Speaker 1We are in a new world, I like to call it trillion-dollar markets with billion-dollar contracts. You have these areas, whether it's robotics or AI infrastructure, the demand is well-documented to be around trillion dollars. A few companies are getting contracts or LOI or interest over the years that are a hundred million, couple hundred million, a billion dollars. So what ends up happening is you get to a billion dollars of revenue scale a lot faster, but it's a lot more concentrated. It might be preceded by a few years of capital investments until you get the platform ready. On the other hand, you have a much more complex product. This is not something that in the software, people could hack it in a weekend or a couple months. It was asset-like, you just had a bunch of programmers. Now it's different. We're talking about serious hardware, complex, not easy. If you get it right, there is a huge payoff. Sometimes the most. Interesting markets and the most interesting companies are hiding within the Trojan horse of capital-intensive businesses. That is not necessarily bad. There is a gem there.
Speaker 2I'm Ted Seides, and this is Capital Allocators. My guest on today's show is Aydin Senkin, the founder of Felicis, a venture capital firm founded 20 years ago that invests in seed and Series A companies, now out of a billion dollar fund. Aydin joined me on the show five years ago, and we followed that conversation with what's changed for Felicis, high-growth companies, and the venture industry. Before we get going, you're on a plane headed to an annual meeting. And this time of year, you're definitely on a plane headed to an annual meeting. With all the travel in front of you, it's a very busy time, so I'll keep this particularly short. Before you doze off in the thin air of the cabin, that's a great time to let the soothing sounds of Capital Allocators fill your ears. And when you find yourself at a cocktail party at one of those meetings, in that uncomfortable moment where you're not sure who to talk to or what to say, that's a fantastic time to tell them about the Capital Allocators podcast. It's an icebreaker that's the gift that keeps on giving. Since you're at an event, if you've come to one of ours, that's a great time to tell someone you think highly of about our capital. Capital Allocators summits. Because if you know, you know. Thanks so much for spreading the word. Capital Allocators is brought to you by AlphaSense. Every allocator sits at their desk for hours preparing the work around investment decisions, getting up to speed on a new theme, prepping for the next investment committee meeting, and tracking what changes across an entire portfolio. AlphaSense just launched something built to help. It's called Super Analyst. An always-on agent that works like a power user on your behalf. It draws on over 500 million premium sources, including broker research, expert transcripts, company filings, and earnings calls, and keeps working long after you've gone home for the day. Point Super Analyst at a theme, company, or market, and it learns the coverage universe so you can easily turn new insights into the briefs, models, and memos you'd otherwise build by hand. It was designed to work. It was designed to work like an extension of your team, so it remembers your projects, follows your templates and processes, and links every output to its source so you can see where each conclusion came from. The best way to judge its quality is to give it a whirl. Pick the research task on your desk before your next committee meeting and hand it to Super Analyst. Start a free trial at alpha-sense.com slash capital and see what it has ready for you. Capital Allocators is also brought to you by. Ridgeline, the investment management platform built for firms who are rethinking how work gets done. You're at your desk looking at a line graph of your firm's growth. The line is moving sideways, limiting your growth, and you know exactly why. You're constrained by your operational bandwidth that's been the same for so long, it just feels like the cost of doing business. Ridgeline is built to change that line's trajectory, to be the inflection point that takes your growth from incremental to accelerated, with the team you already have in place. Ridgeline is the only AI-native investment management platform that brings together the front, middle, and back office with one set of data and powerful AI agents that automate away operational drudgery, so your talent can shift from managing old technology to materializing new ideas. Ridgeline helps asset and wealth managers understand and improve their firm's growth trajectory. To see how your firm can improve their firm's growth trajectory, visit Ridgeline.com. To see how your firm compares to 16,000 of your peers, visit Ridgeline.ai slash trajectory. If you file Form ADV, your firm is already there. Then talk to Ridgeline about how you can do more with the team you already have. Capital Allocators is also brought to you by Juniper Square, the operations partner trusted by the leading private market GPs. One theme that keeps coming up on the show is GPs that build the strongest and most durable relationships. The GPs that build the strongest and most durable relationships with LPs are the ones that have both strong returns and strong operations. AI raises the stakes on operations, and having Juniper Square as your operations partner helps ensure your data is organized, accurate, and accessible so you can unlock operational alpha. That's why thousands of GPs trust Juniper Square. Learn more at junipersquare.com slash capital allocators. Please enjoy. My conversation with Aydin Sanket. Aydin, thanks so much for joining me. Ted, thanks for having me. It's been a few years since you came on, and more importantly, 20 years since you started Felicis. And I thought it'd be fun to start with this open-ended question of, as you look at the landscape and how you're investing today, what's changed and evolved over these 20 years since you started?
