Day in the life of a VC | How to become one? | How much do you earn?

We're back and here with Gary Tan. So, we're going to be talking more about VC stuff because um I have a lot of friends who say that ultimately they want to end up being a VC investor. Totally. Is that how we say it? VC investor, venture capitalist. A VC. Their reasoning is that they don't really want to do the work of building things, but they want to um advise people and, you know, think about what would be a good product and then bet on it. Oh my god. I guess I would tell them don't do it. Okay? Because then you'll end up being remember earlier in the in the episode we were talking about there are investors who lead and they make up their own minds and then there are people who just check check the box and then only want to you know invest when it's absolutely a sure thing right but I guess even okay let's just say they do want to in like they do want to lead right they still want to lead right I don't know if I'm um relaying their messages correctly but for me it sounds like uh they don't really want to do the work, but they want to do the purely intellectual thing, which is Oh, VC is so much work though. That's what I was thinking. So, can you tell me about like your dayto-day work? Yeah, totally. Um, I mean, VC done right is literally like your schedule is like, you know, 9:00 a.m. to 6:00 p.m. or honestly, I have kids now, so, you know, if I didn't, I'd probably be doing like literally like 7 a.m. till like 2:00 a.m., you know, just things all day, right? Uh, but now that I do have two young children, I have to actually cut it back to like, well, get to office at 9:00. I have to leave by 5:00 cuz I pick up my four-year-old, right? Um, and of course, I can get a few hours in the evening, but I better sleep cuz, you know, my 5-month-old is going to cry all night. And so, honestly, this job done right will actually fill uh any amount of space that you give it. And so it is a lot of work to do it right because uh every other day um someone lost their best customer, they lost their director of engineering, uh you know someone somewhere in my portfolio, people are getting punched in the face and you know on that day when maybe the company's going to die, I have to pick up the phone. I can't just be like decline, right? So what do you have to do like if a company dies? It's not like you have a it's not like you have a say on what they they have [clears throat] to do. So, what do you do to prevent that? Yeah, a lot of it is how do we find a better person? Like, if we're if it's personnel, like how do we recruit? How do we hire, get me on the phone with this person? If it's a losing a customer, like let's find other customers. Let's make a spreadsheet of a hundred other people who could fill in that hole. And let's um you know, we'll actually comb through all uh nine partners at initialized their whole networks. And then we'll we actually built software for this to basically get customers and uh hire people for our companies. And so all of these things are a lot of work like we kind of run it like a startup itself. Yeah. I actually had no idea that VCs were such help. Well, we do it this way. There are a few other people who do it like that. Andrea and Horowitz is known to have you know probably more than 100 people who work as an operating company on behalf of their founders. That's really cool. Yeah, we have nine. So we're just getting started. Okay. So you call these operators or Yeah, operating partners. But you know, every single one of our operating partners also can uh do their own deals and bring in companies. Um they're not expected to, but you know, we want them to learn how to do the business. Okay. So what kind of people would be would become good VCs? Yeah, honestly, great founders are sort of the best cuz um those are the people who can actually help like when something happens, it's just not, you know, totally new. you know, I don't have to call in a favor from my network. It's like, oh, when I when I had that problem, here's what I did. Um, and that's just more useful when you're trying to avoid the the landmines. Um, and so the best version of that is actually start a company and even if it doesn't work out, like you'll have learned so much. Uh, the next best thing honestly is join a fast growing company uh as it's, you know, sort of in hyperrowth. Um, here's a really useful uh rule of thumb for your viewers. Um you can basically eval if you wanted to evaluate any startup the way a VC does just figure out what the growth rate is. Um and this might be revenue it might be users um it depends on what the company is but uh basically for seed to series A if they're growing 3x a year um that's pretty good like that's sort of like a solid B. Um anything 4x and above that's like an A. like a five is like a plus. It's like 5x a year really really hard to sustain. And then anything growing around 2x it's like c plus c like you know and this is sort of a measure of why startups are so hard like literally startups are growth and if you've ever tried to grow something like buy two even 2x a year that's really hard. Um, but that's sort of how people can evaluate as a, you know, a nonVC that you just figure out how fast that thing is growing and that'll actually tell you whether your startup is living or dying. Got it. They're like sharks basically. They have to keep growing otherwise they'll die. They have to keep moving otherwise they'll die. Yeah. So for engineers and PMs currently, yeah, um if they want to go into VC then the best thing they should do is join a startup or even start their own startup so that