff that you were afraid to bring to me? Bring me some more odd stuff. Because I can tell you, you know, a cab company, a meditation app, and a stock trading app. We don’t charge people for the trades. Those are our three biggest hits to date. 100 billion $150 billion company, a $20 billion company and a $2 billion company. Uber, Robin Hood, calm. These were very unpopular companies. Very hard to understand. And so okay, decision making. Number two got Delphi decision making, how do you come to decisions? And you know, then doubling down and being able to identify,
Steve Brotman 23:23
Before we go to double and download, you know, the weird stuff metric. What do you quantify for your team? Like, these are the 20 things we look for you —
Jason Calacanis 23:33
If we have 13 things right now. And then we have 25 red flags, sometimes pink flags, we will call them pink flags, red flags, the red flags, the pink flags are obvious stuff like it’s an accounting nightmare. We have one like this company is lost in the wilderness last on the dance floor. They’ve been around for a while they’ve done seven pivots, companies existed for 6-7-8 years. So we’ll ask hey, what’s the incorporation date? And then when did you launch this product? Oh, we incorporated in 2014. Okay, so the company’s been around for 12 years, or 10 years. Okay. And when did you launch this product? We launched it last month. Okay, well, what did you do for the other nine years? Oh, we had these two other products. Okay, great. You know, like, let’s have the discussion about that. Cap table concerns. Okay. The founders own under 10% of the equity because they’ve been lost in the world. And if they’ve done two pivots, the cap table is broken. There’s a huge overhang. Okay, legal issues, accounting nightmare, a very slow, vertical to break into like construction, or it’s capital intensive, like health care. You know, there’s all kinds of categories of things that can be red flags, or pink flags. So let’s put those aside because, you know, most of them are solvable, to be totally honest. So we just want to highlight that we know there are pink or red flags and how many of them there are, like, you know, Uber had a lot of lawsuits. So does SpaceX, Tesla, Google, and that’s part of being successful is you know, that might be one of the 13 things on Well, yeah. So again, this is for early stage, so precede Seed precede means your zero seed usually means your one or two. So when you look at those companies, we’ve identified 13 categories we look for, if something has three, four or five of them, we’re definitely gonna take a second meeting, or five or six of them, you know, they, they are very likely to be a company, we want to be in business with builder founders way up a high on the list. What’s a builder founder, it’s a developer who writes code and who has over 10% ownership. So we say builder founders, we define founder as over 10%, ownership, meaningful ownership percentage. Builder, founders, for me is three categories. You write code, you design the product UX design, like literal designing it, not a product manager, PM, all due respect. A lot of people can be a product manager, I’m talking about design like and I mean, really world class design, like Uber and Airbnb, and travel, so a coder or designer, you know that there are exceptions to it. And I’ll get into that. And you know, I would say he’s a product designer, for sure. Really like an architecture products. And then there’s growth hacking. And that’s my third. And I would say Travis had product design and growth. He really knew growth hacks, he really new product design. So a lot of what you saw on Uber that he doesn’t get credit for, you know, I had long arguments with him about tipping as but one example. You know, he was adamant to not have tipping in there, not because he didn’t believe in tipping. But because he wanted efficiency. And that was a cognitive step. Okay, rate, the driver was a major innovation, kept people in the system, got rid of people who maybe were bad actors in the system on both sides. But tipping just created a cognitive load that he didn’t want to have in the app. Now they’ve since added it, but they added it after you give your rating. So you can kind of just ignore it, and many people do. But in fact, the majority of people do, which is indicative of Travis being right. I think it’s like 80% or 90% of people do not tip and the systems. So putting that aside. Those are — that’s the builder founder. And multiple co-founders is another criteria for us. We like when there’s two, three co founders, why? If you want to go far, you go together, if you want to go fast, you go alone, and a lot of the folks who go alone, and you see oh, they’re solo founders, if you look back in the history of the company, there were two or three other co founders who helped them get to the point at which that founder had enough power to fire somebody like Zuckerberg, you know, he had two founders, with three co founders, Eduardo and everybody else. And so, you know, usually over time, one or two founders drop out Snapchat, and YouTube, I think both are three founders. But we only know the names of two of them. And in fact, now it’s not. And you probably only know Evan Spiegel. So multiple co-founders previously raised venture capital previously had an exit to more criteria, world class design, a fifth criteria. A product outlier. That was the one that I would say is weird. Like, we don’t understand the product. So product outlier, and met a founder who is an outlier. And so Travis is certainly a founder who’s an outlier, charismatic, hard driving, you know, super pumped to use a term. And so you really do. We have those two track criteria, which are not, they’re qualitative. So you can’t really quantify them and say, oh, there’s three co founders, or there’s three co founders, two of them are builders out of the three, and they’re this type of builder. So we look at those as indicators of getting more interested in the company. And then a business model. In our core five is another criteria. We have five business models currently that we are pursuing marketplaces, we love, consumer subscription, SaaS set, you know, business software subscriptions, FinTech and AI. And the fifth one is obviously a horizontal, vertical and everything right? The other four really speak to high gross margin businesses. And we really love high gross margin businesses. And in our list of reasons to not invest in low gross margin businesses or capital intensive businesses might be another way to say it. So that decision-making criteria is great, because we want to have these very highly engaged debates about the companies we invest in. And we share that information with the founders. Hey, here’s the things we really liked about the startup, here are the things we have concerns about, these are the things that came up in our Deal Memo. These are the things that came up in our diligence. Can we talk to you about them? Hey, you’re a solo founder. Do you ever think about having a co-founder? How do you think about this? Oh, well, I’ve got four people who I consider co-founders know how much I weighed down 4% 3% 2% and 1%. was okay, you know, together, maybe that does equal two co-founders or maybe one additional co-founder, but that’s a significant amount of equity. Those people probably stick around and, hey, maybe this person is so charismatic and driven and it’s their third startup that I can pull that off. Sounds good to me. And so decision-making is critical, because we’re also now tracking in our database and we track everything in a database. It’s super important. And it’s proprietary. It’s a proprietary system. Yes. Okay. Yeah. So we do everything in a proprietary fashion.
