Kyle Harrison
← All podcasts
podcast October 21, 2022

20VC: Why 75% of Active Investors Will Disappear

20VC · hosted by Harry Stebbings

Watch on YouTube ↗

Summary

Kyle’s October 2022 appearance on 20VC with Harry Stebbings, recorded a few months into the post-ZIRP correction and built around a line from Kyle’s email to Harry: “differentiation is going to kill the long tail of so-so venture firms.” The title comes from Josh Wolfe’s February 2022 prediction that 50–75% of active private-market investors would disappear within a few years. Harry runs it as a free-wheeling conversation with a quick-fire at both ends.

The circuitous road in. Kyle went to school for filmmaking (his “magnum opus,” still on YouTube, is Pokémon Love Song), paid for college shooting weddings and commercials, and ended up farming jobs out to other creatives for a 2% cut — “a creative marketplace long before it was cool.” He called it “a project” the whole time because he didn’t know it was a startup. After selling it, a friend told him the part he loved (being the resource who knocks down walls for passionate builders) was “sort of what venture capitalists do.” That led to Kickstart Seed Fund in Utah, then the Bay Area and TCV, Coatue and Index Ventures, and finally Contrary, “where I decided to hang my hat and put my fingerprints on something.”

Three firms, three lessons. TCV was private-equity-style investing, “diamonds in the rough,” and the source of Kyle’s we do the work attitude: never “let me know how I can be helpful,” but “I did this and that — is that your top priority? If not, redirect me.” Coatue was the hedge fund, and Thomas Laffont’s idea of TAM Arbitrage: if you understand a market better than anyone and it is bigger than anyone credits, you can pay higher prices, burn harder, grow faster and experiment more. The Buffett-ism inverted: a great founder in a crappy market leaves the market crappy. (Harry: markets matter more than founders, provided the founder clears a bar.) Index Ventures was “graduate school in venture capital,” and the one thing he took to Contrary: venture is meant to be studied. Post-mortems, decision processes, incentive design. It is why he writes about the art and science of venture, and it is his answer to “nobody knows what they’re doing”: everyone acts deliberately, and the line is just how people “soften the blow of being wrong.” The people who get exceptional are the ones who study their own craft.

The so-so venture firm. People increasingly care about the holistic character of the institutions they work with, and differentiation is “how capable is somebody, externally, of articulating you as a firm?” Harry’s counter is that firm power is being disarmed and migrating to partners (Logan Bartlett as the example), which Kyle takes as a restatement of The Unbundling of Venture Capital: monolithic brands (Kleiner, Sequoia) → fiefdoms (Andreessen’s crypto arm under Chris Dixon, Sequoia China) → renegades, who need not run a radical model, only define themselves differently. Kyle’s three buckets for “so-so”: performance (Doug Leone’s “number one performance, number two teamwork, and without number one nothing else matters”; firms that couldn’t return enough capital even in the bull market to justify the carry they paid out), culture (well-regarded from outside, “eating each other” inside), and brand, including the negative side: the correction surfaced firms holding up rounds and demanding provisions within months, and that gets out too. His summary line: “probably 80-plus percent of venture funds are not great, we just don’t always know which ones they are.” Harry’s alternative inputs are discovery (Y Combinator, Sequoia’s scouts and Arc), picking-and-winning (Benchmark’s circling of a founder), and helping.

Why zombie firms survive, and why the rate of death rises anyway. Harry’s objection: a so-so firm that returned DPI on a Lyft IPO keeps raising for another decade. Kyle agrees, then argues from The Death of a Venture Fund, written after Roelof Botha described Sequoia’s pre-mortem (“imagine we presided over the decline of Sequoia; what did we do wrong?”). Venture “has a lot of main-character energy” but is under a century old, and it is moving to internet time: what took decades in the 1970s may take a decade now, and the pace will only increase. Harry’s structural read is that LPs are salaried, loyal and reflexive (a 3x fund gets re-upped even if the firm is spent), and that getting into Andreessen is joyous because nobody gets fired for a 1.6x there. Kyle’s only guess at what changes it: the sources of wealth turn over, and the family-office world he has stumbled into on Twitter already wants to allocate differently.

If Kyle ran a family office. Disciplined diversification (many great businesses should never raise venture), then allocate to managers who can identify their unique funnel, and above all to whoever has access to pockets of high-quality people and is building deep, long-term relationships with them, engaging at multiple points in a person’s life rather than only at top-of-funnel.

Deep relationships, community, and brand. The unbundling thesis grew out of David Perell’s Naked Brands: trust migrating from institutions to people you can empathize with, less Coca-Cola and more LeBron. Every investor is answering Clayton Christensen’s jobs-to-be-done question (“what job are you hiring me for?”), and the deep relationships will come from sincerely articulating your vibe online. Y Combinator has built a generational community, but even YC is a batch you were in and then out of; nobody yet does ongoing relevance across a founder’s life. Firms brand themselves badly because the center of gravity moved to individuals and their marketing didn’t follow, which is also why anyone with a sizable Twitter following gets a job offer from a16z. Community attempts mostly fail (a16z’s CRO Slack channels) because community is an afterthought meant to produce deal flow, which is also why scout networks will dilute. Contrary had a community of ~100 future founders before it had a fund, and treats community members and portfolio founders as the same people at different phases. On YC shrinking batches and bringing back Gary Tan: the compounding effect of YC “is not going anywhere.”

The Blackstone of Innovation. Credited to a riff with Gaby Goldberg and to Stephen Schwarzman’s memoir (What It Takes): Blackstone became a holding company for asset classes ($800B AUM) by building the 80% of a business that is the same everywhere (an “AWS of raising and deploying capital”) and plugging in the person who is the 20% secret sauce. The closest analogue in venture is a16z (gaming, crypto, bio as infrastructure plays; giving Adam Neumann money for round two); Tiger tried without the 20%. Why it worries him: capital allocation and portfolio construction are macro (“we’ve got 15% allocated to fintech, I’d like more”), while company building is micro: people, lives, families, customers, jobs. When the abstraction gets far enough from company building, a failure is “a blip on the macro” but “everything” on the micro. Harry adds two disciplines that are hard to keep: find amazing people and move with them, and earn the right to each new product instead of launching five in two years.

Excess capital. It is easier to raise $2B than $200M because pensions need to place $100M+ and have few homes for it. Kyle’s read: venture ran on an arbitrage that the internet multiplied, people noticed how big outcomes could be, and capital followed. His worry is not the math LPs are doing but the absence of guardrails: “enough money can hide a multitude of sins” (bad product, bad go-to-market, bad unit economics), and the capital goes to whoever will take it for exposure, muddying the water for everyone. The correction tapered it but it is not going away.

What changed after the correction. (1) A suspension of criticism: after years of “rampant intellectual dishonesty,” Kyle expected more mea culpa and saw people rushing to the next thing. (2) Founders more thoughtful about which story to tell (unit economics, market size, product-market fit), not just the biggest one. (3) Pricing chaos: “chickens with their heads cut off,” no acceptance of down rounds at Series A–C. Hence What’s In a Valuation, an almost-throwaway piece that became one of his most popular: the back-of-the-envelope venture math (valuation → revenue → 5–7 years of dilution → public-market multiples → return) that founders doing multi-billion rounds on sub-$20M revenue had never run, “a reality that’s going to punch a lot of people in the face.”

His own mea culpa. He invested too fast and lost price sensitivity, and the bigger one is price: models built to justify valuations by scaling a company past $1B of revenue in four or five years as the base case, when only a few hundred companies in history have ever done it. The companies that defied gravity are compounders (30–40% growth crushed for a long time), not explosive non-linear paths; even Snowflake’s eleven quarters of 100%+ growth tapered. The correction was “not respecting, or being reverential to, how truly difficult it is to build one of those massive companies.”

