July 2, 2025 • 51 mins
In this episode, I speak with Tyler Sosin, founder of Villain Capital, a new fund focused on investing in vertical software businesses. Having grown up in the venture business for 17 years with storied firms Menlo Ventures and Accel Partners, Tyler brings a unique - and perhaps contrarian - perspective to venture investing. With Villain, Tyler's ambition is to help vertical focused founders efficiently scale their start-ups into dominant franchises that can compound their growth and relative market share over decades. The name of the firm, Villain, was inspired by a quote by Harvey Dent, a character in the Batman film The Dark Knight, who said to Batman, “You either die a hero or see yourself live long enough to become a villain.”
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
So everybody comments on your name, villain.
(00:04):
What is the origins for your name, and how didthat come about?
Well, the origin for villain, comes from a aquote from Batman.
Harvey Dent said to Batman over a dinner,quote, you either die a hero or see yourself
live long enough to become a villain.
And just as, like, a cinephile, I always lovethat quote.
(00:24):
But when I reflected upon my investing career,you know, it truly resonated with me as sort of
a north star of what success can be.
And that is, you know, finding companies, youknow, that basically survive and grow and
continue to survive and endure through manydecades often and become, you know, essentially
(00:48):
the dominant players in their category.
And obviously, these companies, when they'reyoung, they start off as heroes.
But if they do manage to get to, you know, atwenty, thirty year mark, they're often
villains at that point.
They express really interesting tendenciesthat, you know, rational capitalists should
love.
They have got amazing customer lock in, reallydominant relative market share, pricing power,
(01:12):
and they're really hard to dislodge.
And so that's why I like them as my North Star.
What are some examples of some now villainsthat you invested at Menlo?
Well, I'd say more generally, like, hey.
The universe of tech companies out there, like,who would be, you know, in my opinion, a
villain.
And this is coming at it from a a compliment.
(01:33):
Like, Oracle would be a villain.
They've been around for a long time.
In the vertical software categories, you know,that I love so much, you know, Jack Henry and
FIS in core banking, Vertifore and Applied ininsurance, you know, Epic and Cerner and
medical health records.
You know, these are companies that have beenaround for multiple decades.
(01:54):
They're very large.
They are extremely dominant in theircategories.
And often, if you were to ask, you know, peoplewho use the products or people are trying to
disrupt them, they are the targets becausethey're no longer innovating.
They capture a lot of economic rent, but it's,in some ways, almost impossible to displace
(02:15):
them.
It's almost like this full circle of theinnovator's dilemma.
It's a startup incumbent now disrupted by a newstartup, but on its way to being a hundred or
five hundred billion dollar company.
Yeah.
And and and I should say, I don't thinkvillains actually have to be enormous to be
that way.
I think they just need to be very dominant inthe categories they can beat in.
(02:39):
As Peter Thiel would say, like, he hatescompetition.
He likes monopolies.
Competition is for losers.
Competition is for losers.
And I feel the same way.
Like, I'd rather be in a business where for avariety of reasons, at some scale, it's very
hard to compete with them.
And so then they can start to display somevillainous tendencies and, you know, basically
(02:59):
have amazing shareholder returns as a result.
So villainous tendencies are a side effect ofhaving so much market power.
It's also the capacity to have a relationshipwith a customer where you can extract economic
rents.
And, you know, that's very hard for mostbusinesses to do.
(03:19):
Most businesses compete in commoditizedmarkets.
They have to basically run on that treadmill orsprint on that treadmill forever.
But there are a few companies out there thatdon't have to do that, and those are the best
investments.
I know you didn't define it by market cap, butlet's define that now as a $100,000,000,000
company.
Many of those companies have this kind ofextractive relationship with their customers
(03:40):
and how many are their customers just love togive money like a Starbucks?
There's different sorts of customer lock inthat you can appreciate.
You know, like, I sort of see myself as ananthropologist.
And so, like, the question is, what are the,you know, the circumstances and the behavioral
tendencies that create, you know, lock in witha customer?
(04:02):
And on the human side, habit formation is ahuge one.
It's why, you know, the nicotine companies havedone been so successful over time.
It's why the Starbucks of the world have beenso successful.
In fact, if you look at I believe it's eitherthe profit margins of addictive businesses,
there's a strong correlation between howaddictive they are and how profitable they are
(04:25):
over time.
And then there's some secondary effects,reinforcement effects that that really matter.
But, you know, for, I'd say, consumer products,addiction is a major point.
And then the other major point is thingsaround, you know, habituation and just
becoming, like, really familiar with somethingand therefore not wanting to give it up because
(04:47):
it's what you know, and there's a friction tochanging to something new.
You have a bank account.
That bank account is connected to all thesedifferent bill play partners.
Your entire financial life is set up on it.
It's a hassle to move, and it's that cognitiveload and perceived friction that keeps people
from switching, regardless of whether it's easyto do or actually really difficult to do.
(05:12):
So you invest at the earlier stage into thesecompanies that you want to be a villain, to be
mature and be a villain at some point.
What characteristics are you looking for?
If I come back to what I'm what I'm doing atVillain, I'm very focused on vertical software
and technologies.
I'd say vertical software, vertical AI,vertical payments.
(05:33):
These are the sort of substrates that, youknow, I will be dealing with at this firm.
The very best companies have very, very stickyrelationships with their customers over time.
In a more dry sense, it's basically theydevelop annuities with these And the best
businesses build a widget or whatever it is,and that widget creates an annuity by selling
(05:55):
it to that customer who basically consumes itfor, you know, many, many years.
And so I want to see the earliest evidence ofthat annuity and the earliest evidence of a
founder who knows how to sell that annuity withsome amount of efficiency.
And if I find that in a vertical softwaremarket, I can get really excited.
That's evidenced by a low burn rate.
(06:18):
So soft customers continue to purchase theproduct month after month.
Is there any other metrics and leadingindicators that you're looking that a customer
would would has this annuity type ofrelationship with the company.
You'd have to
see what their behavior and usage are.
You'd have to test pricing and theirwillingness to churn if you were to suddenly
(06:39):
raise pricing.
I'd like to know that a founder with an initialwedge in the market that's efficiently
developing, generating these annuities has aroadmap for basically building new products and
features that they can sell to that existingcustomer to deepen the relationship
significantly over time.
And you would argue that you're creating moreof a feedback loop from the customer when
(07:00):
they're buying multiple things from the samecompany, then they're more likely to become a
longtime customer.
Yeah.
And there should be two, maybe three reasonsfor that.
One, in cloud software, and this is like animportant tenant of this business, like you
have this data plane that you're creating maybewith that initial wedge product.
And, you know, in the best of cases, that datacan be used in a second or third product to
(07:21):
give you the right, like the permission tobuild a product that would be better than what
someone else building that product de novowould build because you're already using you
already have the data that's relevant.
So it's a matter of a different workflow systemor a different set of computations, but you
have an advantage by having the core datasetthat's used in a variety of different tasks.
(07:43):
So that's number one.
Number two is, you know, as you develop a adeeper relationship with a customer and have
multiple products to sell them, there's avariable very powerful phenomenon cross
subsidization that can occur.
You you are pricing and packaging multipleproducts together.
Often, products, you know, work better togetherin terms of a synergistic, you know, outcome.
(08:06):
But also in terms of pricing, you might be ableto say, hey, if you buy this product and this
product, they both work together and we cangive you a discount where if you bought these
products separately, it would be moreexpensive.
And over time, that's a very compelling way formore incumbent companies to compete against
startups.
It's the bundling effect.
Give me an easy to understand example of acompany that started with one product and then
(08:30):
successfully sold multiple products that mostpeople would be aware of.
Microsoft would be a villain and would be verywell known for having multiple products in a
bundle where you know, over time they have alot of success, you know, bringing out that new
product, bundling it into their existing suiteand ultimately, you know, killing competitors
(08:51):
or really driving competitors into, you know,sort of a state of commoditization as a result.
Going back to these companies that you look forthat you think could be villains or market
leaders, what's the first kernel in a companythat you see that this might be one of these
companies?
When you think about competition and how to tofind markets where competition is less of a
(09:14):
threat, you know, there are probably a few waysof doing it.
One is, you know, network effects.
I mean, that's that's a wonderful, you know,business model if you can attain it.
The second is, you know, something like aCarvana where it's like the amount of
infrastructure and CapEx spend required to getto a scale where there's this virtuous cycle
that is just so hard to disrupt is enormous.
(09:36):
Right?
Amazon would have, you know, similarcharacteristics working for it.
I'd say the third that's lesser discussed ismarket size.
And I read a book probably about ten years agothat just opened my eye to this.
And it was a fascinating book calledCompetition Demystified.
I encourage everyone to read it.
But it was basically this sort ofanthropological survey of monopolies and how
(09:58):
they fail.
Right?
So you think of monopolies as like, hey.
These things really like, they shouldn't fail,but every once in a while, they get disrupted.
And the question is why.
And the answer, which is compelling to me, isit's a an exogenous effect or something happens
that actually increases the size of thatmarket.
And as a result, it creates this sort of pocketof oxygen that allows a new entrant in to get
(10:23):
to a certain amount of scale where then they'reable to basically compete with the incumbent.
And that it comes back to one of the big, areaswhere competition can be controlled is, you
know, one of the big factors is market size.
And actually, it's smaller markets that I tendto like or sort of midsize markets because you
have there's just less revenue to go around andthis results in behavior where the because the
(10:49):
market size is perceived smaller or is smaller,there is less capital funding new companies in
that market because the perceived outcome issmaller.
Often these markets, when they're smaller,they're just, like, less understood.
They're more niche.
They're more technical.
It requires someone who like has exposure tothat market and a build mentality that's hard
to find.
And so there's fewer, I'd say, credibleentrepreneurs who go into these markets.
(11:13):
And as a result, you have fewer competitors.
And when you have fewer competitors competingwith each other, maybe a couple can grow up to
be at scale, and that's fine.
And then there's usually some sort of rationalconsolidation that occurs.
And so in smaller and medium sized markets, asa result, you end up with these market share
constructs that are often quite lopsided, whereit's like, hey.
(11:35):
There's three players who control 85% of themarket or two players that control the market.
Look at, you know, a lot of the businesses Imentioned earlier, Epic and Cerner, Vertifore
Applied.
I mean, these are relatively large markets, butthey are dominated by two people.
And it's largely because they were smallmarkets in the to begin with that grew over
time, but these two players captured thosemarkets.
(11:55):
And then once you are a large player in a smallmarket with a lot of the lock in that I
described earlier, even if someone wants todisrupt you, the fixed cost of doing so can
feel prohibitively high.
And so that keeps a lot of people out.
So, again, like my thesis for verticalsoftware, it's not to say that vertical
software can't build really big businesses, butI think a lot of great vertical software is
(12:18):
great because it is actually going after asmaller market where you can have less
competition from day one, less competitionentering over time, and therefore it gives you
a lot more freedom, like a lot less pressure tohave to grow at any certain rate or to have to
have like a build velocity that's, you know,keeping up with seven other competitors.
And it affords you therefore a chance to bemuch more capital efficient and take a much
(12:42):
longer term view.
So
Put some numbers on it.
What is considered a small market in yourplaybook?
