20VC Altimeter's Brad Gerstner on Why Supercycles and the Powerlaw is the Most Important Thing In Investing, Why Portfolio Diversification is the Opposite of Risk Mitigation and The #1 Question Brad Asks All New Recruits

In this episode of "20 VC," host Harry Stebbings interviews Brad Gerstner, founder and CEO of Altimeter, a technology investment firm. Brad shares his journey from a childhood marked by financial hardship to becoming a successful investor and entrepreneur, having been involved in over 100 IPOs and co-founding three companies. He discusses the importance of focusing on super cycles rather than individual markets, the power law in investing, and how Altimeter's flat, essentialist organizational structure contributes to its success. Brad also emphasizes the significance of living a life of purpose and impact, both personally and professionally, and how he instills values of humility and purpose in his children. Throughout the conversation, Brad underlines the importance of intellectual honesty, thought leadership, and being a true partner to entrepreneurs.

• Brad Gerstner is the founder and CEO of Altimeter, a lifecycle technology investment firm.
• Altimeter manages both public and private portfolios and has participated in over 100 IPOs.
• Brad's notable deals include Snowflake, Mongo, Byte Dance, Gusto, Unity, Okta, and modern treasury.
• Prior to Altimeter, Brad co-founded three businesses sold to IAC, Google, and Marchex, was a founding principal at General Catalyst, a securities lawyer, Deputy Secretary of State of Indiana, and a pilot.

"Brad has personally participated in more than 100 IPOs as a sponsor, anchor and investor, and some of Brad's notable deals include Snowflake, Mongo, Byte Dance, Gusto, Unity, Okta, modern treasury and many more."

This quote highlights Brad Gerstner's extensive experience in the technology investment space, emphasizing his successful track record with high-profile deals and IPOs.

"Prior to founding Altimeter, check this out for a career diversity. Brad was the three-time co-founder where he sold all three businesses to IAC, Google and Marchex. He was a founding principal at General Catalyst."

The quote outlines Brad's diverse career background, illustrating his entrepreneurial success and foundational role at General Catalyst, which adds to his credibility as an investor.

• Brad's interest in investing began in childhood, influenced by his father's entrepreneurial struggles.
• He was inspired by Warren Buffett and Charlie Munger during his youth, leading to an early fascination with markets and stocks.
• Brad's journey included law school, politics, and business school, where he became convinced of the potential for value creation in technology.
• The founding of Altimeter was driven by Brad's conviction that technology would lead to significant opportunities and his desire to be part of Silicon Valley's investment landscape.

"I had just seen the Netscape browser. And I gathered my friends around. I said, this is going to change everything."

This quote captures the moment Brad realized the transformative potential of the internet, which was a pivotal influence on his decision to found Altimeter.

"In business school, 1999, 2000. Internet is going crazy. I feel like I've missed it. I'm too late. But I was hell bent on getting to Silicon Valley."

Brad expresses his urgency to be part of the tech boom, reflecting his foresight and ambition, which ultimately led to the creation of Altimeter.

• The power law indicates that a small number of firms and deals generate the majority of profits in the investment industry.
• Brad emphasizes the importance of organizing one's investment strategy around the power law concept.
• Altimeter focuses on identifying and investing in market leaders within significant tech super cycles, rather than following trends or waiting for opportunities to present themselves.

"We all know that in investing, returns don't follow a normal distribution. We know it's 80, 2090, ten."

The quote explains the disproportionate nature of investment returns, underscoring the need for a strategic approach aligned with the power law.

"It probably takes as much effort, emotional and intellectual to start a restaurant as it does to start Google."

Brad uses this analogy to stress the importance of focusing on ventures with the potential for massive impact and returns, which is central to Altimeter's investment philosophy.

• Brad distinguishes between market size (TAM) and super cycles, with the latter being a primary focus for investment decisions.
• He identifies three super cycles in his career: the rise of the internet, the mobile revolution, and the migration of data and compute to the cloud.
• Altimeter's investment strategy involves recognizing these super cycles and finding companies poised to become leaders within them, rather than being swayed by current market sizes.

