--:-- Host: It's dangerous to do non-consensus investing. Like, that's a dangerous idea. If you're alone in your view, you may just be missing something. Eventually, you have to get to consensus. If you're dependent on capital markets, it's very hard to keep the company alive if nobody wants to fund it.
--:-- Host: Peter Thiel once had a line which was like, the faster and higher the upround, the more you should invest because it's working. Most companies fail from indigestion, not starvation.
--:-- Host: Is non-consensus investing overrated or is it still the secret to venture returns? Today on the podcast, I'm joined by a16z General Partner Martín Casado and Leo Polovets from Humba Ventures to unpack a debate that lit up VentureX. Should founders and VCs chase consensus or run from it? They explore what consensus even means in practice, how market efficiencies shape venture outcomes, the dangers for founders of being too far outside of consensus, and why some of the biggest winners in tech history looked non-consensus at first. Let's get into it.
--:-- Host: So, Martín, it looks like you've helped spark a little bit of an existential crisis on venture Twitter. I thought we'd all come here to talk about it.
--:-- Martín Casado: Great. Super. I'm excited to be here.
--:-- Host: Why don't we recap, Martín, from your perspective? What were you saying in that tweet? What were you trying to say in that tweet? Then we can get into the great back and forth that you and Neil had and get into the conversation.
--:-- Martín Casado: So let me paraphrase the tweet. The paraphrased version of the tweet is: it's dangerous to do non-consensus investing. Like, that's a dangerous idea. The impetus of the tweet, which, by the way, wasn't well thought out — which I think a lot of the viral tweets happen to be not well thought out — is, I've been an investor for 10 years. I've done almost 200 investments, either as running the fund or being directly involved. And it seems being blinkered to how VCs view companies is actually quite dangerous because you're so dependent on follow-on capital.
--:-- Martín Casado: Actually, it reminds me a lot of being an academic. I used to write a lot of papers. You do all of this great research, but when you wrote the paper, if you didn't actually think about how the program committee would view it, it wouldn't get accepted. It felt very similar to that. That was the origins. But I want to be very clear: I did not say, and I would never say, consensus investing is a good idea. I'm just saying not being aware of consensus is a bad idea. The last thing I'll say on this: I think my underlying belief is early markets are actually pretty darn efficient — a lot more efficient than people realize. So if you're alone in your view, you may just be missing something.
--:-- Host: Leo, we're stoked to have you join us as a friend, fellow venture nerd. What was your reaction?
--:-- Leo Polovets: Yeah, I mean, I actually agree with a lot of what Martín just said. Eventually you have to get to consensus, whether it's when you're investing or later, because otherwise, if you're dependent on capital markets, it's very hard to keep the company alive if nobody wants to fund it.
--:-- Leo Polovets: I would say for me — and maybe we invest a tick earlier, more towards pre-seed and seed — a lot of my best investments have been more on the non-consensus side. Not in terms of I had some crazy good insight and nobody else had it and I'm just brilliant. But more like these companies often struggled in the early days because before there's proof points, it's not obvious that it'll be a good idea. Then once they get good, the valuation skyrockets so fast that you could still get good multiples, but they're just much lower than the early stages.
--:-- Host: Yeah. And then there was broader commentary on looking at a list of big winners over the last 15, 20 years and saying, "Hey, what was consensus? Which were consensus? Which were non-consensus?" And then, Martín, what were your reactions to that broader commentary?
--:-- Martín Casado: Well, listen, again, it wasn't meant to be a technical tweet where the wording was exact. On the face of it, it's almost an ill-defined statement because we don't know what consensus means. So everybody picks apart the consensus. But here's my reaction to the list of the Airbnbs and this and that: I think we need to be very careful not to conflate a company having a hard round with market consensus.
--:-- Martín Casado: If you look at the list Keith Rabois put out — which is great, and I love Keith — these are MIT founders, known spaces. I'll bet if you took the median value of their raises over the life cycle of the company, they're way above market. Many of the companies were YC companies. So I just think it's so easy to come up with these anecdotal "oh, this one company had a tough raise" when that's definitely not within the spirit of what I was trying to say, which is markets are actually quite efficient. If the market's efficient and it's a good company, the price is going to be high. If you don't recognize that, you're probably beating yourself as opposed to the market.
--:-- Martín Casado: It really comes down to: you shouldn't be looking for good deals with respect to other investors. You should be looking for good companies, and price shouldn't sway you from that. That's really at the heart of this. So I just don't think that list — unless you actually run the numbers, which we haven't done — demonstrates that the idea that consensus is important is wrong at all.
--:-- Host: Yeah, and I think there are a few quibbles I had with some of the names on that list. Some people put Anduril, and it certainly was a controversial investment, but Palmer Luckey — second-time founder, billion-dollar exit, Trey, who's phenomenal. This is in the shadow of Elon, who shows that you can already create these defense tech companies. If that's our definition of non-consensus, it just shows how insular we are as a community. It's almost an indictment of us that we even make this list. And wasn't the seed round at like 100 or something? It was very expensive. Every round was super expensive. I'm not sure an ex-unicorn founder would ever be non-consensus really.