Steve Brotman 30:17
You created your own database, you didn’t use like something off the shelf?
Jason Calacanis 30:21
We’re definitely not using any of the systems out there. I consider this like a massive competitive advantage to build my own systems. And we have our own community systems and all different processes. Because remember, we’re one of the high-scale companies, we are not putting stuff in a Google sheet or some CRM off the shelf, which is what you should do if you’re a five-person firm or a 21, person, firm, 20,000 applications 50 6070 meetings, some weeks, I’m trying to get it to 100 meetings a week, I’m hiring researchers. By the way, if you want to work for us, you can start as a researcher for 60k, go to an analyst for 70k and then become an associate for 80k. And there’s not we’re not the highest paying, you can get associate jobs that are double that at a major firm, but we’re like a seed stage fund. And that’s what we can afford to pay, we hire a ton of researchers, one, two out of three researchers make it to the analyst position, one out of three analysts makes it to the associate position. And then from there, we’ll find out over time, but we expect, you know, for every three researchers we hire out of school, and we train up in our model, we will have one maker to associate. And it’s almost exactly that one of them, we wind up not continuing with. And then one of them winds up leaving. And then one of them winds up delighting us. And we are really, really rigorous about hiring those people and training those people. And I’m okay with one leaving because they don’t want to work 60 hours a week and do four meetings a day, you’re doing four meetings a day, I don’t know when the last time you put in a 20 I doubt you’ve done this, or I’ve done this in a long time. But doing 20 meetings in a week, for a day and writing coverage of it and preparing for each one that’s going to melt your brain for nine out of 10 people. And that’s my goal. I want to break people who can’t do 20 meetings a week. And when people get to 500 meetings under their belt. And we record these meetings, these are introductory meetings or 20-30 minutes, we have those meetings, we have the feedback we have the founders rate our meetings, we ask them, Hey, how’s your meeting go as part of the process. When people get to 500 meetings, then they can go from researcher to analyst. They do another 500 meetings, they’ve got 1000 founder meetings and about they can become an associate. So most firms do not work like this. We’re very unique in our approach. I think somebody can tell me I’m wrong. But again, remember, one of my core beliefs is the number of meetings and your deal flow is destiny. I want to meet with a lot of people I would like to at some point have complete coverage. I would like to have met with 100% of venture backed startups. You know, in the seed stage, very hard thing to do. I think probably Y Combinator at 45,000 applications within Garritan shout out to Gary was a huge fan of Postgres, his first startup, I think he’s awesome. You know, I think they, they might have pretty close to complete information. Because of the 45,000 applications they get, I can tell you half of them are not venture. Not venture investments, let’s just say like they could be pizzerias, they could be video games, things that venture capitals aren’t going to invest in because there’s, you know, music, whatever. But the other half, like probably the world of startups might be 20,000 starting a year. And then of those maybe 5000, get some level of funding or go to an incubator, maybe 4000.
Steve Brotman 33:37
So you can see, what percentage do you think you’re at today?
Jason Calacanis 33:40
I think we’re well, I know, we’re halfway to why combinators applicants and we’re 1/5 of their number of investments, and we’re not trying to beat or compete with Y Combinator to be totally honest, we’d be happy to invest in Y Combinator habits, we’re happy for our companies to go to Y comm here. And that’s happened. We’ve had companies from Y Combinator come to our accelerator, etc. When we think they’re awesome, I mean, in fact, you know, a lot of the lessons I learned was, you know, just watching Paul Graham, and he is very, very focused, if you look at their application on builder founders, multiple co founders. So those two things are observations, I think he gets a lot of credit for in the industry. I don’t think you can go to Y Combinator without a developer founder. Without multiple co founders, I just don’t think you’ll get in. And if somebody got in there as a solo founder, let me know. I don’t think they will ever accept a solo founder. I think they’re very rigid about that. And I don’t think they’ll accept a team with two or three idea or business or marketing people on it. I think they’ll only accept a team with two or three technical people on it. That’s their belief system. Right. And I think he’s right now. You do have some weird things that can happen, like Airbnb. So one of their biggest successes is three unbelievably thoughtful leaders from risk The Rhode Island School of Design. So you do have to have some flexibility. So we are extremely focused on our process, our process is very different. Most people do not want to do what we do. Most LPS don’t understand what we do. I’d say about half of the LPS out there don’t believe in what we do. And they’re and they’re wrong. And they have the right to be wrong.
Steve Brotman 35:24
But you know, it’s funny, there’s a book called Topgrading that goes into recruiting and talking about how there are two types of recruiters. There are folks that look at a candidate, and they look at it as an artist does, and says, “Oh, I just love the emotion. I love the flavor. I like the look.” And then there’s the airline pilot, who’s got the checklist. Right? Which one do you think outperforms over time?