"We focus on super cycles and power law."

Brad succinctly states Altimeter's investment focus, highlighting the firm's strategy of aligning with overarching technological trends rather than specific market segments.

"It wasn't that we had a strong conviction on the data warehouse market. What we had conviction in was that all the world's storage and compute was going to move into the cloud."

This quote illustrates how Altimeter's investment in Snowflake was driven by the broader trend of cloud migration rather than the specifics of the data warehouse market, exemplifying their approach to super cycles.

• Brad disagrees with the notion of "spraying and praying" in venture capital, advocating for deliberate, well-researched investments.
• He believes there are not hundreds of big outcomes, and a diversified portfolio across too many investments will yield average returns.
• Altimeter seeks pattern recognition in companies that align with super cycles and become market leaders, rather than following momentum or trends.

"First, there are not hundreds of big outcomes. And so if you have a diversified portfolio across hundreds of investments, you will have an index like return."

Brad challenges the strategy of over-diversification in VC, emphasizing the need for focus to achieve exceptional returns.

"I look for pattern recognition around companies that become the market leaders in super cycles."

The quote underlines Brad's strategy of identifying and investing in companies that have the potential to dominate during significant technological shifts.

• Brad and Altimeter emphasize a culture of continuous learning and truth-telling to avoid falling prey to confirmation bias.
• They engage in rigorous debate and invite external opinions to challenge their investment theses.
• Brad believes in being honest with founders about the state of their companies and the investment, reflecting the importance of transparency in venture capital relationships.

"Drinking the Kool aid is a recipe for disaster. But if you really have a culture of continuous learning, because there are plenty of things that we invested in where the facts change, or where we were just wrong."

Brad acknowledges the risks of confirmation bias and the necessity of adapting to new information and correcting course when necessary.

"Being willing to tell the truth, as I would have wanted as a founder."

This quote emphasizes the value Brad places on honesty and direct communication with founders, which is integral to Altimeter's investment approach and founder relationships.

• Businesses must adapt to radical changes in the market, product relevance, and performance.
• Market feedback can necessitate a pivot in business strategy, which requires new underwriting and reassessment of support.

"The facts in the world radically changed. Their products relevance in the world changed, their performance changed. And so you have to accept that market feedback."

The quote emphasizes the need for businesses to acknowledge and react to significant changes in the market and their product's performance, which may lead to a pivot in strategy.

• The challenge of deciding whether to invest at a new, higher price in follow-on rounds.
• Price sensitivity is crucial in managing reserves and capital allocation.

"My biggest mistakes have not been not doing companies... but it's been... They came to me with the new price for the new round, and I went, oh my God, no way. I'm not doubling down in this price."

Brad Gerstner reflects on his past investment decisions, highlighting that his biggest mistakes involved not investing further due to a significant increase in valuation in subsequent funding rounds.

• Investors must base their decisions on thorough underwriting and research.
• Investing at a price higher than one's target exit price is considered momentum investing and lacks discipline.

"If somebody comes to me and they want me to invest in a company that is at a price higher than I in my own underwriting and all my research... then I'm not investing, that is just momentum."

Harry Stebbings emphasizes the importance of sticking to one's underwriting and not getting swayed by market momentum when making investment decisions.

• Interest rates significantly influence valuations, similar to gravity's effect on an apple.
• The rate of change of interest rates is particularly impactful on long-duration, high-growth assets.
• Investors need to incorporate a margin of safety and rational exit multiples in their valuations.

"Interest rates are to valuations what gravity is to the apple."

Harry Stebbings draws an analogy between the fundamental impact of interest rates on valuations and gravity on physical objects, highlighting the importance for investors to consider interest rates in their valuation models.

• Different investment philosophies exist on whether to invest continuously or wait for market stability.
• Investors should adjust their investment aperture based on market conditions and valuations.