Speaker 1On the what change front, our most important top cultural value is learning and adapting rapidly. We have built change into the DNA of the firm. I wanted to do that because there are a lot of exciting companies that come up in technology, and the disruption happens fast. I always wanted us to have the option of being able to choose the markets where we feel the biggest growth is happening, where we feel the biggest future potential is. We have always used that generalist strategy. We started in consumer internet when I left Google, shifted to e-commerce and fintech. With Shopify, Credit Karma, and Plaid, then later on to SaaS. Most recently, AI, infrastructure companies, web security, global resilience, and beyond. That's what changed. What has not changed is we've always been early-stage focused. Even today, with a larger fund, close to a billion dollars, 91% of our investments are seeded in Series A. So one of the things that did not change in those 20 years is to always attempt to be the founder's most trusted partner and venture capital. We've always wanted to be the founder's most trusted partner and venture capital. Earned their trust and their partnership through our ability to show conviction better and faster than others.
Speaker 2What has that looked like over the years? You're covering the world. You're trying to find the biggest growth areas. How have you evolved to doing that better and better as the years have gone on?
Speaker 1We're surfing these waves. If each one of these waves is a technological trend, we're trying to find the best companies, find the best waves, surf it to great results. We're trying to find the best companies, find the best waves, surf it to great results. There are so many waves and surfers. We are trying to go for the tsunami waves. Our business is simple. We need to generate growth that is so far beyond you can get in public markets before it's obvious to most other people. We like to find companies where we can plausibly call out at least 100x revenue growth from the point we invest in or more. It's all about playing the probabilities. If it was super easy to get, most everybody would have done it. Everyone would be in those companies. What we're looking for is, is there enough market size? Is there enough demand? We like to chase demand. So is there enough demand to justify at least 100x revenue growth or beyond? Things in the world are changing fast. Three years ago, not a lot of people were talking about defense, certain aspects of AI or global resilience. In the last three years, we have realized we need a lot better scalable solutions for energy. Defense is not going to go away. The conflicts are here to stay. We need to do a better job at that. In terms of AI, that is an area where a lot of people have pivoted in. We have also found that there are derivative areas that are still benefiting that are not necessarily just model companies. The most important raw material for AI is data. We have a bunch of data companies. They tend to use a lot of data center resources. All we try to do is chase the right demand. The revenue growth will follow. If the revenue growth follows, then the value. The valuation will follow. What happens is a lot of times people are trying to look at the signal, the demand, and the hot companies. Instead of chasing the demand, they sometimes chase hype. We try to pay attention to where the demand is coming from. We base our decisions on the real business performance of the companies. A good example is we invested in Supabase at the top of the 2021 valuation peak. The company's business performance. How's that? has grown almost 3,000x. since we invested. It took three years for the market valuation to reflect what's been happening. All of a sudden, it started taking off fast. If you only look at valuation, you feel like that company has been stagnant for three years. All of a sudden, something happened. If you look at the underlying business growth has been steady and accelerating year after year. If that business performance is strong and growth is accelerating sooner or later, the market valuation will catch up to that.
Speaker 2What you're describing is this difference between the fundamentals and price, or you said hype, that may already reflect a few years of those fundamentals coming through. Talk to me about an example of something where those two things were disconnected, where the hype was way ahead of the underlying growth of something that you chose not to invest
Speaker 1in. There has been many areas where we chose not to invest. Recently, we are now in a new world where because of AI, anybody can build any piece of software and customize it. The bar to developing custom software has gone down so much. You have to look and say, where do you invest in a world where creating software is no longer that difficult? There's fundamental pieces of software that still matters and all of that. That's one of the reasons you're seeing some big changes in the SaaS world. One of the things that changed in my mind in a different way is the interesting trends are also supporting more capital-intensive technology areas than capital-light technology. That's one of the reasons why we're seeing some big changes in the SaaS world. When I started investing, I thought software is capital-light. This is great. Now we're starting to solve more interesting world problems. We're starting to see interesting companies that are not capital-light, but I think have stronger upside potential.