Jason Calacanis 35:55
I’ve read the book, The Checklist Manifesto. And I can tell you, it’s the checklist.
Steve Brotman 35:58
The Checklist Manifesto matters. Yeah. Yeah. So that’s, that’s a, that’s an interesting, I mean —
Jason Calacanis 36:05
I think I’m a fan of systems over goals. And the guy who writes Dilbert, Scott Adams, he’s talked about this a lot. systems over goals, a lot of people want to be then as the example he gives, they want to eat less sugar, but they keep sugar in their house. And they want to be in shape, but they don’t go to the gym. And so, you know, he has a very profound observation, which is he wanted to be cheap. So he just goes to the gym. And then sometimes if he’s not feeling like it, he’ll go to the gym, drink his coffee, I think and then just leave, and he won’t work out. But as a system, his system is go to the gym, and then figure it out from there. His system is to not have sugar or flour in his house, or whatever it is. Because you know, you’re going to be a function of your environment. And there’s other versions of this, he doesn’t get full credit for it. But I think he explains it best out of everybody. He might be the origin of it. But I always look at process. And I think process determines outcomes. And that that is something in sports, they talk about a lot. You can’t control the outcome, you could have a bad rep. So that’s where I first heard it. And then I think Scott Adams says it quite elegantly. Tommy’s a little bit of a controversial figure. He went like full Magan. A little bit loony. But right, a very interesting cat. I think he had some great moments of brilliance. Putting aside that, what is your process? You tell me your process and your incentives? I will tell you the outcome, right. And people say that show me the incentive, I’ll show the outcome. I think: show me the process. And I’ll show you the outcomes.
Steve Brotman 37:38
Do you incent your teams on the number of meetings? And like do they get a they get like, or they get a backup the backslash have a bonus and they have carry?
Jason Calacanis 37:44
But for young people? I don’t think because they’re not fully developed that they’re not thinking long term. Yeah, like your brain kind of gets that long-term thinking sometime around 25 years old. And it’s probably right when we’re hiring them. And I know as a young person into my 30s, I wasn’t really thinking about my retirement or anything. So I think the right person we hire should be based on their energy. And there I hire them based on their ability to have high energy when talking to founders and high curiosity. I don’t need them to be the best decision-makers. I’ll be totally frank, if they can get me the 20 companies a week with high energy. And then just tell me, you know how many of the tiles the qualities we call the tiles because they look like tiles in our database. We color code them, and so just have two, three, four, or five tiles, if it’s got two, three, or four tiles, bring it to another person more senior than you do a second meeting. You don’t have to overthink it.
Steve Brotman 38:54
So I really want you to hire this person meetings. How many converted to a second meeting?
Jason Calacanis 38:58
Probably like a third maybe. Yeah, I have to check out exact number. We do track that number.
Steve Brotman 39:03
And so 20,000 goes into 100 deals a year. Is that right?
Jason Calacanis 39:06
Yeah, so it’s 50 basis points, one
Steve Brotman 39:07
and two basis points. So it’s not wild spray and pray. It’s not really a spray and pray.
Jason Calacanis 39:14
No, no, it’s pretty pray. Spray and Pray rhymes. And anything that rhymes if the if the glove doesn’t fit, you must acquit. Spray and Pray if it rhymes you remember if it rhymes, it’s prime. I don’t know there’s there’s something just about stings rhyming that make people think it’s correct. The truth is, this gets to our next point. Yeah. Yeah. So you have doubling down. And I think in terms of this conversation, doubling down is the one I am most focused on today. So in our fourth fund, we’ve deployed $12 million, as of this week it will be a $50 to $75 million fund. We’re just closing it up. If you actually want to read the Deal Memo. Go to launch.co/memo and And we’ll be closing the fund may 1. The reason I can talk about it is we elected to do 506 A whole other conversation, we are publicly raising, we had $110 million in interest from accredited investors can only take 10 of that. What was the Euro again? launched.co/memo. And that’s about a year old, but it’s my memo for our lunch one, four. And so I’ve been thinking about portfolio construction a whole bunch. And I looked at that first fund 109 names for unicorns, superhuman, Robin Hood, calm, density. And we went back, and Mike Savino, my partner, general partner and President did a little analysis of it. And looking at it with some of our LPs. They said, if we had made one more investment, instead of that being like a 4.9x 5x, on paper, it would have been a 15x on paper, if we had done a follow on with one of those four. And that makes sense, right? If you follow on to the Robin Hood, com deal or superhuman deals, you would have a great investment. So why didn’t they win? Well, back in that day, you were trying to use your 100 swings at bat or in the case of this $10 million, fine 109. We were trying to use those 100 swings at bat to hit one outlier based on the power law. And that’s where the term spray and pray comes from you spray and then you pray you hit the power law, we hit it four times. One in 26 is absurd, or 27 is absurd? Sure. Let’s be clear about that. And when I did that when I was a software scout, I think I did 18 investments, and three became unicorns, thumbtack data stacks, and of course, Uber. So I hit three out of 18. So one in six. So now if you look at my track record, it’s plummeting. The number of unicorns. You know, the ratio of unicorns to non unicorns went from, I think, one and eight, no one in six to that one and 27. And I don’t know where it sits now. But you will see what those you know, more recent funds, you’ll really only need to hit one and 100 Let’s be honest, right? Because he’s pay off 200 300 400, or in the case of Uber, 2000, or 5000. To one. So putting that aside, the question we asked ourselves, did we know that those were the outliers in the fund? And it was clear, and three out of the four. And so then I said to myself, can I make? Can I make a heuristic? Can I make a system, right? Because systems over goals, process over performance, or process over outcomes. So what’s the system or process and I came up with at the seed stage, what I think is a really good process for evaluating if we should make that second bet. And in this fund, let’s say it’s a $50 million fund, we’ll put 25 million into primary