"The best investors invest continuously. And you're always investing, and you're always in market."

Brad Gerstner discusses the differing opinions on investment strategy, with some advocating for continuous investment and others suggesting waiting for more stable valuations.

• Deciding when to distribute returns to LPs is a critical decision for fund managers.
• The decision to distribute is guided by whether venture returns are still achievable over a reasonable timeframe.

"If we don't see a three to five x over the course of the next three to five years in that deal, then we're obliged to distribute to our LPs."

Harry Stebbings discusses the criteria for distributing returns to Limited Partners (LPs), which is based on the potential for achieving target returns within a set period.

• Fund managers must decide when and how to adjust valuations in their investment portfolios.
• The approach to marking down books should be clear and communicated with LPs.

"We don't spend a lot of time marking down our books when the Nasdaq's going down."

Brad Gerstner explains his firm's policy on not frequently adjusting valuations based on market fluctuations, emphasizing the importance of clear communication with LPs about valuation approaches.

• Fund managers must balance fee collection with maximizing investment multiples.
• The economic alignment with LPs is crucial for fund size decisions and investment strategies.

"The return to me of an incremental turn on the multiple is a lot more important... than return to me from fee, from management fee."

Brad Gerstner discusses the importance of aligning economic incentives with LPs, prioritizing investment returns over management fee collection.

• Some LPs may prefer to invest in larger, brand-name funds due to perceived safety and lack of direct incentive to seek higher multiples.
• This preference can lead to misalignment with venture capital's high-multiple return potential.

"Why would I risk it on these two people when I could do Andreessen?"

Harry Stebbings expresses concern over LPs choosing larger, more established funds over potentially higher-return, smaller funds due to a lack of incentive to take risks.

• The venture capital industry is transitioning from being highly fragmented to operating at a more industrial scale.
• Returns in the industry are expected to compress.
• Despite the changes, optimism remains due to the power-law nature of the industry.
• Success in venture capital is not about the quantity of deals but the quality of partnerships and investments with top founders.

"It doesn't matter that you're in 200 deals. Hell, you don't want to be in 200 deals. The question is, is the best founder, is Mike Spiser and Bob Muglia going to do that deal with ultimate?"

The quote emphasizes the importance of quality over quantity in venture capital investments, highlighting that successful partnerships with leading founders are more valuable than a high number of deals.

• Portfolio construction in venture capital can vary between a diversified approach and a concentrated strategy.
• Brad Gerstner advocates for a concentrated portfolio, aligning with Warren Buffett's philosophy that diversification can preserve but not create wealth.
• Concentration is seen as a way to generate Alpha by investing heavily in high-conviction opportunities.
• The concept of 'slugging percentage' is used to describe the importance of making significant gains on successful investments.

"What does that look like in your mind in terms of the optimal concentration?"

This question introduces the topic of portfolio concentration, prompting a discussion on the optimal level of investment focus for generating high returns.

"I want maximum dollars behind our best ideas. Why the hell would I put an incremental dollar in my 10th best idea or my 15th best idea when I can put more money in my best idea?"

This quote illustrates the speaker's belief in allocating more resources to the best investment ideas rather than spreading capital too thinly across many lesser opportunities.

• Taking calculated risks is crucial for venture capital success.
• Preparing mentally for the stress and potential failure associated with high-stakes investments is vital.
• Due diligence, conviction, and a thorough understanding of the investment are necessary before committing significant capital.
• The perception of risk from the outside can differ greatly from the perspective of an investor who has done their homework.

"You never go over a structure like a cliff without first inspecting the other side."

This analogy describes the meticulous approach to risk-taking, emphasizing the importance of understanding and analyzing an investment before committing to it.

"What the outside world oftentimes perceives as tremendous amount of risk to the person who's done the work, prepared themselves... it feels much less risky."