they can build empathy for these startups that they will invest in, right? Absolutely. And then it's about that story, right? like you know what did you do for that company and you know a lot of people jump over to VC because they're the person who they were the growth PM for something that grew from like a million users to 100 million users and that's the kind of experience that is like almost impossible to get and those are the people who are deeply sought after in the world for their advice and so you know that's why joining a fast growing startup sometimes is even better than starting your own cuz it's really hard to start your own. Mhm. So imagine if they have all the skills like how does it work in terms of the money because I don't really understand how the VC world works. So do you usually try to join a VC firm and then pay your stake so that you could be a managing partner or operating partner? How does it work? How do you even join one? Yeah, absolutely. Um I think there are kind of a few different paths. The first one would be um you know work as an operator maybe early in your career. find some sort of win like I was the person who scaled like you know this 10x at you know this fast growing company um and then early in people's career they could join as an associate at a venture capital firm and um usually you have to find your way to network in to meet the person a lot of it is just purely trust right if people uh think you're smart and scrappy and hungry um and you know they've met you like sometimes they're just going to hire you like the next time they have an associate the next level sort of uh principles. I mean these are people who sort of start as VCs um and then get promoted once and those are people who start taking more investing responsibility. Associates tend to do mainly sourcing. So you know sometimes going to events or you know going into Excel spreadsheets or writing software to basically go comb through the internet and figure out what's happening what are companies that could be good opportunities and then they'll work with um you know the general partner uh or you know basically the investing partner to bring that to the whole team and so you know the associate role is not that glamorous but it's kind of like starting out in any business. It starts out as you kind of have to do like the scut work and then as you go associate principal um sometimes there's a managing director role and then you know making partner is uh kind of what it sounds like. It's a really big deal because only then do you really get a significant part of sort of the winnings from a given fund. We call that carry in the business. Okay. Um so only after you return the whole fund um the partners tend to get 20 to 30% of uh anything after you return the money to your limited partners. I see limited partners are the people who give you money to invest. Got it. Okay. So for example for initialized capital you and Alexis you guys are the founding partners right? And then you guys probably put in your own money at first. That's right. And then you guys have bunch of I guess associates that maybe become principal and then maybe a partner. We just have partners. You guys just have partners. Okay, cool. So they have partners. So they put a stake in. Do they have to like pay an amount to be in it or like invest their own money? Oh, I mean we're basically investing on behalf of some of the biggest um endowments and institutions in the world. So, universities, you know, when you watch PBS and you hear about, you know, X Foundation and Y Foundation, uh there are large pools of capital that are billions of dollars that are basically run uh often to support some sort of nonprofit or some sort of um you know, university, some sort of big goal. Uh those are pools of capital that have to grow in order to actually support their mission. So, uh [clears throat] you know, Harvard or Stanford or any university that has an endowment, um they actually can't spend the money that they have. When you hear about Harvard having $ 38 billion, they can't just take a dollar out of that endowment and just uh you know give someone a scholarship, they actually have to go and give that to other investors and those you know private equity or hedge funds or you know Fidelity you there's so many ways to invest and then venture capital uh is crazy because it's only you know something like 1% or you know all of venture capital is uh only a hundred billion dollars a year whereas the total amount of money going in through the financial system is easily in the trillions. And so, uh, everything that we talk about with venture capital, it's basically this tiny moat of dust on this vast ocean of finance and there's more capital in the world than people know what to do with at this point. So, which is [clears throat] like mindboggling for me. Like when if you told the 15-year-old me that there's more money in the world than anyone knows what to do with, I wouldn't believe you. um because we didn't have money and how you know and so that's one of the core problems in society today. It's like how do these giant pools of capital actually put it towards you know businesses that employ people that actually are useful for society. So that's why venture capital is probably one of the most important businesses and I'm you know I'm glad people want to do it but the best venture capitalists are probably people who also started their own too so they can actually help. That makes a lot of sense. Can you tell me a little bit of the timeline for Initialized Capital, like how much money you've raised and now like how much you've grown and stuff like