Speaker 2Walk me through something that is both capital-intensive and you can see the potential for a thousand X growth. Usually the capital-intensivity makes scaling much harder than in the virtual platform.
Speaker 1One of the areas where we're seeing a lot of growth is in robotics and physical AI. If you're curious about cool ways to catch, watch a lot of sci-fi movies and read sci-fi books, virtually almost all of them have robots in them. I thought about it differently and I said, let's look at the low-wage labor market. US, Western Europe, Japan alone, we're talking about 190 million low-skill jobs. That I'm assuming 20 to 25K per year. These robots can do this job. What if the robotics company we invested that is already gaining incredible projects with Fortune 100 companies or top companies and S&P 500, they got 0.1, 0.2% of this market, which is a tiny part of this. 0.2% of that market would equal to 10 billion in revenues. These companies are going to require a lot of capital. Robotics is not capital-like. You need to scale that across all kinds of robots and deployment. On the other hand, the demand is vast. I only took the market for current low-skilled labor. If all of a sudden we had robots that could do jobs 24-7 reliably, it might open up whole new areas where you normally would not have humans do things, you might have robots do things. This is without even considering how much the market can expand. I remember the days where we used to use Nokia phones with nine buttons, 12 buttons, and everybody's like, oh, this is as big as the cell phone market is going to go. Apple comes up with iPhone and Android comes out and all of a sudden you're seeing Apple is a $5 trillion company. Google is around $5 trillion company. This is an interesting area where a lot of robotics companies have failed in the past. This new wave of robotics, I feel, is going to be as big of a chat GPT moment, if not bigger, moving into the future. And we're bullish on it.
Speaker 2When you have that belief of the growth of that sector, how do you then go from there to identifying which companies, economic models, founders who want to back with it?
Speaker 1We have several different ways we go about it. One is finding the most obvious companies that are going to be the leaders who are looking for original IP and durable IP. You don't want to just see high revenue growth. You want to see durable revenue growth. One of the key ingredients to durable revenue growth is core IP that is not difficult to replicate and copy. For instance, we made our bet in a robotic company called Skill.ai. Skill.ai was built by two professors. They were each Facebook VP. They were Carnegie Mellon professors. We found them. They're the most quoted people ever in robotics. They had an idea that one of the interesting ways to solve this was synthetic data. They were one of the first to incorporate reinforcement learning. They hired some amazing people, including from Tesla. These are difficult things to do. Getting the best talent in the world, having two ideas that nobody else has seen yet, applying that in a robot is equivalent of our open AI or entropic bet in robotics. That's not where it stops. If robotics take off, there's going to be huge demand for robotics parts. They use actuators. A lot of these parts are not made in the US. We just recently signed a term sheet to invest in a company that's going to be making parts for these robotics and they can scale it. We're also looking for a bunch of companies that could be data in robotics. We have done well in the AI wave, backing companies like Mercore that supply the data. To improve these models, that business has grown incredibly by leaps and bounds. Probably the fastest growing company ever in our portfolio. We also feel there will be similar companies in robotics and beyond.
Speaker 2When you have a theme like that, you're looking for the anchor company in the space, the ancillary companies that are benefiting from it. How do you balance that with backing the right founders?
