If you invest in a category or if you invest in a kind of company or you invest in a kind of founder, then it doesn't go well — it's extremely easy to learn from the mistake. To basically say, all right, I touched that hot stove. I'm never doing it again.
And then the next thing shows up and pattern matches. And it's the thing that you should invest in and you have the chance to invest in. But you touched the scalded stove and you're learning from your mistakes, right? You're doing the responsible thing. And so you don't do it.
There's something particularly pernicious about learning from your mistakes in venture capital. AI was a tremendously good way to lose a lot of money in venture capital from 1945 to 2017. When I was getting my computer science degree in the late 80s, AI was the one field that you knew would never succeed. There had been an investment boom for AI in the 80s, and it failed. And everybody, including all the computer scientists, were like, yeah, this field is dead. And that happened five times over the course of AI over the last 80 years.
In venture, you're always much more worried about the mistake of omission than the mistake of commission. The mistake of cost is you invest $10 million in a startup, it fails, you lose the money. The mistake of omission is you don't invest in Google and you lose $100 billion of opportunity cost.
Arthur Rock, who's virtually the creator of modern venture capital — he invested in Apple and Intel in the seed rounds and many other great companies for 30 years — his conclusion was that he would have been a better venture investor had he fed all of the business plans and pitch decks straight into the shredder upon receiving them, and if he had spent 100% of his time on the resume.
I think that's basically right. The great founders will buy you enormous upside that may break rules in all kinds of directions, may break precedent in all kinds of directions. And the world's best business plan executed by a mediocre team will almost certainly get lapped by a great team.
Having said that, this sounds easy. Of course, why is that hard is because it's somewhat tautological. We define great founders as the ones that have great outcomes. It's a lot easier after the fact to say Steve Jobs is a great founder when you look at the success of Apple. But when you have special people, you should back them almost without consideration of other factors.
My personal formula is you need high IQ as table stakes. You just need somebody who's incredibly smart. My basic test is if I have my notebook open and they're talking, am I writing down lots of notes or not? If I'm writing lots of notes and I'm learning from them, then clearly they're very smart. But I think that's table stakes because just intelligence — there are many people who are very smart who are just grinders or the clerk mentality.
The second thing you need is what my partner Ben calls courage. An absolute determination to succeed and to confront problems directly and pound through anything. The Navy SEALs have the term "embrace the suck." I always like to say I want the founder who leaves a founder-shaped hole in any brick wall that he runs into, like a cartoon character.
The third thing is something more fundamental — drive, ambition, will to power. It's not just solving problems. There's a more fundamental ambition: I want to build something of my own. I want to really demonstrate what I can do. I have a very primal drive to do that. People cast moral aspersions on it and call it greed. I'm not even talking about the money component. I'm talking about: I want to build something.
On that one in particular, you don't necessarily see it on the resume. But you can see it in the background. Was their entire life basically a sequence of things being handed to them — credential achievement? Or is it like, when they were 14 they built this, when they were 17 they built that, when they were 20 they did this. This primal drive to create.
The full version of the theory is all the great founders are broken in some way. You get into broken home, Steve Jobs being adopted. The metaphor is when the bone breaks, it either doesn't heal or when it heals it's stronger. You're trying to get people who are responding to childhood pain through overachievement.
You need some reason to get out of bed in the morning that's not just "I have a job" or "I don't want to embarrass myself." You have to have a primal reason when things are really, really bad — when you dread checking your email and you simply do not want to know what the new bad news is because there's so much bad news you can't even cope. You need a very primal reason to get out of bed and continue to fight.
Having said that, some of the best founders in history have no trace of trauma. Zuckerberg grew up in a classic upper middle class New Jersey household, very close to his parents. Bill Gates — his father was a lion of the Seattle establishment. He went to all the best prep schools and Harvard and had a perfectly great childhood. People who knew both of those guys in their teenage years said these are driven guys. It's very core to their origin stories. You have to be open to the idea that some people are just born that way.
Jocko Willink's thing on extreme ownership: famous Navy SEAL commander, very accomplished guy. He says life just gets a lot simpler if you just assume everything is your own fault.
This LP didn't invest or this founder didn't take my money? It's my fault. It's not his fault. Clearly I didn't do a good enough job. Clearly I can do better. His argument is it gets you productively focused on improvement.
When I'm in my own head and I'm mad about somebody doing something I don't like, the number one stress-relieving thing I can do is say, that's my fault. It gives me ownership of the problem and something I can do. And it drains away resentment. I'm not resentful and angry at somebody else.
It also has the enormous advantage of becoming an intrinsic motivation over an extrinsic motivation. It's not a motivation to put points on a board, to achieve a certain net worth, to be in some league table. The problem with all the external markers of success is: are you going to get up in the morning when it really, really sucks? The extrinsic motivations don't do that. You need something intrinsic.
Founders have a very hard time ever finding anybody they can confide in. As a founder, you feel like if you admit that you have an issue, you're being a bad leader. You're showing a crack in the armor. If your people pick that up, they're going to lose confidence in you. If word gets around that you're second-guessing yourself, investors won't want to invest and candidates won't want to join.
If you're going to lead one of these things, you have to do it with such a brave face. The duck looks totally placid above water and is paddling furiously underwater.