investments in 250, companies 100k, and each, maybe 200, companies 100 and change in each. Okay, so 200 names, now we have 25 million leftover to put into the top of those names. So if we just picked a number 10%, that would be 20. Companies, that’d be about a million dollars into each right. And so a million dollars at the Series A round 50 million, you get another 2%. Or if it’s, you know, the seed or you know, a $30 million and get another 3%, another 5% could be even another 7% something in that range, call it two to 7% for that million. So what we’ve decided to do is look at those 200 and then use half of the fund with my current thinking could change. But I’m currently thinking half the fund will be deployed into the top 5% to 10%. So that’s either 10 names or 20 names. Probably more likely 20 names could be 30. Could be 15%. But if we give that 20 million to 30 names 750 On average, 500, batting average, whatever it is, I think we had a pretty good shot of having 10% ownership, perhaps even 15% ownership in another unicorn. And that’s the thing I’m trying to do as a goal. We had that kind of ownership in a unicorn that came out of our accelerator, and we were able to clear some of our position in it, which was delightful for our LPs. And so that as Act has actually happened in our first 75 companies, we had a company grin which became a unicorn, and we were able to sell a little bit in secondary I can say that we took advantage of that opportunity. We wanted to buy our shares, and we had over 10% ownership in that so it is possible in this model to hit 10% ownership in a unicorn. We’ve done it already. And I believe we can do it again. And, and if you were to do that 10% ownership in a unicorn company with 1,000,000,002 billion, let a lot of DECA corn you’re gonna have. And that’s really what I’m playing for right now is I believe, if you look at what the average seed fund does three or 4x on paper, or three or 4x dpi, maybe they had four or five TV API, you know, they on paper, you know, if you just return 3x, consistently, yeah, that’s a pretty darn good track record, isn’t it? So you have to ask yourself, if the average had seed is like, 3x, why doesn’t everybody do seed? What I just explained to you is a ton of work. And the reason people don’t do it is because they just want to make 30 pets. They don’t want to make 200 pets in a fund 30 bats with five partners is enough, or four partners or three partners, whatever you choose to have.
Steve Brotman 45:56
Great. So have you do you have a set of heuristics, you said, he said, You have to have a different set of heuristics for those doubledown bouts. And that’s a series right not in the site.
Jason Calacanis 46:07
It could be seed series a like if we went to our accelerator, and we gave them the standard Y Combinator Tech Stars do we have 7% for 125k. So you know, if it was a seed round at 10 million, we put in 500k, or 250k, we could add 2.5 to 5% to that position and hit the 10% goal. And so we look at two concepts, likely winners and definitive winners. And that’s the basic heuristic. I couldn’t get into what’s in there at the seed stage. But it’s profoundly different than the heuristics that you were giving me. But I like your heuristics. But I think those heuristics are for Series B, and C, right?
Steve Brotman 46:45
Alright, let’s see for Series B, and C. So we’d be thrilled to get five to 20 million for each of those companies that match our heuristics. Yeah, that is B and C rounds, and it’d be quite lucrative.
Jason Calacanis 46:57
Yeah, I mean, it’s the, you know, SPVs are a great way to pass the hat and to keep the train going, if you can figure those that. Yeah. And so right now, you know, coming out of the seed round, we will typically say, you know, if you look at those four companies, Robin Hood, river, calm density, superhuman, in all cases, all four cases, there was a lead investor, who wanted to own 10% of the company in the series A and join the board, those rounds are priced. There’s a share price, they’re not convertible notes. Somebody joins the board. It’s a notable VC. And they want to own over 10%. If you think about the other rounds, we see. And these rounds could result in a great outcome as well. But coming out of the pre seed and seed stage in the incubator stage, you will see a lot of convertible notes, and you will see a party round, passing the hat. And then nobody’s joining the board. There’s no governance. And so that is the tier of likely winner. Definitive winners. We know for us, it’s a definitive winner. Because somebody is joining the board, it’s a price round. And it’s a notable partner at a notable firm kind of situation. And we’re going to want to backup the truck in those situations, those are our first priority. And then after that anybody was able to complete around if you’re able to complete around, and it’s a convertible note. It’s safe. It’s a party round, there’s two co-leads, who set the price, nobody knows who set the price. The founder came up with what they thought the market clearing price was and they just sent everybody an email and said, We’re closing on this date I have you down for 250. Are you in, how does 15 million sound? These other two people are cool with 15 million and hopefully nobody checks. You know what the valuation was and more power to founders, you know, those rounds take a lot of effort to get done. And that’s why they are likely winners. And then the people who can’t clear market and want us to fund them, as opposed to the market setting a price and funding them after they come out of the accelerator, are the programs we have to program the founder University and launch accelerator. Yeah, then we got to work with those folks. And try to help them get funding or figure out why they can’t clear market. And if they can’t clear market, you know, their idea, or their execution or their team or the market or competition, or timing, it can be so many different issues. And some usually it’s a combination of those issues. And that’s okay, we’ll just tell those founders, hey, we tried an experiment. Shut the company down. You’re in our founder’s Slack. Let’s talk about your next idea. You didn’t clear market, okay. But we make it clear to them that we are not leading their next round, but we might co lead or participate in it if they find a great lead. So let us know. Which is kind of I think where Y Combinator is going to wind up and where they have the content continuity fund, I think they called it created a lot of drama. Because I think like we’re discussing here, how do you explain this to 500 founders every year compounding, you know, five years later, you got 2500. Startups,
Steve Brotman 50:13
right? Why do I mean this one? Not that one. You’re like the light. It’s like choosing a favorite child.