--:-- Martín Casado: Yeah, it is interesting. There are rounds that are maybe non-consensus at 10 million, but then become super hot rounds at 50 or 100 and then become 10 billion or 100 billion dollar companies. Even if you invested at that consensus round, you 10x or 100x. So it's in the face of "if it's a hot deal, that must mean it's not good." Peter Thiel once had a line which was like, the faster and higher the upround, the more you should invest because it's working.
--:-- Host: Yeah, I would love to do a correlation analysis. Actually, Leo and I had a very interesting discussion on trying to figure out how you'd actually measure this, how you actually throw some data at it. We actually have an analyst working on it now, but the data isn't ready yet.
--:-- Martín Casado: Actually, I want to test this with you, Leo, on a good thing to test. I'll bet the best prediction of a high up round — outside of the business — is the fact that the previous round was hot. I think that's probably true. If that's the case, it would suggest the market's actually pretty efficient because it's almost inductive that the previous round knew that the next round was going to be hot.
--:-- Leo Polovets: I do agree with that. I think the question for me is, where is there more opportunity? Because if the five hot companies keep having great rounds and there's 10,000 not-hot companies, but 100 of them will become hot over time — even though the odds of becoming hot are low, most of the hot companies end up coming from the not-hot batch.
--:-- Martín Casado: Right. So the question comes down to: is it easier to spot the company nobody sees, or get into the company that's obviously good? And maybe even further than that: to what extent do even high price rounds underprice hot deals? If my view is correct — that hot deals are hot because they're good companies, not because the market is very efficient, and that drives most of the returns — then the next obvious question is, if that's the case, the market isn't that efficient because it's underpriced the company. The majority of returns are in high-priced rounds and the market has underpriced it.
--:-- Martín Casado: But I think risk-adjusted, that's not necessarily true. It could still be price-right because there's still a chance it goes to zero. So my sense is, until we run the numbers, we're not going to quite know the answer. I think a lot of these theories prove out anecdotally. And I think maybe that's the problem — there's an anecdote for every theory.
--:-- Host: Yeah, I think the basket analysis is probably the most interesting one. How did this one company do, but how did this portfolio of companies that raised a really quick follow-on or had 10 term sheets at the Series A — how did those end up doing over time? There are even cases in my portfolio where a super hot company from an investor standpoint — so many term sheets — the business didn't work out at the level you'd expect, but the outcome was still really good. So in some level, even independent of the productive asset, human opinion about it matters.
--:-- Martín Casado: There are almost two ways you can slice this conversation. One is the asset is what's productive and produces the value, and the market will determine if that's valuable or not. That's the productive asset view, and that's the one I hold. I think investors are very smart. I think they know which companies are good, and then they pay for those. But there's another view: independent of whether the company is good or not, there are things that people think are good. So you're almost playing to the human perception of the company independent of the underlying business. And I would say, again anecdotally, until we run the numbers, that also seems to be a bit true.
--:-- Leo Polovets: Yeah, I've been in venture for 12, 13 years now. I've definitely seen this in sectors where sectors fall in and out of favor. We had e-commerce was hot and then it was dead. Then Dollar Shave Club got acquired and it was hot again. E-commerce — I think the fundamentals didn't change that much year to year, but the valuations and the appetite for investing and maybe starting companies changed a lot year to year. That to me is an indicator. It's not just the fundamentals. There are all these other forces.
--:-- Martín Casado: Yeah, totally.
--:-- Host: One other part to your tweet, Martín, that I think was underappreciated was the risks for founders of being seen as non-consensus. Because founders need to raise money and they need to raise follow-on funding within 18 to 24 months, sometimes even sooner. If everyone's passing on you, people are bragging about how other investors don't want to do your deal — that's not going to be super helpful to you in your next round.
--:-- Martín Casado: I actually think the most interesting aspect of the tweet was the sociological study that followed of how different people interpret it. The tweet itself was pretty banal — it's almost tautological. But the different constituencies viewed it very differently. Relatively inexperienced investors kind of used it as an opportunity to be like, "Oh, Andreessen Horowitz consensus invests," which anybody that knows anything about our investment knows is just totally not true. Even my own portfolio — many of the top deals I've done, nobody else was in the deal. So that was one cohort.
--:-- Martín Casado: There was another cohort — like Leo and Keith — who have a lot of data and have had a lot of really interesting things to say, and that ended up in great discussion. I think there's still a lot more to do there. But most of the founders — and I got a bazillion DMs — were like, "You're totally right." The founders clearly feel this tension that it's dangerous to be non-consensus because they have to cater to VCs, and they know it, and they see the pattern match responses. They deal with this all of the time. From a founder perspective, you almost have to be non-consensus to have alpha in the actual product market, but you have to look consensus when you're raising.
--:-- Leo Polovets: I think that's probably right. I think this is one area where I differ a bit. I think there's benefits to being non-consensus because from the company side, when the money's hard to raise, you tend to be more frugal with it. Also, if the next round is less certain, there's less of a "it could crumble at any moment" aspect. When it is hot and you're raising subsequent rounds very quickly, unless the assumption of things will go perfectly, if anything slows down, now you can't raise any more capital all of a sudden. If you're in the mentality of growing quickly and spending, I think that's pretty hard. On the flip side, if you're not consensus, you tend to be more cash efficient, more frugal out of necessity.