Speaker 1There is also the tension of you want to invest early enough, you want to invest early enough, you want to invest early enough, you want to invest early enough. There is incredible pressure to be early in these companies. If you're too early and somebody else comes to the market with a better, more durable idea or better IP, they're also going to be able to come into the market and capture a lot more value. It's basically a probability game. You cannot wait until things are obvious. Nobody has the crystal ball. What we try to do is look at as many fundamentals as possible. We try to look at as many fundamentals as possible. We call it multitude of signal. Let's say there are four or five elements what makes a great company. Each company has maybe one or two signals. But if a company has three signals or four signals, let's go all in. We try to capital adjust to that risk or the level of signal that we have, the multitude of signal. The other thing is to try to play the wave in as many different ways as possible. Most people think if we're going to make a bet, we're only going to make a bet in a model company. They don't think of other elements like in robotics. There's going to be a data manufacturing element. There might be a sovereign element. We are now in a different world where five to 10 years ago, the sovereignty didn't matter. They were always global companies. Now for key areas, energy, AI, maybe robotics, maybe each continent will want to have their own champion. They're not going to be satisfied with a champion from the US or Europe for different national security reasons as others. It's not mutually exclusive. There might be three, four, five ways to play the same wave. The more you do that, you bring resiliency to that wave versus making one bet. Because if something happens and some other company comes in, if you have also invested in the foundational companies, then whoever ends up winning, you end up winning. A great example of that is a bet we made in Superbase. There are some successful companies that have grown revenues, Globable and Replit, chasing the citizen developers. It's a hard area because these companies are doing a great job. Even though we have not backed them, virtually all of them use Superbase as the underlying database. We didn't have to make one of those bets. We still won because the company we backed that is the underlying infrastructure layer is benefiting from the sprints of these companies and the growth spurs. If I was to boil down all of Felice's 20 years of what worked out the best for us, we have always chased high demands ahead of revenue growth materializing. Virtually all of our major fundmaker companies have been foundational layer infra companies. Shopify was commerce infrastructure. Adyen was payment infrastructure. Credit Karma was credit score infrastructure. We've made investments like Semgrep and other in web security that was application-like code security infrastructure. And AI, foundational model companies that have become Runway and others that have become underlying layer for a certain area of AI. Every time we have chosen a great infrastructure or foundational layer company, those tend to be the ones that had the biggest upside.
Speaker 2What's different in underwriting as you're moving towards capital-intensive businesses from your SaaS of the old days or AI with this infinite scaling potential? We are
Speaker 1in a new world. I like to call it trillion-dollar markets with billion-dollar contracts. You have these areas where there is robotics or AI infrastructure, the demand is well documented to be around trillion dollars. So what does end up happening is you get to a billion dollars of revenue scale a lot faster, but it's a lot more concentrated. This is not something that in the software people could hack it in a weekend or a couple months. It was asset. like. You just had a bunch of programmers. Now it's different. There is customer concentration, the scale, and the speed with which companies scale. The speed could be an order of magnitude bigger. The scale could be an order of magnitude bigger. There's also more capital. So you need to take that into consideration and underwriting that this might need to be more than one round investment. We might need to maybe think about reserves a little bit differently than we originally did with software companies.
Speaker 2In the environment we're in today, where there's a lot more capital looking for these types of high power law opportunities, how have you thought about how you're competing and participating when there's so much more capital looking for these
Speaker 1ideas? I'm glad the industry has scaled and grown. The abundance of capital has become more and more important. I think it's important to think about how you're competing with companies. When you have that much capital chasing fewer companies, it's inevitable that ownership is going to decline, valuation is going to increase. It becomes more important and imperative that you find the right companies and you find them as early as possible to make sure that we can continue those returns. There are some things that change and some things that don't. We do a founder survey and we ask the founders, what are the elements that are most important to you that influences your decision to choose a venture capital partner? Over the years, it's always been consistent. Trust is an important element. Let's say that there is five firms or 10 firms, the firm that they trust the most, that will be one of the top three reasons. The second one is level of conviction and speed of conviction. You can say we're in a new era where there is so much capital, things are changing and things are capital heavy instead of capital light. The way the founders make decisions has not changed that much. They're going to have conviction. How can you back out the conviction? It's almost like a job interview. It used to be that founders came to investors. This is the reason you should invest in my company. Now, venture capitalists are going to the founders. This is the reason you should take our money. We've done our homework. This is why we have conviction. This is what we think the future could look like. This is why we want to partner with you. The last thing is the founders want to make sure the venture capital firm they're partnering with is going to be able to support them. That's another area where we have to keep earning their trust. We've done a lot of good job because we can tell the founders that love us become references for the new ones that we need to win. If you do right by the founders, the work gets around and it affects the companies you can invest in, the companies you can win.
Speaker 2In the last few years, what are some of the examples of ways you've worked with your portfolio companies to continue to build that trust?
