20VC Why We Will See A Big Series B Crunch Why Proprietary Data Pools & AI Talent Will Be The New Limited Natural Resources Why Now Is The Closest Thing To A New Normal with Tim Chang, Managing Director @ Mayfield Fund

Summary Notes


Harry Stebbings hosts Tim Chang, the fitness-focused, musically-inclined, and body-hacking managing director at Mayfield Fund, on his venture capital-focused podcast. Chang, a successful investor with triumphs like Ad China and Playdom, previously worked at General Motors and Norwest Venture Partners and has been recognized on Forbes' Midas List. They discuss Chang's accidental venture into venture capital, the importance of seeing industry cycles, and the current investment climate with a focus on AI and machine learning startups. Chang emphasizes the significance of proprietary data and top-tier AI talent in distinguishing genuine AI ventures from the crowd. They also explore the challenges of establishing business models for AI startups and delve into body hacking, with Chang sharing his strategies for optimal health through diet and intermittent fasting. Stebbings also promotes sleep and productivity tools, Simba Sleep and Cirrus Insight, as personal enhancements for the new year.

Summary Notes

Introduction to Tim Chang

  • Harry Stebbings introduces Tim Chang as the managing director at Mayfield Fund.
  • Tim is recognized as the fittest man in Silicon Valley by other VCs and tech publications.
  • He is a musician in three bands and is known for his body hacking.
  • Tim has notable investments, including Ad China, Playdom, and Basis, which were acquired by Alibaba, Disney, and Intel respectively.
  • He has a background with General Motors and Norwest Venture Partners.
  • Tim has been named to Forbes Midas list of top 100 innovators for two consecutive years.
  • Rick Marini is thanked for introducing Tim to the show.

"So I'm delighted to welcome today's guest, Tim Chang, managing director at Mayfield Fund, to the show."

The quote is Harry Stebbings introducing the guest, Tim Chang, setting the stage for the discussion about Tim's background and his contributions to the venture capital industry.

Tim's Path into Venture Capital

  • Tim admits he did not know about venture capital before attending Stanford Business School.
  • He was attracted to the challenge of entering what was considered one of the hardest industries to break into.
  • Tim's background includes a master's degree in electrical engineering and experience with large technology companies and product marketing.
  • His time as an Entrepreneur in Residence (Eir) at Idealab helped meet the qualifications for venture capital firms.
  • He reflects on the changed qualifications for entering VC, noting a variety of backgrounds are now suitable.

"I fell into venture capital when I was at Stanford Business School and I didn't know about the industry before I got there."

Tim Chang explains how he discovered and entered the venture capital industry, highlighting his lack of prior knowledge and the allure of the challenge it presented.

Early Career Challenges

  • Tim started in venture capital in fall 2001, with his second week coinciding with 9/11.
  • The following three years were difficult, with many startups going out of business, which gave him a pessimistic view.
  • He acknowledges that starting in a down cycle may have been a disadvantage as it did not expose him to the potential success of up cycles.

"Well, I entered at the fall of 2001, so my second week at work was 9/11."

The quote denotes the challenging timing of Tim's entry into venture capital, which influenced his initial perspective on the industry.

Understanding Industry Cycles

  • Tim suggests that to be a good venture capitalist, one needs to experience both up and down cycles.
  • He admits that his early experiences led to a negative bias and a lack of understanding of the potential for massive success during positive market trends.
  • It took him several years to calibrate his expectations and understand the full spectrum of possibilities in venture capital.

"I believe to be a good venture capitalist, you probably need to see a couple of cycles both up and down, so you know the full spectrum of possibilities."

This quote conveys the importance of experiencing multiple market cycles to gain a balanced understanding of the venture capital industry.

Current State of the Venture Capital Industry

  • Tim describes the current state of the industry as a "new normal."
  • He notes that despite concerns, events like Brexit did not have the catastrophic impact that many feared.
  • Valuations have corrected, and the market environment is not as inflated as it previously was in terms of valuations based on gross merchandise volume (GMV).