Quick-fire. Favorite book: Reinventing Knowledge by Ian McNeely, his newest quake book, which made him obsessed with the Republic of Letters and a 2.0 where Twitter DMs change the world. Most underrated angel: Amjad Masad of Replit, “an oracle” in a world short on ambition. Roam Research: a dogmatic note-taker who found Conor White-Sullivan via a Tiago Forte interview, whose first founder call involved whiskey-and-Red-Bull and a blowtorch, then gave a hundred personal Roam tours and remains an hourly active user. Biggest miss: passing on Coinbase at $1.5B, a failure to imagine a colossal shift in user behavior, and the origin of his habit of asking what he strongly believes and is probably wrong about (What Do You Have To Believe). Biggest hit: Teamshares, a “laughable” idea (buy small businesses, convert them to ESOPs, scale as a holding company) that executed, per Keith Rabois’s test of success as how many peers think you’re insane. Growth market in 12 months: better only if founders accept what valuations mean; Harry’s 98%-desert / 2%-flight-to-safety split holds until a consensus darling implodes, which hasn’t happened. One change to venture: de-risk the earliest days of starting a company for ambitious people trapped in “systemic risk intolerance.” Most recent investment: Pave, led at Index and then joined again from Contrary in the same round, part of a thesis on companies that turn a critical corpus of data into a foundational layer (Ramp on transactions, Toast on restaurants, Persona on identity), with a give-to-get data model (plug in your HRIS and cap table, get benchmarking) and 600+ venture-firm partners.

Transcript

Published October 21, 2022 on the 20VC YouTube channel as episode #940; ~61 minutes. The source was YouTube’s auto-generated transcript with no speaker labels, so speakers were attributed from context. ASR errors, names and stutters cleaned and the text paragraphed — nothing reordered, tightened or summarized. Proper nouns the transcription mangled have been corrected (Coatue, Thomas Laffont, Josh Wolfe, Logan Bartlett, Roelof Botha, Ada Lovelace, Gaby Goldberg, Stephen Schwarzman, Adam Neumann, Tiago Forte, Conor White-Sullivan, Amjad Masad, Keith Rabois, Elizabeth Yin, Teamshares, Wiz, Deel, Theranos). Words that remain uncertain are marked [?]; expletives are marked rather than transcribed.

The circuitous road into venture (00:00)

Harry Stebbings: Kyle, I’m so excited for this. I’ve heard so many great things, and I also love your writing — it’s one of my favorite pieces of writing in venture. So first, thank you so much for joining me today.

Kyle Harrison: Yeah, thanks for having me.

Harry Stebbings: Not at all. I’ve been excited for this one, especially when I saw your suggestions for the show. But I want to start with a little bit on you. So many great firms you’ve worked at — but how did you first make your way into the world of venture, and most recently come to be a GP at Contrary?

Kyle Harrison: So my journey is very circuitous. I didn’t know anything about venture or startups growing up. I was actually obsessed with film growing up, and so when I got to school my original major was actually filmmaking. My magnum opus that I created, which you can still find on YouTube, was “Pokémon Love Song.” So I was very into film and videos, and I was paying for college doing wedding videos and commercials and things like that. That focus on film was a big part of my life, and then eventually it got to the point where I had too many clients, so I just started farming them out to other creatives. I’d take two percent on whatever they would make, and before I knew it I realized I was much better at getting jobs than I was at making videos. So I kind of transitioned to that as a full-time job. I joke that I was running a creative marketplace long before it was cool. I didn’t know to call it that, but I built this really crappy website, I expanded to graphic designers and photographers, and I was helping them get jobs and do all these different things.

So that was my first exposure. I didn’t even know to call that a startup. You can ask my wife — for the entire time I ran it, basically, I called it a project. I was just working on a project, because I was so used to a job being a very different thing. Eventually I ended up selling that business, and I was trying to figure out what to do next. I was talking to a friend and they said, “What did you like most about running your company?” And I said, “I loved being this resource for these passionate people who were building their own businesses. I loved that they could rely on me, and I could go knock down walls for them, or find answers for them, or whatever.” And my friend said, “Well, that’s sort of what venture capitalists do.” And I said, “I don’t know what those words mean when placed together.”

So I sort of stumbled backwards into the world of venture. I’d been running my company in Utah, and I worked for a seed fund called Kickstart in Utah — that was kind of my education in venture. But that’s what led me out to the Bay Area eventually. I wanted to see more than just seed investing, I wanted to see lots of different companies, and so I jumped to the Bay Area and worked at firms like TCV and Coatue and Index. And eventually Contrary is where I decided to hang my hat, and be able to put my fingerprints on something and actually help build something.

Harry Stebbings: It’s rather a shame you don’t actually have one of these [a hat?], because then we could both be hanging them up [?]. But I’ve got to love a TikTok audience. I’m doing a very weird thing today, because normally we obviously have a quick-fire at the end. But you’ve worked, as you said, at TCV, Index, Coatue, in quite a short amount of time, Kyle. So my question to you is: we’re going to go through each one, and just go for one lesson from each and how it changed your mind, in a quick-fire. So if we start with TCV — the lesson, and how did it shape your mindset?

Three firms, three lessons: TCV, Coatue, Index (02:37)

Kyle Harrison: Yeah. TCV, then Coatue, then Index — it’s a very different, it’s a real smattering of opportunities. TCV I credit a lot; I learned a significant amount. I was very much drinking from the fire hose, baptism-by-fire kind of stuff. TCV’s changed a lot since I was there. When I was there it was very much a private-equity style of investing. It was really looking for diamonds in the rough, and the people at TCV were never afraid to get their hands dirty. For me that really changed my perspective on what it means to be an investor. The way that I think about it — it’s actually funny, I’ve never really liked the memeification of venture, because my whole career I’ve had this “we do the work” attitude that I learned at TCV. I don’t ever feel like I would passively say, “Hey, let me know how I can be helpful.” I just start doing stuff, and then I go to the founder and say, “Hey, I did this and that — is that your top priority? If not, redirect me. What else can I do?” That was definitely a big part of TCV.

Harry Stebbings: Okay, so that’s TCV. Tell me, what was the learning from Index?

Kyle Harrison: Well, let’s do Coatue, because that was the order. I feel like I actually like my journey in order. If I could have written the book, this is how I would have written it — but it was absolutely scattershot how it hit me.

Harry Stebbings: Coatue. What was the lesson from Coatue?

Kyle Harrison: So Coatue, again, very much a hedge-fund style of investing. If TCV was the private equity, Coatue was the hedge fund. There are some aspects of that that are less fun — hedge funds are very intense, they’re very competitive inside and out. But one of the most eye-opening things that I learned was not just, “Hey, we get in and we do work,” but we do work in markets that matter, and after opportunities that matter. At Coatue I learned this idea from Thomas Laffont — he called it TAM arbitrage. It’s this idea that if you can do the work and understand the market better than anyone else, and appreciate that it’s actually bigger than anybody else gives it credit for, that can help you pay higher prices. Sometimes that can come back to bite you if you don’t — who knows, it’s always difficult to predict how big markets actually are. But if markets really do turn out to be larger than anybody else gave them credit for, not only can you pay higher prices, you can get more aggressive with burn, you can grow more quickly, you can experiment a lot more, because you have a more fundamental understanding of the market.

It’s kind of the Buffett-ism, right: if a good manager meets a bad business, it’s the reputation of the business that remains intact. I think the same way about a market. If a really good founder goes and tackles a really crappy market, that market’s still going to be crappy. The question marks are going to be around that founder’s ability to tackle the market if it’s not big enough.