Everybody individually has an inaccurate view of what everybody else is feeling. In practice, everybody's feeling very tense and nervous and anxious and fearful — but everybody's pretending they're not feeling that way. Everybody thinks everybody else is doing great. Everybody thinks they're the only one faking the smiles at the party.
It's incredibly important to have an internal psychological mechanism to deal with that and not have it overwhelm you.
Startups are like baking a cake. If you bake the cake and leave the sugar out, you can't pour sugar on the cake afterwards and fix your mistake. Sugar has to go in the cake.
That first two years is when you're baking the cake. When you're really figuring out what the formula is — what the product is, what the company is, what the business is, what the culture is, who the team is. Those decisions are absolutely fundamental. If you get those right as a founder, the payoff will go for decades. If you get those wrong, even if your company succeeds, you're going to live with those sins forever. They're going to extrapolate out.
The investor who's engaged with the company at that stage often becomes the key advisor to those founders for the rest of the company's life. You build this incredible emotional bond. You have complete context on why all the decisions got made and you remember how it first started. There's just no substitute for the early stage.
Don't ever do diamonds in the rough — only do diamonds. This is an investor ego thing: you say, I'm the investor that's going to find the thing nobody else knows about. All these other investors are herd animals, they're copycatting each other, and I'm the one who's going to be different.
By the way, Peter Thiel does that really well. Nobody else does that well. And you're probably not Peter Thiel.
The general pattern, 99 out of 100 times: if it's got merit to be investable for venture, there are a lot of really smart and hungry VCs out there working extremely hard to sniff these things out. It's their full-time job. It's really unusual to have the diamond in the rough. And usually if it is, it means a company that's offside in some fundamental way — it's in the wrong place or structured wrong. There's a reason why it's a diamond in the rough that actually ends up becoming a big problem.
I was very optimistic in 2020, 2021 that we had cracked the code on how to finally get away from the geographic constraints of Silicon Valley. I was blown away in 2020 that the banking system didn't collapse, the stock market didn't collapse, that you could just put all these companies online and they could keep running.
In the last two years, that process has whiplash reversed in an incredible way. The tech industry is more centralized in Silicon Valley than it has been in its entire existence. And it's AI very specifically.
Something very close to 100 percent of the quality companies are in California and specifically in a 20-mile radius of where I'm sitting right now. There are exceptions — Eleven Labs, Black Forest Labs, Mistral. But if you look at the value creation numbers, the talent base, the flow of where people are going — for better or for worse, it's in Northern California. This region is going to be more central in the next decade than it's been in the last 50 years.
There's a concept of Schumpeterian economics, Schumpeterian gains. When there's a new fundamental technology — electricity, steam power, computers, the Internet, smartphones, AI — something close to 99 percent of the economic value arrives in the market not as economic benefit to the companies that make the thing, but rather to the customers. The economists call this consumer surplus.
If you look at the total economic value creation downstream of the Internet, something like 99% accrued to the users of the Internet, not the companies that built it. Same with the smartphone. Apple and Google get 1% of the value. Everybody in the world who uses a smartphone to become more productive gets 99%.
I think AI is already that way. It might even be 99.9999% of the value of AI is going to accrue to the users, not the companies that make AI. The best AI in the world is the app you download on your iPhone. We're not that many years away from 5 billion people having AI running on their smartphones. That's such a hyper-democratization of technology.
This entire labor displacement thing is 100% incorrect. It's completely wrong. It's classic zero-sum economics. It's the lump of labor fallacy. It happens over and over and over again. It's always been wrong. It's going to be wrong again.
Classical economics says the actual economic function of technology, including AI, is to raise productivity — specifically to raise marginal productivity of the individual worker. You take a worker who wrote on pencil and paper and give them a typewriter, then a word processor, then a spreadsheet, and on and on. Social media manager is a job that didn't exist before the internet. Technology creates new jobs.
Every single one of those people now has AI at their fingertips. Anything they want to do in their life, their career, their profession — they're going to use AI to become a better version of themselves, to learn new skills, to become more productive, to not do the grunt work so they can do higher-value work.
The layoffs are very easy to explain. Interest rates went from zero to five percent at record speed. Every big company had to replan all their financials. And they all overhired during COVID — the hiring binge was wild. It was the combination of interest rates going to zero and a complete loss of discipline when companies went virtual and employees just became an icon on a screen.
Essentially every large company is overstaffed. We could debate how much — it's at least 25%. I think most large companies are overstaffed by 50%. I think a lot of them are overstaffed by 75%.
Now they all have the silver bullet excuse: "It's AI." I know this for a fact because AI, literally until December, was not actually good enough to do any of the jobs they're cutting. It just can't have been AI.
The old Don Valentine thing, which I do think is correct: more companies die from indigestion than from starvation. Overfunding is actually very dangerous to the operations of a company. This is the one piece of startup advice that I think is tremendously grounded in reality, for which everybody has many examples in the past. No founder ever listens to it. My track record of ever convincing any founder on this point is zero. But I will keep trying.
The problem with high valuations: God help you if you need to clear the bar next time and you can't. Every round sets a post, a threshold, a hurdle for being able to raise in the future. No new investor wants to do a down round in anybody else's company. If you put the investor hat on — I'm going to do a down round because I'm going to be the hero and save the company — everybody's just going to hate me. The employees, the other investors, the founders.
Having said that, on the venture side, I think every time we passed on a promising venture company over price, it's been a mistake.