The quote explains that thorough preparation and research can significantly reduce the perceived risk of an investment for the investor, even if outsiders view it as highly risky.

• The cultural North Star for Brad Gerstner's firm is essentialism, which is about doing less but better.
• Overextension and participation in trends like SPACs can lead to mistakes, especially when market conditions change rapidly.
• The SPAC investment in Grab is cited as a mistake due to timing and market shifts.
• The lesson from this experience is the importance of adhering to essentialism and being selective in commitments.

"Our cultural North Star at ultimater is essentialism, right? It's kind of an operating roadmap for me in life."

This quote introduces the concept of essentialism as a guiding principle for both personal and professional decision-making, suggesting a focus on what truly matters.

"The biggest mistake we made with Grab is we committed to that deal in April of last year... And so it was like an IPO right on the doorstep of the single biggest change in interest rates that we've had in 30 years."

The quote reflects on a specific investment mistake, highlighting the challenges of timing in the market and the impact of external economic factors on investment outcomes.

• Brad Gerstner advises young investors to be prepared for market downturns and to have a genuine curiosity and passion for understanding the world.
• He emphasizes the importance of having a unique edge or 'Alpha' to succeed in the venture capital industry.
• The ability to generate income and demonstrate entrepreneurial spirit is critical when evaluating potential hires.
• The conversation touches on the importance of having a clear strategy and building an organization that reflects that strategy.

"If you don't have a stomach for it, find a different thing to do. This was never meant to be a get rich quick scheme."

This advice to young investors highlights the need for resilience and a long-term perspective in the face of market volatility and challenges.

"Tell me how you've made money. You know the number of people went to Harvard Business School and worked at Goldman Sachs who can't answer that question."

The quote underscores the importance of practical experience in making money as a critical factor in evaluating potential talent for the venture capital industry.

• Brad Gerstner discusses his approach to hiring and the importance of a flat organizational structure.
• He believes in recruiting individuals who can bring unique value ('Alpha') to the firm.
• Loyalty and the potential for employees to eventually pursue their ventures are not seen as negative but as indicative of the firm's ability to attract strong talent.
• The discussion also touches on the pitfalls of hiring based on prestigious backgrounds ('logos') without considering individual capabilities and fit with the firm's culture.

"We have an incredibly flat organization. We have 13 or 14 analysts. We all call ourselves analysts."

The quote describes the organizational philosophy of Brad Gerstner's firm, emphasizing a flat structure and a focus on analytical work.

"I suppose if you want to go raise $100 billion, then fine, do like Softbank did and hire 50 people over a course of a year. We saw how that turned out."

This quote criticizes the approach of rapidly expanding a team to manage large funds, suggesting that a smaller, more focused team can be more effective.

• The conversation concludes with reflections on the relationship to money and how it has evolved over time.
• Despite achieving financial success, Brad Gerstner describes living a life that differs from what he might have envisioned earlier, suggesting a more grounded and perhaps less materialistic approach.

"If you would have told me I was going to have what I have, let's say, when I was 20, and then you would have said, describe to me the house you're going to live, in, the car you're going to drive, the life that you're going to live. I would have described to you a life totally different than the life I'm living."

This introspective quote reveals a personal perspective on wealth and the contrast between expectations and reality, suggesting a complex and evolving relationship with money.

• Brad Gerstner set a personal goal to make a million dollars by the age of 30.
• The financial struggles of his family, particularly his father's bankruptcy, served as a "dragon" he felt compelled to slay.
• Brad credits Fialco and Cutler for giving him an opportunity that led to success with his first company, NLG.
• Following NLG, Brad, Bajel (now at Lightspeed), and Samaya co-founded Open List, which they later sold.
• After achieving financial success, Brad shifted his priorities to raising his sons with humility and an understanding of the value of hard work.

"er, 6th grade, I was like, I have to make a million dollars by the time I'm 30. It was a dragon in my life because it destroyed our lives. When my dad went broke, destroyed his health, his marriage. So when you grow up in that, that is a real dragon. That's a beast you have to slay. Fortunately, because Fialco and Cutler gave me a shot, I was able with NLG to slay that beast right at 30."