Harry Stebbings: I have recent learnings from the last 12 months that markets matter more than anything. Markets matter more than founders. You need a sufficient level of founder, but if you have a sufficient level of founder and operator in a [expletive] great market — win, go. You agree?

Kyle Harrison: Yeah. I’m glad I’m not alone in that lesson. Not everybody agrees.

Harry Stebbings: Not everyone agrees, but they’re wrong, and we don’t pay attention to anyone who disagrees with us. Final one, then: Index. How did that shape your mindset?

Kyle Harrison: Yeah, so — and again, I sound like Goldilocks, right? I was jumping around, testing out, just finding what’s just right for me. Index — the way that I think about Index is a little bit different. There’s not one thing that impacted my way of thinking about investing. For me, I feel like Index was like graduate school in venture capital. Maybe this was my mindset even before I joined Index. Remember, I started a company before, and I didn’t know to call it a company. Now I knew what a company looked like, what a startup looked like, and I started to feel this entrepreneurial itch — but I liked investing too much. So when I’d think, “Should I go start a company? Should I go join a company?” — I really like investing, I don’t think I want to leave it. So I was in this opportunity-canvassing mindset, and I sort of directed that energy at venture. While I was at Index I was constantly paying attention to how we did things, and studying the way that we did things: how do we make decisions, how do we incentivize people to take risks and build relationships, and stuff like that. A lot of that study comes out in my writing. It’s the reason that I write about what is the art and science of venture — it’s because I felt like I was studying it. It’s one of the things that led me to Contrary, where I wanted to try and take what I had observed in three very different styles of venture — Index being the kind of venture classic — take those learnings and try and go build a new model. Contrary is that avenue for me to go do that.

Harry Stebbings: I didn’t take that vague answer. What is the one single thing from Index that you took with you to Contrary, and that changed the way you think about what you do at Contrary?

Kyle Harrison: If I had to summarize: venture is meant to be studied. While I was at Index — for good, there were good and bad things — I started to appreciate how much you have to actually treat your effort as something to be studied and learned from. Post-mortems and stuff like that. There is an actual psychology and study that every firm should apply to what they do, good and bad.

”Nobody knows what they’re doing” is crap (08:05)

Harry Stebbings: One of the biggest bits of [expletive] advice, I think, is: “Oh, don’t worry, no one really knows what they’re doing.” To me this is complete crap. People do know what they’re doing, which is why they’re often where they are, and you should learn from them and seek them out. Do you agree, or do you take the ever-changing-circumstance-and-time, you-do-you style?

Kyle Harrison: The way that I think about it is that everybody knows what they’re doing. I think that everybody is acting deliberately and trying to do things in a certain way. The thing that I don’t take for granted — and I think the reason people say stuff like “Oh, nobody knows what they’re doing, we’re all just kind of making stuff up as we go” — is everyone’s trying to soften the blow of being wrong. So we try and say, “Hey, we’re all just doing our best, we’re all doing this or that.” But there are people who are exceptional at what they do, and there are people that are repeatedly really bad at what they do. I think the biggest difference between those people is that the people who get really good are the people who learn and grow and pay attention to how they do stuff, and then they get better at it. So those people do know what they’re doing — not only what they’re doing and what they’re trying to accomplish, but they know they’re capable of their craft and their skill because they’ve studied it. I feel like that makes the biggest difference.

Harry Stebbings: I absolutely agree with you. I want to start on — we spoke about three incredible firms, but from the prior generation, bluntly. I want to talk about the current landscape that we have in venture today. You said before, and you said in an email — I love this — “differentiation is going to kill the long tail of so-so venture firms.” Great cliffhanger, by the way. What did you mean by this?

Differentiation will kill the so-so venture firm (09:42)

Kyle Harrison: So Josh Wolfe made this prediction back in February. He said that, in his prediction, between 50 and 75 percent of active investors in the private markets are just going to disappear within the next few years. For me, the way that I think about what is the so-so venture firm, what is differentiation: people are starting to care more and more about the holistic character of these institutions that they work with. A reputable bank may not be enough to acquire customers anymore. People care a lot more about what the identity of this firm is. I think founders are progressively going to look for more distinct characteristics in the firms that they work with, and I define that as differentiation — how capable is somebody, externally, of articulating you as a firm? If you can’t answer that question very clearly, it’s going to get harder and harder and harder. So I think the ways that firms look to differentiate themselves are going to get progressively more interesting.

Harry Stebbings: I think what we’re seeing, actually, is kind of the disarming of firm power and the migration towards individual and partner power. So the ways in which firms differentiate themselves — I actually don’t think will change very much, or I don’t think will change as significantly as the ways in which partners will try to. I think a recent example of this is Logan Bartlett — obviously he’s done a very good job building his personal brand from nothing, very quickly. But I think it’s the partner and the characteristics that will change much more rapidly and significantly than the firm, and I think we’re seeing that now with founders choosing partners, not firms.

Kyle Harrison: I would agree with that. And you would know this, because you were featured prominently in the writing — this was one of my first articles that really blew up, The Unbundling of Venture Capital. The evolution was sort of three phases of how firms have been structured. To your point, one of the things that I get a lot of pushback on is people say, “Well, I think by and large things are going to stay the same.” I think that venture will look and feel very similar, and not change so dramatically that 20 years from now you’re going to look back and not even recognize how things work. But there are subtle changes that are happening.

The way that I described it in the article was: you have these monolithic brands — the old school, 60s, 70s, 80s, whatever — you’ve got the Kleiner Perkins and the Sequoias and stuff like that, and you almost abstract away the partners. It’s focused on this — almost like a bank — this monolithic institution. The next phase of that progression was sort of what I call these fiefdoms. So you have Andreessen’s crypto arm, or Sequoia China, or whatever — you have these pockets that exist, but by and large they have a Chris Dixon who is the leader of that fiefdom. You have these kind of universes that exist within the firm. Progressively that has continued to abstract even further, to the point where now what I refer to in my writing is the renegades of venture. That became a series for me. I’ve written about people who are trying to take fairly different models, and written about people who are doing things quite differently. But my definition of what it means to be a renegade in venture does not have to mean that it’s this radically different model, or it’s venture debt 2.0, or whatever. It doesn’t have to be crazy. It is, honestly, a Logan Bartlett — it is somebody who is changing the way that they define themselves. You are a perfect example of that, and what you’ve built with your firm: it becomes more about — I mean, you have a vibe, right? It’s more about these vibes that people feel.

What makes a firm so-so (13:37)

Harry Stebbings: People think I’m like this Charlie in the Chocolate Factory of venture. I’m not. I’m like the most cynical on that. I think most venture firms are actually really, really substandard and poor. I want to understand what you define as so-so venture firms. What makes them average to you?

Kyle Harrison: I joke it’s kind of the line where they say, “We know that half of our marketing budget is wasted, we just don’t know which half.” It’s kind of the same thing with venture: probably 80-plus percent of venture funds are not great, we just don’t always know which ones they are. I think a lot of firms are trying to be those good firms — it’s just had this cottage-industry vibe for so long that it’s allowed people to be very substandard and just doing their own thing. In my mind, the characteristics that I look at when I think about what does it mean to be so-so — three buckets come to mind for me.

One is pretty straightforward: it’s economic performance. Doug Leone said this with you last September, and it’s a quote that I use a lot, where he talks about the two most important things: number one, performance, and number two, teamwork — but if we don’t have number one, nothing else matters. It doesn’t matter what three or four or whatever is. Performance is critical. There are firms out there — and it definitely takes a long time for these things to catch up with you — but there are firms out there that, even in this massive bull market that we’ve had, have not returned enough capital to be able to justify the carry that they’ve paid out to partners, or that they should have paid out, or whatever. There are economic models that are going to crumble under the pressure of the market that we’re going into now. So that economic piece is critical.

