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we're back yeah and here of Gary tan so we're gonna be talking more about VC stuff cuz then I have a lot of friends who say that ultimately do you want to end up being a VC investor totally is that how we say a VC investor a venture capitalist a VC their reasoning is that they don't really want to do the work of building things but they want to advise people yeah you know think about what would be a good product and then bet on oh my god I guess I would tell them don't do it okay yeah because then you'll end up being remember earlier in that in the episode we were talking about their investors who lead and they make up their own minds and then there are people who just check check check check the box and then only want to you know invest when it's absolutely a sure thing right but I guess even okay let's just say they do want it and like they do want to lead yeah yeah they still want to lead right I don't know if I'm relaying their messages correctly there for me it sounds like they don't really want to do the work right they want to do the purely intellectual yeah yeah which is Oh VC there's so much work though that's all I was thinking so paint top tell me about like your day-to-day work yeah totally I mean VC done right is literally like your schedule is like you know 9 a.m. to 6 p.m. or honestly I have kids now so you know if I didn't I probably do be doing like literally like 7 a.m. till like 2:00 a.m. you know just things all day right but now that I do have two young children I have to actually cut it back to like well get to office at 9:00 I have to leave by 5:00 because I'm gonna pick up my four-year-old right and of course I can get a few hours in the evening but I better sleep because you know my five monthl is gonna cry all night and so honestly this job done right will actually fill any amount of space that you give it and so it is a lot of work to do it right because every other day someone lost their best customer they lost their director of engineering you know someone somewhere in my portfolio people are getting punched in the face and you know on that day when maybe the company's gonna die I have to pick up the phone I can't just be like decline right hmm so what do you have to do like if a company dies it's not like you have us it's not if you have a say on what they are they have to do so what do you do to prevent that yeah a lot of it is how do we find a better person like if we're if it's personnel like how do we recruit how do we hire and get me on the phone with this person if it's losing a customer like let's find other customers let's make a spreadsheet of a hundred other people who could fill in that hole unless you know we'll actually comb through all nine partners at initialised their whole networks and then we'll we actually build software for this to basically get customers and hire people for our companies and so all of these things are a lot of work like we kind of run it like a start-up itself yeah I actually had no idea that feces were such help well we do it this way there are a few other people who do it like that andreessen horowitz is known to have you know probably more than a hundred people who work as an operating company on behalf of their founders that's really cool yeah we have nine so we're just getting started okay so you called these operators oh yeah operating partners but you know every single one of our operating partners also can do their own deals and bring in companies they're not expected to but you know we want them to learn how to do the business okay so what kind of people would be would become good VCS yeah honestly great founders are sort of the best because those are the people who can actually help like when something happens it's just not you know totally new you know I don't have to call in a favor from my network it's like oh when I when I had that problem here's what I did and that's just more useful when you're trying to avoid the landmines and so the best version of that is actually start a company and even if it doesn't work out like you'll have learned so much the next best thing honestly is join a fast-growing company as it's you know sort of an hyper-growth here's a really useful rule of thumb for your viewers you can basically about if you wanted to evaluate any startup the way a VC does just figure out what the growth rate is and this might be revenue it might be users [Music] it depends on what the company is but basically for seed the series a if they're growing three acts a year that's pretty good like that's sort of like a solid be anything for X and above that's like an a like a five is like a plus it's like five X a year really really hard to sustain and then anything growing around 2x like in C plus C like you know and this is sort of a measure of why startups are so hard like literally startups are growth and if you've ever tried to grow something like by - I even 2x a year that's really hard but that's sort of how people can evaluate as yeah a non VC the you know just figure out how fast that thing is growing and that'll actually tell you whether your startup is living or dying god they're like sharks basically they have to keep growing otherwise they'll die they have to keep moving otherwise they'll die yeah so for engineers and pm's currently yeah if they want to go into VC then the best thing they should do is join a startup or even start your own