that, just to give some numbers. Yeah. Yeah, totally. Uh we started off with a small $7 million fund about 7 years ago and uh now we have over $500 million under management. Nice. Um our newest fund is $225 million. So we will write checks of a million to $5 million uh in exchange for about 15% of companies. M [clears throat] um and so we'll lead and we'll do the whole round and you know if we if we write a really big check we'll sit on the board um and that was very different like we are a true institutional venture capital firm before uh now but before we actually started kind of like angels like we were writing uh $50,000 checks $25,000 checks and even then I was like that's a crazy amount of money. Um but we were writing them into companies uh as the first check and those companies became billiondollar companies. And so you know that kept happening and we realized well instead of sending 20 or 30 emails to all everyone else saying hey this is a good company you should invest in it. We just write one check the founder is done and then we get back to work. Right. And that was sort of the evolution of us from going tiny checks and helping other people to helping other investors to well we'll just do the whole thing. Mh. So, what were some of your biggest wins personally that you have rewarded yourself financially the most? I mean, honestly, I've just been super lucky. Like, you know, for me, Stanford was pretty crazy because the people you got to meet, I mean, you went to Waterl, like the people you get to sit next to, people who are going to go on and do all kinds of insane stuff. And when I was there, I had no idea. Okay. So, I guess what I meant was like, what was your best exit and how much did you make out of it? Yeah. Yeah. So, I've actually never talked about this, but we did sell posters for $20 million. Nice. And how many co-founders? Uh, two co-founders. Okay. Okay. And did you have initial investors? Yes, we did. Um, I won't tell you how much I actually made. Um, but I can tell you how uh as a VC I try and figure out how much people made from a given exit. Um, so obviously you have the acquisition price and then again going back to cap table, um, you can kind of guess most co-founders are probably close to equal, but not always, assuming it it makes the math easier if everyone's equal. Um, and then basically count the number of funding rounds they've done. Um, if it's an early round like a seed round or a series A, uh, sometimes a series B, it's about 20% of dilution. meaning uh investors came in and bought 20% of the company at that moment and then the founders and the employees would only own 80% after that funding round. So if you had 50% and then after one funding round you would have 40%. Yeah, exactly. Um and then you can count them up basically the series C's CD E F like G you know they go on for a while these days. um those tend to go from, you know, 10% for the B uh down to sometimes just 1 or 2% for the much later rounds. So almost all of the dilution is actually usually in the seed series A and B. I see. Okay. Just mostly A and B. So if you ever wanted to do the math, just count the percentages and then do the math and multiply it by the acquisition price and that's how much that person probably made. Mhm. And um sorry for asking this question, but what about being a VC? How much can you make from that given a success? I'll tell you how to do the math for that, too. All right, let's do it. Um, let's make the math easy. Say, say a VC has a $und00 million venture capital fund. So, they raised $100 million from other people. Um, and then a lot of people often ask like, how much does the VC usually put in? So, um, it varies. It's sometimes as low as 1%. um you know sometimes it's as high as I think um Peter Teal is putting in 20% of the billion half dollar fund that uh he's raising for founders fund or has raised so it varies so for a hund00 million fund the uh people who run that fund might only put a million dollars in total and then what happens is they invest that over usually 2 to 3 years uh and then 10 sort of 10 to 15 years from from uh that they're kind of expected to give back something like between surprisingly a low number of like maybe 2x or 3x like 2x is 2x to 3x is basically um considered a pretty decent fund. Uh so meaning investors gave them a h 100red million and they have to give back 200 to $300 million in the next 10 to 15 years. I see. Um and then the typical carry for a VC fund is 20 to 30%. And so, uh, all of the VC partnership, if they only, if it's only a 2x fund, would make about $20 million. Nice. Thanks for really simple numbers. Uh, but it is an incredible job, right? Mhm. That's finance is crazy. Mhm. Mhm. Um, so friends of mine actually started a company with Peter Teal in 2004. And um, I was 22 years old, just graduated. um didn't know anything about money or how companies started. Didn't know anything about venture capital. I got my first like full-time job with Microsoft up in Seattle. Program manager. Yeah, program manager uh for Windows Mobile, weirdly enough. Um you know, 2 3 years before the iPhone uh ever came out. And so I saw them just kind of try and copy designs, like literally copying like the checkbox mentality of um you know, here's what RIM does, let's just copy it. But [clears throat] it was my first job. I had health insurance. Uh, you know, I actually could have a really nice apartment. I ran out and bought a new car. And um, and then my friends called and said, "Hey, you got to quit your job. Uh, we're starting a company with Peter Teal." You know, the guy I mean, and Peter Teal was not a billionaire yet. I think