This quote explains Brad Gerstner's childhood motivation to achieve financial success as a way to overcome the hardships faced by his family.

• Brad Gerstner believes that parenting is not just about what you say to your children but also about the life you live and how you treat others.
• He lives in a modest home to teach his children about humility and the value of hard work.
• Brad emphasizes the importance of actions over words in imparting values to his children.

"It is the most difficult. And I've discussed this with lots and lots of people on the topic, and here's what I've concluded from wisdom, from, whether it's from buffett to reader, is it's not what you say to your kids. Like, you can say, oh, be humble. And then you go into your 18,000 square foot home. It's not what you say. It's what you do."

Brad Gerstner discusses the challenges of teaching his children humility and the importance of living a life that exemplifies the values he wants to instill in them.

• Brad Gerstner acknowledges the difficulty of ego management, especially when surrounded by success and praise.
• He stresses the importance of surrounding oneself with honest people who are not afraid to speak the truth.
• Brad values the honest feedback he receives from his family and close friends, which helps him stay grounded.

"First, the number of people in life who surround themselves with sycophantic others who are their yes, people, tell them what they want to hear. Afraid of speaking truth. It's almost everybody at a certain level."

This quote reflects Brad Gerstner's perspective on the prevalence of yes-men in the lives of successful individuals and the importance of having people who will speak the truth.

• Brad Gerstner and his family participate in service trips with the organization Give Power.
• He believes in using vacations as an opportunity for family service projects, which has become a cherished tradition for his children.
• Brad emphasizes the importance of integrating service into one's life to create lasting values and impact.

"We do a service, a family service trip every year with give power, an incredible organization that uses solar microgrids to light up schools and health clinics around the world."

Brad Gerstner shares his commitment to service and the impact it has on his family, demonstrating the value he places on contributing to the greater good.

• Brad Gerstner discusses the changes in relationships that come with wealth, such as people wanting something from you.
• He believes in the importance of maintaining genuine relationships and surrounding oneself with people who are not looking for material gain.
• Brad values the authenticity of his friendships and the simplicity of his lifestyle.

"The relationships you have with family and with friends. The perception that they have of you changes. I find. I always find they want something from you now."

This quote addresses the complexities of relationships when wealth is involved and the effort required to retain purity in those relationships.

• Brad Gerstner's experiences with loss have influenced his philosophy on life and the urgency to live intentionally.
• He believes in making the most of life, loving deeply, and having no regrets.
• Brad is inspired by figures like Steve Jobs and Alexander Hamilton, who lived with a sense of urgency.

"We are all just passing through like this. Life is really, really short. And as humans, we're programmed not to think about mortality. It's actually a survival instinct."

Brad Gerstner reflects on the brevity of life and the importance of living with intentionality, inspired by his personal experiences with loss.

• Brad Gerstner discusses the role of SPACs (Special Purpose Acquisition Companies) in the market.
• He believes SPACs have driven innovation in IPOs and direct listings, and their existence is not necessary but has been beneficial.
• Brad's focus is on ensuring that entrepreneurs have a fair path to the public markets.

"Listen, I don't think spacs need to exist in the world. They're a mechanism by which companies come public."

This quote summarizes Brad Gerstner's view on SPACs as a mechanism for companies to go public and their impact on the market.

• Brad Gerstner expresses his fear of failing as a father and not instilling the right values in his children.
• He also fears having regrets at the end of his life and not using his resources to make a positive impact.
• Brad is committed to living intentionally and making a difference with his platform and network.

"Number one, I'm terrified that I will do a bad job as a dad and that my kids will grow up being entitled and not living to their full potential."

Brad Gerstner shares his personal insecurities about parenting and the legacy he wishes to leave, emphasizing the importance of living a life with purpose and impact.