I would say anything below, like, a like, a100,000,000 of SAM, you know, like, or TAM,
total addressable market is is considered a aSo
a 100,000,000 of customers spending money inthat market.
(13:03):
Yeah.
We're, like, the perceived, hey.
If we acquire this entire market, we couldbuild a $100,000,000 business.
I think that's, like, that is like relativelysmall.
And for me, I would be interested in companiespursuing markets of that size up to, you know,
500,000,000.
Let's just go in the middle of that$250,000,000 total market per year.
(13:25):
Bunch of venture capitalists are going, lookingaround the table at different firms and they
all see the same $250,000,000 market and theysay this can't return the fund, double click on
the rationale on why it's not as competitive.
Exactly that.
I think you would find a business I mean, myideal villain investment, you find a company
that is expressing that early efficiency,building an annuity with the wedge product that
(13:48):
they're selling, and therefore is growingefficiently.
And when you look around, you see very littlecompetition, right?
Like maybe there's one legacy incumbent andthen that's it.
That's great.
And then the venture guy looking at that says,well geez, you know, it's a nice business, but
my opportunity cost is, like, enormous.
(14:09):
And so if I put a $5,000,000 investment in thiscompany, like, I might make a 10 x, but that
doesn't move the needle for me.
I need to make my fund.
Yeah.
I need to I need to believe that I can make a150, 200 on this investment.
And I hopefully, with the funds, the waythey're organized now, is I need to believe I
(14:30):
can not only invest that 5,000,000, but toreally make it worth my time, I need to be able
to invest another 50,000,000 behind that or
a 100,000,000 viable check size or companycheck size per company.
Yeah.
There's a minimum check size that's in the waymost funds work is like, hey, they've got a
certain amount of slots, a minimum check size.
(14:51):
A fixed number of board seats.
There's a fixed number of board seats.
And then they think about the amount that ainvestment can return as a percentage of a
fund.
And they're looking to, basically, everyinvestment they make, believe that they have a
fund returner on their hand.
Funds, as they've gotten a lot larger, it'sjust much harder for them to get excited about
(15:12):
a business where it's like, wow, that's that'sgreat.
That's a $400,000,000 TAM.
Company is growing really nicely.
Like, whoop dee doo.
It doesn't move the needle because I'm lookingfor the $50,000,000,000 company that I can
write that first check, and then I can write amuch larger check from my growth fund, and then
I can do something even larger from an SPV,like and that's a very different, you know,
(15:34):
mode of thinking and and capital allocation.
How do you make your math work?
Three things matter.
One is fund size.
I think a fund size of a 150,000,000 or less issuitable for this strategy because you could
have a bunch of 3,000,000, $5,000,000investments where you're making a five to seven
(15:56):
x, and I think that those could have, like, areal, like, they could be needle movers for
that fund.
Fund size matters.
Concentration matters.
Like, I think we would be looking for aportfolio that's a bit unusual in the venture
industry where it's 15 to 20 investmentsversus, I'd say, 25 to 30 or 25 to 40.
And nominal pre money matters.
(16:17):
It's most liquidity in venture outside of themega IPOs or acquisitions in the 100,000,000 to
$500,000,000 range.
And so building an investment philosophy and astrategy where we make a lot of money on those
outcomes.
And then if you were to reverse engineer intothat, let's just say the average outcome you're
thinking about is a 200,000,000 EV once yousell it.
(16:40):
Therefore, what does the pre money have to bein order to make a five to 15 x return?
And my guess is that for us, it's gonna besomewhere between and 30,000,000 pre, depending
on some of the underlying characteristics ofthe company.
And so then you might say, hey.
Well, Tyler, how do you find companies thathave that early product market fit that you're
(17:00):
looking for, where you can sort of get them atpre monies that sort of make sense, you know,
that are that are normally on the lower end?
And the answer is, well, you're looking forbusinesses where there's a fly in the ointment.
There has to be something that iscountervailing, that is uninteresting to the
mainstream VC.
And for me, the two things that I'm willing totake risks on are one, the market size, and two
(17:24):
is the growth rate.
Right?
And so market size, we discussed earlier.
Growth rate, it's a longer conversation, but,you know, when you look at the venture industry
today, I think there was a guy, like, abenchmark partner interviewed on a podcast
recently where he said, hey.
Like, these new AI companies, like, are growingat, like, four x year over year.
Like, the new it's it's now venture guys
(17:45):
all Two x is four x.
Venture guys all speak in, like, multiples ofgrowth rates for the first three or four years.
I never understood why exactly, but it's likenow it's like you gotta be four x, four x, and
then three x or, like, you mean nothing to me.
Right?
And and you look at these companies, and it itis incredible.
That can grow from, like, zero to a 100,000,000in eighteen months.
Like, it is phenomenal.
Right?
But, like, I'm delighted when they say thisbecause it means, like, there's this, like,
(18:10):
wide swath of companies out there who are onlygrowing at, like, you know, a 120% who are,
like, completely uninteresting as a result.
And so when you get those factors, like, hey,they might be growing a little bit slower.
And a 120% is, like, exceptional growth in myopinion.
They might be growing at, like, 70 to 80%.
(18:30):
That would be fine with me too.
They might be going after smaller temps.
That's fine too.
As long as the pre money valuation makes senseand the companies are efficient and the
founders and I lock arm in the ethos ofcompounding the business as opposed to just
growing the business at the highest ratepossible at all costs, we can have a very, very
(18:52):
productive and lucrative partnership over time.
Is there a different psychology with thesefounders that are looking to build a $2.03,
$400,000,000 company?
Are they older, more experienced, less kind ofin their twenties looking to become
billionaires?
And is there something different about thesetype of founders?
I often think the founders who are willing togrow go a little bit more slowly have been
(19:18):
burned.
Like, I was actually speaking to a foundertoday who has this ethos of growing a bit more
slowly, but also just, like, efficiently.
And, you know, his last company ran out ofmoney.
It was just cash zero and and died.
The other phenotype of founder is one that's,like, been in the woods for a while.
I've I've done a few angel investments as we'vegotten villain off the ground, and some of
(19:41):
these companies have been, you know, in thewoods for five or six years.
And they started with something, and they hadto pivot and they had to pivot again.
So by the time they get to this product marketfit that I love, like, I don't know.
They've been kind of burned by the ventureindustry.
It's just very hard for them to raise capital.
The the instincts of, like, survival andfrugality are, like, in their DNA at that
(20:03):
point.
In what ways is being burned like that anasset?
And what ways is it liability?
I think it's an asset.
Right?
I I like, to me, it's much scary.
Because you could argue the opposite, which isit keeps them from making bold bets and
compounding and all all these other benefit.
But you would argue it's an asset.
Generally, I would say it's an asset.
In what ways?
Because I think the vast majority of even greatbusinesses that fail fail because they grow too
(20:28):
fast.
There's this urgency to, like, like, keep upwith the Joneses, which, again, is, like, that
four x growth rate.
It's it's this feeling like, hey.
If we don't achieve this perceived set ofnumbers, like, no one's gonna fund us.
We're gonna die.
Our competitors are gonna overtake us.
I mean, there's like this panic that sort ofyou see as they start, you know, walking
through their mental models.
(20:49):
And I think that can lead to some really,really shitty capital allocation decisions.
Right?
Like, most companies fail, in my opinion, inthe venture landscape because they try to grow
too quickly, they try to build too much producttoo quickly, and they basically parallel
process too many things that need to be done ina more sequential manner.
(21:10):
And some of this also is just like certainmarkets require just more time to sort of,
like, break, and there's a learning curve toany business being built that just requires
time.
And so I actually get quite, like, nervousabout companies that are just growing fast.
Whether whether they're permitted to becausethey have great economics or not, they're like,
(21:31):
there is something that, like, frightens me alittle bit because I I think, you know, like,
organizational capacity can get strained to thepoint where things can break in a in a in a way
that it's hard to put back to pieces.
And you've seen that in the venture landscape.
You know, we've got all these assets out therethat are basically hung.
(21:51):
Right?
Like, from 2021, all these mega funding roundschasing a lot of growth.
And and you could say there's probably an alterlike, alternative history where if these
founders had a different mentality of just,like, growing I I take taking a compounding
mentality where it's like an endurancecompounding mentality where it's not, you know,
(22:13):
triple, triple, double, double, or four x, fourx, three x, but it's more, hey.
I'm gonna grow this business between 6080% forthe next seven years or the next twelve years.
And I'm just gonna do it on my time frame, butwe're gonna continue making progress.
We're gonna do it with precision and withcapital efficiency.
I suspect a lot of the founders who now havehung businesses would be in much better places.
(22:37):
It seems like there's like a dialectic here,like two opposing philosophies.
One is about founder market fit.
So you have like a Facebook that's literallyplowing and burning billions of dollars trying
to build their network.
In fact, before they even knew whether they hada business model, that was like the question
for many years.
And then there was a question in 2012, whetherthey could port their business model into
(22:58):
mobile.
They had to deal with all that.
Sam Altman's another example, OpenAI justburning all this.
People still don't know whether LLMs will havea sustainable model, but they're just going out
there and doing market share.
And then there's the businesses that, likeQualtrics, that grew and compounded over twenty
years, and oftentimes not in New York or SanFrancisco, in these second tier cities where
(23:22):
they're compounding, and maybe it's one ofthese industries that starts out as a
$500,000,000 TAM and it also compounds 12% peryear, and suddenly in year 20 it's a
$5,000,000,000 industry and they have this kindof monopoly position.
So both models could work, but they'recertainly different personality types.
You make a great point with Qualtrics.
You look at Procore.
(23:43):
I think that was a twenty year overnightsuccess.
I think ServiceTitan was sort of under theradar building for a long period of time before
it really broke out as an asset that VCs andgrowth equity firms liked.
But, you know, I think there's something aboutthat journey that makes these businesses
(24:03):
amazing.
And for me, hyper growth is much less excitingthan seeing a business that was a kind of a
slower grower that actually over time starts tosee their growth accelerate.
And often it's the case because, like, the thesort of the flywheel is working.
The multi, know, product strategy is working.
The familiarity of the market with the productis working.
(24:25):
They're becoming the standard.
The ecosystem is converging around them.
And and these create, you know, these flywheelsof operational leverage where a business that
was kind of sleepier, you know, growing at, youknow, 80% maybe suddenly is growing at a 120%
at a much larger scale.
And when you see those things, you gotta belike, wow, that's gonna be an incredible
(24:46):
business.
Sometimes the different arms of the businessaren't aren't individually that spectacular.
When when you put them into one system, theythey achieve product market fit.
It's interesting.
You bring up like, you know, Google or Facebookor OpenAI.
You know, I I there's a podcast I eventuallywanna maybe do myself called, like, the first
five years, which would be going back andtrying to get to, like, the first five years of
(25:10):
financial data of, like, these, you know,really amazing companies.
Because I actually think that, you know,Facebook was quite profitable early on if I
look back at, like, their s one, like, businessgrew, like, an enormous amount through the
early years.
I don't know what the quality of revenue was.
Obviously, like, Facebook had these networkeffects that were just incredible.
(25:32):
And so it's a business I I really understandand appreciate.
And same with Google.
I think Google actually was like really quiteprofitable out of the gate growing at several
100% a year.
And so there are special businesses like that.