--:-- Leo Polovets: The other side is, depending on the form of consensus, sometimes there's much softer diligence. I think the worst form of consensus I've seen is like, "Oh, Sequoia and a16z did this round. Let me just do a 2x markup in two weeks because I want to be in the same company." There's no diligence there. It's just, "Oh, this is hot. Let me do it." But then maybe you're overlooking: is it actually a good business? Sequoia and Andreessen — we all make good investments and bad investments. So maybe this is one of the bad ones and you're just marking it up because you want to be in the hot deal. That ends up not being good for anyone.
--:-- Martín Casado: I think this is a tremendously important and good point. I tend to believe now that most companies fail from indigestion, not starvation. They just raise too much money too easily. They don't listen to the actual market, which is the customer base. As a result, they have a bunch of bad practices and end up running out of money. I think there's a lot to that. I actually think in 2021, if you just did a study of that cohort — the companies that had these billion-dollar bees, if you remember that time, it was totally crazy — I'll bet that's probably one of the biggest wipeouts of capital. So I definitely think consensus investing is very dangerous. Only leaning into that from a founder is definitely dangerous. But I also think the flip side is true: if you're totally blinkered to it, your life is pretty tough.
--:-- Host: So there's a broad question as to, of the companies that do win, how many of them are sort of competitive rounds versus not competitive rounds? What is the duration between them being non-competitive rounds and then becoming competitive? And what percentage are really able to make that transition? One question I have is: is the market getting more efficient over time? A lot more investors. We should be getting smarter as an asset class on how to evaluate these companies. A lot more capital. Are we getting better? And if so, what does that mean? Oh, I'd love to hear Leo's view on this. It's something I've been thinking about for a while.
--:-- Leo Polovets: My take would be that for non-consensus companies, it's getting more efficient because the more investors there are, the more likely you are to find at least one or two that like what you're doing. For the consensus companies, it's starting to get more inefficient. When you have 10 term sheets, you get 5x the market — what maybe the fair value should be. That's great for the founder, and maybe it's a little bit more of a house of cards if things go south at all. But it's not necessarily great for investors because you might have to pay 2, 3, 4x over the actual intrinsic value of a company or the likely future value in order to get in.
--:-- Martín Casado: But that would be actually efficient, right? The prices are actually approaching the return profile. From a market standpoint, that would be efficient. It sucks from an investor standpoint because prices go up.
--:-- Leo Polovets: Yeah, that's what I'm saying. For founders, it's getting hyper-efficient — or maybe there's such an imbalance for the really hot companies that your price gets bid up way past where it should be. Similarly, for non-consensus companies, it's the opposite. There's not enough investors, so your price is lower than it should be, perhaps.
--:-- Host: Yeah, this is a great question. I totally agree.
--:-- Martín Casado: So I think we can all acknowledge that there's a failure mode where the consensus gets bubbly and then companies raise too much capital and there's a bunch of wipeouts. That has always happened, that will always happen. That's just part of the market. We can also all agree that there's parts of the market where there's probably unnecessary pessimism. For example, right now during this AI craze, in my area of traditional infra, a lot of the traditional companies that two years ago would be great can't even raise right now just because they're not in the sweet spot. I think that will always be an aspect of the market too.
--:-- Martín Casado: But in general, for the mean investment, I do feel like the market over time has gotten a lot more efficient. We can deploy more dollars with more regularity and the price is converging on what will ultimately be a fair price. This is acknowledging both of these failure modes on either side. We're seeing one right now. There's AI companies that are raising speculative money where nobody even really understands the business model, and there's great companies that can't get invested. But I will still say the reality is OpenAI has grown tremendously, Anthropic has grown tremendously, Cursor has grown tremendously. So there is some underlying market signals to fuel the chaos.
--:-- Leo Polovets: Yeah. I think part of it is, if you ever look at vintage year data for venture funds, it's probably a good way to see how consensus and non-consensus do over time. When you look at the dot-com bubble years, I think the median fund was terrible. Everyone overpaid, and then the companies weren't worth that. Even though everything was hot, it didn't do well, and a lot of the funds didn't do well. If you look at the Airbnb, Uber 2010-ish era, it's kind of the opposite. The top quartile funds crush it. The market was pessimistic. So if you're willing to invest, you had a different opinion, you did really well. And now it's probably somewhere in the middle.
--:-- Leo Polovets: Maybe I'll just go through my own startup as a single anecdote to frame the conversation a little bit. I did my PhD at Stanford. I was a classic "take the research, do a startup." We had so many term sheets before we had any idea of what we were doing. It was the hottest thing ever. We did a seed fund — actually Andy Rachleff from Benchmark joined my board — and we raised at the time a super high priced seed round, 10 million post. This is in 2007. Then the market tanked in 2008 and we still didn't know what we were doing. We were just a bunch of researchers. We couldn't raise any money at all. Sequoia very famously gave us a black eye. We couldn't raise.