Jason Calacanis 50:19
Right? And then if Y Combinator does it, the continuity fund doesn’t do it. Oh, Lord, you know, and if they said they’ve got a billion dollars, like, they can’t spare a million for you. I think it’s like a signaling issue. It’s probably why Gary 10x it and I think they’re raising a couple billion dollars now. And I think the way they do it now is everybody automatically gets $375,000 into whatever the price is of their next round. So they just basically get a convertible note, that converts at whatever the market clearing price is. So I think that’s a smart way for them to do it. And they get their 7% for 125. And then the 375. If the average clearing price is 10 million, they get another three 4%. So they get some to 10%. So the pursuing very similar strategy does, which seems like spray and pray but is concentrating on the winners, I guess. But yeah, that’s a big problem is the signaling issue for at scale seed stage investors, we’ve been very clear about it, we only have enough dry powder for the top 5% of the portfolio. And we don’t need so to be clear, we’re not going to need it.
Steve Brotman 51:26
Interesting. That’s great. That’s a great synopsis. Jason. Yeah. Yeah, that’s really remarkable. I learned, I learned a whole lot here, in terms about systematic investing, as a superpower process,
Jason Calacanis 51:42
to do people don’t know I’m doing all this, I’m glad that you asked these really thoughtful questions about it. It’s like, everyone’s like, Oh, he has a podcast or two? Oh, he does. He gets lucky on an angel investment. Once in a while. I prefer people think that, I will say I prefer that. And that, you know, I explained this stuff to LPs. And a lot of LPs don’t understand it. And then some LPs are like, Ah, I get it. But most people don’t think at scale investing works. They think it will get you beta. And then I say to them, what’s the beta of seed? They say 3x? And like, what’s the beta of venture? And they’re like, 2x. I’m like, if we can deliver a beta, we’re 50% better than the series A firms. And they’re like, Hmm, I don’t think people have really thought this through and done the analysis of what I discovered, and people are probably asking, Well, why would you explain it here, I’m, I’m literally not in competition with anybody, like, Y Combinator accepts 1%, we accept 50 basis points, I think they’re probably less than 1%. Now, and then I think about it. And they have more applications than us. So therefore, you know, you know, they’ve got more to choose from. So if we’re accepting 50 basis points and doing 100 a year, and they’re doing 500 a year, that’s 600. And if we think there’s 10,000 quality startups made a year between the two of us, we’re doing 6%, which is to say 94% of startups don’t go to launch, or Y Combinator. Or if you add in the next two or three accelerators, and let’s say it’s 1000 accelerators slots of note per year, which I think probably is what it is 500 for them, 100. For us, maybe there’s 200, or 300, going into TechStars, maybe 100 200 going to 500 global, let’s put it out 1000. Let’s put that 1500 People go through an accelerator every year, if 1500 go through an accelerator, out of the 10,000 legit startups, that means 85%, don’t go to an accelerator. Now, the interesting statistic would be how many of the unicorns went to an accelerator. And I think some people are starting to study that. And remember, Y Combinator is only existed for, you know, less than 20 years. This is a new concept in venture. And it’s just starting to emerge, how powerful Y Combinator and TechStars, which started at the same time, and why and 500, which blew up for various reasons. It’s just that data set is just starting to emerge. And I think as people look at it, even looking at 500, startups or Tech Stars, like I think the returns are going to turn out to be pretty great and above average. And so once again, if you deliver beta, which my understanding is a fancy word for the average, with a chance of alpha in the seed stage, I think it’s the best bet you can make. And I think it’s the worst business you can run.
Steve Brotman 54:43
Why is that? Just hard work? It’s hard work.
Jason Calacanis 54:46
You have I’m gonna tell you, most people who want to be in the Metro capital want to do it because it’s easy. They want to do five meetings a week, one meeting a day, they want to take six weeks off in the summer, it’s six weeks off in the winter. I mean, let’s get Buck CV, we know these VCs, they do not work hard. They’re not hard working. It’s the cushiest job ever, you make a million or 2 million or $3 million in fees a year, you get lazy, you have a couple of associates and you know, you, you live off the fees and you get lucky. And you hit the power line, it all works out. You want to have to sort through who wants to do 70 meetings a week and have debates? And pick two of those companies to invest in a week on average and golf programs? And running these programs, by the way, is capital intensive? No, they’re $50 million firms do not have 21 employees. And nobody ever would say, how do you do that? I pay a million dollars a year, myself to pay for the staff. So I’m coming out of pocket for a million dollars a year for the staff that doesn’t get covered in management fees. So you can just do the math. Like I have a very profitable podcast this week in startups. And the events are off a little bit of capital. So I’m able to underwrite a team size that is 3x. What a $50 million. How many team members would a $50 million fund have typically seen your experience? What three or four? Maybe? Yeah, so let’s say a lot. Yeah, let’s see. Yeah, rounded up to five. I have four times then. So yeah, I’m not living off the fees here. I made my money from Uber already. And Robin Hood, I did, okay, I’m really, I want to be as helpful as I can to founders. And I want to build a great team and a great legacy. And, you know, most funds, I just read a statistic from carta or PitchBook. They said like, only 15% of funds created in this last cycle are going to make it to a second fund. Like, that’s pretty extraordinary. And they said it used to be half. So it’s plummeted from 50%, making it to the second fund to only 15%. So that’s very cute.