You know, OpenAI is a very different business.
It hemorrhages cash to the extent that theseother businesses at their scale did not.
(25:54):
As a sort of a someone interested in companyhistory or economic history, it reminds me a
lot more of the memory business where, like,the need to reinvest in the next generation
model is feels like it's important forsurviving and continuing to be the best LLM out
there.
And I I personally just think that's a reallyhard place to be.
(26:14):
I do think it's an interesting study today ofthese businesses that are being funded that
have enormous burn rates in their early yearsand they're growing fast.
The question is, like, when they get to be moremature, like, how valuable are they and how are
they? Able are
they? Able are they?
Startup history is also something that I'mreally interested in, just how these things
came about.
And one of the most interesting things is thiskind of three person club that Reid Hoffman,
(26:38):
Mark Pincus, and Peter Thiel had talking aboutsocial networks before Facebook.
Talk about having a prepared mind.
They would just talk about this.
Obviously, Reid Hoffman also started LinkedIn.
I think Mark Binka started a social networkthat ended up not getting off the ground.
But they were kind of developing this thesisboth in real time individually and also as a
(26:59):
group.
So they had this really powerful prepared mindfor when Facebook landed on their lap.
They were almost waiting for the Facebook tocome about, versus to the rest of the world,
the rest of the 7,000,000,000 people, it justseemed like a totally novel, totally
idiosyncratic business.
They were like really ready for it.
For Facebook, it was probably some combinationof cloud computing and modern software
(27:23):
engineering and behavioral psychology,understanding addiction and how to get users
engaged that like all of these things needed tocome together to make a network effect that we
understand it as now viable.
And before Villain, were at Menlo Ventures,storied venture capital franchise, best known
(27:44):
for Uber and I'm sure many other DeCA unicorns.
When you were inside Menlo, how much morepowerful is it to be around a group of really
smart people kind of workshopping these ideasversus I have this thesis?
How much did having a group help help youformulate your your thinking?
Certainly, in terms of blind spots, I think,you know, groups can be helpful.
(28:06):
Just sort of seeing something from an anglewhere, you know, you're you're you didn't see
it or you're not being intellectually honestenough with yourself about that potential issue
or that potential upside that you just, like,haven't been able to accept.
And so I think for that reason, like, peoplearound who you can talk to about investments
(28:29):
and get their feedback, people you trust, isimportant.
And I definitely benefited from that during mytime.
And now as a solo GP, how do you build thataround you so that you have people to, you
know, riff with and and to keep you honest in
your thesis?
There's a they're very small set set of peopleout there who have similar mental models as I
(28:49):
do about these types of companies.
And they're at other small little firms, and,you know, I think you can be very collegial.
Your partnership almost becomes this extendedgroup of people who, you know, you're just
happy to talk to about investmentopportunities.
You're happy to have them look at investments.
And, you know, maybe that changes.
But I think when it's a bunch of small firmslooking at stuff, like you can be in a
(29:14):
situation where you can, like, both invest in ain a company.
The incentives are aligned for you guys to bothco invest versus one firm has to take the
Exactly.
So conscious about not having mediocre or poorthought partners.
Do you think that information could couldnegatively affect you as well?
Any information can negatively affect you.
I think you you you know, thought partners arelike this repeat game.
(29:37):
You you have you you work with them onsomething, and you can decide after that you
don't wanna like, you just discounted theirthoughts.
Or they might impress you, in which case, like,you reweight them even higher sort of in in in
your estimates.
I feel like I've been fortunate to surroundmyself and and and be part of firms where
there's a bunch of really intelligent people.
And and so I've just I've figured out thepeople who I like.
(30:01):
And when you talk to them over the course ofseveral months looking at several opportunities
kind of riffing, like, you you get a sense of,like, do they do they provide some some insight
that that really, like, helps your thinking?
And part of that sense is you know whatexcellence looks like, what a tier one VC looks
like, and that's the standard that you holdyour your network to.
Whether it's a tier one VC, I you know, mybrother is one of the smartest people I know.
(30:24):
He founded a it's now a hedge fund called CASPartners.
Like, I've learned a lot from him over theyears, just mental models around endurance.
He invests at companies at much later stagesthan I do, but, like, I think our thinking is
similar.
Like, what causes these businesses to, like,continue to compound for for many years to
come?
Like, what's the what's the advantage?
(30:44):
It's both within top tier firms like Menlo and,like, Excel.
It's within a broader network of people whoinvest in different asset classes but can bring
unique insights.
It's from reading.
I mean, I think reading is, like, a wonderfulplace to find mental models, like competition
demystified, people like Peter Thiel.
Like, and you might have your own variant onit.
(31:05):
Like, Peter Thiel is thinking about how do Ibuild monopolistic businesses, like, you know,
and he has a different substrate that he canwork with.
He's like, I've got the Elon Musk empire, thePeter the the Founders Fund franchise.
Like, he has a advantages compared to me thatallow him to invest in incredible businesses
(31:25):
that look very different but can achievesimilar economic returns.
For me, I'm I'm taking a more off the beatenpath approach.
And But again, I think our North Star is like,how do you find businesses that can persist?
When you look at tier one funds, is it kind ofFOMO and herd behavior, or is it more just
rationally following incentives?
(31:46):
What percentage is herd behavior versusrational first principles thinking?
I think a lot of it is herd behavior aroundcertain themes and founder personas.
And then, again, kind of coalescing aroundcertain metrics that would basically qualify or
(32:09):
disqualify a company as being.
And sometimes I think some VCs, like, don'tunderstand why those metrics are what they are.
You're like, well, this company needs to begrowing at 400% year over year.
Okay.
Why?
Or this company needs to have a three x LTVCAC.
Okay.
That made made sense, but but why?
Like, what's the underpinnings of that from aneconomic standpoint?
(32:31):
And are all the three x LTV CAC companies thesame?
Are they are they same or or is, you know, athree x LTV CAC company where the company has a
nine month lifetime value with its customerdifferent from one that has a multiyear, you
know, customer relationship?
Are they the same or different?
The answer is very different.
But, like, I I don't you know, I think thereare a lot of very smart PCs.
I think there are, like any industry, I thinkthere's a wide variety of thinkers out there.
(32:55):
One of the things I really think about in assetmanagement as a whole is there are these
incentives for herd behavior in that ifeverybody goes down, if every long only fund
goes down by 5% and you're down by 5%, the LPsare gonna re up.
But if you're down and everybody else is up,even if the last three years you were up,
that's gonna put pressure not only on the fundto re up, but your champion within that LP
(33:20):
having to vouch for you.
So there's this kind of rational herd behaviorwhere you could be safe in a losing strategy as
long as the entire industry is going in thatdirection.
The way LPs think obviously, know, sort of putspressure on GP thinking.
There's some really interesting dynamics that Ithink people don't fully appreciate unless
they've been in that seat.
(33:41):
Yeah.
Sometimes I question it.
I think that, you know, for instance, peoplegive me feedback that, okay.
Hey.
You know, 15 to 20 investments, like, that'sjust not a lot of diversification.
I'm like, well, you also have 15 to 20managers.
Like, you're diversified at the GP level.
So then, like, why do you want so muchdiversification at the individual investment
level?
(34:01):
I don't always get great answers.
I just think like things are done the waythey're done and it's better to have okay
returns with no obvious black eyes than, youknow, great returns.
And I think that thinking sort of can permeatethrough the industry.
Part of the art of being a GP is knowing whichrules to follow and which rules to break.
(34:26):
Knowing which hills to die on and being veryconscious about that.
And sometimes you could even tell I knoweverybody wants this, this is why I'm doing
this.
And a lot of top LPs will accept that, butthere's only so many variations to their
business model they could also accept.
One of your paradoxical strategies is that yourcompanies will be bought by PE, growth equity,
(34:46):
incumbents.
Tell me about that.
Is that a fundamentally different business thatgets bought by strategic M and A and IPOs?
Vertical software, when these companies get toa certain scale, and by that I mean 10 to
15,000,000 of ARR where they can basicallyfloat, they can be close to profitability or
profitable depending on how fast they want togrow.
(35:07):
They become very attractive assets to a largeruniverse than what I think is available to a
any random venture backed company.
Because, like, again, vertical softwarecompanies, they build these annuities.
They have these very sticky customer bases.
Like so they're highly sought after by privateequity firms or or growth equity firms.
(35:31):
And so they become those become an additionalset of buyers for the companies that we'll be
investing in.
And then, you know, related to that, there'scompanies like Constellation Software who,
like, their entire business is buying verticalsoftware companies.
And so it's not that I don't want to buildbusinesses that incumbents don't wanna buy.
(35:51):
Like, when I look at my investments at Menloand the acquisitions that occurred, Guildwire
was bought by Hilty, an incumbent in theconstruction space.
Indio was bought by Applied.
Again, another incumbent in the insurancespace.
Callstone was bought by Carlyle.
You know, Flywire went public.
Carta, I think, will go public.
And so there is more of a diversity.
(36:13):
I just think that at some scale, softwarecompanies become great assets, and that's just
not the case for most venture backed companies.
And so I think there's just better liquiditycharacteristics for these businesses.
So we're not gonna orient selling thesecompanies to PE just for the sake of it.
I just prefer that there are additional offramps.
(36:34):
The vast majority of m and a in the venturemarket is still 1 to 500,000,000, and I wanna
play to the fat part of that curve.
And so that includes all of the potentialliquidity participants.
Does that make your fund kind of a mix of VCand PE almost like a combination of both?
Yes.
I I think it's kind of VC and, like, microgrowth equity.
(36:54):
I I think the distinction is, you know, I thinka lot of PE firms, when they buy businesses,
like, that's the end of innovation or, youknow, it it's a lot about cost reduction and
and rationalization.
Like, I want to invest in businesses that, youknow, are pushing products.
I want to invest in product centric founderswho have just a long timeline ahead of them to
(37:18):
build and compound their businesses at somereasonably high rate.
And I I think that's a different ethos thanwhat, like, PE would be bringing to the table
for most of these assets.
I'm on the boards of several companies now inthat are vertical software businesses that have
have grown to be much larger than I probablyever anticipated they could be.
(37:41):
And so that that is a core tenet of thisthesis, which is that, like, I I think that one
of the hardest things like, one of the areaswhere VCs make the most mistake most mistakes
around actually, like, saying no to businessesthat end up being very successful is saying no
to businesses that at their earlier stages looklike they're in niche markets or smaller
(38:05):
markets, and they turn them down for marketsize.
But the businesses are working, and eventually,as they scale, they discover new areas to
expand into.
For me, like, for instance, when I was atExcel, you know, sourced this business called
Peer Transfer at the time that turned into acompany called Flywire.
And I remember, like, this was a company thatsold a reconciliation platform to college
(38:26):
universities.
Actually, they gave it away for free, but itallowed them to monetize international student
tuition payments.
So the value proposition was, hey.
Really hard for these college universities tomanage international student payments and also
very expensive for students to send thesepayments through their traditional banking
networks.
(38:47):
So you kind of solve the problem on both sidesand you actually monetize through FX.
And and we did it as like a series a investmentwith Spark at the time.
And I remember the company went out to raiselike a series b and like everyone turned down
this company except for
Small town.
Small town.