"You know, the consensus is that right now might be the closest thing to a new normal."

Tim Chang provides his perspective on the venture capital industry's state at the time of the conversation, suggesting a stabilization in the market.## Valuation Sensitivity and Investment Timing

  • Investors are currently more focused on unit economics, LTVs (Lifetime Value), and payback ratios on CAC (Customer Acquisition Cost).
  • The current environment is considered a good time to invest due to more reasonable valuations and massive platform shifts in technology.
  • AI and machine learning are seen as the business plan disruptors for the next decade.

"People are much more sensitive to unit economics, LTVs, payback ratios on CAC, all these sorts of sensible ways to value a business and because of that, I actually think it's a pretty good time to invest."

This quote highlights the shift in investment valuation towards fundamental financial metrics, suggesting a more rational market that could be opportune for investors.

Investment Cadence Through Economic Cycles

  • Traditional investment wisdom suggests buying low and selling high.
  • Post-downturn periods can offer cheaper valuations and opportunities for significant returns.
  • Mainstream early-stage VC firms maintain a consistent investment pace but may invest more aggressively during economic slowdowns.

"My best deals were actually in the post 2008 downturn."

This quote reflects the speaker's experience with successful investments during economic downturns, emphasizing the potential for high returns when investing during such periods.

The Phenomenon of Down Rounds and Bridge Rounds

  • Down rounds and bridge rounds are becoming more common, potentially indicating a lack of product-market fit or a need for additional runway.
  • The traditional series A and B rounds now demand more substantial metrics and data, leading to a crunch for companies that previously relied on momentum.
  • Seed rounds are easy to secure, but may result in underfunding for the milestones required for a true series A round.

"Let's call a spade a spade and there is no real seed two or seed three. That is basically a bridge, right?"

This quote suggests that additional seed rounds are effectively bridge rounds, indicating that companies have not yet achieved the necessary product-market fit for a proper series A.

Series A and B Funding Crunch

  • The transition from series A to B funding is scrutinized for scalability and unit economics.
  • Investors are looking beyond gross merchandise volume (GMV) and focusing on metrics like payback on contribution margin and customer acquisition costs.
  • The ability to scale acquisition channels without topping out is critical.

"Are your acquisition channels for paid users? Is it scalable or does it start topping out after this amount of Facebook ads?"

The speaker is emphasizing the importance of sustainable and scalable user acquisition strategies for startups seeking series B funding.

Benchmark Awareness for Investors

  • Knowing the benchmarks for the next funding round is crucial for investors.
  • Understanding the business model and metrics reduces the risk of not being able to raise follow-on funding.
  • In well-known spaces with defined metrics, such as SaaS or e-commerce, it's essential to know the targets for a successful series B round.

"It is the best way to look at a deal, because really your risk is yes, ultimately, does it succeed or not?"

This quote underlines the importance for investors to understand the benchmarks that startups need to hit in order to secure the next round of funding and reduce investment risk.

Differentiating Machine Learning Startups

  • The proliferation of startups claiming to use machine learning requires careful evaluation.
  • The authenticity of a startup's machine learning capabilities can often be assessed by the credentials of its team.
  • Startups with teams lacking top-tier academic backgrounds in machine learning may be overstating their capabilities.

"The way you can suss that out is look at the PhD caliber backgrounds of the teams on their machine learning or AI staff."

This quote provides a practical approach to differentiating genuine machine learning startups from those that might be misrepresenting their capabilities.## AI Talent and Recruiting

  • World-class AI machine learning startups require name-brand AI rockstars.
  • AI specialists are approached like NBA draft picks, with similar salary amounts and recruiting efforts.
  • Proprietary data pools and AI talent are considered the new natural limited resources, akin to oil and gold.

"For true world class AI machine learning startups, they're going to need name brand AI rockstars."

This quote emphasizes the importance of having leading experts in AI for startups to succeed in the competitive tech industry.

"Proprietary data pools and AI talent are the new natural limited resources."