--:-- Leo Polovets: Then as we started to come out of the recession, Andreessen Horowitz, NEA, Lightspeed — a few got very interested. We had a pretty hot round again. Andreessen — it was actually over the market price, even though the business wasn't quite working, but there were signs of life. Then we had an incredibly hot round because things started working. When we actually sold the company, it returned a fund. It was one of the highest acquisitions on multiples of revenue at the time in enterprise software.
--:-- Leo Polovets: So you ask the question: was the initial flurry of interest warranted or not? Because it turns out we were probably a month from going bankrupt and we actually didn't know what we were doing. The company definitely wasn't working. What we had pitched at that time didn't make any sense. We were like, "We're going to change switch hardware," which didn't make any sense. So there's one view that the market was over-exuberant and you were lucky. There's another view that says the initial conditions were there to do it. I just feel like if you run the data, the companies that have good outcomes did have sufficient interest along the way because there are enough signals to do it.
--:-- Leo Polovets: I think on my side, for a lot of the pre-seeds and seeds I've done, I went back over my top 10 investments. Maybe 6, 7, or 8 took them months to raise a seed round. A lot of times, a lot of passes. They were all down to the wire. But then they ended up doing better over time. I think that transition from non-consensus to consensus ended up being really important because if you never transition, it's really hard. If you're always consensus, that's great for you. But one thing I noticed that was interesting: a lot of the companies that struggled — obviously some of them just go to zero because the business isn't that great and people recognize it — but the ones that did well, a lot of times the gap between the seed and A or the A and B was literally 20x or 50x. So as an investor, you can still get good returns at the Series A or B in those companies, but it's so different to invest at the seed where there's a thousand x versus the A at a billion where now maybe there's still a 10x or 20x. That's very different.
--:-- Host: I've got a question for you, Leo, because I think you play a bit of a different game than we do. If you have a seed which is non-consensus — they're having a tough time raising, you're the only person putting money in — do you have a theory on how it will become consensus? Or is your belief that the underlying productive asset is going to do very well and that by definition is consensus? Do you see the question? Is it just true belief in the underlying business? The ultimate sign of success is the business is really working. So are you, for the next raise, thinking the business will definitely be working? Or do you have some other theory on what will attract the investors?
--:-- Leo Polovets: I'd say it's often the latter. It's especially true these days because I'm investing more in deep tech companies. At Seed, it's very rare to see an asset that's going to be working here at the Series A because usually the asset's still going to be being developed at the Series A or maybe Series B. I think what I'm looking for is: there's maybe not enough here for somebody to write a $5 or $10 or $20 million check, but the company has milestones that I think if they hit them, then it would become consensus enough to merit a check of that size. I'm basically trying to evaluate: okay, the company has these milestones, do I think they could hit them or not? And also, if they hit them, are they compelling enough? That's sort of the big investment wager.
--:-- Host: So in this case, you do think about what the follow-on is going to want to see. You have reached a conclusion for the current round that is non-consensus.
--:-- Leo Polovets: Yeah, and I would say the consensus piece is part of it. I definitely meet companies where they're like, "We're raising three right now, it'll help us do these milestones, and then we think we can raise 10." And then there's other ones where it's like, "We're raising three now, we're going to hit these milestones, and then we want to raise a $50 to $100 million Series A." That's a much harder bet because you have to assume they're going to be consensus by the time they raise the next round, and it's going to be a top 5% Series A. That's a hard bet to take. For the companies where the capital needs are more modest, or they have a more tranched roadmap planned, it's a little bit easier to predict: "Hey, would these milestones be enough to raise 10?" A lot of times, I don't know if it'll be enough to raise 100. It's probably not. But 10 feels pretty feasible if you do the things you think you're going to do with this three.
--:-- Host: Has your view on this shifted in the last... Do you find this AI wave to be different than previous waves or fairly similar?
--:-- Leo Polovets: I'm probably a bad person to ask. I actually haven't invested much in AI because of the deep tech angle. Maybe like 10-15% of my companies are pure AI. Others obviously use it in some way, but that's not the product.
--:-- Host: How about deep tech then? Because I think that's also pretty different than what we were all investing in five years ago. So maybe on the AI side, and I'll touch deep tech next.
--:-- Leo Polovets: I think AI is interesting to me because on the one hand, I've never seen faster growth. People talked about the triple-triple-double-double-double thing for a while of getting from a million ARR to 100 in five years. That seems so antiquated now. The best companies are doing that in like one or two years. On the flip side, the endurance — how long those companies endure and last and grow — feels like much more of a question mark. In the triple, triple, double, double, double era, if you hit 100 million ARR and there was no one close to you, you probably just keep growing. Now it feels like you could hit 100 and then you drop to 50 because someone else came out with a better product. So the growth is amazing and then the moats are weaker. I think there's a counterbalance there. I'm not sure how to evaluate it because I haven't invested that much in that stuff.
--:-- Martín Casado: I agree, yeah.