Steve Brotman 57:01
You make it to 30. Do you consider this your own fund for here? Do you consider this a fund for do you consider this sort of your first, like, institutional output or close to institutional offer?
Jason Calacanis 57:13
I guess the you know, if you look at fund three and four, that’s when I had institutions and fund one and two were all individuals. So yeah, I it was a $10 million fund and an $11 million dollar fund. So this probably is arguably my second institutional fund. But then I also had the benefit of being a Sequoia scout for a couple of years. So I kind of got to try this on for size for the first eight years part time. And it’s only really the last five or six years when I’ve had these two funds that I’ve been really dedicated and building a process and a firm. So yeah, maybe I can say this my third fund, yeah, combined the for the scouts, the scouts, and the first two would be 20 million, or $21 million. Almost exactly. So we put those three together, that would be my first fund. And then fund three, LAUNCH Fund three would be 44 million, and this won’t be 50 to 75. And I’m not going for big funds. I’m not trying to have five partners, I had that opportunity. I’m not trying to do late stage, I had that opportunity. And I had the opportunity twice to merge my operation with other large players who wanted to have a leader, like me run a large operation that needed a leader, I’ll leave it at that. And a large fund that didn’t have seed exposure wanted to plug us in very notable firm as well. And I was like, you know, let’s see what I can build on my own. Let’s see if I could build launch into my legacy. And I’m 53 prepared. I love what I do. Can’t imagine. I mean, I can’t imagine doing other things. But yeah, none of those other things are as enjoyable as doing a podcast with the founder and talking about tech and startups and finance every week. And then meeting with founders all day.
Steve Brotman 58:57
Pretty great. Your LAUNCH and your podcasts and your presence, all that reinforces your venture activity. Right? It’s not like it’s a fly, don’t really think about it right? You don’t really think about it as like, oh, I have to do this other job. It’s just an extension of what you’re doing.
Jason Calacanis 59:13
Correct. Most people are like, Oh, you spend all your time podcasting. Like, I don’t go to lunch with anybody anymore. Because it was making me fat. Gained like 40 pounds, because I could afford. You know, for the first time in my life to order food at a fancy restaurant. I went a little crazy for 10 years there and gained like 40 pounds. And now I’m just like, instead of having this like two hour lunch and talking for two or three hours with somebody really smart. I just haven’t come on the pod. And This Week in Startups I do three days a week and I do all in one day a week and four days a week. Awesome. Yeah, it is like a great joy of my life.
Steve Brotman 59:51
Well, thank you for making us the sixth day.
Jason Calacanis 59:55
I love talking and I know one of the great things in life is to have fun relationships over different eras, and different, you know, arcs of your career. And you and I got to meet in the 90s, when we’re in our 20s, and trying to figure out this internet thing, and then we got to see the boom and the bust. And then we had to do web 2.0, or a financial recession, then this crazy ZIRP, 15-year run, and then another bust. And now we start all over again, with this AI revolution. And, you know, all these like cycles and eras. I don’t get all Taylor Swift here. But you get all these areas, you get to enjoy them and look back on them. I look back fondly on the Silicon Alley era that you and I were part of the web 2.0 era joyful. This last one, the Uber Airbnb on demand ZURB era was amazing. And I’m just thrilled with this next one. And what a great launch it is. And if anybody wants to apply for funding, founder dot University is our pre accelerator 12 week course, we want to invest in about 10% of people come to that course. Launch accelerator, and you can apply launch.co/apply launch.co/apply apply for funding, my email for life will be Jason@calacanis.com, my first name and last name. And I’m Jason on Twitter/X. And I’m Jason on Instagram and my DMs are open and you can unfortunately can’t add me on LinkedIn. I’m at the 30,000 cap, and you can only follow me on that. But, you know, myself and my team monitors all that stuff.
Steve Brotman 1:01:24
And your team has a team who monitors your emails.
Jason Calacanis 1:01:29
So having given up the email box yet, but for the social media stuff, we have to have somebody look at my inbounds there because it gets a little crazy, but I I tried to do it myself. I like to make myself available. I watched it like certain folks. I remember Marc Andreessen, I would send him companies and he didn’t meet with him. And I was kind of bummed, you know, because he was like a hero of mine. And yeah, I was like, Mark, I’m sending you accompanies and like, you don’t meet with me, he’s like, Well, I got people now and like I watch people get weird and like, become more reclusive. And then people like admonish people for emailing them or emailing them at the wrong stage. Or they should know I don’t invest in medical devices. I’m like, you know, I get email can be oppressive, looking at an email box. But you know, what’s more oppressive for a VC? An empty email box. So if you have to pick too many emails, too many people trying to get your time or being a nobody, and nobody cares. I’d say go with the former rather than the latter, and shut the heck up, Shut the front door, as my daughters would say, Shut the front door and take the meeting or read the email. It’s not the end of the world, folks.
Steve Brotman 1:02:50
Are the institutional investors here like 70 million are fun. Why should I pay attention as that’s like? Yeah, no, no, no, no, no, no, no, I meant, you have any aspirations for the future in terms of like?