Here, the speaker likens the value and scarcity of AI talent and proprietary data to traditional valuable resources like oil and gold, highlighting their significance in the current era.

Access to Proprietary Data Pools

  • Startups without access to massive proprietary data sets may not improve their algorithms, risking being targeted for Aqua hires by tech giants.
  • Startups can gain a competitive edge by securing pilot deals with enterprises possessing vast data pools to train their algorithms.

"That's what my biggest fear is, that if startups can't train on massive proprietary data sets, then they'll never get that advantage on their algorithms."

The speaker expresses concern that startups need access to large data sets to enhance their AI algorithms, which is a significant challenge in the industry.

AI Applications in Various Industries

  • AI startups are focusing on assistance and AI assistance applications.
  • Broad horizontal applications include customer service, CRM, and ERP, which may be augmented or disrupted with machine learning.
  • Vertical applications include healthcare for reading radiology charts, financial services for insurance and lending, telecom for subscriber behavior, and retail.

"We've seen a wide variety of AI startups focusing on the assistance and AI assistance."

This quote points out the current trend and interest in AI startups that are concentrating on developing AI assistants and related services.

Business Models for AI Startups

  • AI startups need to either generate more revenue or save immense cost for existing business lines.
  • AI can augment workers' productivity, such as salespeople handling more accounts or improving their email communications.
  • SaaS-based pricing models are straightforward and can be leveraged for AI machine learning startups.

"Can you either generate more revenue for an existing line of business or save immense cost on a cost line?"

The speaker discusses the fundamental approach for AI startups to create value by increasing revenue or reducing costs in existing business lines.

Body Hacking and Quantified Self

  • Body hacking and the quantified self involve getting data signals about oneself and using machine learning to understand one's behavior.
  • The speaker admits to being more interested in achieving maximum output with minimal input, especially in a busy lifestyle.
  • Body hacking is largely about diet and what one consumes, rather than just exercise.

"So early on I was exploring body hacking, and my big learning on it was it's actually 70 80% about what you eat, not even the exercise part."

The speaker shares their personal experience with body hacking, emphasizing that diet plays a more significant role than exercise in health and fitness.

Managing Diet and Exercise with a Busy Schedule

  • The speaker suggests that with limited time, it is crucial to optimize one's food schedule for health benefits.
  • Even with a hectic schedule, finding ways to fit in exercise and maintain fitness is important for startup founders and VCs.

"I'm intrigued, kind of. And this is just me asking for advice here. What does the food schedule like? How do you optimize the food schedule for health benefit?"

The speaker inquires about how to manage a healthy diet effectively amidst a busy schedule, seeking advice that could be applicable to others in the fast-paced startup environment.## Diet and Fitness Strategy

  • Tim Chang discusses his approach to a healthier lifestyle, focusing on diet and exercise.
  • Emphasizes a ketogenic or paleo-like diet with lean protein and high-fiber vegetables.
  • Advises cutting out processed sugar, starchy and low-quality carbs like bread, pasta, and rice.
  • Suggests increasing healthy fat intake with sources like coconut oil and avocado.
  • Recommends intermittent fasting with an eating window of approximately 6 to 7 hours.
  • Advocates for high-intensity weight training 3-4 days a week to achieve a fit physique.

"The first is if you can switch your diet to more of a ketogenic or paleo like diet. So you're eating a lot of lean protein, a lot of high fiber, superfood type of vegetables like spinach or kale and broccoli, those sorts of things."

This quote outlines the dietary components of Tim's health regimen, focusing on protein and high-fiber vegetables.

"If you can do it, cut out all processed sugar, cut out carbs that are starchy and low quality carbs."

Tim advises eliminating processed sugars and starchy carbs to improve diet quality.

"Increase your healthy fat intake. These are coconut oils, avocado, et cetera."

Tim suggests incorporating healthy fats into the diet as part of his recommended nutritional strategy.

"And then if you can throw intermittent fasting into the schedule, you'll see immediate, wonderful results."

The quote highlights the incorporation of intermittent fasting into the diet plan for health benefits.