Was like, hey, this could be a $152,100,000,000dollars.
(39:07):
So even after your investment several yearslater, it's too it's too small even then.
Yeah.
It's still a small business, but it's working.
Small, but working.
Right?
And and so then Which might as well be dead forVC.
Might as well be dead for some v for some VCs.
One of the partners at Bain ended up funding itat the series b.
And and, you know, the company eventually endedup, like, compounding to be much larger than
(39:28):
anyone imagined, including myself.
And I think it's a $500,000,000 revenuebusiness today.
At one point, it was a $5,000,000,000 marketcap.
It's I think closer to like 1.3, which is stillmuch larger than a 150,000,000 in terms of of
enterprise value.
And I I remember my colleague at the time, AdamFalcon, he was talking to the Bain partner, and
(39:49):
this is after the company IPO ed.
He's like, did you know did you have, like, anysense that this company was gonna be, like, a
multibillion dollar outcome?
He said, no.
Like, I underwrote it to a four x, and I was,like, completely surprised on the upside.
And in my career, like, I've just I've seenthat time and time again, like, whether it's,
(40:09):
you know, Carta, which today is, you know,close to a $500,000,000 business starting in
the small dinky market of cap table management,or it's something like Qualia, which is, like,
a really, like, amazing business in titlesoftware where ostensibly the Cortan that they
were going after was, you know, 2 to300,000,000.
Or even Everlaw, which today is an amazingbusiness in ediscovery where, like,
(40:33):
historically, you know, the size of ediscoveryoutcomes was quite tapped, or I should say
quite limited.
There is a history of VCs when they say no todeals, they say no to companies that are
growing really nicely, have really strongfounders with great product DNA, and where the
blemish is the market size.
And I think what really people should bethinking about is how receptive is a market to
(40:57):
the product.
Like, if it's a small market but people arebuying, like, that's something worth
investigating.
What are some patterns across those fourcompanies?
You get to a certain size and credibilitywhere, like, you start to see adjacencies,
whether it's, an adjacent constituent in theecosystem that you can sell products to because
(41:18):
the data that you're harvesting for your coreproduct is relevant to them, or it's just other
products within the broader stack of theconstituency that you're selling to just it
becomes, like, bigger and bigger and bigger.
People could challenge me on this, but I havenever found a business that has been like,
well, I ran out of market size.
Like, I just I've stopped every single customerand I ran out of market, like and could never
(41:40):
figure anything out again.
It's that is not what happens.
Like, companies stop growing.
They may start to saturate their market, butthey typically stop growing because they their
ability to build new product, you know,declines.
And so for me, like, if we're gonna go after ifwe're gonna invest in a company that ends up
being the size of Carta, which now has four orfive products, or the size of, you know,
(42:04):
Qualia, which has, you know, several differentproducts.
Like, it it is a it is a long term commitmentto building product.
And I don't necessarily think it needs to be insome, like, hyperbolic, you know, eight year
period.
It could be over a longer period of time.
And as long as you have a really efficientbusiness, it affords you that time to build
that product.
(42:24):
And so never underestimate a business that'sworking.
And and a founder who builds while a businessis working to unlock new opportunity.
It's it happens.
It's almost like a belief system, but it'smagic.
I would add one other factor to that is abilityto fundraise and storytell.
Henry Ward has done a phenomenal job tellingthe story of Carta and connecting all the
(42:46):
threads together into Carta's competitiveadvantage.
But other founders as well are able to sellpast their current vision.
Good fundraise is something about selling thefuture, but the ability to sell the future is
what makes the best fundraisers the best.
I agree, especially in the venture context.
What are those components that allows you togrow to 50,000,000, saturate the market and now
(43:08):
grow to 500,000,000?
Like, double click on that.
The number one thing is you have to becomedominant in a certain vertical.
Like, the size doesn't really matter, but youhave to become dominant.
That sort of dominance allows you, you know,affords you a book of business like ARR that
gives you just a lot of cash running throughthe company.
(43:29):
Because you have resources.
You have so then you can sustain
What about team?
You have built a team that executes on a bigfactor.
Team is very important.
You know, companies can fail because there arethere's a deficit of of quality hires and an
ability to track talent.
But I think people can mistake, like, hiringlots of people for, like, hiring a great team.
(43:52):
Quality versus quality.
Like, you can have a much smaller team thatthat really kind of does incredible things over
time.
And so I think it's about keeping the bar high,especially for the businesses that I'm going to
be funding.
Like, in in especially in the earlier days,it's like they've got to approach the problem
from, hey.
Everyone that we hire is high, high impact, butwe're not hiring a lot of them.
(44:15):
Yeah.
So as your company, as you invest in thesecompanies and they saturate the market, should
they be taking small shots on goal for theirnext market?
How do they operationalize finding the secondmarket?
Often I think it's very continuousconversations with customers and with, you
know, counterparties to customers.
(44:37):
Seeing where the market is pulling.
Yeah.
Yeah.
I wish you'd have this product.
Yeah.
It's like, oh, wow.
I remember India was ultimately sold toApplied, but it was it was kind of an
interesting story.
Like, they started out as this product that satnext to the AMS system that enabled Accords
data to be collected more efficiently fromcustomers of commercial insurance agents, you
(45:00):
know, brokerages.
And they built this like, this was a wedgeproduct.
Right?
Like like, AMS systems are their dataarchitecture, like, they are not structured to
collect houses data, do anything with it, andthey didn't have the front end workflows.
And so this is what Indio built and got thisreally nice flywheel going, building, you know,
like, basically, a a a nice book of ARR withwith insurance agencies.
(45:27):
Lo and behold, you know, as we're starting toget to a certain scale and thinking about the
next products, obviously, there's a bunch ofother stuff we wanted to sell into the
insurance agency.
But, you know, these insurance companies cameknocking on our door and said, well, look.
You have all of this Accords data that weessentially, like, take from you in a PDF and
then rekey it into our underwriting system sothat we can, like, you know, create, like, a,
(45:49):
like, a policy or a quote for for thatcustomer.
Like, can you sell us an API and we'll justconsume the data that way?
Another way to look at it was what is acompany?
It's mostly a brand promise.
So I go to Tyler and he delivers this to me.
Let's say you do laundry and I come to you, andyou do laundry so well, and I'm like, oh man, I
(46:10):
wish you would do dry cleaning.
Why don't you do dry cleaning?
I could start selling you for many months, thisis the market, I could bring my friends.
The customer actually driving the supplier tostart something is is even next level to
product market fit.
Hey, if you built this, like, I would lovethis.
This other product sucks.
Like, we've got this huge problem.
And then it's a question of sequencing.
(46:32):
Like when you've got an empathetic founderwho's product driven and listening to their
customers and has good instincts themselves,then it's a question of prioritization.
All right.
There's these five different things we couldbuild.
Maybe three of them are for the existingcustomers.
So that's an easier sell because you'reexcelling to that existing customer you already
have a relationship with.
(46:53):
Oh, two are to their counterparty that, like,you know, we could, like, get some sort of
network effects selling to them through ourinitial customer.
There's some sort of forcing function, like, weshould consider that.
And you just have to think about, like, okay.
Well, how scaled is our business?
How much volatility is our in our core businessversus, you know, like, how many things we need
(47:17):
to solve in our core before we start to thinkabout what's next?
That's always the question.
And then once you feel like you can dosomething next, it's alright.
Of these five different things, you know, whatis the thing that we are most excited about,
either in terms of, like, confidence in itsucceeding or, hey, it really opens up this big
new opportunity for us.
And you used a very specific term sequencing,which is not necessarily shot selection.
(47:40):
I have these five industries.
I'm gonna pick one.
I might do three of these five, but here's theexact order to do it.
Because if I do it this way, I'll get moreprofit, which will allow me to hire and solve
these two problems faster.
Versus if I go this way, it's gonna take tenyears to build profitable business, and then
those two opportunities might not be there.
So it's also like literally the sequence, notnecessarily which business do I want to go to,
(48:03):
and I think a lot of times people confuse thosetwo.
In asset management, for example, you knowexactly what your business will look like at a
trillion AUM.
There's five of these companies.
They'll have real estate, private equity, maybesome venture capital, some secondaries.
So it's not actually what will your businesslook like, it's what is the best and most
efficient way to get there.
It's kind of like this maze.
(48:23):
One thing that I always kind of look down on isthese founders, Naval Ravikanth, I would sit
and he's like, I make nine months to make a bigdecision.
And I always egotistically thought, well, he'sjust being, he's just not proactive enough.
He doesn't have the courage to go out and act.
Like, why doesn't he just go do something?
But oftentimes these are one way doors.
You come in and you're now committed to thisbusiness for five, maybe ten years.
(48:46):
So spending nine months could be very efficientto make that decision, versus to use Jeff
Bezos' analogy, was two way doors.
You could go in and go out, those maybe you doact quicker.
So there is a lot of wisdom to knowing when youdo spend a lot of time deciding the next stage
of the business.
If you could go back seventeen years ago whenyou first started Venture in 02/2008, what
(49:08):
would be your advice to younger Tyler?
What nugget of advice would you give him inorder to accelerate his career?
That's a great question.
(49:29):
You know, you stumped me.
I could ask myself that question.
Just started thinking about it.
The number one concept I would teach myself isthis concept of ignorance debt, which is when
you start something, there's a lot that youdon't know about it.
And you have to methodically go out to seek theknowledge to make at least the known unknowns.
If you can make the unknown unknowns into knownunknowns, you're gonna progress much faster
(49:54):
than if they remain unknown unknowns.
And I think the way to do that is just to getthe right peer group and the right mentor group
around you to accelerate your knowledge.
And then I've tried to teach myself how to dothat because that's also have to learn those
skill sets.
But basically trying to pay down my ignorancestatus quickly as possible, that's a term
(50:15):
coined by Alex Ramosy.
I like that.
I I you know, you've you've flummoxed me.
The Thilians are, like, an interesting bunch.
Like, I I feel I feel like it it you know, sortof being close to, like, that kind of founders
fund kind of group would have been interesting.
Like, there's just I clearly take a much moreconservative, you know, almost growth equity
(50:38):
approach to venture building, but there'sthere's very clearly a, you know, don't know if
it's a classic venture model, but, like, kindamore the risk frontier model.
And not to say that I'd be good at it.
I just I think it's fascinating, you know, whathe's able to accomplish.
So The the Thiel fellowship and that wholeecosystem is really interesting.
(51:00):
It's very powerful.
It's, like, it's a very powerful, interestingecosystem.
I think it's a very like, you know, theirthinking is extremely first principles based,
and and and it's quite foreign to me.
So I'm not saying I I I would want to, like, doanything differently than I do today or think
necessarily differently.
I I like the mental models that I've accruedover time, but I'm impressed with, you know,
(51:24):
they've been able to build.
How do people follow you and and stay up todate with everything that you're working on?
If you're interested in in getting in touchwith me either, you know, through LinkedIn or,
tyler@villaincapital.com.
Awesome.
Thanks.
Thanks, Tyler, for sitting down.
It was a real pleasure.
Thank you for listening.
To join our community and to make sure you donot miss any future episodes, please click the
(51:44):
follow button above to subscribe.
So everybody comments on your name, villain.
(00:04):
What is the origins for your name, and how didthat come about?
