20VC: David Tisch on Why High Ownership and Concentration is BS | Why No Manager Actually Wants to Stay Small | Why Competing with the Mega Platforms is a Losing Game | Why the Lean Startup is a Fake?

Anysphere Inc. (Cursor)

Across the shows: 1 speaker in other episodes, 1 bullish and 0 bearish calls, past 30 days

• David Tisch · BoxGroupBullish

  Cursor was the biggest venture M&A deal in history and an early stake returned the fund multiple times.

  Box Group was in Cursor's earliest round, after meeting the founders before the business scaled, and the position returned the fund multiple times. He calls the sale the biggest venture M&A deal in history and a generational outcome. He credits luck with being early, and the company took about four years to reach this scale.

  “what they did and accomplished is truly sensational and it's generational outcome. It's the biggest venture M and A deal in history. We were just lucky to have been there early.”at 33:03

Clay Labs

• David Tisch · BoxGroupBullish

  Clay took a bumpy four-year road but is now compounding growth in an amazing way.

  Box Group was the earliest investor in Clay. The company went through a bumpy four years of learning and iterating on its go-to-market before breaking out. It is now growing and compounding in what he calls an amazing way, though not a clean story.

  “Clay is a bumpy four year road to explosive growth and now is growing and compounding what they're doing in an amazing way. But it's not a clean, story.”at 33:41

Baseten

• David Tisch · BoxGroupBullish

  Baseten is a full outlier company now hitting its hockey stick, after Box led its seed round.

  Box Group invested in Baseten's seed round. He says the company needed inference to become a viable space. Baseten is now a full outlier company running at full speed and hitting its hockey stick, though the path was not a straight line up.

  “We're in the seed round of Base ten. You needed inference to sort of become a space. And Base ten today is a full outlier company, and they're running at full speed and sort of hitting that hockey stick fully.”at 34:05

Rogo

• David Tisch · BoxGroupBullish

  Rogo was passed on by 39 of 40 Series A leads yet kept executing and is now a consensus company.

  Rogo builds AI for finance. After Box Group's seed round, Tisch helped it raise a Series A and sent it to about 40 lead investors, and 39 passed. He argues the passes were quick and reflected timing and traction concerns, and that investors misread the company at that moment. Rogo kept building and getting better, and was then funded by Keith Rabois's firm, Sequoia and Kleiner. Box Group has since written substantial checks into it, so he is an investor.

  “He got fully passed on by 39 of them.”at 42:34

Y Combinator

• David Tisch · BoxGroupBullish

  Y Combinator has the only differentiated product in venture and the best business model in the industry.

  Asked to pick a seed fund to be an LP in, he picks Y Combinator. He argues it invented the only product in the venture industry and has built a world-class brand and a strong attractor of talent. He says criticism of YC is rooted in jealousy, and that it runs the best business model in the whole industry. Harry Stebbings echoes that YC is the only differentiated product in venture.

  “I think Y Combinator has invented the only product in our industry. And I think for all the people that say anything critical about them, it's probably just rooted in some version of jealousy... and I think run the best business model in our whole industry.”at 1:04:33

Venture capital & startups

• David Tisch · BoxGroup

  Macro conditions matter less for early-stage VC than picking the right companies.

  Every cycle contains good and bad companies. For an early-stage VC, the macro is a portfolio and industry analysis rather than a company analysis. What matters is whether a given company is great and whether its founders can navigate changing conditions.

  “I think the macro is less impactful than the micro. Is the company that I am fortunate enough to be an investor in the good one? Is it the great one?”at 6:43

• David Tisch · BoxGroup

  A $10B outcome now looks like a normal target, which makes today's large seed rounds workable.

  Ten years ago building a $10B company was far-fetched. Today investors look at early-stage companies and see a $10B outcome as a plausible normal result versus a $1B one. Larger outcomes offset the higher entry prices of 10 to 20 million seed rounds, so the starting point does not materially change venture economics.

  “So if think about ten years ago, the idea of building a $10,000,000,000 company was far fetched. Today, is sort of like you have to sit and look at an early stage company and try to squint and get there as a sort of normal outcome versus a billion.”at 10:06

• David Tisch · BoxGroup

  Later-stage rounds now dilute founders 3-8%, versus 12-20% before, lifting early investors' stakes.