--:-- Leo Polovets: On the deep tech side, I definitely see areas with a lot of hype from time to time. For example, we invested in defense a lot three, four years ago. Then we kept looking. We basically paused for a year and a half or two because after the Ukraine and Israel, prices just went up like two, three, four times. But the company fundamentals didn't change. Then it started being an opportunity cost of: should I invest in this defense company at 40 when there's this really great energy company at 15? Defense was kind of like that. Bio has had a lot of ups and downs. In robotics, humanoids are probably one of the most hyped areas where the valuations just get crazy before there's any revenue. I feel like I kind of lost the thread in the original question.
--:-- Host: No, this is great. I was honestly just wondering how you thought about this current wave. You did a great survey of a set of the waves.
--:-- Martín Casado: I actually agree. I would say for the consensus areas like humanoids, we end up not explicitly, but implicitly avoiding them. Once you have a few companies that have raised hundreds of millions, whether they end up being great outcomes or not, I think it's pretty hard for someone to start something new with near zero resources and team.
--:-- Leo Polovets: Yeah. It's interesting when you do the humanoid. I think there's all sorts of types of investing and they're all pretty valid. One type of investing is: humanoids are clearly interesting. Big companies are clearly interested in it. So why don't you back a bunch of good teams?
--:-- Leo Polovets: In worst case, they get acquired. And I think that's totally legitimate, but that's not how I think at all. For me, the company has to make sense as a standalone business at scale. So things like humanoids are tough for that, just because the unit economics right now are so unknown. Competing with a human body is a very, very hard thing to do. And then, of course, you can be like, okay, we'll put it where human beings can't go, like a car factory. But then all of a sudden, you're building a manufacturing company, so you verticalize heavily, and the company has to look at whatever sector the robot is going into. It's more constrained, and I don't understand the competitive set. So from my standpoint, the idea that this is very buzzy and hot for big companies and may have an M&A exit—I don't know how to invest that way. I just don't know how to handicap that.
--:-- Martín Casado: The way I tend to view these things—for AI, for better or worse—you have great unit economics. We always talk about the OpenAIs and the Anthropics, but what about the 11 Labs or Midjourney? Those are famously model companies where the unit economics are great. They've grown very quickly, and I understand that. But there's been this weird thing where people take the example of these model companies and apply it to totally different spaces where you don't have the proof points or the economic case. That's one thing I don't know how to do. So certainly, I don't believe we should all just follow the common consensus around areas to invest in. But I do think there's going to be a pool of capital that wants companies to look a certain way. If you don't consider that when you're investing, life will be a lot more difficult.
--:-- Leo Polovets: Yeah, I agree. An aside on the humanoid stuff—what I've seen over the last 10 or 15 years is that if the market is big enough, it really distorts VC investing. It used to be that you'd look at a market and think, "It's a $2 billion a year market. If there's a 1% chance they could capture it, they'll be worth this much, so let me justify a seed price." If the market is $5 trillion of human labor, any price makes sense. But I think that really distorts how much value is actually there. The most boneheaded partner meetings were like, "Well, yes, it is cold fusion, but this is the largest market ever, so on the off chance it works..." I'm like, "This isn't engineering. This is laws of physics. I'm not sure a good software founder is going to bend the laws of physics."
--:-- Martín Casado: I totally agree. I don't want to harp on this too much, but unit economics is so important. What is the story for autonomous vehicles? The story is that even after the industry has put $100 billion into it, the unit economics are still on par with Uber. Does that make sense for venture investment? It's really, really hard to build a standalone business with those types of economics. Google can do it, sure. Tesla can do it, sure. But can Startup X do it? No. So you're either playing for a great company that got acquired—which happened a lot and people made good money—or you're building picks and shovels, like Applied Intuition, where you're building software for this market. But I do think a lot of investment dollars follow these spaces where there really is no thesis on the ultimate unit economics. There's this kind of market-TAM sloppiness that says, "Well, if the market's infinite, then the expected payout is high."
--:-- Leo Polovets: Also infinite.
--:-- Martín Casado: Exactly right. When I look at my portfolio, I see both. Some of the winners—Pave and Scale—were non-consensus, non-competitive, unproven but very talented founders. And then on the more consensus competitive side, there was Jack Altman and Kasser.
--:-- Leo Polovets: How is Scale non-consensus?
--:-- Martín Casado: At seed. Alexander Wang was 18. It's a total known space. He's phenomenal. The A was done by Volpe, who's amazing. I feel like this is a very narrow definition of non-consensus.
--:-- Leo Polovets: Sure. For nearly most of the rounds, it was competitive. So yeah, I can agree.
--:-- Martín Casado: I mean, Dan Levine—come on. These are like the best investors in the world. I brought the example to say that Casper's round was almost an order of magnitude more expensive. I think what people have been late to really internalize—and what a16z was super early to internalize—is that the outcomes are an order of magnitude bigger, maybe two orders of magnitude bigger. So you can get seed-like returns at an order of magnitude or even two orders of magnitude more expensive. Remember, YouTube and Instagram were considered very expensive acquisitions at just a few billion dollars. In a few years, we're going to have more trillion-dollar companies. Once we truly internalize the outcome expansion on the order of magnitude, it makes sense to Leo's earlier point: can you have 1,000x-like returns not just at what we used to consider seed-like pricing, but maybe at Series A or even Series B?
