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Joe Lonsdale (cofounder of Palantir, Addepar and Partner of 8VC) provides a high-level overview of VC.
Key Takeaways
- Venture capital is investment into private companies, often at the earlier stages of their development. These companies tend to be disruptors either within existing industries or creating entirely new industries.
- Investments occur at different stages - pre-seed/seed, Series A and Series B+. As companies go for later funding rounds, risk typically decreases as the product and team becomes more established or as the company begins generating revenue.
- Series A has historically been the highest returning, but also the riskiest private asset class. Very little is known about these companies as they have no track record, so investors rely on the strength of the team, the idea and the market.
- Venture investors often do follow-on investments into later rounds of the companies they really believe in. Participating in the Series A gives them access to future rounds.
Transcript
I'm Joe Lonsdale. I'm an entrepreneur and investor. I founded several companies, including Palantir, Addapar, Open Gov, Affinity, Resilience Bio. And I run a firm called 8VC. What venture capital is, is it's taking money to help people create new businesses. And it's taking upside in these new businesses. They can be betting on how logistics should work how the single finance should work. They can be betting on how some new cryptocurrency things should work. There's basically infinite parts of the economy. You could evolve, and you can make better. But venture capital is an attempt to try a new, better way of doing things to innovate and to back these people and doing it. The way it generally works is there's a seed round, where might give them only a few million dollars to start and own a piece of their company. And that's really risky. It's really early. It's more likely to go to zero. But if you're going to own a big piece of the company for a lot less. Venture capital, as traditionally practiced at the kind of high end of the top firms, is what we call Series A and Series B investing. So, Series and Series B investing.
Series A is the first big institutional round. So a company might raise two or $3 million to get going, get the team together, start taking early progress show that their idea is working, or at least seems to start to be working. And that's when they go out for a Series A, and traditionally Series A are the highest return area in venture. They're also the hardest to access for outsiders because you can't really measure the metrics of a company in Series A. You can only see the very early progress. So what you're really measuring is an art. You're measuring how strong is the team? How exciting is the market? How much is the technology actually possible? How much are they aligned with where the industry is going to be in the next five years? These are all really fun, interesting questions that a venture capital firm has to answer. And a venture capital firm will go and write a Series A check. It'll usually be between five and $25 million. They'll take a piece of the company for writing that check. So what that means is if they put $10 million into a company, they might value the company at $30 million after the round. So that means for $10 million, they bought a third of the company. And so now, of course, if the company succeeds, if it becomes a multibillion-dollar company, then they're going to have a third of that. And, of course, they won't have a full third of that because there will be other rounds where they get slightly diluted. But they're going to have a huge multiple on their money if it works.
Series A investing tends to be very risky. The reason it's not as risky as people think is if you bet on the very best teams. Lots of other companies might want to acquire those teams. A lot of times, you're building a new company, you're stealing the best people to help you build something. And then, if it maybe only sort of works, those people are still really valuable. So another company might acquire. This company is called an acqui-hire, and you might be able to at least get your money back as the investor; it's pretty common. But Series A is kind of the most exciting part of venture for that reason to me because it's kind of just starting to work, and you map it out.
Venture capital also, of course, has in series B, series C, series D, you know, half a billion dollars is a pretty standard-sized venture capital firm. And they'll invest maybe in 30 companies or so without money. And it's very common to put some money into seed, and A and then for their very best companies they might double down and put a lot more in the B and C as well as they follow it along and help the company succeed.
And a good returning fund will return 3x to the investors, usually lasts about ten years because these companies take a long time. So you might get some exits in the first three or four or five years. But some of the companies, the best companies, they might keep growing really fast for ten years. That's how you get big winners, but it takes that ten years to get the returns back.
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