The other piece of it is cultural. Culture can kill firms, and there’s definitely examples of that. I think there are even many well-regarded firms that, outside in, people would think are great, but internally they’re eating each other, and eventually that spills out into the work. It impacts their performance.

And then the third is just brand, which is what we’re talking about. This is also a Logan Bartlett joke — as we talk about how, as VCs, we invest in these firms that have durable competitive moats, when venture firms have it, it’s largely brand. It’s largely that competitive advantage that comes from a brand. But in my mind it’s this idea that the market correction in particular — it didn’t take very long for a lot of bad behavior to start coming out. A bull market has hidden a multitude of sins. Venture firms haven’t had to be super aggressive in certain ways. Within a few months you started seeing things like firms jeopardizing a company’s survival, holding up funding rounds, demanding specific provisions be met, whatever. That behavior is going to get out too. We’re talking about the positive side of building a brand, but the negative side of brand and bad behavior can kill you too.

Harry Stebbings: I think it’s threefold. Fundamentally: discovery — do you have an innovative way to continuously and reliably discover the best generation of companies? A great example of this would be a Y Combinator on the very early stage; a Sequoia, on the very early stage, with their innovations around scout programs, around Arc. I think they’ve actually productized discovery continuously very, very well. So I’d pick discovery as number one for me. Picking and winning is number two: do you have an innovative way, or a better decision-making process, around picking and winning? Benchmark in particular are phenomenal — I’m sure you know — when they all want to win a deal, their circulation around a founder and their convincing is unparalleled. And then helping: how do you help founders in a better and more scalable way? I think performance is an output, and it’s the inputs there which make the output what it is.

I think my biggest concern there — and actually what we should be concerned about, Kyle — is that these so-so venture firms are going to continuously get funding, because they’re still getting DPI on Lyft IPO-ing last year and sending cash back to their investors, even though they’re [expletive] and the last time someone went to them for funding was in 2012. So the next question is: I get you on everything that you said, and I agree with everything that I said — we’re on the same page — but it takes so long for a venture firm to die, and they’ve delivered DPI. Will they not just continue for another 10 years?

Kyle Harrison: I don’t disagree with that. I think it’s all relative. The idea of venture — this is something I think about a lot; it helps keep me humble and honest. I wrote this article a few months ago called The Death of a Venture Fund, and I went and interviewed a bunch of people. It was actually inspired by Roelof, who was on, I think, Invest Like the Best, and he was talking about this exercise they do at Sequoia where they say, “All right, the group of us in this room — imagine that we presided over the decline of Sequoia. What happened? What did we do wrong?” That sort of pre-mortem of evaluating what could cause the death of a firm like Sequoia. So I dug into that.

I think venture has a lot of main-character energy, but we forget that we’re relatively a baby. When you think about it, financial services have existed for thousands of years. Even software, at least as a primitive, has been — you’ve got Ada Lovelace in the 1800s. All these things are very old. Venture is relatively pretty young, maybe the 40s and 50s, so it’s not even 100 years old. So the reality is that, as an industry, it’s very young — that’s number one. Number two, we’re getting to internet time. Maybe it took multiple decades for a firm to die in the 60s and 70s and 80s. Maybe it takes a decade nowadays, or the last few years. I think that pace is going to increase. Information gets disseminated more quickly, companies scale more quickly, for better or for worse, and venture firms have an impact on them. All of those things are going to happen faster and faster. So I think for folks like you and me, the thing that we have to do is to skate to where the puck is going to be. Yes, it’s going to take a long time; yes, they’re going to be competing for capital and stuff like that. But I think the rate of death can increase.

LP incentives and where the wealth comes from (19:54)

Harry Stebbings: Sorry, I’m being deliberately divisive. Increase in velocity, if the structure of funds changes fundamentally — I think it’s a question of LP perspective. It’s not because we can look at it and say, “Oh, we want to be these cutting-edge, thoughtful, innovative ways of doing things.” LPs are fundamentally very stable and secure and salaried, in principle. Same as last year — what have we done? I’m loyal. When people send cash back, they feel obligated to then return cash back for the next funds. It’s very difficult for the LP — to be fair on them — to get 3x funds returned and then go, “Thanks, Kyle, not coming back for the new one.” It’s very hard to do.

Kyle Harrison: I think that’s absolutely right. I think that is the reason, for me, why I am more interested in trying to build something — it has this longer-term potential. I think the difficulty is unseating anybody who is really powerful.

Harry Stebbings: And I think once you get to that Andreessen stage, it is joyous, because you get to the LP mindset of: it doesn’t matter about performance, I just won’t get fired, and I get credit for being in them. Once you’re in that hallowed ground, it is absolutely joyous. Before then, it’s not so joyous. So I totally get you there. I think the big “why” that I have — and I’d love your thoughts on this, and again I’m just kind of chatting [expletive], going off schedule — the reason for this is LP incentive structures. They’re largely salaried and bonused, and they’re not really aligned in terms of carry and performance. So of course you would invest and get a 1.6x in Andreessen rather than do Contrary, because they might get fired if you guys break up and hate each other. If Andreessen doesn’t work out: “They got into Andreessen — well done, well done, shame it didn’t work out.” So what do we need to see change in terms of LP incentives to fundamentally change this?

Kyle Harrison: I think that one of the things that I have thought a lot about — and I don’t know, honestly; in this market I don’t know what’s going to happen — I think that the sources of wealth will change. When you think about it, the family office circuit is a fascinating world: the ways that people make their money, and the people who are brought in to help manage that money, and stuff like that. I think that a lot of that is not likely to change. I think the transition that we will see is that more and more of the wealth that gets created — if you think about this massive pool that exists — and not to say there isn’t a whole other bag to unpack for massive institutional endowments and pensions and things like that — but just within these long-tail pockets of capital that exist out there to go get, the question becomes: where is that wealth going to come from, and does it turn over over time? It feels like the opportunity to be able to have wealth coming from different sources that think about things differently — already I have started to see it. I feel like I kind of exist in two planes of existence on Twitter. On the one hand I have this very venture-tech-heavy world. Then, for whatever reason, I’ve kind of stumbled into this family office, institutional allocation world on Twitter, and you pay attention to what those folks are saying. Progressively, more and more, family offices — the way they allocate their capital — they want to do things differently. I think we’re still at the very earliest inflection point, but I feel like some of those things are going to start to change in terms of the way that people want to manage that capital. What that’s going to mean, how that’s going to play out — I don’t know.

If Kyle ran a family office (23:25)

Harry Stebbings: Okay — Contrary does a 50x fund, you just hit it out of the park, and here’s your family office today, Kyle. How would you structure it, and what would you do in terms of your approach to direct and fund investments? How do you do it?

Kyle Harrison: I think that there’s two things. Number one, there is diversification. I do actually think that there is an opportunity to invest in lots of different things. I really liked the episode you did with Will [?], where you talked about the venture firms that aren’t really venture firms. I think there are a lot of companies that shouldn’t raise venture; there’s a lot of great businesses that can get built without venture. There’s all these different pools, and so number one, there is a more disciplined approach to diversification.

Number two, when you think about allocating capital to venture — for me, I think it goes back to some of the things that you talked about, which is looking for allocators and fund managers that have these characteristics of being able to identify their unique funnel. But the biggest thing for me would be focusing on where the biggest pockets of high-quality people are congregating. I think there’s still always the halo effect, where any founder, regardless of their previous affiliations, is going to go where those halo effects exist. I think that’s always going to be true, and there’s always going to be the desire to allocate to the best firms, or the most well-regarded firms, or whatever. But for me it is all about allocating to who has access to these pockets of people, these communities of people, and how are they building really deep, long-term relationships with those folks. I feel like a lot of firms right now benefit from sort of here-and-there deep relationships — they continue to compound, which is great — but it’s not just about how do you take a top of funnel of all companies, but how do you build a product that stays close to those people throughout their lives. I think there’s a really exciting opportunity to identify multiple points along an individual’s life cycle to engage with, and allocate capital in different ways, beyond just “How do we have the best top of funnel?”