  For companies that grow quickly, Series B, C and D rounds are far less dilutive to founders and the early cap table than before. Rounds now dilute at 3-8% instead of 12-20%. Across several rounds, an early-stage investor's stake gets diluted less, which is an economic factor in the model.

  “the series B, C, D are dramatically less dilutive to the founders and the early cap table than in the past. They are raising these later stage rounds at three to 8% dilution instead of 12 to 20%.”at 10:38

• David Tisch · BoxGroup

  Competitive seed rounds now draw 10-15 term sheets, up from 3-5, driven by fundraising efficiency.

  Since COVID, fundraising has become more efficient and founders run processes differently. Competitive early-stage rounds that used to get three to five term sheets now get 10 to 15, or are capped at three to five that compete directly with each other. Firms that want a seed deal have to compete harder.

  “Competitive deals, it used to be three to five term sheets in an early stage round can these days be 10 to 15.”at 14:09

• David Tisch · BoxGroup

  Concentrated VCs' claimed 90% deal win rate is BS; the real rate is about 20%.

  Adverse selection: concentrated funds need about 10% ownership in roughly 30 companies, so they must offer deals to 120 to 150 companies to land 30. Their true win rate on deals they want is far below the 90% they claim, closer to 20%.

  “Meaning every concentrated manager will say that we win 90% of the deals we want to win. And I think that's total BS. I think it's like 20%.”at 16:17

• David Tisch · BoxGroup

  The lean startup methodology was a fake; successful venture-backed companies need lots of money.

  Lean startup was a decade-long brainwash spread by professors, books and blogs. He challenges anyone to name a company that ran the playbook and succeeded. Every company that succeeds needs a lot of money today, and 37signals, a bootstrapped company, is the exception. Being well funded is not the same as being undisciplined.

  “I think the lean startup was a total fake. It was a stupid brainwash that happened for ten years with professors and books and tweets and blog posts.”at 18:42

• David Tisch · BoxGroup

  Pure-play lead-only seed funds struggle to compete with multistage firms' bigger checks and lower price sensitivity.

  Multistage firms that run seed as part of their strategy are very strong at it. They offer much bigger checks with much less price sensitivity, and they win seed rounds he has lost. Firms that once waited to see a company at the A or B now move straight into later rounds, and lead-only seed funds have trouble competing against them.

  “I don't think you can compete against the greatest firms in the world who are running that strategy as part of what they do. With much less price sensitivity and much bigger checkbooks.”at 26:41

• David Tisch · BoxGroup

  LPs want pure-play seed exposure that isn't available, while multistage funds take most venture allocation.

  Founders now have the leverage to raise from people they like at prices they like, so GPs struggle to keep a static, focused strategy. LPs are frustrated because the exposure and portfolio construction they want is not available. Most venture allocations still go to established multistage firms, which give scaled capital and exposure to top companies.

  “I think GPs are struggling to have a very static and focused strategy because of we're in a founder friendly world. And I think LPs are frustrated because they want certain versions of exposure or portfolio construction that basically aren't available.”at 29:44

• David Tisch · BoxGroup

  Today's startup founders are more technical and smarter, leaving little room for mediocrity.

  Founders today are more technical and smarter than ever, and there are fewer sales-led founders. A gap in the market can no longer be attacked with a laissez-faire approach. Founders have to be very good to win, and the founder quality at each emerging outlier is very impressive.

  “I think the founders today are more technical, in a non offensive way, smarter than ever before. I think there's less opportunity for mediocrity to succeed.”at 38:38

• David Tisch · BoxGroup

  Venture now demands huge outcomes, so small-scale categories it once funded no longer fit the model.

  For about ten years venture funded many categories that could not become as big as founders hoped, because they were aiming for something smaller. Today the appetite for scale is non-negotiable because a fund needs outsized winners to return its capital. Founders' ambitions are now huge and they see an unlimited opportunity set, so the bar for what gets funded has risen.

  “I think today, the appetite for scale from the venture product is uncompromisable because you need to get huge to make the [math] work.”at 39:54

• David Tisch · BoxGroup

  Seed investors cannot judge consumer brands; brand funding belongs at later stages with sales data.