Speaker 1The number one thing that we hold dear is that we treat every founder as individual. We have done a couple of things that are different. We always start with a question of, if we can help you, what is the most important thing that we can do that you care about? Asking that question is important because every founder can ask us five things, 10 things, 20 things. To me, what matters is if I could do only one of those, what is the most important thing so that if I do well, then I know it's going to matter. The other thing that we're trying to do as a firm is set the expectation right so that you are more likely to exceed the goal. If you do a great job with 20, you do 10 and the founder is like, you've done only half of what you promised me. In reality, nobody can do 20 items for each company they back. You're going to have to choose the few things that matter and do a good job. The second thing that also matters is to have trust with the founders. Sometimes the contribution is not, you helped me hire, you helped me do this. In tough times, giving advice that is maybe contrary to what people are reading on X and social media. In order for that to work, the founders need to have to trust you. That is not going to happen because you're on their board. Sometimes it's opposite. They actually afraid to tell you all the things because you're on the board. One of the other things that we go to extreme lengths with, we tell the founders, we're never going to vote against you. You might as well tell us everything about the company or everything that's going on. Let's talk about the hard things. Our platform team gets involved before we write the check. Imagine if you were the leader of the platform team at Felices and we said, hey, Ted, you're not going to touch any of the things we invest. After that, you're not going to touch any of the things we invest. After we invest, you can come in and do your job. That is not rewarding at the end. Investment firms, they're always investment driven. One of the things we said is, why are you waiting until we write the check? Become part of the check writing process. You're a true believer then. You know exactly why we're doing it. The other thing that happens is then when our team follows through, the people that are helping are true believers in the company. You're not doing it because it's your job, because somebody else wrote the check. You're trying to save them. You're doing it because you were there in the very beginning. You were part of the decision-making process. Everybody from the investment team to everybody else in the firm that helped the founders have high agency and high belief. Then everything they do tends to be more effective because of that.
Speaker 2If we turn back to the first one, identifying what's the most important thing for the founders and working on that, of those categories of things you've heard are the most important, how has that been changing over the last few years?
Speaker 1There are certain things that every founder tells you, we need to hire this person or I need to get a customer intro. One of my obsession is with strategy and instrumentation. Sometimes what I do with the founders, instead of immediately going and tackling a problem, why don't we figure out what is the most important problem to solve? Sometimes they're not even realizing, but the instrumentation is not there. They have this big vision. They have this big dream. My question is, how do you know we're achieving that dream? How would you measure that? How do we know that the most important role that the company can go after? Or is there something even more important? Maybe there is a distribution deal that's important. One of the things that I like to do is, like playing chess, round three, round five, am I going to move the bishop to here? No, let's think about the end game. What are we trying to do here? How are we going to get the checkmate? We might have to sacrifice a couple of pawns. Let's not do the obvious move. One of the things that I try to do, whether I'm on the board or a close advisor to the founders, is listen to them carefully. If I feel there is something bigger or bigger picture or higher level, that's what I like to bring to them. My benefit is to see a bunch of really incredible companies. There has been many instances where a founder has been like, we're doing really great. And I'm like, I can pretty much tell you in isolated case of your company, yes. In a group of companies in our fund where you are, you're 58th percentile. This is helpful to the founders because if on an isolated basis, they might think, wow, this is three X growth. You're in a vintage where three X growth is 58th percentile in a book of great companies across different sectors and different geos. These are things that are subtle, not as obvious, but important to lay a great foundation for these companies to continue their journey towards being the best in their sectors.
Speaker 2What are some of the most recent issues that have come across your plate as things that are most important to work on today?
Speaker 1There is always a tendency to look at what you're reading on X and social media. The market is moving fast and so-and-so is raising this much money. A lot of times what I tell them is there is not a certain formula where you get to X number at X percentage growth last year. All of a sudden, the next round is going to materialize. I always call this, don't show me the numbers, show me the growth formula. Have we engineered the growth formula and how durable is that growth formula? I'll tell them, I know you're not going to like to hear what I'm going to say. Wait a little bit more. Maybe we need a big distribution deal or we need to launch a self-serve product where you know it's going to be a step function in the revenues more than the numbers and the growth figures themselves. Let's make sure that we have engineered the fundamentals because if we engineer the fundamentals, the rest is going to follow. We are part coach, part advisor, part helper, part psychologist. Just because something is happening in the market doesn't mean you need to blindly follow it. You also need to look at the fundamentals and say, if we don't have the fundamentals, we might need more time. Don't rush. Do we really have to make this decision? If we rush into it and we are not ready, it might be worse than waiting longer and doing it the right way because sometimes when you go into the market and it's premature, you're not going to get a second or third shot and say, oh, oops, that was not right. Let's do it again, six to 12 months. People might not want to listen to you if that's the case. A lot of it is reflecting in years and years. Now I can say at least two decades of experience as an investor and another decade as an operator is to essentially help them with making sure that they don't fall into those traps or they don't hit on those mines.