Well, the origin for villain, comes from a aquote from Batman.
Harvey Dent said to Batman over a dinner,quote, you either die a hero or see yourself
live long enough to become a villain.
And just as, like, a cinephile, I always lovethat quote.
(00:24):
But when I reflected upon my investing career,you know, it truly resonated with me as sort of
a north star of what success can be.
And that is, you know, finding companies, youknow, that basically survive and grow and
continue to survive and endure through manydecades often and become, you know, essentially
(00:48):
the dominant players in their category.
And obviously, these companies, when they'reyoung, they start off as heroes.
But if they do manage to get to, you know, atwenty, thirty year mark, they're often
villains at that point.
They express really interesting tendenciesthat, you know, rational capitalists should
love.
They have got amazing customer lock in, reallydominant relative market share, pricing power,
(01:12):
and they're really hard to dislodge.
And so that's why I like them as my North Star.
What are some examples of some now villainsthat you invested at Menlo?
Well, I'd say more generally, like, hey.
The universe of tech companies out there, like,who would be, you know, in my opinion, a
villain.
And this is coming at it from a a compliment.
(01:33):
Like, Oracle would be a villain.
They've been around for a long time.
In the vertical software categories, you know,that I love so much, you know, Jack Henry and
FIS in core banking, Vertifore and Applied ininsurance, you know, Epic and Cerner and
medical health records.
You know, these are companies that have beenaround for multiple decades.
(01:54):
They're very large.
They are extremely dominant in theircategories.
And often, if you were to ask, you know, peoplewho use the products or people are trying to
disrupt them, they are the targets becausethey're no longer innovating.
They capture a lot of economic rent, but it's,in some ways, almost impossible to displace
(02:15):
them.
It's almost like this full circle of theinnovator's dilemma.
It's a startup incumbent now disrupted by a newstartup, but on its way to being a hundred or
five hundred billion dollar company.
Yeah.
And and and I should say, I don't thinkvillains actually have to be enormous to be
that way.
I think they just need to be very dominant inthe categories they can beat in.
(02:39):
As Peter Thiel would say, like, he hatescompetition.
He likes monopolies.
Competition is for losers.
Competition is for losers.
And I feel the same way.
Like, I'd rather be in a business where for avariety of reasons, at some scale, it's very
hard to compete with them.
And so then they can start to display somevillainous tendencies and, you know, basically
(02:59):
have amazing shareholder returns as a result.
So villainous tendencies are a side effect ofhaving so much market power.
It's also the capacity to have a relationshipwith a customer where you can extract economic
rents.
And, you know, that's very hard for mostbusinesses to do.
(03:19):
Most businesses compete in commoditizedmarkets.
They have to basically run on that treadmill orsprint on that treadmill forever.
But there are a few companies out there thatdon't have to do that, and those are the best
investments.
I know you didn't define it by market cap, butlet's define that now as a $100,000,000,000
company.
Many of those companies have this kind ofextractive relationship with their customers
(03:40):
and how many are their customers just love togive money like a Starbucks?
There's different sorts of customer lock inthat you can appreciate.
You know, like, I sort of see myself as ananthropologist.
And so, like, the question is, what are the,you know, the circumstances and the behavioral
tendencies that create, you know, lock in witha customer?
(04:02):
And on the human side, habit formation is ahuge one.
It's why, you know, the nicotine companies havedone been so successful over time.
It's why the Starbucks of the world have beenso successful.
In fact, if you look at I believe it's eitherthe profit margins of addictive businesses,
there's a strong correlation between howaddictive they are and how profitable they are
(04:25):
over time.
And then there's some secondary effects,reinforcement effects that that really matter.
But, you know, for, I'd say, consumer products,addiction is a major point.
And then the other major point is thingsaround, you know, habituation and just
becoming, like, really familiar with somethingand therefore not wanting to give it up because
(04:47):
it's what you know, and there's a friction tochanging to something new.
You have a bank account.
That bank account is connected to all thesedifferent bill play partners.
Your entire financial life is set up on it.
It's a hassle to move, and it's that cognitiveload and perceived friction that keeps people
from switching, regardless of whether it's easyto do or actually really difficult to do.
(05:12):
So you invest at the earlier stage into thesecompanies that you want to be a villain, to be
mature and be a villain at some point.
What characteristics are you looking for?
If I come back to what I'm what I'm doing atVillain, I'm very focused on vertical software
and technologies.
I'd say vertical software, vertical AI,vertical payments.
(05:33):
These are the sort of substrates that, youknow, I will be dealing with at this firm.
The very best companies have very, very stickyrelationships with their customers over time.
In a more dry sense, it's basically theydevelop annuities with these And the best
businesses build a widget or whatever it is,and that widget creates an annuity by selling
(05:55):
it to that customer who basically consumes itfor, you know, many, many years.
And so I want to see the earliest evidence ofthat annuity and the earliest evidence of a
founder who knows how to sell that annuity withsome amount of efficiency.
And if I find that in a vertical softwaremarket, I can get really excited.
That's evidenced by a low burn rate.
(06:18):
So soft customers continue to purchase theproduct month after month.
Is there any other metrics and leadingindicators that you're looking that a customer
would would has this annuity type ofrelationship with the company.
You'd have to
see what their behavior and usage are.
You'd have to test pricing and theirwillingness to churn if you were to suddenly
(06:39):
raise pricing.
I'd like to know that a founder with an initialwedge in the market that's efficiently
developing, generating these annuities has aroadmap for basically building new products and
features that they can sell to that existingcustomer to deepen the relationship
significantly over time.
And you would argue that you're creating moreof a feedback loop from the customer when
(07:00):
they're buying multiple things from the samecompany, then they're more likely to become a
longtime customer.
Yeah.
And there should be two, maybe three reasonsfor that.
One, in cloud software, and this is like animportant tenant of this business, like you
have this data plane that you're creating maybewith that initial wedge product.
And, you know, in the best of cases, that datacan be used in a second or third product to
(07:21):
give you the right, like the permission tobuild a product that would be better than what
someone else building that product de novowould build because you're already using you
already have the data that's relevant.
So it's a matter of a different workflow systemor a different set of computations, but you
have an advantage by having the core datasetthat's used in a variety of different tasks.
(07:43):
So that's number one.
Number two is, you know, as you develop a adeeper relationship with a customer and have
multiple products to sell them, there's avariable very powerful phenomenon cross
subsidization that can occur.
You you are pricing and packaging multipleproducts together.
Often, products, you know, work better togetherin terms of a synergistic, you know, outcome.
(08:06):
But also in terms of pricing, you might be ableto say, hey, if you buy this product and this
product, they both work together and we cangive you a discount where if you bought these
products separately, it would be moreexpensive.
And over time, that's a very compelling way formore incumbent companies to compete against
startups.
It's the bundling effect.
Give me an easy to understand example of acompany that started with one product and then
(08:30):
successfully sold multiple products that mostpeople would be aware of.
Microsoft would be a villain and would be verywell known for having multiple products in a
bundle where you know, over time they have alot of success, you know, bringing out that new
product, bundling it into their existing suiteand ultimately, you know, killing competitors
(08:51):
or really driving competitors into, you know,sort of a state of commoditization as a result.
Going back to these companies that you look forthat you think could be villains or market
leaders, what's the first kernel in a companythat you see that this might be one of these
companies?
When you think about competition and how to tofind markets where competition is less of a
(09:14):
threat, you know, there are probably a few waysof doing it.
One is, you know, network effects.
I mean, that's that's a wonderful, you know,business model if you can attain it.
The second is, you know, something like aCarvana where it's like the amount of
infrastructure and CapEx spend required to getto a scale where there's this virtuous cycle
that is just so hard to disrupt is enormous.
(09:36):
Right?
Amazon would have, you know, similarcharacteristics working for it.
I'd say the third that's lesser discussed ismarket size.
And I read a book probably about ten years agothat just opened my eye to this.
And it was a fascinating book calledCompetition Demystified.
I encourage everyone to read it.
But it was basically this sort ofanthropological survey of monopolies and how
(09:58):
they fail.
Right?
So you think of monopolies as like, hey.
These things really like, they shouldn't fail,but every once in a while, they get disrupted.
And the question is why.
And the answer, which is compelling to me, isit's a an exogenous effect or something happens
that actually increases the size of thatmarket.
And as a result, it creates this sort of pocketof oxygen that allows a new entrant in to get
(10:23):
to a certain amount of scale where then they'reable to basically compete with the incumbent.
And that it comes back to one of the big, areaswhere competition can be controlled is, you
know, one of the big factors is market size.
And actually, it's smaller markets that I tendto like or sort of midsize markets because you
have there's just less revenue to go around andthis results in behavior where the because the
(10:49):
market size is perceived smaller or is smaller,there is less capital funding new companies in
that market because the perceived outcome issmaller.
Often these markets, when they're smaller,they're just, like, less understood.
They're more niche.
They're more technical.
It requires someone who like has exposure tothat market and a build mentality that's hard
to find.
And so there's fewer, I'd say, credibleentrepreneurs who go into these markets.
(11:13):
And as a result, you have fewer competitors.
And when you have fewer competitors competingwith each other, maybe a couple can grow up to
be at scale, and that's fine.
And then there's usually some sort of rationalconsolidation that occurs.
And so in smaller and medium sized markets, asa result, you end up with these market share
constructs that are often quite lopsided, whereit's like, hey.
(11:35):
There's three players who control 85% of themarket or two players that control the market.
Look at, you know, a lot of the businesses Imentioned earlier, Epic and Cerner, Vertifore
Applied.
I mean, these are relatively large markets, butthey are dominated by two people.
And it's largely because they were smallmarkets in the to begin with that grew over
time, but these two players captured thosemarkets.
(11:55):
And then once you are a large player in a smallmarket with a lot of the lock in that I
described earlier, even if someone wants todisrupt you, the fixed cost of doing so can
feel prohibitively high.
And so that keeps a lot of people out.
So, again, like my thesis for verticalsoftware, it's not to say that vertical
software can't build really big businesses, butI think a lot of great vertical software is
(12:18):
great because it is actually going after asmaller market where you can have less
competition from day one, less competitionentering over time, and therefore it gives you
a lot more freedom, like a lot less pressure tohave to grow at any certain rate or to have to
have like a build velocity that's, you know,keeping up with seven other competitors.
And it affords you therefore a chance to bemuch more capital efficient and take a much
(12:42):
longer term view.
So
Put some numbers on it.
What is considered a small market in yourplaybook?
I would say anything below, like, a like, a100,000,000 of SAM, you know, like, or TAM,
total addressable market is is considered a aSo
a 100,000,000 of customers spending money inthat market.
(13:03):
Yeah.
We're, like, the perceived, hey.
If we acquire this entire market, we couldbuild a $100,000,000 business.
I think that's, like, that is like relativelysmall.
And for me, I would be interested in companiespursuing markets of that size up to, you know,
500,000,000.
Let's just go in the middle of that$250,000,000 total market per year.
(13:25):
Bunch of venture capitalists are going, lookingaround the table at different firms and they
all see the same $250,000,000 market and theysay this can't return the fund, double click on
the rationale on why it's not as competitive.
Exactly that.