Deep relationships, community, and Naked Brands (25:10)

Harry Stebbings: I want to touch on the network and the community, because you mentioned it. You said before it will get more focused on deep personal relationships as a landscape — and what will make one win? What does “more deep personal relationships” actually mean? What does “community” actually mean in venture? They’re kind of fluffy words, respectfully, that are thrown around a lot. How do you actually think about it in practice?

Kyle Harrison: So this goes back — and I mentioned it before — to the article that I wrote about the unbundling of venture capital. I focus it very much on venture and these renegades and stuff, but the idea was sort of born out of this article by David Perell called Naked Brands. He goes through all these examples of ways that different industries are changing. He talks about fashion and sports and media, and how people are progressively transitioning to trust more in people that they can empathize with, versus just brands that they can trust. So it’s progressively less about Coca-Cola and more about LeBron James, or whatever. That dynamic, I think, is a function of — we’re steeped in the internet. There’s so much of what we see, so much information, that to be able to discern what we want to be associated with, there is this essence — we’ve talked about it before — this essence of vibes that people give off.

When I think about the deeper personal relationships, I think there is the more shallow, functional relationship, and then there is the person who you have an actual deep friendship with. And a deep friendship is not always scalable to massive amounts of founders. But the idea, I think, is that every individual investor, every firm, is trying to articulate this idea of “What job are you hiring me for?” — the jobs-to-be-done framework from Clayton Christensen. You’re trying to articulate what you’re good at, what you can offer them, why they should — why they vibe with you and stuff. I think those deeper personal relationships are going to come, honestly, from the way that people present themselves online. We can get into the brand-drenched-ness of venture, or whatever, but I hope that it’s not going in that direction. My focus is on people being able to sincerely articulate what their vibes are online, and then being able to attract the right people that want to have a relationship with you.

Harry Stebbings: Who do you think has done that best?

Kyle Harrison: I’m not going to toot your horn — you’re doing pretty good. You’re doing pretty good yourself. The move into TikTok was in spades; that was pretty good. I think that when I think about it — because there’s also this element of community. We’ve talked about community. I think there are people who do community really well. I look at Y Combinator — there’s no question that they’ve built a generational community. I think folks like Gary [Tan] stepping into that role — I think they’re going to continue to just be amazing. But I think the opportunity that exists right now is to create an ongoing relevance in the relationship that you have with somebody. It’s not a one-and-done kind of thing. Even YC — most people talk about it like, “Yeah, I was in the summer 2020 batch,” or whatever. But to stay relevant — that’s a relationship. To be part of a program, it’s sort of, you’re in it and then you’re out of it, and “what fun memories we have.” To stay relevant throughout someone’s life, that’s having a relationship with them, because you continue to be relevant to them. Candidly, I don’t know that anybody is doing that well.

Harry Stebbings: I think about it in terms of frequency, which is like frequent and often, and then infrequent but higher quality. When we look at these two different landscapes, the one I admire the most is the infrequent, because it’s [expletive] hard to do infrequent brand well. When we look at who does that well: it was Bill Gurley, when Bill Gurley was writing — obviously now he tweets more — but he released few posts, and when he did, they were seismic. I think Ravi Gupta at Sequoia releases few posts, but when he does they really, really hit. Same with Pat Grady and [name unclear — ?], both at Sequoia — he did “15 lessons from 10 years at Sequoia” [?] and it [expletive] hit so well. Again, very infrequent. On the frequent side, for me, actually, Elizabeth Yin at Hustle Fund — she has scaled quite a following very sustainably, with a lot of volume, but actually consistently done very well. I think those three for me really stand out.

Do venture firms brand themselves terribly? (29:44)

Harry Stebbings: I’m intrigued. I think venture brands — funds — brand themselves terribly. Do you agree, and why do you think yes or no?

Kyle Harrison: I think that the center of gravity has shifted, to your point, largely to the individual investors, and I think there are very few firms that have kept up with that shift in the center of gravity. So firms that are trying to push forward the — almost the celebrity, if you will — of the individuals, that’s a powerful dynamic. I think it’s one of the reasons why anybody with a reasonably sized Twitter following probably gets at least job interest, if not a job offer, from Andreessen. They recognize that micro-celebrity appeal of being able to hire anybody who has even remotely a sizable following. So I think that they are trying to tack on to that shift. I don’t think anybody has done it well, because it feels uncomfortable. It feels uncomfortable to have this quote-unquote brand when today most of the way that people want to interact with institutions is they want to interact with people, knowing that the institution has something that has backing. That person represents the vehicle into that stuff. You don’t want to necessarily be interacting with this faceless, monolithic brand. But most firms’ marketing efforts have not kept up with that shift in gravity.

Harry Stebbings: I do just want to ask one final thing on the communities, because I agree — YC is the wild one, but that’s one very distinct case. Have we really seen other venture firms try and build communities? And if so, what’s the difference between those that have worked and those that haven’t?

Kyle Harrison: The short answer is we’ve seen them try; we haven’t seen very many succeed. Some examples of this — even Andreessen has some of these, where they have Slack channels: they’ll take the CROs of all their companies and dump them into this Slack channel. It’s not a good community. It’s an attempt at trying to coalesce people into buckets, but it’s not a good attempt. So your question around what does it mean to make a successful community — in my perspective, and obviously I’m biased — Contrary, this is our bread and butter. Before we had a fund, we had a community of about a hundred future founders that we had met and were working with. So we have always tried to emphasize this people-centric community and building that.

The reality of why it works is, just like any product, if the customer is an afterthought it’s not going to hit. It’s not going to be a very good product if it’s secondary to something else. Even from a community perspective — you talk about people’s scout programs and stuff — those scout programs can be powerful, but I think you’re going to see a lot of dilution in the value and quality of those scout networks progressively over time. The biggest reason for that is because it is an afterthought. You even plant this community with the hope that it leads to something else, which is deal flow or whatever. You’re not necessarily super incentivized to make that community experience as high-quality as possible; you’re incentivized to get it to lead to something else. At Contrary we talk about this a lot: we are as focused on our community members as we are on our portfolio founders, because we hope that eventually one day they become both. The focus is on these people who will eventually be founders. We’re going to help them at every phase of their career, so that when they become a portfolio founder it’s not that we suddenly shifted and said, “Oh great, now we can stop exuding all this effort on them as community members and now really focus on them as portfolio founders.” The idea is that it becomes this seamless transition. I don’t think anybody has done that well, because community has always been an afterthought, not the core product.

Harry Stebbings: YC obviously went from 600 to now, I think, half the batch size, and they’ve got Gary back. I think this is the biggest sign of strength from YC. I was worried about them for a while, and now I’m like, [expletive], buy YC, long hold. Are you with me? Do you think they’ve just completely regained all power from the unbundle? Because we did see this splattering of the unbundling of accelerators, which I think now — power retained, concentrated, centralized. Do you agree?

Kyle Harrison: Yeah, I think YC has built something — again, I use this word, I try not to throw it around even though it’s one of these buzzy venture words — but I talk about having built a generational community, because it is this once-in-a-generation thing that people have built and have affiliation with. I think there’s nothing like it. The other thing — I don’t even know that I would have ever said I was worried about YC per se. I think the drive to Xs and having more and more people dilutes the experience on the micro, for sure. Individuals’ experience can be more negative. But I still think it’s getting them exposure and closeness to really high-quality people. The biggest thing is that it’s a compounding effect. No firm compounds the way that YC does, because it’s so expansive and so involved in all these different aspects, and can bring people in in these different ways. That compounding effect in YC is not going anywhere.