startup so that they can build empathy totally startups that they will invest in right absolutely and then that's about that story mhm like you know what did you do for that company and you know a lot of people jump over to VC because they're the person who they were the growth PM for something that grew from like a million users to a hundred million users and that's the kind of experience that it's like almost impossible to get and those are the people who are deeply sought after in the world for their advice and so you know that's why joining a fast-growing startup sometimes is even better than starting your own because it's really hard to start your own mm-hmm so imagine if they have all the skills like how does it work in terms of the money because I don't really understand how the VC world works so do you usually try to join a VC firm and then pay your stake so that you could be a managing partner or operating partner how does it work how do you even join one yeah absolutely I think there are kind of a few different paths the first one would be you know work as an operator maybe early in your career find some sort of win like I was the person who scaled like you know this 10x and you know this fast-growing company and then early in people's career they could join as an associate at a venture capital firm and usually you have to find your way to network in to meet the person a lot of us just purely trust right if people think you're smart and scrappy and hungry and you know they've met you like sometimes they're just gonna hire you like the next time they have an associate the next level is sort of principles I mean these are people who sort of start as VCS and then get promoted once and those are people who start taking more investing responsibilities associates tend to do mainly sourcing so you know sometimes going into events or you know going into Excel spreadsheets or writing software to basically go comb through the internet and figure out what's happening what are companies that could be good opportunities and then they'll work with you know the general partner or you know the basically the investing partner to bring that to the whole team and so you know the associate role is not that glamorous but it's kind of like starting out in any business it starts out as you kind of have to do like the scut work and then as you go associate principal sometimes there's a managing director role and then you know making partner is kind of what it sounds like it's a really big deal because only then do you really get a significant part of sort of the winnings from a given fund we call that carry in the business okay so only after you return the whole fund the partners tend to get twenty to thirty percent of anything after you return the money to your limited partners nice limited partners are the people who give you money to invest got it okay so for example for initialize capital you and Alexis you guys are defending partners right and then you guys probably put in your own money at first that's right and then you guys have a bunch of I guess associates that may be become principal and then maybe a partner we just have partners you guys just have partners okay cool so they have partners so they put a stake in do they have to like pay an amount to be in it or like investor-owned money oh I mean we're basically investing on behalf of some of the biggest and and institutions in the world universities you know when you watch PBS and you hear about you know X foundation and Y Foundation there are large pools of capital that are billions of dollars that are basically run often to support some sort of nonprofit or some sort of you know university some sort of big goal those are pools of capital that have to grow in order to actually support the mission so you know Harvard or Stanford or any university that has an endowment they actually can't spend the money that they have when you hear about Harvard having thirty eight billion dollars they can't just take $1 out of that endowment and just you know give someone a scholarship they actually have to go and give that to other investors and those you know private equity or hedge funds or you know fidelity you there's so many ways to invest and then venture capital is crazy because it's only you know something like 1% or you know that all of venture capital is only a hundred billion dollars a year whereas the total amount of money going in through the financial system is easily in the trillions and so everything that we talked about with venture capital it's basically this tiny mote of dust on this vast ocean of finance and there's more capital in the world than people know what to do if at this point which is like mind-boggling for me like when if you told the 15 year old me that there's more money in the world than anyone knows what to do with I wouldn't believe you because we didn't have money and how you know and so that's one of the core problems in society today is like how do these giant pools of capital actually put it towards you know businesses that employ people that actually useful for society yeah so that's why venture capital is probably one of the most important businesses and I'm you know I'm glad people want to do it but the best venture capitalists are probably people who also started their own - so they can actually help that makes a lot of sense okay tell me a little bit of the timeline for initialize capital like how much money you've