--:-- Leo Polovets: This is a very interesting question because you actually run into fund mechanics as a price modulator in this discussion. You're exactly right. I'll go back to my company. My company was acquired for $1.2 billion. We had less than $10 million in ARR. Does that make any sense? A lot of people thought it was totally crazy. Except when I left three and a half years later, the run rate was $600 million within VMware, who acquired the company. Now it's about $2 billion. At one point, it was 40% of the growth of VMware. Clearly, it made sense to VMware. So you should say all the check sizes should be high for the winners because the outcome was so good. The problem is that would mean fund sizes would be too large, and you'd have to unlock different pools of capital—which did start to happen during the SoftBank, Tiger, and Coatue era. You could argue that all of their theses were correct. SoftBank was actually right, and Tiger was right. It was a macro issue that caused the pullback, and that's going to come back again. That's a very legitimate thesis. But I really feel the reason prices don't continue to go up is more about access to LP capital.
--:-- Martín Casado: Leo, let me try to make this more concrete. I think what Eric said is correct: the outcomes are so big that it suggests the prices are too low. The fact that we get the returns we do suggests the prices are too low. So the question is, why are the prices too low? The answer is that we just don't have the dollars to place all of those bets. A number of people have questioned this very famously. SoftBank questioned this. Tiger questioned this. They raised these huge funds and deployed a lot of capital. Those experiments had very mixed success. But it's not obvious to me that the reason they had mixed success is because the prices were too high. There are a lot of reasons why those could not have worked, including macro cycles and the fact that none of them were Silicon Valley insiders or traditional early-stage investors. So there's a very reasonable question: maybe someone should just run the Tiger strategy again, but as a Silicon Valley insider.
--:-- Leo Polovets: In some ways, there are failure cases, but in other ways, Thrive raised bigger funds. Founders Fund raised bigger funds. We raised bigger funds. The winners—Multistate raised bigger funds. It could just be that this is the market being efficient. The reason more money is going into this and the funds are getting larger is because the opportunity set is larger, and this is just a market working its way out.
--:-- Martín Casado: But Leo, you're very quiet, and this is actually a pretty controversial statement, so I want to make sure that...
--:-- Leo Polovets: Well, I guess I'm not sure what you mean by "we should be paying more." Do you mean that you think the current prices are still well below where they should be?
--:-- Martín Casado: I'm riffing off of Eric's statement, which I thought was right: venture capital has been a top returning asset class. If you just take the top 10th percentile of funds, they return so much money. So there is an argument that even with these high prices, they're still underpriced. Put it differently, Leo: a seed fund may say, "I'm not going to invest in something at 50 post or 100 post because I don't think there's 1,000x potential. I don't think Anthropic is going to be a $100 billion company or OpenAI is going to be a $100 billion company." But it turns out it is.
--:-- Leo Polovets: I think it'd be contrary not to say OpenAI is going to be a $100 billion company.
--:-- Martín Casado: Right, exactly. A few years ago... So it doesn't seem like we've truly internalized that this is the norm—that there are going to continuously be $100 billion outcomes. Or that the market just continues to grow and therefore necessitates larger fund sizes.
--:-- Leo Polovets: The venture market was probably 100th the size 20 years ago.
--:-- Martín Casado: Yeah, probably something like that. It's kind of wild to think about.
--:-- Leo Polovets: We did think a few years ago that there'd be a great contraction in the asset class, that 2021 was a blip and it would right-size back to where it used to be. It doesn't seem to be the case that it's going to 2010 levels. I'm not sure if you guys have the data on you, but when I talk to the RRT and Thrive, it seems that people think more capital is just going to keep entering. I think that's because companies stay private longer too.
--:-- Martín Casado: But the actual number of $100 billion-plus companies in the last 20 years is pretty small. I don't know the exact number, but I bet it's like 10 or 15 or maybe 20. You're really betting you can get the one every year or two that gets there. Let's say you're doing a Series A at a billion post and you want 100x, even ignoring dilution. You'd have to bet that there are more of them and that more of them are going to happen, and that there are also more ways of getting liquidity from them as well.
--:-- Leo Polovets: Martin, you agree? That also kind of suggests purely by the numbers that the most important thing is just being in one of those, independent of price. That's the higher-order bit.
--:-- Martín Casado: I generally agree. If you're in the best company of the year, I don't think ownership matters that much. I don't think the price matters that much if it's going to be the best company 10 years forward.
--:-- Leo Polovets: To your earlier point, if venture funds had more money, they'd do higher valuations. It sounds like you could do the higher valuation today too, though. You could just be like, "Hey, if we just want to get in this one, we'll pay twice the price and get half the ownership."
--:-- Martín Casado: But you also need a diversified portfolio. You need enough companies.
--:-- Leo Polovets: No, you need the fund size to run that.
--:-- Martín Casado: This is why I think a lot of this comes back to fund size. Even in the Andreessen portfolio, I was just thinking off the top of my head—we have four companies at the $100 billion mark: Stripe, Databricks, Coinbase, OpenAI. So they're not that rare. You guys have awesome coverage.