The Blackstone of Innovation (35:14)

Harry Stebbings: No, listen, I totally agree — it’s kind of compounding effects and power. There was something that we went back and forth on before, on emails, and it was your concern about “the Blackstone of innovation.” I thought it was really interesting phrasing. What did you mean by the Blackstone of innovation, and why are you concerned about it?

Kyle Harrison: So I’d credit Gaby Goldberg as the one who first — she and I riffed on this idea back and forth, and I thought it was super interesting. I read the biography of Stephen Schwarzman, the founder of Blackstone, a couple of years ago, and there is this quote that really struck me, where he talks about how they build businesses. The idea was basically: if we come across the right person to scale a business in a great investment class, why not? We can apply our strengths, our network, our resources, whatever. They’re so focused not on being — “we’re not just a private equity firm, we’re not this, we’re not that, we’re everything.” Now they’re effectively a holding company for financial asset classes: $800 billion of AUM; they’ve got private equity, real estate, hedge funds, credit funds, whatever. They think of it almost like exposure.

Somebody — I don’t remember who — said this idea that building a business, 80% or something of building a business, is kind of the same thing across the board. It’s that 20% that’s super unique to the company and the market and the circumstances that is kind of the secret sauce. If that is true, I feel like Blackstone has done a really good job of figuring out what the 80% is. They’ve just built this infrastructure — the kind of AWS of raising capital and deploying capital towards XYZ strategy. They figure that crap out, and then they just focus on, “Hey, how do we go find that person who represents the secret sauce, that 20%?” And we plug them into the infrastructure, we let them go nuts, and we just scale to this big thing.

I think the firm that most closely resembles that in venture is Andreessen. The way that they have approached things like gaming and crypto and biotech — that’s sort of them saying, “Hey, we have this fundamental infrastructure of brand, of thought leadership, of capital raising, whatever, portfolio support, whatever. If that’s valuable, they have that infrastructure.” And if they can take — to your point — 1.5x, 2x return thresholds, people can park their money there and they can just deploy. They can go take big bets, like giving Adam Neumann money for round two, things like that. It’s just this massive calculus of: we have this infrastructure, how do we bring in capital and deploy it at scale? I think Tiger, to some extent, tried to do that, though they may not have nailed the 20% specialty.

Harry Stebbings: Yeah. But that’s the kind of thing you’re seeing. Is this good for our ecosystem?

Kyle Harrison: So it’s one of the reasons I characterize it as something that concerns me. Capital allocation and portfolio construction — those are macro activities. If you think about it as exposure — I have heard large multi-stage firms talk about things like, “Hey, we’ve got 15% of the portfolio allocated to fintech, I’d like to get some more allocation in that.” It’s almost hedge-fund-esque, the way they think about where they’re allocating their portfolio. That’s a very macro game. Company building is micro, especially in the earliest stages. It’s people, it’s lives, it’s families, it’s customers, it’s jobs. It is appropriate to have a certain level of abstraction — at the end of the day this is a capitalist exercise, we’re trying to take in capital and maximize the outcome of capital. That’s okay. It’s okay to have that abstraction at some point. But if that abstraction gets so far removed from this fundamental company-building aspect, I think you start to get into some dangerous territory. When those companies fail — when they get tons of capital and all this thing, and it’s an exercise in portfolio construction and capital allocation and all this stuff — when those companies fail, it’s a blip on the macro. That’s okay, because it’s $35 billion of AUM, or $800 billion of AUM, or whatever. But on the micro, it’s everything for a lot of those folks. I think that abstraction causes some breaking points.

Harry Stebbings: I’ll say there’s two things that are fundamental which are [expletive] hard to maintain — it’s many a challenge to do so. Number one, like you mentioned with Blackstone: find amazing people and move with them. I don’t think all of the firms that we’ve mentioned find amazing people and move with them. They move to the space that they like and then look for people — very different, I think. And then number two, I think, is the temporal diversification of product expansion, which sounds very nerdy, but what I mean by that is earning the right to do the next financial product, and not doing five in two years. Because what you do to your morale is [expletive] overnight, bluntly. If Contrary adds a new vehicle every three years, you can stage your culture progression in a much easier way than “here’s five new products.” I think that’s a core challenge that some people have faced.

Fund sizes and excess capital (40:12)

Harry Stebbings: My question to you here, though, is: it gets to a stage, with fund sizes too, Kyle, where it’s almost easier to raise two billion than it is 200 million. The reason I say that is because there is a pool of LPs, as you know — the pension funds of the world — who need to move 100 million. Can’t get into Sequoia; struggle to move that much into Founders Fund, for sure. So where do you go? There’s not that many places, and so you have this finite supply of homes for your 100 to 250 million. This is where it makes sense. Do you agree with that analysis?

Kyle Harrison: I agree with that. I think one of the reasons for that is that for a long time there was kind of this arbitrage in venture. I don’t know that people fully — I mean, the internet is sort of the thing that was the massive multiplier on all of these outcomes. Nobody appreciated venture as a place where large amounts of capital could be effectively allocated to maximize returns. I think there was an arbitrage in that: people had shockingly big outcomes, and over time people have realized how big those outcomes can be, and have paid more and more attention to it, which has attracted more and more capital.

One of the reasons I get concerned — and I understand the fundamental math that people are doing, to say, “Hey, if I can allocate X amount of capital, if I can expect a certain rate of return, this is a place where I can park money.” That’s okay, and I don’t disagree with that. People are welcome to do their best in whatever capital allocation strategy they want. The reason I am worried about the excess capital is because there aren’t really guardrails or good standards of excellence. It’s again this idea that enough money can hide a multitude of sins. We’ve seen it over and over again: bad products, bad go-to-market, bad unit economics — they can all be covered up just by having enough cash. To your point, it’s not that there’s a lot of cash and it’s being allocated to good managers who are going to do their best to invest that in really good companies. It’s to whoever will take it, to try and get exposure to this market. I worry about that for sure, because it also muddies the water for everybody else. When everybody has so much cash — we’re seeing this pullback now with this market correction, which has tapered some of that — but I don’t think that’s going away. I don’t think that people are just going to say, “Oh, never mind, venture is actually not that great of an asset class, back to bonds and real estate.” I think people recognize that there are still large outcomes to be had here, and so there’s still going to be that excess of capital. What we do with that, and how companies react in that world — it’s something that every company has to worry about.

What changed after the correction (43:08)

Harry Stebbings: What are the biggest changes that you’ve seen post the correction that we’ve had over the last six months? I tweeted the other day about some trends I’ve observed. What are some big changes you’ve seen?

Kyle Harrison: The first one that comes to mind is what I would describe as almost a suspension of your own criticism. We went through such a phase of people just pumping everything they possibly could — rampant intellectual dishonesty, all these different things — and I’m surprised. I thought that it would be more humbling for more people. I think there’s been this suspension of criticism, where people are desperately trying to avoid having to come to grips with what they did, basically — with what a lot of people did over the last couple of years. That worries me a lot, because I think this is a great opportunity to sit back and reflect on what we should have done differently, what you could have done differently, whatever. I expected a little bit more of the mea culpa, and there’s not been much of that at all. So that’s certainly a trend: people just trying to move on to the next thing.

The second thing is that companies are more thoughtful about what matters most in the way that they build their business, from a storytelling perspective. Before, it was just this idea that if you have a pulse and you have some indication of an interesting market or whatever, there’s going to be enough people that get jazzed. Now I’ve had a lot more conversations with founders, both in and outside the portfolio, where we’re talking about: what should I focus on in my business, and how can I articulate that to investors to indicate the quality of my business? It’s not just about the big-picture story; it’s about where I should be focusing to be able to articulate my story of why my unit economics are working, or why my market is sizable, or why I do have product-market fit, or whatever. There’s more of that. A lot of that was just swept under the rug, because it was so focused on how I tell the biggest story I possibly can.