I think you would find a business I mean, myideal villain investment, you find a company
that is expressing that early efficiency,building an annuity with the wedge product that
(13:48):
they're selling, and therefore is growingefficiently.
And when you look around, you see very littlecompetition, right?
Like maybe there's one legacy incumbent andthen that's it.
That's great.
And then the venture guy looking at that says,well geez, you know, it's a nice business, but
my opportunity cost is, like, enormous.
(14:09):
And so if I put a $5,000,000 investment in thiscompany, like, I might make a 10 x, but that
doesn't move the needle for me.
I need to make my fund.
Yeah.
I need to I need to believe that I can make a150, 200 on this investment.
And I hopefully, with the funds, the waythey're organized now, is I need to believe I
(14:30):
can not only invest that 5,000,000, but toreally make it worth my time, I need to be able
to invest another 50,000,000 behind that or
a 100,000,000 viable check size or companycheck size per company.
Yeah.
There's a minimum check size that's in the waymost funds work is like, hey, they've got a
certain amount of slots, a minimum check size.
(14:51):
A fixed number of board seats.
There's a fixed number of board seats.
And then they think about the amount that ainvestment can return as a percentage of a
fund.
And they're looking to, basically, everyinvestment they make, believe that they have a
fund returner on their hand.
Funds, as they've gotten a lot larger, it'sjust much harder for them to get excited about
(15:12):
a business where it's like, wow, that's that'sgreat.
That's a $400,000,000 TAM.
Company is growing really nicely.
Like, whoop dee doo.
It doesn't move the needle because I'm lookingfor the $50,000,000,000 company that I can
write that first check, and then I can write amuch larger check from my growth fund, and then
I can do something even larger from an SPV,like and that's a very different, you know,
(15:34):
mode of thinking and and capital allocation.
How do you make your math work?
Three things matter.
One is fund size.
I think a fund size of a 150,000,000 or less issuitable for this strategy because you could
have a bunch of 3,000,000, $5,000,000investments where you're making a five to seven
(15:56):
x, and I think that those could have, like, areal, like, they could be needle movers for
that fund.
Fund size matters.
Concentration matters.
Like, I think we would be looking for aportfolio that's a bit unusual in the venture
industry where it's 15 to 20 investmentsversus, I'd say, 25 to 30 or 25 to 40.
And nominal pre money matters.
(16:17):
It's most liquidity in venture outside of themega IPOs or acquisitions in the 100,000,000 to
$500,000,000 range.
And so building an investment philosophy and astrategy where we make a lot of money on those
outcomes.
And then if you were to reverse engineer intothat, let's just say the average outcome you're
thinking about is a 200,000,000 EV once yousell it.
(16:40):
Therefore, what does the pre money have to bein order to make a five to 15 x return?
And my guess is that for us, it's gonna besomewhere between and 30,000,000 pre, depending
on some of the underlying characteristics ofthe company.
And so then you might say, hey.
Well, Tyler, how do you find companies thathave that early product market fit that you're
(17:00):
looking for, where you can sort of get them atpre monies that sort of make sense, you know,
that are that are normally on the lower end?
And the answer is, well, you're looking forbusinesses where there's a fly in the ointment.
There has to be something that iscountervailing, that is uninteresting to the
mainstream VC.
And for me, the two things that I'm willing totake risks on are one, the market size, and two
(17:24):
is the growth rate.
Right?
And so market size, we discussed earlier.
Growth rate, it's a longer conversation, but,you know, when you look at the venture industry
today, I think there was a guy, like, abenchmark partner interviewed on a podcast
recently where he said, hey.
Like, these new AI companies, like, are growingat, like, four x year over year.
Like, the new it's it's now venture guys
(17:45):
all Two x is four x.
Venture guys all speak in, like, multiples ofgrowth rates for the first three or four years.
I never understood why exactly, but it's likenow it's like you gotta be four x, four x, and
then three x or, like, you mean nothing to me.
Right?
And and you look at these companies, and it itis incredible.
That can grow from, like, zero to a 100,000,000in eighteen months.
Like, it is phenomenal.
Right?
But, like, I'm delighted when they say thisbecause it means, like, there's this, like,
(18:10):
wide swath of companies out there who are onlygrowing at, like, you know, a 120% who are,
like, completely uninteresting as a result.
And so when you get those factors, like, hey,they might be growing a little bit slower.
And a 120% is, like, exceptional growth in myopinion.
They might be growing at, like, 70 to 80%.
(18:30):
That would be fine with me too.
They might be going after smaller temps.
That's fine too.
As long as the pre money valuation makes senseand the companies are efficient and the
founders and I lock arm in the ethos ofcompounding the business as opposed to just
growing the business at the highest ratepossible at all costs, we can have a very, very
(18:52):
productive and lucrative partnership over time.
Is there a different psychology with thesefounders that are looking to build a $2.03,
$400,000,000 company?
Are they older, more experienced, less kind ofin their twenties looking to become
billionaires?
And is there something different about thesetype of founders?
I often think the founders who are willing togrow go a little bit more slowly have been
(19:18):
burned.
Like, I was actually speaking to a foundertoday who has this ethos of growing a bit more
slowly, but also just, like, efficiently.
And, you know, his last company ran out ofmoney.
It was just cash zero and and died.
The other phenotype of founder is one that's,like, been in the woods for a while.
I've I've done a few angel investments as we'vegotten villain off the ground, and some of
(19:41):
these companies have been, you know, in thewoods for five or six years.
And they started with something, and they hadto pivot and they had to pivot again.
So by the time they get to this product marketfit that I love, like, I don't know.
They've been kind of burned by the ventureindustry.
It's just very hard for them to raise capital.
The the instincts of, like, survival andfrugality are, like, in their DNA at that
(20:03):
point.
In what ways is being burned like that anasset?
And what ways is it liability?
I think it's an asset.
Right?
I I like, to me, it's much scary.
Because you could argue the opposite, which isit keeps them from making bold bets and
compounding and all all these other benefit.
But you would argue it's an asset.
Generally, I would say it's an asset.
In what ways?
Because I think the vast majority of even greatbusinesses that fail fail because they grow too
(20:28):
fast.
There's this urgency to, like, like, keep upwith the Joneses, which, again, is, like, that
four x growth rate.
It's it's this feeling like, hey.
If we don't achieve this perceived set ofnumbers, like, no one's gonna fund us.
We're gonna die.
Our competitors are gonna overtake us.
I mean, there's like this panic that sort ofyou see as they start, you know, walking
through their mental models.
(20:49):
And I think that can lead to some really,really shitty capital allocation decisions.
Right?
Like, most companies fail, in my opinion, inthe venture landscape because they try to grow
too quickly, they try to build too much producttoo quickly, and they basically parallel
process too many things that need to be done ina more sequential manner.
(21:10):
And some of this also is just like certainmarkets require just more time to sort of,
like, break, and there's a learning curve toany business being built that just requires
time.
And so I actually get quite, like, nervousabout companies that are just growing fast.
Whether whether they're permitted to becausethey have great economics or not, they're like,
(21:31):
there is something that, like, frightens me alittle bit because I I think, you know, like,
organizational capacity can get strained to thepoint where things can break in a in a in a way
that it's hard to put back to pieces.
And you've seen that in the venture landscape.
You know, we've got all these assets out therethat are basically hung.
(21:51):
Right?
Like, from 2021, all these mega funding roundschasing a lot of growth.
And and you could say there's probably an alterlike, alternative history where if these
founders had a different mentality of just,like, growing I I take taking a compounding
mentality where it's like an endurancecompounding mentality where it's not, you know,
(22:13):
triple, triple, double, double, or four x, fourx, three x, but it's more, hey.
I'm gonna grow this business between 6080% forthe next seven years or the next twelve years.
And I'm just gonna do it on my time frame, butwe're gonna continue making progress.
We're gonna do it with precision and withcapital efficiency.
I suspect a lot of the founders who now havehung businesses would be in much better places.
(22:37):
It seems like there's like a dialectic here,like two opposing philosophies.
One is about founder market fit.
So you have like a Facebook that's literallyplowing and burning billions of dollars trying
to build their network.
In fact, before they even knew whether they hada business model, that was like the question
for many years.
And then there was a question in 2012, whetherthey could port their business model into
(22:58):
mobile.
They had to deal with all that.
Sam Altman's another example, OpenAI justburning all this.
People still don't know whether LLMs will havea sustainable model, but they're just going out
there and doing market share.
And then there's the businesses that, likeQualtrics, that grew and compounded over twenty
years, and oftentimes not in New York or SanFrancisco, in these second tier cities where
(23:22):
they're compounding, and maybe it's one ofthese industries that starts out as a
$500,000,000 TAM and it also compounds 12% peryear, and suddenly in year 20 it's a
$5,000,000,000 industry and they have this kindof monopoly position.
So both models could work, but they'recertainly different personality types.
You make a great point with Qualtrics.
You look at Procore.
(23:43):
I think that was a twenty year overnightsuccess.
I think ServiceTitan was sort of under theradar building for a long period of time before
it really broke out as an asset that VCs andgrowth equity firms liked.
But, you know, I think there's something aboutthat journey that makes these businesses
(24:03):
amazing.
And for me, hyper growth is much less excitingthan seeing a business that was a kind of a
slower grower that actually over time starts tosee their growth accelerate.
And often it's the case because, like, the thesort of the flywheel is working.
The multi, know, product strategy is working.
The familiarity of the market with the productis working.
(24:25):
They're becoming the standard.
The ecosystem is converging around them.
And and these create, you know, these flywheelsof operational leverage where a business that
was kind of sleepier, you know, growing at, youknow, 80% maybe suddenly is growing at a 120%
at a much larger scale.
And when you see those things, you gotta belike, wow, that's gonna be an incredible
(24:46):
business.
Sometimes the different arms of the businessaren't aren't individually that spectacular.
When when you put them into one system, theythey achieve product market fit.
It's interesting.
You bring up like, you know, Google or Facebookor OpenAI.
You know, I I there's a podcast I eventuallywanna maybe do myself called, like, the first
five years, which would be going back andtrying to get to, like, the first five years of
(25:10):
financial data of, like, these, you know,really amazing companies.
Because I actually think that, you know,Facebook was quite profitable early on if I
look back at, like, their s one, like, businessgrew, like, an enormous amount through the
early years.
I don't know what the quality of revenue was.
Obviously, like, Facebook had these networkeffects that were just incredible.
(25:32):
And so it's a business I I really understandand appreciate.
And same with Google.
I think Google actually was like really quiteprofitable out of the gate growing at several
100% a year.
And so there are special businesses like that.
You know, OpenAI is a very different business.
It hemorrhages cash to the extent that theseother businesses at their scale did not.
(25:54):
As a sort of a someone interested in companyhistory or economic history, it reminds me a
lot more of the memory business where, like,the need to reinvest in the next generation
model is feels like it's important forsurviving and continuing to be the best LLM out
there.
And I I personally just think that's a reallyhard place to be.
(26:14):
I do think it's an interesting study today ofthese businesses that are being funded that
have enormous burn rates in their early yearsand they're growing fast.
The question is, like, when they get to be moremature, like, how valuable are they and how are
they? Able are
they? Able are they?
Startup history is also something that I'mreally interested in, just how these things
came about.