--:-- Leo Polovets: I guess the question is, how many more could you name from the last 15 years? My guess is 15, not 100.
--:-- Martín Casado: Yeah, yeah. 20 billion-plus, there's a lot. And that used to be huge. In enterprise software, it used to be an adage that nobody ever broke 20 billion or 10 billion. Palo Alto Networks was at 15, and we were like, "This is crazy." Now there are so many of them. So maybe with 100 billion, you're right. But in the world I live in, the amount of decacorns is probably an order of magnitude more than what it was 10 years ago. On the face of it, that would argue for an order of magnitude higher fund size if you want to play the strategy of being in the winner. There are clearly multiple strategies. For me, the key question—I don't know the answer, I want to run the numbers—is: if you take a dollar of earnings for a venture capitalist, did that come from a company that raised at high prices or not? I would guess the answer is yes, just because the winners are so outsized.
--:-- Leo Polovets: There are multiple ways to play it. If the outcomes are 10x bigger, you can have a 10x bigger fund and basically run the same playbook, keep the same ownership, and a big outcome still returns the same amount of the fund. You can also do more investments at a fraction of the ownership, and then each investment maybe moves the needle less, but you have a higher chance of hitting the Uber of the year.
--:-- Martín Casado: Yeah, that's a good point. I want to make a few related points. One is, I remember someone tweeted Martin's tweet and said, "This is a sign that the asset class is dead." The idea of a more efficient market. I think what that really means is that if an individual firm can't compete and win deals in an efficient market, they're going to lose. My second point is that I think a lot of venture capitalist identity is tied to being non-consensus, to being able to see things others can't see, because it's hard to win against all these other much bigger, much more well-funded players. For that reason, I less want to use the terms "consensus" and "non-consensus" because it's so core to people's identity. Instead, I think of it as: is the round hot or not? Is it competitive or not competitive? Another way of framing it—not perfect—is: is the company working or is the company not working at the point of investment? If something is working, then it's okay. What is the price, what is the potential return multiple, and how does that work with your threshold? There are some things that are competitive and not working but have an incredible founder, so people believe the vision and you're still paying that price based on what you think. Then there are lots of things that are not working or not obviously working, and we've chosen to do less of those. It's basically: do you want to invest in things that have traction or no traction? There are failure modes with both. Not every hype thing, not every competitive thing has traction. But it's just another way of framing this to me. I'm curious—feel free to quibble with my framing.
--:-- Martín Casado: I think I saw the same quote tweet. I'm probably somewhere in between. I don't think venture is dead. I think it gets a lot less fun if it's purely consensus. The reason is, in a purely consensus world, it all just comes down to the cost of capital. If my LPs want 5x and yours want 2x, you could pay 2.5 times higher prices, and the company's not better—it's just that your cost of capital is lower, so you're going to win all the time. We all see the same value. Who wants the smallest return that can still sell the business? That just feels less exciting to me. I'll get a little bit philosophical. The thing that's always bugged me about PE investing and public market investing is that it just doesn't care about productivity really. It does to some degree, but if you're in a large public company like I was, you realize that the public markets really care about predictability over innovation. Innovation is stifled so much. In fact, it causes large companies to protect themselves through incumbency and monopolistic practices just because they're not allowed to be aggressive on growth. I feel like it's almost this negative force on progress and innovation. I don't want to be too dramatic about it, but I'll bet if you draw a dollar at random that gets invested, 90 cents of that dollar goes into keeping incumbents alive and predictability, not into growth. I'm a huge believer in creative destruction. Get them out of the way. Let's invest in growth. So I love the idea of venture as an asset class getting more efficient. I love the idea of more money going into it because the entire thesis is growth. I never invest on downside laws. I only invest on upside. To me, more dollars going into venture is only a positive for humanity. I don't mean to sound too grandiose, but I do feel it's just a net positive.
--:-- Leo Polovets: Well, on that front, I think that's a really interesting perspective. From a company perspective more than an investor perspective, I feel like a lot of the most disruptive products were non-consensus at the time. You start with no buttons on the iPhone, or you get Uber instead of a taxi—it's a stranger driving. Those are the ones where if you're like, "I'm going to build a taxi company, but it's 20% more efficient," it can be a big business, but not quite the same level of disruption and growth. You take a big bet, and there's a very high chance you're wrong, but if you're right, you're going to be in a really good position.
--:-- Martín Casado: This is so critical. I'm glad you brought it out. I really believe the best companies themselves are non-consensus to customers. I just think the investing market is different. They kind of understand that, and therefore a comment on investors being consensus is very different from a product being consensus. Does that make sense? Investor sentiment is actually much smarter than people think. The adage is that VCs are dumb—they just chase trends. The reality is, as a group, we have identified a cohort of companies that are quite disruptive and invested in them and priced them. Those companies themselves tend to be quite non-consensus to the actual consumer or to the market.