Jason Calacanis 1:03:05
Well, the next one will be 100 Maybe, and I’m really interested in what’s going on in the Middle East. So I’ve been spending a lot of time in, you know, Abu Dhabi, Dubai, Riyadh, Doha. I’ve gone three times in a year, and they keep getting invited back. And I keep meeting partners over there and seeing the businesses they’re building over there and their interest in venture here. So I’m really fascinated with their aggressive push into venture capital and their optimism. And to be totally honest, like the endowments here, have gotten very large. And they can only write checks that are the size of my fund, you know, like, if you go to a government, that’s 1020 30 $40 billion, their minimum check size is 50 million, and my fund is 50 million, and they don’t want to be more than 10% of a fund. So, you know, we’re not worth their time. It just, they’re not designed for this. And that’s okay, you know, and I have those people come to my liquidity event, I have them on the pod. And yeah, they look at our companies afterwards, some of them are smart. And they will put a small bet into our fund. And then I give them a spreadsheet. And then I have somebody on my team, email them, when we have a company we think is promising because some of them like to co invest. And so some savvy, larger entities, which I won’t name, we’ll put in a one to $5 million, check into our fund, so that we have a relationship and we’re forced to get together every year and have lunch or, you know, I send them emails and say, you know, like a point guard, where do you like the ball? Right? So I’d like to bring the ball up the court, and some people want to dunk it when it’s a you know, Series A, they just want me to give an alley, more than happy to do that with Sequoia with social capital and Chamath more than willing to do it with David Sachs. And those folks I get the advantage, valor and Tonio grace, as you know, those partners of ours, we will, we will pass the ball right where they want. And they get the advantage of us, talking them up to our partners sincerely because we respect them. And we’re partners with them in getting in early. And they see value in that great, and then we get to learn from them. So, you know, Antonio at valor, was nice enough to analyze all of my performance with his team. And then, you know, a lot of the stuff I talked about today, and Tonio taught me because, you know, he’s like, my big brother or my brother who’s more successful. And he’s been doing this for twice as long as me. And, you know, valor was able to show me some weak points on my game, and then show me the strengths of my game. And one of the strengths I brought up today, which was at one point, and Tony was like, you know, the beta of the seed stage is incredible. And as like, it is, like, yeah, like, you realize VC, most VC firms don’t get to 3x, they get to 2x. You’re hitting 3x, consistently,
Steve Brotman 1:06:07
Half of all VC firms don’t return anything.
Jason Calacanis 1:06:11
Okay, so here we go, right. So you just when you look at, you know how variable that is, if you can consistently do a seed stage fund, that hits two 3x, don’t be afraid of the word average, because the word average in the seed stage means three times your money in 10 years, or 12 years, whatever winds up being pretty darn good. So you can kind of own average at the early stage. And we’re obviously going for alpha, we’re obviously want to get those five and 10 and 20x funds, that’s my personal goal. But if we deliver average, so we deliver beta with the chance of alpha, I think we’re going to be the best game in town. And for those other large funds, I mean, I think what’s going to wind up happening is, we’re going to top out at 100 million in terms of fund size, because I don’t want it to get unruly, and you know, even Y Combinator, the mighty Y Combinator, if they’re doing 400 companies that 500 Each, that’s 200 million, right? So it’s kind of hard to put a lot of money to work in this category. Right? So if you did, because you’re doing 125, that initial bat of 125k. You know, if you do that, you know, 100 times, you know, it’s really not that much money. Right? It’s Topol million dollars. And if you do it, I don’t know if they did four, or maybe they do 400. Now, you know, 50 million bucks. So it’s really not a lot of money to do 400 125k bets. Now, if you want to put continuation bets in, you know, if we were to catch up to Y Combinator, which is possible, that’s one way to go about it. Or the other way is to just do a little more follow on, you know, it’s like, I think will top out at 100 million. And then I’ll be honest, as I’m looking at this, and the flywheel keeps growing, the existing LPS I have are going to rehab where you know, 80% of them, right. And then I’m going to want to put my own money in, because I’m starting to look at my family office. And when I put money into other L, other funds, I’m now going, You know what, I can put 250k into this other fund or 100k. Usually, I start with putting in 25, or 50k, that I go to 100 to 250k. And sometimes I’ll do 250 to 500k in a fund. That’s not mine, and I might maybe put that into my fund. I don’t believe my strategy, more than I’m believing the strategy I’m hearing from other folks. And so I am more inclined to put my money into my own fund. And I could see a moment in time where I do at Hunter walk did at homebrew. And did you see that? That they just did it himself? He does? Yeah, homebrew just, I think it was after somebody had to look it up after the second or third fun. They told their LPs great working with you. We’re going to work with her on capital. So you ever watch that TV show billions. And then there’s like a little moment in time x cap is like, I’m going to bet my own money. I’m going to do my own book.
Steve Brotman 1:09:19
If you’re making those types of returns, why should you give that opportunity to others?
Jason Calacanis 1:09:24
I mean, there is an answer. It makes you sharper. So I bought into poker tournaments myself, but then with my friends, we’d like to buy a piece of the action. So let’s say you’re gonna buy into the World Series of Poker for $10,000. You know, in my friend group, I’ll always be like, Oh, can I take $1,000 of your $10,000 and then just send me get the best hands that you’re in. So I get the action in it. But it also when people have done that with me and staked me in a game like that, and I put in 5005 of my friends put in 2000 I play better. I play more thoughtful because I’m like I want to. I really care. So I’m You’re not going to do stupid things. I’m going to be more thoughtful. I’m going to be more precise, right? But it’s my own money. I don’t I can be loosey goosey.