And one of the most interesting things is thiskind of three person club that Reid Hoffman,
(26:38):
Mark Pincus, and Peter Thiel had talking aboutsocial networks before Facebook.
Talk about having a prepared mind.
They would just talk about this.
Obviously, Reid Hoffman also started LinkedIn.
I think Mark Binka started a social networkthat ended up not getting off the ground.
But they were kind of developing this thesisboth in real time individually and also as a
(26:59):
group.
So they had this really powerful prepared mindfor when Facebook landed on their lap.
They were almost waiting for the Facebook tocome about, versus to the rest of the world,
the rest of the 7,000,000,000 people, it justseemed like a totally novel, totally
idiosyncratic business.
They were like really ready for it.
For Facebook, it was probably some combinationof cloud computing and modern software
(27:23):
engineering and behavioral psychology,understanding addiction and how to get users
engaged that like all of these things needed tocome together to make a network effect that we
understand it as now viable.
And before Villain, were at Menlo Ventures,storied venture capital franchise, best known
(27:44):
for Uber and I'm sure many other DeCA unicorns.
When you were inside Menlo, how much morepowerful is it to be around a group of really
smart people kind of workshopping these ideasversus I have this thesis?
How much did having a group help help youformulate your your thinking?
Certainly, in terms of blind spots, I think,you know, groups can be helpful.
(28:06):
Just sort of seeing something from an anglewhere, you know, you're you're you didn't see
it or you're not being intellectually honestenough with yourself about that potential issue
or that potential upside that you just, like,haven't been able to accept.
And so I think for that reason, like, peoplearound who you can talk to about investments
(28:29):
and get their feedback, people you trust, isimportant.
And I definitely benefited from that during mytime.
And now as a solo GP, how do you build thataround you so that you have people to, you
know, riff with and and to keep you honest in
your thesis?
There's a they're very small set set of peopleout there who have similar mental models as I
(28:49):
do about these types of companies.
And they're at other small little firms, and,you know, I think you can be very collegial.
Your partnership almost becomes this extendedgroup of people who, you know, you're just
happy to talk to about investmentopportunities.
You're happy to have them look at investments.
And, you know, maybe that changes.
But I think when it's a bunch of small firmslooking at stuff, like you can be in a
(29:14):
situation where you can, like, both invest in ain a company.
The incentives are aligned for you guys to bothco invest versus one firm has to take the
Exactly.
So conscious about not having mediocre or poorthought partners.
Do you think that information could couldnegatively affect you as well?
Any information can negatively affect you.
I think you you you know, thought partners arelike this repeat game.
(29:37):
You you have you you work with them onsomething, and you can decide after that you
don't wanna like, you just discounted theirthoughts.
Or they might impress you, in which case, like,you reweight them even higher sort of in in in
your estimates.
I feel like I've been fortunate to surroundmyself and and and be part of firms where
there's a bunch of really intelligent people.
And and so I've just I've figured out thepeople who I like.
(30:01):
And when you talk to them over the course ofseveral months looking at several opportunities
kind of riffing, like, you you get a sense of,like, do they do they provide some some insight
that that really, like, helps your thinking?
And part of that sense is you know whatexcellence looks like, what a tier one VC looks
like, and that's the standard that you holdyour your network to.
Whether it's a tier one VC, I you know, mybrother is one of the smartest people I know.
(30:24):
He founded a it's now a hedge fund called CASPartners.
Like, I've learned a lot from him over theyears, just mental models around endurance.
He invests at companies at much later stagesthan I do, but, like, I think our thinking is
similar.
Like, what causes these businesses to, like,continue to compound for for many years to
come?
Like, what's the what's the advantage?
(30:44):
It's both within top tier firms like Menlo and,like, Excel.
It's within a broader network of people whoinvest in different asset classes but can bring
unique insights.
It's from reading.
I mean, I think reading is, like, a wonderfulplace to find mental models, like competition
demystified, people like Peter Thiel.
Like, and you might have your own variant onit.
(31:05):
Like, Peter Thiel is thinking about how do Ibuild monopolistic businesses, like, you know,
and he has a different substrate that he canwork with.
He's like, I've got the Elon Musk empire, thePeter the the Founders Fund franchise.
Like, he has a advantages compared to me thatallow him to invest in incredible businesses
(31:25):
that look very different but can achievesimilar economic returns.
For me, I'm I'm taking a more off the beatenpath approach.
And But again, I think our North Star is like,how do you find businesses that can persist?
When you look at tier one funds, is it kind ofFOMO and herd behavior, or is it more just
rationally following incentives?
(31:46):
What percentage is herd behavior versusrational first principles thinking?
I think a lot of it is herd behavior aroundcertain themes and founder personas.
And then, again, kind of coalescing aroundcertain metrics that would basically qualify or
(32:09):
disqualify a company as being.
And sometimes I think some VCs, like, don'tunderstand why those metrics are what they are.
You're like, well, this company needs to begrowing at 400% year over year.
Okay.
Why?
Or this company needs to have a three x LTVCAC.
Okay.
That made made sense, but but why?
Like, what's the underpinnings of that from aneconomic standpoint?
(32:31):
And are all the three x LTV CAC companies thesame?
Are they are they same or or is, you know, athree x LTV CAC company where the company has a
nine month lifetime value with its customerdifferent from one that has a multiyear, you
know, customer relationship?
Are they the same or different?
The answer is very different.
But, like, I I don't you know, I think thereare a lot of very smart PCs.
I think there are, like any industry, I thinkthere's a wide variety of thinkers out there.
(32:55):
One of the things I really think about in assetmanagement as a whole is there are these
incentives for herd behavior in that ifeverybody goes down, if every long only fund
goes down by 5% and you're down by 5%, the LPsare gonna re up.
But if you're down and everybody else is up,even if the last three years you were up,
that's gonna put pressure not only on the fundto re up, but your champion within that LP
(33:20):
having to vouch for you.
So there's this kind of rational herd behaviorwhere you could be safe in a losing strategy as
long as the entire industry is going in thatdirection.
The way LPs think obviously, know, sort of putspressure on GP thinking.
There's some really interesting dynamics that Ithink people don't fully appreciate unless
they've been in that seat.
(33:41):
Yeah.
Sometimes I question it.
I think that, you know, for instance, peoplegive me feedback that, okay.
Hey.
You know, 15 to 20 investments, like, that'sjust not a lot of diversification.
I'm like, well, you also have 15 to 20managers.
Like, you're diversified at the GP level.
So then, like, why do you want so muchdiversification at the individual investment
level?
(34:01):
I don't always get great answers.
I just think like things are done the waythey're done and it's better to have okay
returns with no obvious black eyes than, youknow, great returns.
And I think that thinking sort of can permeatethrough the industry.
Part of the art of being a GP is knowing whichrules to follow and which rules to break.
(34:26):
Knowing which hills to die on and being veryconscious about that.
And sometimes you could even tell I knoweverybody wants this, this is why I'm doing
this.
And a lot of top LPs will accept that, butthere's only so many variations to their
business model they could also accept.
One of your paradoxical strategies is that yourcompanies will be bought by PE, growth equity,
(34:46):
incumbents.
Tell me about that.
Is that a fundamentally different business thatgets bought by strategic M and A and IPOs?
Vertical software, when these companies get toa certain scale, and by that I mean 10 to
15,000,000 of ARR where they can basicallyfloat, they can be close to profitability or
profitable depending on how fast they want togrow.
(35:07):
They become very attractive assets to a largeruniverse than what I think is available to a
any random venture backed company.
Because, like, again, vertical softwarecompanies, they build these annuities.
They have these very sticky customer bases.
Like so they're highly sought after by privateequity firms or or growth equity firms.
(35:31):
And so they become those become an additionalset of buyers for the companies that we'll be
investing in.
And then, you know, related to that, there'scompanies like Constellation Software who,
like, their entire business is buying verticalsoftware companies.
And so it's not that I don't want to buildbusinesses that incumbents don't wanna buy.
(35:51):
Like, when I look at my investments at Menloand the acquisitions that occurred, Guildwire
was bought by Hilty, an incumbent in theconstruction space.
Indio was bought by Applied.
Again, another incumbent in the insurancespace.
Callstone was bought by Carlyle.
You know, Flywire went public.
Carta, I think, will go public.
And so there is more of a diversity.
(36:13):
I just think that at some scale, softwarecompanies become great assets, and that's just
not the case for most venture backed companies.
And so I think there's just better liquiditycharacteristics for these businesses.
So we're not gonna orient selling thesecompanies to PE just for the sake of it.
I just prefer that there are additional offramps.
(36:34):
The vast majority of m and a in the venturemarket is still 1 to 500,000,000, and I wanna
play to the fat part of that curve.
And so that includes all of the potentialliquidity participants.
Does that make your fund kind of a mix of VCand PE almost like a combination of both?
Yes.
I I think it's kind of VC and, like, microgrowth equity.
(36:54):
I I think the distinction is, you know, I thinka lot of PE firms, when they buy businesses,
like, that's the end of innovation or, youknow, it it's a lot about cost reduction and
and rationalization.
Like, I want to invest in businesses that, youknow, are pushing products.
I want to invest in product centric founderswho have just a long timeline ahead of them to
(37:18):
build and compound their businesses at somereasonably high rate.
And I I think that's a different ethos thanwhat, like, PE would be bringing to the table
for most of these assets.
I'm on the boards of several companies now inthat are vertical software businesses that have
have grown to be much larger than I probablyever anticipated they could be.
(37:41):
And so that that is a core tenet of thisthesis, which is that, like, I I think that one
of the hardest things like, one of the areaswhere VCs make the most mistake most mistakes
around actually, like, saying no to businessesthat end up being very successful is saying no
to businesses that at their earlier stages looklike they're in niche markets or smaller
(38:05):
markets, and they turn them down for marketsize.
But the businesses are working, and eventually,as they scale, they discover new areas to
expand into.
For me, like, for instance, when I was atExcel, you know, sourced this business called
Peer Transfer at the time that turned into acompany called Flywire.
And I remember, like, this was a company thatsold a reconciliation platform to college
(38:26):
universities.
Actually, they gave it away for free, but itallowed them to monetize international student
tuition payments.
So the value proposition was, hey.
Really hard for these college universities tomanage international student payments and also
very expensive for students to send thesepayments through their traditional banking
networks.
(38:47):
So you kind of solve the problem on both sidesand you actually monetize through FX.
And and we did it as like a series a investmentwith Spark at the time.
And I remember the company went out to raiselike a series b and like everyone turned down
this company except for
Small town.
Small town.
Was like, hey, this could be a $152,100,000,000dollars.
(39:07):
So even after your investment several yearslater, it's too it's too small even then.
Yeah.
It's still a small business, but it's working.
Small, but working.
Right?
And and so then Which might as well be dead forVC.
Might as well be dead for some v for some VCs.
One of the partners at Bain ended up funding itat the series b.
And and, you know, the company eventually endedup, like, compounding to be much larger than
(39:28):
anyone imagined, including myself.
And I think it's a $500,000,000 revenuebusiness today.
At one point, it was a $5,000,000,000 marketcap.
It's I think closer to like 1.3, which is stillmuch larger than a 150,000,000 in terms of of
enterprise value.