raised and now like how much you've grown and stuff like that just to give some numbers yeah yeah totally we started off with a small seven million dollar fund about seven years ago and now we have over 500 million dollars under management our newest fund is 225 million dollars so we will write checks of a million dollars to five million dollars in exchange for about 15% of companies and so we'll lead and we'll do the whole round and you know if we if we write a really big check we'll sit on the board and that was very different like we are a true institutional venture capital firm before you now but before we actually started kind of like angels like we were writing fifty thousand dollar checks twenty-five thousand dollar checks and even then I was like that's a crazy amount of money but we were writing them into companies as the first check and those companies became billion dollar companies mm-hmm and so you know that kept happening and we realized well instead of sending 20 or 30 emails to all everyone else saying hey this is a good company you should invest in it we just write one check the founder is done and then we get back to work and that was sort of the evolution of us from going tiny checks and helping other people to helping other investors to well we'll just do the whole thing mm-hmm so what were some of your biggest wins personally that you have rewarded yourself financially the most I mean honestly I've just been super lucky like yes for me Stanford was pretty crazy because the people you've got to meet I mean you went to Waterloo like the people you get to sit next to people who are gonna go on and do all kinds of insane stuff and when I was there I had no idea okay so I guess what I meant was like what was your best exit and how much did you make up yeah yeah so I've actually never talked about this but we did sell postures for twenty million dollars nice founders two co-founders okay okay and did you have initial investors yes we did I won't tell you how much I actually made but I can tell you how as a VC I try and figure out how much people made from a given exit so obviously you have the acquisition price and then again going back to cap table you can kind of guess most co-founders are probably close to equal but not always assuming it makes the math easier if everyone's equal and then basically count the number of funding rounds they done if it's an early round like a seed round or series a sometimes a series B it's about 20% of dilution meaning investors came in and bought 20% of the company at that moment and then the founders and the employees would only own 80 percent after that funding round so if you had 50 percent and then after one funding round you would have 40 percent yeah exactly and then you can count them up basically the series sees cdef like GE you know they go on for a while these days those tend to go from you know 10 percent for the B down to sometimes just one or two percent for the much later rounds so almost all of the dilution is actually usually in the seed Series A and B I see okay just mostly a and B so if you ever wanted to do the math just count the percentages and then do the math and multiply it by the acquisition price and that's how much that person probably made mm-hmm and sorry for asking this question but what about being a VC how much can you make from that give it a success I'll tell you how to do the math for that too all right um let's make the math easy say say VC has a hundred million dollar of venture capital fund so they raised a hundred million dollars from other people and then a lot of people often ask like how much does the VC usually put in so it varies it's sometimes as low as 1% well you know sometimes it's as high as I think Peter teal is putting in 20% of the billion-and-a-half dollar fund that he's raising for Founders Fund or has raised so it varies so for a hundred million dollar fund that the people who run that fund might only put a million dollars in total and then what happens is they invest that over usually two to three years and then ten sort of ten to fifteen years from from that they're kind of expected to give back something like between a surprisingly a low number of like maybe 2x or 3x like two x's 2x to the 3x is basically considered a pretty decent fund so meaning investors gave them a hundred million and they have to give back two hundred three hundred million in the next 10 to 15 years I see and then the typical carry for a VC fund is 20 to 30 percent and so all of the VC partnership if they only if it's only a 2x fund would make about 20 million dollars nice there's really simple numbers yeah but it is an incredible job right mm-hmm that's why it's finance is crazy mm-hmm so friends of mine actually started a company with Peter Thiel in 2004 and I was 22 years old just graduated didn't know anything about money or house company started didn't know anything about venture capital I got my first like full time job with Microsoft up in Seattle program manager yeah program manager for Windows Mobile weirdly enough um you know two three years before the iPhone ever came out and so I saw them just kind of try and copy design and literally copying like the check box mentality of you know here's what rim does let's just copy it but it was my first job I had health insurance you know I actually could have a really nice apartment I ran out and bought a new car and and then my friends called and said hey you