Speaker 2As you're trying to give them that advice based on your experience, let's say it's the example of saying, well, let's slow down on a capital raise and get that growth model going the right way. When you're facing a market that has an abundance of capital and there's some thought, maybe we should get the capital that we're going to need in the future while it's there. How do you help a founder balance that trade-off between getting the capital while it's there, they're excited to do it, and then trying to get them to do it again? And to listen to you to slow down, which isn't where the market's been going.
Speaker 1These things are sometimes a little bit of science, but also a little bit of art. The little bit of art is you can tell by the demand and heat in the market, whether this idea of the market is moving, we need to do this. The more important thing is to see how much market validation there is. Even if you do an incredible job in positioning and narrative and get everything right, this is where the wave surfing analogy comes in. Sometimes when you're a little bit early, you miss the wave. You're a little bit too fast, you're not the sweet spot in the way. You can think about all the fundamentals, but there is also this art of being there just when the supply and demand of capital is at the right point. One of the things we try to do is the same way that we try to chase demand when making investments. We know all these funds and all the partners, and we try to get ahead of things before a fundraise happens. Our job is to know where the heat is. What are the partners paying attention to? What are they investing in so that we are not missing something that's obvious? We can tell the founders, you might like firm X, Y, and Z, but in reality, they don't care about the sector as much, or this is not something they're going to get excited. We can give them market intelligence that help cover some of the obvious things that it's not always easy to do from a founder's perspective as they're focused on operating.
Speaker 2We're going to take a quick break in the action to tell you about Brookfield. Brookfield invests in a company called Brookfield. In the thing, behind the thing, behind the next big thing. Their focus across infrastructure, energy, real estate, private equity, and credit is helping to build the backbone of the global economy. Brookfield combines deep operational expertise with disciplined long-term investing, uncovering value, and partnering alongside clients to shape tomorrow's economy today. Invest in the businesses that shape tomorrow. Learn how you can own what's next at brookfield.com, slash, own. This is not an offer to sell or investment advice. Investing involves risk, including the loss of capital. And now, back to the show. In your work alongside a founder, you're going down this path. Let's just say as an example, which I'm sure you've come across, times where you just have a different opinion about what you think is the right thing for the founder, and they keep acting in a way that doesn't agree with you. You've also held this stick back, which says we're always going to vote with you as a founder. How do you behave then, as a part owner of this business, when the founder seems to not be listening to what you think is the right thing to do?
Speaker 1What I have learned over the years is, even let's say that I know I'm right, and we have a stick. I do not like using this stick, because even if you're right, it leaves a bad feeling with the founder. And instead of being functional, it ends up sometimes creating more chaos. If we're going to tell them something, we try to show them data. All the founders we work with are smart. If you go to them with an opinion, they might react and debate. If you go to them with data, chances are they're going to listen more carefully, because data is harder to refute. Let's say that there's been an interpretation of the data, and you're like, the data is in front of you. Sure, you don't want to listen to it. What I found is you need to let them walk through. And sometimes there are situations where you end up in a place where you're like, well, I told you a month ago or three months ago, and it's unavoidable. Hardest thing about being a parent is you can only tell your kids what to do and sometimes give advice. At the end, they're going to learn through their own experiences, and there is nothing you can do. They're going to make mistakes sometimes. What I've found most valuable is using the stick is not as helpful. And yes, sometimes you've got to discipline them. You've got to stop them and everything. Sometimes also the most valuable life lessons is when your kids learn it by experience, you just have to put some great guardrails. It's sometimes similar with the founders too. That was the price for them to see, oh, I see now why you gave me that advice. And from now on, I will listen to your advice. That is much more effective. What we try to do is make sure that on the guardrail front, that we try to avoid anything that's catastrophic or irreversible. Let's say that we're going to go to Code Red. We want to make sure that we're doing that because it's truly catastrophic to the company, company destroying type of thing, or there is some major legal risk. Of course, we stand in and say, we have to take this seriously. This is a line we're not going to cross.