  Box Group has stopped funding brands at seed. Brands are built on early evidence such as whether the brand and product resonate, whether people buy, and customer LTV or CAC to LTV ratios, and seed rounds provide none of that data. He sees a subset of investors that fund brands at Series A and beyond, citing scaling businesses in beverages, quick-service restaurants and personal care, and says his firm is not equipped to invest that way.

  “I don't think you can fund brands at Seed. Because brands to me are built off of your initial data set of like, does the brand resonate? Does the product resonate? Do people buy it?”at 40:39

• David Tisch · BoxGroup

  VCs should not sell early; the best companies compound most late, so early secondaries leave money behind.

  He rejects the idea that because founders are taking secondary, investors should too. Selling early risks reputational damage with founders who do not want investors to sell. More importantly, the best companies compound the most at the end: going from $2B to $4B to $8B is easier than going from zero to $1B, so selling early leaves the most money on the table. If a company is still great, he would rather stay invested through it.

  “And then the second one, I think the best companies compound the most at the end, Right? Going from like a $2,000,000,000 to $4,000,000,000 to an $8,000,000,000 company is easier than going from 0 to a billion.”at 50:35

• David Tisch · BoxGroup

  Early-stage failure rates are very high at seed, but dramatically lower one stage later.

  He cites the widely used figure that 70 to 90% of early-stage companies do not work. Harry Stebbings argues the true zero-loss rate is much lower for great founders. Tisch says that holds at Series A, but at seed there is a real scale of failures, and the loss rate drops dramatically once a company reaches the next stage. He adds that Keith Rabois is a generationally talented investor whose loss rate may be far below the rest of the market.

  “I think at Seed, it's some real scale of numbers. You do. But I think you go one stage ahead and that number is dramatically lower.”at 1:04:06

• David Tisch · BoxGroup

  Venture is consolidating; the top 20 to 30 firms will keep compounding while many others fade.

  Returns in venture are concentrated in the top 5 to 10% of firms, and most firms that stop investing linger as names without activity, so the number of active firms is shrinking. The best firms access the best founders and the best scaled LP capital, which compounds their advantage. He sees roughly 20 to 30 competitive firms, about 10 of which are outliers, with a haves and have-nots split in venture.

  “I think the real answer to your question is you're in a period of consolidation in venture, and the best firms are going to continue to compound in every which way because they're going to access the best founders.”at 1:07:29

AI bubble & tech valuations

• David Tisch · BoxGroup

  Frothy private AI valuations are a standalone cycle, not 2021, and not industry-wide harmful.

  This moment is not 2021 because the drivers differ. It is a standalone market condition that may be frothy. Some great companies raise large sums at high valuations, but that has always happened. Blowups happen, and even Uber, Facebook, Airbnb and Ramp have had down rounds. Underneath, many companies are building quality businesses, so the froth is not an industry-wide harm.

  “I don't think that that is a, like, industry wide harmful set of conditions. It's just, is this company a great company?”at 7:54

AI: overall outlook

• David Tisch · BoxGroup

  AI adoption moves in short 2-3 month cycles of impact, plateau and new innovation.

  Like earlier technologies, a horizontal shift produces an initial wave of impact and reaction, then plateaus, then more innovation. The difference now is that these cycles run about two to three months. Each new model release, vertical AI revenue ramp or large M&A deal creates a mini cycle that ripples across the industry.

  “what you see is this initial wave of impact, initial set of reactions, some version of plateauing, more innovation, plateau, innovation, plateau. The difference this time is those cycles are like two to three months.”at 8:24

Robotics & autonomous vehicles

• David Tisch · BoxGroup

  Autonomous driving is safe enough that delayed adoption costs lives; mandating it would save hundreds of thousands.

  He argues the data show autonomous driving would save hundreds of thousands of lives worldwide if mandated. He says the technology is not perfect but is pretty solid from a safety perspective, and that pretty solved would mean roughly an 80% reduction in deaths from car accidents. He concedes it is not yet solved for ambiguous cities and challenging weather. He blames social and institutional resistance, not the technology, for holding it back, and sees the next five to ten years as the window in which this should happen.

  “The data on autonomous driving would save hundreds of thousands of lives worldwide if we just mandated it.”at 1:11:00