Steve Brotman 1:10:09
It does make me disciplined, it makes you walk away the bad hands, it makes you yes makes you more. It’s one thing to lose your own money. It’s another thing to lose other people’s money.
Jason Calacanis 1:10:20
So I think I’ll be 50-50 at some point. So maybe in the next couple of years, I’ll be you know, some amount of my money, some of my other people’s money. 50.
Steve Brotman 1:10:28
Listen, I know that. It’s been a challenge.
Jason Calacanis 1:10:32
Right now.
Steve Brotman 1:10:33
Yeah. You know, you mentioned AI, that seems to be like the, if you have one more, one more, one more question about that. Like, you know, it seems to be the new software seems to be like the new, but it seems pretty real. How would you conceptualize it? How do you think about it? It’s, um, yeah, everyone has their own perspective. But you know, is this? You mentioned it as one of your five segments. Because it doesn’t pervasively enter all of those segments.
Jason Calacanis 1:11:06
You’re exactly right. So I would say 100% of startups are using AI internally to run their companies faster, better, cheaper, more efficiently. And then I’d say Reatta, four of the startups we’re investing in right now our I’d say half our AI first, which is they’re leading with AI, we’re making a copilot for accountants. We’re making screenplay writing software, with AI first. So we’re going to replace final draft or whatever with, you know, saga, this new AI based screenplay writing and storyboarding software. So yeah, I do think it’s, you know, first AI first half the time and then I’d say three out of four, then our AI, either first or primarily, and, or significantly, significantly, and then there’s probably like a quarter of them that necessarily, you know, AI isn’t, like, in the first five slides of the pitch deck is just infecting how they are thinking and building your company. So it’s kind of like saying cloud computing, like, is Uber a cloud company? No, it’s a mobile company. It’s a network based company. What are they racking their own servers? No, of course, you’re using the cloud. So I think it’s like, we’re probably halfway to the point at which saying, AI would be like saying software to your point, maybe even two thirds of the way there that it would be kind of like silly to be like, like, there were mobile startups for a while. And you’re like, oh, yeah, HotelTonight is a mobile travel started. And then now you’re like, Well, yeah, SPG and bonvoy. Have a mobile app. And it’s great. And you can book a hotel in it, and United’s, you know, got a great app. So you don’t need a hotel tonight necessarily, to you know, everybody’s got a mobile app. It’s like the idea that a mobile that Walmart or you know, HEB supermarket in Texas wouldn’t have a mobile app is crazy. Now, is it as good as Instacart? Probably not. But good enough.
Steve Brotman 1:13:12
So we’ve had 30 years, you and I have experience in the tech sector? Is this time different? Or does it remind you of any other years in the past? Or like, how would you characterize today’s investment climate?
Jason Calacanis 1:13:27
Yeah. And I think this will be the best vintage in our lifetimes. Simply because the infrastructure to build companies has gone down precipitously. And then the number of people online, with their credit cards, in their smart device attached to their bodies with broadband accessible at all times, is kind of reached 100% of the modern world. Like the idea that a human being on planet Earth will not have a smart device on them with their payment system in it. I mean, who’s left, you know, this, we you and I live through the digital divide in America. And we watched this like it was like only 3 million people have broadband and 30 million people are on AOL. So 33 million of 300 million Americans 10% of the country online, there’s a great digital divide. And poor people can’t afford the internet. And now people are like, poor people can’t afford the internet. It’s really short, because in India, you can buy an Android phone for $15. And the service is either free or a couple of dollars a month. You know, like Android phones 15 bucks,
Steve Brotman 1:14:41
and he’s in the washroom giving you handouts. It’s really remarkable.
Jason Calacanis 1:14:46
Yeah, I mean, like, you could if your I didn’t have cash, I was at the valet and I was apologizing profusely for the second time with the same valet at the hotel I was staying at for not giving them a tip and I’m like Oh my God, I am so sorry. Because I have Venmo. And I was like you do, like, like, almost all my tips come from Venmo. I’m like, why don’t you put a sign that says tip on Venmo. So they won’t let us it’s the Ritz Carlton. I’m like, Oh, can I pay you? And he’s like, literally just took his phone out. But then poop, and I have to invent. Now, did you know valets are taking Venmo? Did you know that? Have you tipped valet? And Venmo?
Steve Brotman 1:15:30
I have. Okay. You know, it’s actually I’m looking at a hotel company that has software that enables hotels to hit a pretty, pretty interesting market.
Jason Calacanis 1:15:44
So yeah, like to meet that company I actually looked at there was I don’t want to say the name of it, because we were talking to this one company in Europe that I was at a rope course with my daughters. And they had a screen that tipped the staff, and you just tip this one QR code. And then it showed you the staff’s pictures, and you could pick who you wanted to give the tip to. And it was just like a SaaS product. And I was like, oh, that’s brilliant. Well, we should, we should chat. Definitely want to know about that one.
Steve Brotman 1:16:12
Yeah, we should. We should definitely connect more often. And, yeah, you know, we do some deals. Let’s do some deals. It’s been too long. It’s time. We’re all grown up. We know. We know where we’re going. Yep. And super great to see Jason.
Jason Calacanis 1:16:26
Thank you for having me. Thanks. Great to catch up. I’ll see you when I’m in New York. Go next.
Steve Brotman 1:16:32
Next, we’ll talk to you soon, Jason. Cheers, brother.
Outro 1:16:40
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