"If you then also add on top of that a high intensity 30 to 40 minutes weight training only schedule on, say, three, four days a week, you will pretty much achieve kind of the six pack Abercrombie fitch model look."

Tim describes the exercise component of his health strategy, emphasizing high-intensity weight training.

Alcohol Consumption

  • Tim Chang acknowledges the need to cut out or severely limit alcohol to improve health outcomes.
  • Recognizes that alcohol is often overlooked in health discussions but is a significant factor.

"Oh, that is one thing I should mention. If you're able to cut out alcohol or limit it severely, that'll do quite a bit."

The quote emphasizes the importance of reducing alcohol intake as part of a healthy lifestyle.

Personal Interests and Influences

  • Tim Chang shares his favorite book, blog, and mentor, providing insight into his personal interests and influences.
  • Mentions "Nexus" by Ramesnam as his favorite book due to its combination of various themes.
  • Expresses admiration for his mentor, Naval Ravikant, and highlights their deep discussions.
  • Shows preference for the "Wait But Why" blog for its writing quality.

"So your favorite book and why Nexus by Ramesnam? I think it's the next successor to the matrix."

This quote reveals Tim's favorite book and hints at its thematic similarities to "The Matrix."

"My friend of all, ravikant, founder of Angelist, has influenced me quite a bit."

Tim credits Naval Ravikant as a significant influence and mentor in his life.

"But wait, but why is of course, my favorite blog? I know that's a common answer by now, but Tim Urban is such a great writer."

Tim expresses his preference for the "Wait But Why" blog, praising the writing quality of Tim Urban.

Professional Challenges

  • Tim discusses the challenge of maintaining a beginner's mind in his professional work at Mayfield.
  • Highlights the tendency of the human brain to rely on shortcuts and biases.
  • Strives to question assumptions and approach situations with fresh perspectives.

"Trying to keep a beginner's mind. Our human brains are basically shortcut and bias machines."

The quote addresses the cognitive challenge of overcoming ingrained patterns and biases in professional decision-making.

Healthcare Perspectives

  • Tim Chang offers controversial opinions on America's healthcare issues.
  • Suggests treating processed sugar as a controlled substance and restricting dietary freedom based on BMI.
  • Acknowledges these ideas are unlikely to be accepted due to their restrictive nature.

"But the first is treating processed sugar like a scheduled narcotic substance, because let's admit, that's really what it is."

Tim compares processed sugar to narcotics, suggesting it should be regulated due to its health impact.

"The second would be if you could limit people's freedom to eat what they want based on their BMI."

The quote presents a contentious idea of restricting dietary choices based on an individual's BMI to address obesity.

Investment Decisions

  • Tim Chang discusses his most recent investment decision in Next Entertainment.
  • Explains his interest in the company's attempt to replicate China's live streaming success globally.
  • Suggests the potential for a reverse trend of innovation from China to the rest of the world.

"So this is a company called Next Entertainment. They are taking the China live streaming phenomena and trying to see if that playbook will apply to the rest of the world."

Tim shares the rationale behind his investment in Next Entertainment, focusing on the company's business strategy.

Acknowledgements and Endorsements

  • Harry Stebbings expresses gratitude to Tim Chang for the interview and to Rick Marini for the introduction.
  • Promotes personal goals for the new year, such as better sleep and productivity.
  • Endorses Simba Hybrid mattresses and Cirrus Insight as tools to achieve these goals.

"So much fun chatting with him and really was a highlight for me. Also, a huge hand to Rick Marini for making the intro, without which the episode would not have been possible."

Harry thanks Tim for the interview and Rick for facilitating it, acknowledging its significance.

"Mine is sleeping more, and that's where Simba hybrid comes in."

Harry shares his personal goal of more sleep and endorses Simba Hybrid mattresses as beneficial.

"Another target of mine for the new Year is also productivity, and there's no better for that than Cirrus Insight."

Harry promotes Cirrus Insight as a productivity tool, aligning with his new year's resolution.

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