--:-- Leo Polovets: I do want to build on your point, Martin, because I think it's so interesting to comment on how not everyone's incentives are totally aligned, especially between what's good for the individual and what's good for the ecosystem. If you're an individual VC, you don't want more capital. If you're a founder, you don't want more founders in your space. But competition is what fuels incredible product. It's the Darwinian process. This is how we get bigger startup outcomes, a startup ecosystem having more value, incredible products for customers and users. This is how we solve cancer. More money goes into VC, and we invest in companies as opposed to investing in dying companies' ability to retain their place.
--:-- Martín Casado: 100%. All the finance needs to change. VCs are trying to straddle LP incentives, founder incentives, and their own incentives. There is some overlap and there's magic there, but it's also worth acknowledging that not every individual person is aligned, and that's okay.
--:-- Leo Polovets: I also still very much believe in the barbell. There will be these big, massive funds that continue to win and invest in compound value, and also these smaller, focused, concentrated boutiques who absolutely crush it. And we all work together.
--:-- Martín Casado: So Leo, we're going to run the numbers. I was trying to get it done by now, but there's a lot to do. The numbers are fuzzy. I just want to walk through what we're going to be looking at, and then maybe we'll schedule another podcast once the numbers are out to actually discuss it. One of the numbers we're going to look at is if you cohort companies into winners and not winners, looking at whether on average for that company, the rounds were priced above or below median for other companies at a similar stage. This will tell us whether it's relatively high priced for winners or not. The other one, which is even more difficult to determine, is given actual returns, are the bulk of the returns from companies that were on average high priced or not? I think these two numbers will give us a sense of whether the market is actually pretty smart about the value and the price. You should not look for price arbitrage if you're looking for returns. Does that sound fair?
--:-- Leo Polovets: Yeah, I think that sounds fair. I definitely agree with the not looking for price arbitrage piece. For me personally, my best investments have been ones that on average took a while to raise their seed round. A lot of people didn't get it or didn't like it. But on the flip side, some of the biggest misses are also the ones where it's like, "Oh, we liked everything except the price. We thought it should be a 10, and some big fund gave them a term sheet at 20, and we passed. And now it's a $10 billion company." So maybe that was not a good pass.
--:-- Martín Casado: Honestly, as we go through this conversation, it does strike me that I think a lot of this is just that we have a bit different perspectives. I have to deploy a lot more money than you do. I'm a Series A investor who needs to basically cap out $30 to $40 million in order to have a significant position. So I may have to be a bit more concerned about this than you do at the early stage. I'm sure stage does color this conversation quite a bit. Everything you're saying is totally sensible to me. I don't think there's any disagreement.
--:-- Leo Polovets: It was definitely something I was thinking about. I think if every check you write has to be at least $100 million, it's actually very hard to do non-consensus. Because there's not a lot of companies that hit a stage where you invest in a million, but it's still not clear if it's a good company or not. The earlier you go—if it's $30 million checks, $10 million, $5 million, $1 million—you get more and more of a category where you have the option and you could do either one, assuming you have access to the consensus opportunities.
--:-- Martín Casado: Leo, I'm curious—and you guys have absolutely crushed it at seed with Robinhood and Flexport, et cetera—but I'm curious what you think of Rompton's sort of thesis that multi-stage has won seed more or less in the last 10 years. When you look at a lot of the big winners, they were done from multi-stage firms at seed. I'm curious, one, if you agree with that reading of history. And two, if you think that's unlikely going forward.
--:-- Leo Polovets: Hey, you guys. [Laughs] I actually thought this was an interview. I'm sorry, what's the next part of the question? Did multi-stage win seed more than seed firms win seed? Obviously, there's First Round, Susa—lots of great seed firms. But when you look at the aggregate of winners, do they have a multi-stage seed or not? That's Rompton's argument: they had a multi-stage seed, and that's why he co-invests with multi-stage as a whole strategy. And the past isn't necessarily the future. What do we think about the future?
--:-- Martín Casado: I mean, I haven't rigorously analyzed the $10 billion, $50 billion outcomes. Over the course of Susa, I think we've invested in 10 or 12 unicorns, roughly. Maybe a third of those or a quarter of those had a Series A investor at seed. I'm not really counting. Sometimes it was like, "Oh, the Series A investor did a $50K check in the YC round." I mean, actually took half the round or more. Most of them still were seed-only. Seed funds dominated the early round, and then they went to multi-stage very quickly after that. So in my experience, I think there's a subset of seed where—I don't know if I'd say multi-stage funds won—but they have a very strong advantage. If it is a founder that previously built a business that exited for $100 million and they're in the space that they know super well, that's going to get done at 40 instead of 20, or 80 instead of 20 post. Chances are it's going to be a multi-stage and not a boutique seed firm. So for that segment, I think it's probably the predominant majority of the time, they have a big leg up. For the other ones where it's less obvious, it tends to be much more seed-dominated.
--:-- Host: Martin, Leo, this has been a great conversation. Coming your way. See you next time. As a reminder, the content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice, or be used to evaluate any investment or security, and is not directed at any investors or potential investors in any a16z fund. Please note that a16z and its affiliates may also maintain investments in the companies discussed in this podcast. For more details, including a link to our investments, please see a16z.com forward slash disclosures.