Speaker 2I'd love to get your perspective on the competitive environment from the venture side and providing capital to companies with so much more capital. The business models of venture capital firms have changed both scale, specialization. Love to hear your thoughts on the way that the changes in the competitive environment have impacted how you go about investing.
Speaker 1The competitive environment is different than anything else that I've seen in the 20 years that I've been doing this. You have so much capital. The abundance of capital is inflating valuations, reducing ownership. We're also seeing a few companies that are producing business performance that I don't even think that I have watched in the early days of Google or Shopify. For a few companies, this is justified. What is also happening is some of the founders are getting so much larger. It is not shared equally across all the companies. There are whole sectors and whole geos, huge number of companies where investors are simply not interested. All of them are going to the same few companies over and over again. There are a few companies for the right reasons. They're important. You want to be in those early, but we also try to use our general strategy and our philosophy of having 50 companies per fund versus 25 companies per fund that there are some non-obvious bets. If you're only making investments in the obvious companies, chances are returns are going to get diluted. There is so much capital going into that. Who knows what's going to happen? That capital can also make that company almost a winner by default. We have seen that in the history of venture capital, it's not just enough to be right. You also have to be right and not consensus. That's the reason we try to have some of the more obvious bets, always barbell and balance them with less obvious bets that we think that is not yet obvious or super hot to the market. We do have strong reasons to make that investment because we're chasing, high demand and market is eventually going to wake up and see the potential there.
Speaker 2When you agree with the trend behind one of the obvious companies at the later end, an anthropic or something like that, how have you thought about whether to participate with that, say 10% of your capital that's not in the seed in early stage on something that you completely agree with, but it's also obvious to everybody?
Speaker 1One of the things that's different about Felicis is I have this favorite chart that we use for our LPs is this chart of our best fund maker companies. All I show is little dots when we invest it, then these hockey stick curves that follow. What you want to see in manager alpha is you invested in a company and after you invest it, the company has truly gone up into the right because there is a lot of signal in a company instead of no revenues or pre-revenue. Some of these companies have already demonstrated traction at a certain level, growth at a certain level. One of the things we forget, at the time that we invest, we are re-underriding the company. What really matters is what is your confidence that the growth is going to accelerate from there, or is it going to stay as steep as when it was when you invested? One of the things that we have gotten right is there has been many times when we paid a high price where it was a pre-revenue company or little traction. People thought this was just insane. It's because we followed the demand. We knew that the demand is going to generate incredible revenue growth. Those are my favorite investments because we're in the minority. When the growth finally ensued, then a lot more investors followed. There are also some times when you called out, the company is already showing revenues and growth. A good example is we're involved in this company, X. It's essentially a search infrastructure, but a lot of the AI models and AI companies are using it. The way that we use search has changed. It's no longer consumers going to Google. This was a company that you could look at it and say, the company, has done well, but we thought that despite those incredible news, this is a company that can grow five to 10 times faster. The idea is not that the traction and the growth is not obvious. The non-consensus view is whether that growth can not only continue, but continue at a much sharper rate. People always worry that, oh my God, do we think that the growth is going to continue? Similar how entropics surprise people, people said at that scale, getting that growth, let alone accelerating, is unlikely. Law and being, I mean, I don't know if it's true, but I don't think it's true. I don't think it's true.
Speaker 2With a team of generalists in a world where so much capital comes in and you have specialization, what does that look like when you're trying to either get up to speed of a company, investing in a company where there's someone at another firm who's focused on that vertical? What you see that excites you just happens to coincide with an area that that person may have known for decades.