got to quit your job we're starting a company with Peter Thiel you know the guy I mean then Peter Thiel was not a billionaire yet I think he had just sold PayPal he was probably worth like tens of millions of dollars at that point which was still like insane and he said well come have dinner with me I flew down to San Francisco he had just opened a French restaurant the French restaurant was bad it was opening a restaurant yeah I mean it's one of those things when you like sell a company you know you buy the flashy car you like open your own restaurant like you know you get it all out of your system that's fine it's called free zone it was terrible the restaurant closed almost immediately but it was about the time he wrote the five hundred thousand dollar check to Facebook that made him a billion dollars or made him a true millionaire and I had met him a bunch of times I hadn't come to speak at Stanford so it wasn't like I didn't know who this person was it's like clearly a Silicon Valley legend and here he was having dinner with twenty-two-year-old you know program manager he's like Gary what the hell you doing at Microsoft you're wasting your life I'm so sure you quitting your job enjoying this startup is the right thing he got out his personal checkbook and he said I'm gonna write you a check for $70,000 which is my whole annual salary in 2004 which is more money than I'd ever you know I was probably $40,000 in in debt you know student loans and credit cards and all that it's like and because because I ran out and I didn't treat money like you know capital in time I treated it as well I deserve this because I have a job now and you know jobs really hard so I should have nice stuff I'd like basically fell into that trap of being lulled into like the physical having nice things you know and the problem was I felt like I couldn't take the risk it was crazy right I had it you know and so he said you know here take this check I'm sure this is right I got on a plane back to Seattle and I said no and that company became talent here which is you know worth twenty to forty billion dollars depending on who you talk to yeah and so easily the equity from that if I had joined at that moment as the first engineer it would have been worth probably close to two hundred million dollars and that's the kind of decisions those are the kinds of decisions that people have to make when you're a maker it's completely crazy but it's commonplace you spend any time in around here and you just got run into people who literally say no to the next Facebook no that's sorry actually say no to actually Google or actually face fraction actually yeah but that's also kind of the crazy thing about tech now it's like we are touching every part of society with software and so I don't know I spend a lot of time trying to decide like why did I make that crazy 200 million dollar mistake and that is just crazy well I mean you're doing pretty well right now so I think it's not that bad yeah but if it did end up going you did end up working for Palantir yeah I just joined a year later right a year later so I mean I guess that's a big difference in terms of like equity percentages but yeah totally but yes so I guess that was still pretty fruitful for you yeah you designed a logo yeah well that was fun and I got to see what it was like you know what made me quit was actually seeing all of my friends who were way smarter than me quit their like I had a friend bottom the Guru who quit his PhD and had Stanford and I said well you know Microsoft's a big deal but you know PhD at Stanford is a bigger deal and that's kind of what you end up finding with a lot of these startups is I like to say that it's kind of like packing a snowball do you like 90s 90s noosphere vintage video games like for Sony Playstation I wasn't born [ __ ] okay okay there's this game called Katamari Damacy I think it might be like early 2000s is it the phone to ball yeah yeah that's basically what a start-up is like actually you start out with this tiny like in the game you're an alien and you're about this high and you know you're probably smaller than this this cap right here you know I'll have a prop here I should oh yeah totally it's rolling around and then the deal is you're a little alien rolling around a ball and anything that you are bigger than you pick up and then it becomes like a part of you and then you can pick up bigger thing and anything that is too big and you try and hit it you'll actually bounce off and you'll get smaller and that's basically what a startup is all the time so getting a first customer hiring your co-founder hiring your first engineers raising your first money that's all you're doing like it's like little bottle caps and things like that sticking onto your ball and then you know the funny thing about this game is by the last few levels you know you start picking up tables you pick up like buildings cars by the end you're actually picking up whole continents and so that's kinda you know it's startups or basically cut Amar'e dama see and you know that's what you'll find in these patterns it's like hiring is really important raising money is really important but then the most important thing is actually getting customers like that that telling that story well we'll get you all over the rest you know you'll get people to drop what they're doing and come join this thing because hey this is a rocket ship that's about to take off [Music]