In the latest episode of "20 minutes VC," host Harry Stebbings interviews Gary Tan, co-founder and managing partner at Initialized Capital, a prominent early-stage venture fund. Tan, a former partner at Y Combinator and co-founder of the YC-backed Posturus, shares insights from his extensive experience in venture capital and startup advising. The conversation delves into the nuances of building relationships with founders, the importance of supporting them through moments of doubt, and the strategies for transitioning from angel to VC investing. Tan highlights the significance of trust and human connections in venture capital, emphasizing that contrary to popular belief, there is no shortage of good ideas or capital; the challenge lies in connecting them effectively. Initialized Capital's approach to investing, ownership targets, and price sensitivity are also discussed, underscoring the importance of discipline and a supportive decision-making process within the firm.
"And starting today, I will be doing a day in the life of VC. So that should be fun and very interesting. But to our episode today and the biggest joy for me of doing the show is always building relationships and friendships with just incredible and inspiring people."
This quote explains Harry's enthusiasm for his podcast, particularly the aspect of connecting with remarkable individuals, and introduces a new segment that will provide insights into the life of a venture capitalist.
"Brex founders Enrique and Pedro built a payments business in Brazil, but found themselves rejected for a corporate card when they were in Y Combinator. They decided to build Brex with instant online sign up, no founder liability required, and limits ten to 20 times higher than standard cards."
This quote describes the origin of Brex, emphasizing its benefits for startups, and serves as an example of how entrepreneurs can solve problems they encounter by creating new solutions.
"What I realized is it's kind of a common story. A lot of people have no intention of ever actually coming into venture capital. And then as you discover how much capital there is actually in the world and how many problems there are out there, then venture sort of sucks you in."
Gary shares his personal experience of how he was drawn into venture capital, highlighting a common narrative among VCs who start in different fields but find their way into the industry due to its potential to address global challenges.
"And along the way, that was winter 2011. That was the batch that Yuri Milner and SV angel came along and said, we're going to give everyone $150,000 to every single company in that batch."
Gary recounts a pivotal moment in his career when significant capital was injected into Y Combinator startups, marking the beginning of his deeper involvement in venture capital.
"And the economics, the way people make decisions all of those things are all very tightly held because it's such a difficult journey to even be able to deploy that type of capital, be able to raise institutional capital is so rare that people hold it very, very tightly."
This quote highlights the guarded nature of venture capital, as the ability to raise and manage institutional funds is a challenging and rare achievement, influencing how decisions are made within the industry.
on the investment decision, and then five additional people who are operating partners who actually do also weigh in on the investment decision.
This quote explains the collaborative nature of Initialized Capital's investment decision-making process, highlighting the involvement of operating partners.
Well, it's really, to me, kind of a stage thing. The precede and seed level really still is about what should I be building?
Gary Tan emphasizes that the role of VCs at the precede and seed stages is to help founders determine what to build by providing guidance and leveraging experience.
And believing in people before they even truly believe in themselves, that's one of the most powerful things that an early investor can do for their founders.
Gary Tan describes the psychological support that early-stage investors can provide by instilling confidence in founders who may doubt themselves.
And that point you build this crazy network of thousands of people who you have a relationship with, who you've already helped, who they trust you and you trust them, you've seen them through adversity.
Gary Tan explains how building a network through consistent support of founders leads to trust and strong deal flow.
And so what that means is don't do a shotgun wedding. You really can't expect to build a partnership with your series a board member more or less in an abbreviated process of a week or two.
Gary Tan advises against rushing into fundraising and emphasizes the importance of taking the time to build a meaningful relationship with potential investors.
"Pre product market fit is often about just trying to start a fire, period... Post product market fit is, hey, we've actually built this fire." "One of the most common things we see in SaaS these days is that sometimes a company that gets started selling to SMB realizes they need to go upmarket to mid market and enterprise."
The quotes explain the difference between the stages of a startup's development, with the pre-product market fit stage focused on beginning and surviving initial setbacks, and the post-product market fit stage on growth and strategic adjustments.
"We got to 125,000,000... And that meant that we needed to get our ownership targets to five to 10%... We're actually up to a $225,000,000 fund with basically 15% ownership targets."
The quote details the progression of fund sizes and the corresponding need for larger ownership percentages, illustrating the challenges of scaling venture capital investments.
"Price is actually about trying to match that correct valuation to the stage of that company... More money at a higher valuation sometimes can actually get in the way of that adventure to be able to get to the next stage."
The quote emphasizes the importance of appropriate valuation for sustainable growth and the potential pitfalls of overvaluation.
"It's not one partner setting the price. It's us as a group through a voting process... We want to give people as much agency as possible in getting into a deal, but we don't want to do things that, frankly, are imprudent."
This quote conveys the collaborative nature of Initialized Capital's investment decisions and the balance between individual agency and collective prudence.
"At initialized, all the gps get silver bullets, not unlimited ones, but that's sort of the release valve. And then up the middle, we basically require too strong yes in that process."
The quote describes the internal mechanisms at Initialized Capital that enable both individual conviction and collective agreement in investment decisions.
"At this point, we really want to reduce the effect of attribution. So I don't want people to basically act as if they have to protect their deal at all cost. And the vote trading and things like that that happen at other partnerships I would be desperate to avoid at initialize."
The quote highlights Gary Tan's desire to steer clear of the negative practices associated with attribution in venture capital, such as protecting deals at all costs or engaging in vote trading, which can be detrimental to the firm's culture and decision-making process.
"Zero to One is probably the most interesting book that frankly just crystallizes a lot of the super contrarian thinking that nobody talks about around how to deploy capital and even at a deeper level, what's important in society."
This quote explains why Gary Tan values "Zero to One" so highly—it offers unique perspectives on capital deployment and societal importance that are not commonly discussed, providing valuable insights for venture capitalists and entrepreneurs.
"Palantir at the end of the day was one of the most powerful cults I ever came into contact with. And cult in a good way, in that every startup that I've ever worked with that worked very well, had that sort of atmosphere of, this is something we believe that nobody else believes."
The quote reflects on the strong, mission-driven culture at Palantir, which Gary Tan sees as a hallmark of successful startups—a deep, shared belief in a unique mission that sets them apart from others.
"Satish Jamaraj at Redpoint was actually our first board member for Posturis. And so my favorite things about him was that he's so technical."
Gary Tan's quote underscores the value he places on having technically knowledgeable board members like Satish Dharmaraj, who can deeply understand and support the startups they are involved with.
"I think there's just infinite ideas, infinite people and infinite capital. And if we can connect all of those things, then we really will live in a better world."
This quote encapsulates Gary Tan's rebuttal to the common misconception in VC that there is a scarcity of good deals and ideas. He believes in the abundance of ideas, talent, and capital, and the potential for positive change when these elements are brought together.
"We just announced a really big round for standard cognition. And so they are cashierless checkout."
The quote reveals Gary Tan's enthusiasm for Initialized's investment in Standard Cognition, a company that is innovating in the retail space with cashierless checkout technology, which he believes has the potential to transform the industry.