he had just sold PayPal. Um, he was probably worth like tens of millions of dollars at that point, which was still like insane. And he said, "Well, come have dinner with me." I flew down to San Francisco. He had just opened a French restaurant. Uh, the French restaurant was bad. It was terrible. Open the French restaurant. Yeah. Yeah. I mean, it's one of those things when you like sell a company, you, you know, you buy the flashy car, you like open your own restaurant, like you, you know, you get it all out of your system. That's funny. Uh, it's called Freezone. It was terrible. The restaurant closed almost immediately. [laughter] But it [clears throat] was about the time he wrote the $500,000 check to Facebook that made him a billion dollars or it made him a true billionaire. And I had met him a bunch of times. I had him come to speak at Stanford. So, it wasn't like I didn't know who this person was. is like clearly a Silicon Valley legend. And here he was having dinner with me, the 22-year-old, you know, pro program manager. He's like, "Gary, what the hell are you doing at Microsoft? You're wasting your life. Um, I'm so sure you quitting your job and joining this startup is the right thing." He got out his personal checkbook and he said, "Um, I'm going to write you a check for $70,000," which is my whole annual salary in 2004. Uh, which is more money than I'd ever, you know, I was probably $40,000 in uh in debt. Um, you know, student loans and credit cards and all that. It's like um and cuz because I ran out and I didn't treat money like um you know, capital and time. I treated it as well, I deserve this because I have a job now. and you know, job's really hard, so I should have nice stuff. I like basically fell into that trap of being lulled into like the physical having nice things, you know. Um, and the problem was I felt like I couldn't take the risk. It was crazy, right? Um, I had, you know, and so he said, you know, here, take this check. I'm sure this is right. I got on a plane back to Seattle and I said no. And that company became Palunteer. Uh which is you know worth 20 to40 billion dollars depending on who you talk to. Uh and so easily uh the equity from that if I had joined at that moment as a first engineer it would have been worth probably close to $200 million. Um and that's the kind of decisions those are the kinds of decisions that people have to make. Uh when you're a maker it's completely crazy. Um, but it's common place. You spend any time in around here and you just get run into people who literally say no to the next Facebook. No, sorry. Actually say no to actually Google or actually Facebook [laughter] actually. But that's also kind of the crazy thing about tech now. It's like we are touching every part of society uh with software. And so I don't know I spent a lot of time trying to decide like why did I make that crazy $200 million mistake? And um that it's just crazy. Well, I mean, you're doing pretty well right now, so I think it's not that bad. But um you did end up going you did end up working for Palunteer. Yeah, I just joined a year later, right? A year later. So, I mean, I guess that's a big difference in terms of like equity percentages, but totally. But, uh but yeah, so I guess that was still pretty fruitful for you. You designed a logo. That was cool. That was fun. And I got to see what it was like. You know, what made me quit was actually seeing all of my friends who were way smarter than me. uh quit their like I had a friend uh Bob Mcgru who quit his PhD at Stanford and I said well you know Microsoft's a big deal but you know PhD at Stanford is a bigger deal and um that's kind of what you end up finding with a lot of these startups is I like to say that it's kind of like packing a snowball. Do you like uh '9s uh '9s obscure vintage video games like for Sony PlayStation? I wasn't born. Oh shoot. Okay. [laughter] I think I was born. Okay. There's this game called Katamari Damicy. I think it might be like early 2000s maybe. Is it the thing with the ball? Yeah. Yeah, the one with the ball. That's basically what a startup is like actually. Uh you start out with this tiny like in the game you're an alien and you're about this high. And you know, you're probably smaller than this this cap right here. You know, I have a prop here actually. Oh yeah, totally. This it's rolling around. [laughter] It's rolling around. And then the the deal is um you're a little alien rolling around a ball and anything that uh you are bigger than you pick up and then it becomes like a part of you and then you can pick up bigger things and anything that is too big and you try and hit it uh you'll actually bounce off and you'll get smaller and that's basically what a startup is all the time. So getting a first customer, hiring your co-founder, hiring your first engineers, raising your first money um that's all you're doing. like it's like little bottle caps and things like that sticking onto your ball. And then, you know, the funny thing about this game is by the last few levels, uh, you know, you start picking up tables, you pick up like buildings, cars, by the end, you're actually picking up whole continents. And so that's kind, you know, startups are basically katamari damicy. And, you know, that's what you'll find in these patterns. It's like hiring is really important, raising money is really important, but then the most important thing is actually getting customers. Like that that telling that story well will get you all of the rest. you, you know, you'll get people to drop what they're doing and come join this thing because, hey, this is a rocket ship that's about to take