Harry Stebbings: Have you seen pricing change?

Kyle Harrison: I have seen chickens with their heads cut off, running around trying to figure out what the right price is. It’s insane to me, the conversations I’ve had — especially because most of my bread and butter is not necessarily the pre-seed, seed stuff. Contrary has done that by and large; I joined Contrary to help build out our ability to invest more in Series A, Series B, Series C. Those companies that I’m working with — there is no rhyme or reason. There’s no valuation, there’s no thought process, there’s certainly not an acceptance of down rounds, for the most part, beyond the very late-stage folks that are just engineering capital raises at this point. In the stages that I work at, there’s certainly not been an acceptance of down rounds.

I wrote this piece a couple of months ago, and I was blown away — it was honestly almost a throwaway piece, I was just trying to work through some thoughts in my head, I put it out there, and it was one of my most popular pieces. It’s called What’s In a Valuation, where I unpacked all these dynamics that go into a valuation. I’m shocked by the number of times I have a conversation with different founders and I explain venture math, basically — very back-of-the-envelope, simple stuff. It’s like, “Listen: if your valuation is this, and your revenue is this, and if I look at the next five to seven years and you have to go from where you are to hundreds-plus millions of revenue, there’s going to be dilution along the way, so my ownership is going to be X. When you get to that point, if you look at the public markets, they’re trading at these ranges, and then you’ll trade at those ranges. This will be our return, and that’s the factor.” If I can’t get that math to work — granted, there’s so many ifs in that statement: if you grow to this scale, and if dilution is this, and if multiples are that — we can’t predict all that stuff. But just doing the math is the sense check that you do to say, does this make sense? For people who are doing these deals at multiple billions of dollars of valuation for companies that are generating sub-$20 million of revenue or whatever, that math is really, really, really difficult to get to. The number of founders for whom that’s just not a way that they think about things always surprises me. But that’s the math that people were sort of fudging and ignoring for the last couple of years, and it’s a reality that’s going to punch a lot of people in the face.

Mea culpa: the gravity of building a massive company (47:37)

Harry Stebbings: Question: did you invest too fast in this boom period? Did you lose price sensitivity?

Kyle Harrison: I lost both, I think, at different points in time. I invested too fast. Price sensitivity, I think, is the thing I would say is my bigger mea culpa. What I look at is appreciating the weight of gravity of what it means to build a massive company. The way that I think about this — again, I’m investing at the later stages — the number of models that we built to be able to justify certain valuations, the number of them scaling to over a billion dollars of revenue over the course of four or five years, to say, “Well, if they scale to over a billion in revenue then this is the return, and it can be a very healthy return, and that’s our base case.” That’s an insane base case. When I step back and think about how many companies — in the literally hundreds of thousands of startups in the world that exist, that have existed — how many of them have scaled to over a billion dollars of revenue? 200, 300, or something. It’s a tiny fraction of companies that have truly gotten to that massive scale.

When you step back and think about that, that was the thing that I used too easily, to just say, “Well, if we can paint the most optimistic financial picture, sure, anything makes sense.” Now I often find myself reflecting on that and thinking, I want to go compare this to the companies that actually went up against gravity, and did have to scale year after year after year after year, achieving growth rates and adding new customers and launching new product lines and stuff like that. What did that look like? It’s crazy, the number of things that we’ve seen lately — Wiz talked about this, and Deel talked about this, and there’s a bunch of these companies talking about, “Hey, one of the fastest companies to get to $100 million of ARR,” or whatever. That’s great — there are companies that can be those massive scalers. But by and large, when you look at those companies that have defied gravity, they almost never do it in these explosive, non-linear paths. They’re just compounders. Very quickly they get to that sort of 30–40% growth, and then they just crush it for a long time. You have the Snowflakes of the world — but even Snowflake, you look at, they’re getting to $2 billion of revenue, insane massive growth, 11 quarters of over 100% growth, but eventually it tapers off, and it’s just: have you built an effective compounding engine or not? For me, that price insensitivity translated into not respecting, or being reverential to, how truly difficult it is to build one of those massive companies.

Quick-fire (50:04)

Harry Stebbings: Listen, I want to move into my favorite, which is a quick-fire, Kyle. So I say a short statement, you give me your immediate thoughts. Does that sound okay?

Kyle Harrison: Sounds great.

Harry Stebbings: What’s your favorite book, and why, Kyle?

Kyle Harrison: So I have on my personal website this thing I call my “quake books” — the books that shook me. My most recent addition to that is this book called Reinventing Knowledge, by Ian McNeely. It got me obsessed with this idea about the Republic of Letters. Basically, just this study over history of how the world has been changed largely through people writing personal letters — really smart people trading personal letters. So now I’m obsessed with this Republic of Letters 2.0, where Twitter DMs are going to change the world.

Harry Stebbings: Who is the most underrated angel in the ecosystem, and why them?

Kyle Harrison: My favorite person to work with lately is Amjad Masad, the CEO of Replit. I think the guy is an oracle. There’s just a shortage of ambition in the world, and every founder could benefit from having Amjad on their cap table, because he just brings such an ambitious perspective.

Harry Stebbings: How did you get involved in the Roam community? I heard this was one I had to ask.

Kyle Harrison: I have been an obsessive note-taker in my life. There’s a scripture that I joke that I quote — “whatsoever you record on earth shall be recorded in heaven.” I am a dogmatic note-taker, and I’d never found something that worked the way my brain works. I was watching this YouTube video with Tiago Forte, and he was interviewing Conor, and I felt like I had stumbled on a prophet. I DM’d him — I had to talk to him. Our first call was very unorthodox: he was shotgunning whiskey and Red Bull and lighting a cigarette with a blowtorch. Definitely a one-of-a-kind founder call. I went on to do a hundred personal Roam tours, because I just loved the product so much, and I’m still, to this day, an hourly active user.

Harry Stebbings: Tell me, what’s your biggest miss, and how did it change how you think?

Kyle Harrison: Back in the day we passed on Coinbase at $1.5 billion. It still ebbs — you look at the market cap, it’s definitely had big ups and downs. But for me, the reason I think about that pass specifically, that missed opportunity, is because the failure was a failure to imagine a colossal shift in user behavior — how big those shifts can be when they happen. There’s still a question to be had about what is going to happen; we went through this crazy [?] market, there’s a lot of speculation. I think that it’s still around to stay. For me now, when I think about my “what do you have to believe” equation — I just wrote an article about this — I try frequently to ask myself, what’s something that I strongly believe right now that I am probably wrong about, and to try and constantly call it into question. I was wrong because I had such a strong belief in the consumer shift not happening for Coinbase, and I think it has.

Harry Stebbings: Tell me, what’s your biggest hit so far, and how did it change how you think?

Kyle Harrison: There are certainly investments that I have made that have done really, really well within the firms that I’ve worked at. For me personally, the biggest impact of an investment that I have made was a company called Teamshares. It reminds me of the quote — I think it was with you — Keith Rabois talking about “I measure success based on how many of my peers think I’m insane, or laugh at me.” When I invested in Teamshares, there was a couple of people with an idea. The idea was to basically buy small businesses, turn them into ESOPs, and scale them almost like a holding company, at scale, with services and stuff like that. People thought of it as just a private-equity play or whatever, but effectively it was this fintech mechanism to be able to make employee ownership of — not tech companies, but salt-of-the-earth types of businesses — and increasing that equity ownership that exists. There was so much skepticism about that. Financially it’s been a very rewarding investment, but also just seeing what felt to a lot of people like a laughable idea execute incredibly well — that has reinforced my perspective as an investor, to think about what are the things that I actually believe in, not just the things that I think people won’t laugh at me about.