And I I remember my colleague at the time, AdamFalcon, he was talking to the Bain partner, and
(39:49):
this is after the company IPO ed.
He's like, did you know did you have, like, anysense that this company was gonna be, like, a
multibillion dollar outcome?
He said, no.
Like, I underwrote it to a four x, and I was,like, completely surprised on the upside.
And in my career, like, I've just I've seenthat time and time again, like, whether it's,
(40:09):
you know, Carta, which today is, you know,close to a $500,000,000 business starting in
the small dinky market of cap table management,or it's something like Qualia, which is, like,
a really, like, amazing business in titlesoftware where ostensibly the Cortan that they
were going after was, you know, 2 to300,000,000.
Or even Everlaw, which today is an amazingbusiness in ediscovery where, like,
(40:33):
historically, you know, the size of ediscoveryoutcomes was quite tapped, or I should say
quite limited.
There is a history of VCs when they say no todeals, they say no to companies that are
growing really nicely, have really strongfounders with great product DNA, and where the
blemish is the market size.
And I think what really people should bethinking about is how receptive is a market to
(40:57):
the product.
Like, if it's a small market but people arebuying, like, that's something worth
investigating.
What are some patterns across those fourcompanies?
You get to a certain size and credibilitywhere, like, you start to see adjacencies,
whether it's, an adjacent constituent in theecosystem that you can sell products to because
(41:18):
the data that you're harvesting for your coreproduct is relevant to them, or it's just other
products within the broader stack of theconstituency that you're selling to just it
becomes, like, bigger and bigger and bigger.
People could challenge me on this, but I havenever found a business that has been like,
well, I ran out of market size.
Like, I just I've stopped every single customerand I ran out of market, like and could never
(41:40):
figure anything out again.
It's that is not what happens.
Like, companies stop growing.
They may start to saturate their market, butthey typically stop growing because they their
ability to build new product, you know,declines.
And so for me, like, if we're gonna go after ifwe're gonna invest in a company that ends up
being the size of Carta, which now has four orfive products, or the size of, you know,
(42:04):
Qualia, which has, you know, several differentproducts.
Like, it it is a it is a long term commitmentto building product.
And I don't necessarily think it needs to be insome, like, hyperbolic, you know, eight year
period.
It could be over a longer period of time.
And as long as you have a really efficientbusiness, it affords you that time to build
that product.
(42:24):
And so never underestimate a business that'sworking.
And and a founder who builds while a businessis working to unlock new opportunity.
It's it happens.
It's almost like a belief system, but it'smagic.
I would add one other factor to that is abilityto fundraise and storytell.
Henry Ward has done a phenomenal job tellingthe story of Carta and connecting all the
(42:46):
threads together into Carta's competitiveadvantage.
But other founders as well are able to sellpast their current vision.
Good fundraise is something about selling thefuture, but the ability to sell the future is
what makes the best fundraisers the best.
I agree, especially in the venture context.
What are those components that allows you togrow to 50,000,000, saturate the market and now
(43:08):
grow to 500,000,000?
Like, double click on that.
The number one thing is you have to becomedominant in a certain vertical.
Like, the size doesn't really matter, but youhave to become dominant.
That sort of dominance allows you, you know,affords you a book of business like ARR that
gives you just a lot of cash running throughthe company.
(43:29):
Because you have resources.
You have so then you can sustain
What about team?
You have built a team that executes on a bigfactor.
Team is very important.
You know, companies can fail because there arethere's a deficit of of quality hires and an
ability to track talent.
But I think people can mistake, like, hiringlots of people for, like, hiring a great team.
(43:52):
Quality versus quality.
Like, you can have a much smaller team thatthat really kind of does incredible things over
time.
And so I think it's about keeping the bar high,especially for the businesses that I'm going to
be funding.
Like, in in especially in the earlier days,it's like they've got to approach the problem
from, hey.
Everyone that we hire is high, high impact, butwe're not hiring a lot of them.
(44:15):
Yeah.
So as your company, as you invest in thesecompanies and they saturate the market, should
they be taking small shots on goal for theirnext market?
How do they operationalize finding the secondmarket?
Often I think it's very continuousconversations with customers and with, you
know, counterparties to customers.
(44:37):
Seeing where the market is pulling.
Yeah.
Yeah.
I wish you'd have this product.
Yeah.
It's like, oh, wow.
I remember India was ultimately sold toApplied, but it was it was kind of an
interesting story.
Like, they started out as this product that satnext to the AMS system that enabled Accords
data to be collected more efficiently fromcustomers of commercial insurance agents, you
(45:00):
know, brokerages.
And they built this like, this was a wedgeproduct.
Right?
Like like, AMS systems are their dataarchitecture, like, they are not structured to
collect houses data, do anything with it, andthey didn't have the front end workflows.
And so this is what Indio built and got thisreally nice flywheel going, building, you know,
like, basically, a a a nice book of ARR withwith insurance agencies.
(45:27):
Lo and behold, you know, as we're starting toget to a certain scale and thinking about the
next products, obviously, there's a bunch ofother stuff we wanted to sell into the
insurance agency.
But, you know, these insurance companies cameknocking on our door and said, well, look.
You have all of this Accords data that weessentially, like, take from you in a PDF and
then rekey it into our underwriting system sothat we can, like, you know, create, like, a,
(45:49):
like, a policy or a quote for for thatcustomer.
Like, can you sell us an API and we'll justconsume the data that way?
Another way to look at it was what is acompany?
It's mostly a brand promise.
So I go to Tyler and he delivers this to me.
Let's say you do laundry and I come to you, andyou do laundry so well, and I'm like, oh man, I
(46:10):
wish you would do dry cleaning.
Why don't you do dry cleaning?
I could start selling you for many months, thisis the market, I could bring my friends.
The customer actually driving the supplier tostart something is is even next level to
product market fit.
Hey, if you built this, like, I would lovethis.
This other product sucks.
Like, we've got this huge problem.
And then it's a question of sequencing.
(46:32):
Like when you've got an empathetic founderwho's product driven and listening to their
customers and has good instincts themselves,then it's a question of prioritization.
All right.
There's these five different things we couldbuild.
Maybe three of them are for the existingcustomers.
So that's an easier sell because you'reexcelling to that existing customer you already
have a relationship with.
(46:53):
Oh, two are to their counterparty that, like,you know, we could, like, get some sort of
network effects selling to them through ourinitial customer.
There's some sort of forcing function, like, weshould consider that.
And you just have to think about, like, okay.
Well, how scaled is our business?
How much volatility is our in our core businessversus, you know, like, how many things we need
(47:17):
to solve in our core before we start to thinkabout what's next?
That's always the question.
And then once you feel like you can dosomething next, it's alright.
Of these five different things, you know, whatis the thing that we are most excited about,
either in terms of, like, confidence in itsucceeding or, hey, it really opens up this big
new opportunity for us.
And you used a very specific term sequencing,which is not necessarily shot selection.
(47:40):
I have these five industries.
I'm gonna pick one.
I might do three of these five, but here's theexact order to do it.
Because if I do it this way, I'll get moreprofit, which will allow me to hire and solve
these two problems faster.
Versus if I go this way, it's gonna take tenyears to build profitable business, and then
those two opportunities might not be there.
So it's also like literally the sequence, notnecessarily which business do I want to go to,
(48:03):
and I think a lot of times people confuse thosetwo.
In asset management, for example, you knowexactly what your business will look like at a
trillion AUM.
There's five of these companies.
They'll have real estate, private equity, maybesome venture capital, some secondaries.
So it's not actually what will your businesslook like, it's what is the best and most
efficient way to get there.
It's kind of like this maze.
(48:23):
One thing that I always kind of look down on isthese founders, Naval Ravikanth, I would sit
and he's like, I make nine months to make a bigdecision.
And I always egotistically thought, well, he'sjust being, he's just not proactive enough.
He doesn't have the courage to go out and act.
Like, why doesn't he just go do something?
But oftentimes these are one way doors.
You come in and you're now committed to thisbusiness for five, maybe ten years.
(48:46):
So spending nine months could be very efficientto make that decision, versus to use Jeff
Bezos' analogy, was two way doors.
You could go in and go out, those maybe you doact quicker.
So there is a lot of wisdom to knowing when youdo spend a lot of time deciding the next stage
of the business.
If you could go back seventeen years ago whenyou first started Venture in 02/2008, what
(49:08):
would be your advice to younger Tyler?
What nugget of advice would you give him inorder to accelerate his career?
That's a great question.
(49:29):
You know, you stumped me.
I could ask myself that question.
Just started thinking about it.
The number one concept I would teach myself isthis concept of ignorance debt, which is when
you start something, there's a lot that youdon't know about it.
And you have to methodically go out to seek theknowledge to make at least the known unknowns.
If you can make the unknown unknowns into knownunknowns, you're gonna progress much faster
(49:54):
than if they remain unknown unknowns.
And I think the way to do that is just to getthe right peer group and the right mentor group
around you to accelerate your knowledge.
And then I've tried to teach myself how to dothat because that's also have to learn those
skill sets.
But basically trying to pay down my ignorancestatus quickly as possible, that's a term
(50:15):
coined by Alex Ramosy.
I like that.
I I you know, you've you've flummoxed me.
The Thilians are, like, an interesting bunch.
Like, I I feel I feel like it it you know, sortof being close to, like, that kind of founders
fund kind of group would have been interesting.
Like, there's just I clearly take a much moreconservative, you know, almost growth equity
(50:38):
approach to venture building, but there'sthere's very clearly a, you know, don't know if
it's a classic venture model, but, like, kindamore the risk frontier model.
And not to say that I'd be good at it.
I just I think it's fascinating, you know, whathe's able to accomplish.
So The the Thiel fellowship and that wholeecosystem is really interesting.
(51:00):
It's very powerful.
It's, like, it's a very powerful, interestingecosystem.
I think it's a very like, you know, theirthinking is extremely first principles based,
and and and it's quite foreign to me.
So I'm not saying I I I would want to, like, doanything differently than I do today or think
necessarily differently.
I I like the mental models that I've accruedover time, but I'm impressed with, you know,
(51:24):
they've been able to build.
How do people follow you and and stay up todate with everything that you're working on?
If you're interested in in getting in touchwith me either, you know, through LinkedIn or,
tyler@villaincapital.com.
Awesome.
Thanks.
Thanks, Tyler, for sitting down.
It was a real pleasure.
Thank you for listening.
To join our community and to make sure you donot miss any future episodes, please click the
(51:44):
follow button above to subscribe.
Popular Podcasts
Crime Junkie
Does hearing about a true crime case always leave you scouring the internet for the truth behind the story? Dive into your next mystery with Crime Junkie. Every Monday, join your host Ashley Flowers as she unravels all the details of infamous and underreported true crime cases with her best friend Brit Prawat. From cold cases to missing persons and heroes in our community who seek justice, Crime Junkie is your destination for theories and stories you won’t hear anywhere else. Whether you're a seasoned true crime enthusiast or new to the genre, you'll find yourself on the edge of your seat awaiting a new episode every Monday. If you can never get enough true crime... Congratulations, you’ve found your people. Follow to join a community of Crime Junkies! Crime Junkie is presented by audiochuck Media Company.
24/7 News: The Latest
The latest news in 4 minutes updated every hour, every day.
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.