Harry Stebbings: Is the growth market better or worse in 12 months, and why?

Kyle Harrison: The growth market is likely to be better in 12 months, only if you see that shift I talked about with founders. There has still, I think, not been a reality check of what valuations really mean, fundamentally. If that reality check continues to occur — if progressively founders recognize what that means — I think the growth market can improve. It’s going to come down to earth; valuations are going to be a lot lower, and it’s still going to be hard to fundraise, but it’s not going to be what it is right now. What it is right now is you have two sides of the party. One is still convinced that they can get a billion-dollar valuation, because before, three to five million of revenue could get you a billion-dollar valuation — or pre-revenue. Now it’s like, “We’ve got $10 million, we’ve got $15 million, we want a billion.” That mentality. And then you’ve got a bunch of investors that are, again, chickens with their heads cut off, running around having no idea how to price anything. Both of those things I think are going to improve over time. Investors are going to get more thoughtful about valuations; founders are going to be more thoughtful about what valuation means to them, and what is success versus what they wish they could get.

Harry Stebbings: I finally think there might be two different worlds in growth, which is the 98% and the 2%. The 98% — it’s a desert. You cannot raise. It’s impossible, really challenging and hard. And then the 2% — there’s this real concentration of capital, or flight to safety, where there’s very obviously very brilliant companies — not Figma, but your Figma-esques of the world — which are guaranteed, as much as you can say guaranteed, to be very generational, defining companies, and they will continue to be able to raise at very high prices. Maybe a 10% discount, but not really. You’re seeing actually a concentration of capital to the 2% there, where it’s much more concentrated. Do you agree with that?

Kyle Harrison: Yeah, that’s what I have seen. I think that there has yet to be a company like that — because even when you look at some of the high-profile failures that we’ve seen, I don’t know that any of them were like, “Oh my gosh, they were just the darlings, the high-flying…” Even when people talk about stuff like Theranos — there’s very few traditional VCs involved in those. That’s very rarely the darlings. I think the only way that flight to safety gets rocked is if there is something where you’re like, “I thought this was a darling. Everybody was convinced that this was a generational company, and it just absolutely imploded.” I don’t think we’ve seen that, which reinforces for people that flight to safety.

Harry Stebbings: No, I agree with you. I think it’s coming. What would you most like to change about the world of venture?

Kyle Harrison: I wish there was a better way — we talk about this a lot, because we’re so community-focused at Contrary — I wish there was a better way to de-risk those earliest days of starting a company. I think there are a lot of ambitious people trapped in a systemic risk intolerance because of their circumstances, or whatever, and I wish we could lower the bar for that risk curve. It’s scary, because as a capital allocator I have to think about risk management, and I have to be thoughtful about different risks. I try as hard as I can to not let my biases — that exist for everyone — stop me. But I wish that we could de-risk that journey into being able to build something.

Harry Stebbings: Final one: what’s the most recent publicly announced investment, Kyle, and why did you say yes and get so excited?

Kyle Harrison: So I had the privilege of getting to lead an investment in Pave while I was at Index, and then to very quickly jump over to Contrary and be able to invest at Contrary as well.

Harry Stebbings: In the same round?

Kyle Harrison: The same round, yeah.

Harry Stebbings: I love that. That’s brilliant. Worked it perfectly.

Kyle Harrison: I’m a huge fan of these businesses that can take massive, critical corpuses of data and make them accessible and actionable, and then make it possible to build — they’re going to become a new foundational layer upon which to build new things. You think about some of the investments I’ve made: Ramp does this with expenses and receipts — [?] called it the transaction layer of a business. Toast does this on the restaurant side. Persona does this with user identity. So Pave does it with compensation data. They’ve built this massive database of compensation data for tech, and now, with that data, they can build on top of it in terms of compensation planning and offer letters and all these different areas, to give people more visibility into what the job market looks like. Over time, when you have that real-time lens on the labor market in tech, the opportunities are pretty compelling. That’s really difficult data to wrap your arms around, and they’ve done a really good job of it.

Harry Stebbings: What’s the data entry and acquisition strategy there? Because obviously with Ramp, you have the cool card and you have the core account, which then lends to the flow of the data — the transaction data, which you can then act on. Here, unless they’re the payroll provider, I don’t understand where the data acquisition strategy on internal team salaries and compensation is.

Kyle Harrison: So their Trojan horse is a give-to-get data model. If you plug in — and you could do this with your firm; any company can do this — if you plug in your HRIS, to be able to offer up your salary data, and your cap table management, to offer up equity data, you get access to their benchmarking module. So you can see all these different cuts of different salaries and stuff like that. That’s the data ingestion: this give-to-get, completely free. They’ve got over 600 different venture firms that are partners, to be able to roll it out to their portfolio. It’s on that foundation that they then build things that they monetize on, like compensation planning and stuff like that.

Harry Stebbings: I totally get you. I like the give-to-get. Kyle, listen, as you can tell, I’ve so enjoyed this. I love free-wheeling conversations like this. So thank you so much for putting up with me, and I so appreciate the time today, my friend.

Kyle Harrison: Thanks for having me. It was fun.

Connections

Kyle’s writing this episode is built on

The firms and the lessons

  • Kickstart Seed Fund — Kyle’s first venture job, in Utah.
  • TCV — private-equity-style, “diamonds in the rough,” and the we do the work attitude.
  • Coatue · Thomas Laffont · TAM Arbitrage — the hedge fund, and the lesson that markets matter more than founders.
  • Index Ventures — “graduate school in venture capital.”
  • Contrary — community of ~100 future founders before there was a fund; community members and portfolio founders as the same people at different phases; Kyle joined to build Series A–C investing.

Differentiation, brand, community

  • Josh Wolfe — the February 2022 prediction that 50–75% of active private-market investors disappear.
  • Logan Bartlett — Harry’s example of partner power over firm power; Kyle’s example of a renegade; source of the “venture’s only moat is brand” joke.
  • Doug Leone — “number one performance, number two teamwork; without number one nothing else matters.”
  • David Perell · Naked Brands — trust migrating from institutions to people; the seed of the unbundling thesis.
  • Clayton Christensen · Jobs to Be Done — “what job are you hiring me for?”
  • Brand · Personal Brand · Community Building · Differentiation in Venture
  • Y Combinator — the one generational community; batch-size cuts and Gary Tan’s return; “no firm compounds the way YC does.”
  • Sequoia · Benchmark · Scout Programs — Harry’s discovery / picking / helping frame; Kyle’s prediction that scout networks dilute because they are an afterthought.
  • Bill Gurley · Pat Grady · Hustle Fund — Harry’s examples of infrequent-but-seismic vs frequent-and-sustained brand.
  • a16z — fiefdoms (Chris Dixon), Twitter-follower hiring, CRO Slack channels, and the venture analogue of Blackstone.

LPs, family offices, excess capital

  • Family Office — the “second plane of existence” on Twitter that wants to allocate differently.
  • Tiger Global Management — tried the Blackstone model without the 20%.
  • Unit Economics · Down Rounds · Valuation — “enough money can hide a multitude of sins”; the pricing chaos of late 2022.
  • Snowflake · Wiz.io · Deel — gravity: compounders vs explosive non-linear paths.

The Blackstone of Innovation

  • Stephen Schwarzman · What It Takes · Blackstone — the memoir quote about scaling any business with the right person; $800B AUM as a holding company of asset classes.
  • Gaby Goldberg — co-riffer on the idea.
  • Adam Neumann — “money for round two” as the infrastructure-deploys-capital example.

Quick-fire

Other appearances

Referenced in