Speaker 1Generalist is just a strategy. It's the purview. We like to refer to our team as the Avengers. Everybody is a carbon copy of each other. Everybody has a different strength. Everybody has worked at different companies, have built different muscles and different strengths. That's key because you never know who's going to resonate with which founder or which one of those skills and backgrounds is going to be key when we're making a certain investment, whether it's people's personalities, what companies they worked at. We try to make sure that people strengthen each other. When we're doing the work, each time you make a decision, you're trying to make a decision on three things. Do we want to invest in this market? Do we want to work with this founder? Is this the right company to invest? The one area you can do the work in advance and truly have prepared mind is the market. What we're trying to do is if instead of making three decisions for an investment, you make two decisions, one of them, you've already done the homework. Now, all your intellectual capacity is focused on the founder and the company. If the founder came through trusted referrals and we've already done our job, from what we can tell, seems to be having the most unique insight and is more confirmatory. The more homework you can do where you're trying to reduce the surface area on which you have to make the decision. As a generalist, this is how we like to scale because the specialists are given as well as a generalist, how would you know all the nuances? Our business is misunderstood. Our business is all about understanding what matters to the future of a company, what makes a founder outlier. That's our core mode as a venture capital firm. The better you do that, the better you're going to identify founders and markets.
Speaker 2What are some of the non-obvious characteristics of the successful founders that you've found?
Speaker 1There's been so many interesting examples where you can categorize them and say, the founders are relentless. They can face adversity and grit. We came up with important questions. What's the most unreasonable thing that you've done? Or tell us something that's not obvious to anything else. We're looking for people that are low ego and that have truly mastered what matters in an area. They have also understood something that's going to lead to success that is not yet obvious to everyone else. We are excited about AI infrastructure. One of the hot things right now is inference. There are a lot of companies helping with inference. Most of them are chasing the same five or six names. Those five or six names know the market power they have. Sure, you can win them and it gives you a lot of scale, but it also absolutely kills your margins. We have a company that was doing two things differently than anybody else. They had a cost structure that was better than most people. One of the things that we're talking about right now is a lot of these inference and neoclod companies, they're building their infrastructure on that. You're paying 10% higher interest rate for these things. Finances do matter. When you have great margins, that can make a big difference. We chose a company that was not growing as fast in the beginning, that was not as popular, aggregated long tail demand. What was beautiful about it is they had superior margins, not 10% better, but order of magnitudes. Better margins, the customer mix was unconventional. Because of that, they were never at the mercy of if all of a sudden Google changes CapEx or Entropic is a bad year, this is going to impact your revenue numbers. This is one of the things that the race is still out there. We have not won the race yet. It's an example of an unconventional bet we made where a lot of big firms have chased a few companies that are all chasing the same customers. We said, we're going to zig when other people are zagging. We're going to zig when other people are zagging. We will only know at the end if a company goes public or gets acquired. Sometimes it's important to have confidence that these things do matter. Even if the market is not rewarding you, you look at the company's business performance and say, we're going to stand our ground here because with this growth, with this performance, we know that eventually the market is going to wake up. There's always going to be dislocation in the market. Our job is to not get carried away with the hype. Always look at the fundamentals and always make the right decisions for the right reason.
Speaker 2How do you decide when price is too much relative to fundamental strength? There's always going to be a point when investors see the fundamental strength, they're going to be comfortable with a higher price. You gave the example of Superbase where it was ahead. There might have been another one where you passed because of that.
Speaker 1One of the reasons why we had the courage to do it with Superbase, when we first started with them, they had so much demand. Most of it was initially all the crypto apps are being built on Superbase. All the AI and citizen developer apps are being built on Superbase. One of the reasons why we had confidence is if you look at the history of tech, some of the most valuable companies are database companies, whether it's Oracle or Snowflake, ClickUp. There are so many great companies. The zip code and category matters as much. When you're in an area where you have to look and say, if things work out great, if things are deep, if you chase potential acquirers that have trillions of market value, you're going to end up in a good place. We always pay attention to, as a foundational layer, is this important? How much confidence do we have? How much demand can there be for this product in an area where citizen developers are going up by 10 to 100x? People used to think of developers as only people that have studied computer science in a world where anybody in the world can become a citizen developer. That totally changes the nature of the market. And then we now have agents as well. The agents, even if they're not humans, they're still going to need an underlying database. There are other things where you're underwriting just as high of a revenue growth, but when you double-click on that revenue growth, it is harder to justify how that revenue growth is going to materialize. That's when normally you can run into a situation where there are a bunch of companies where you're about to write a check on 100x multiple on Signal, and the Signal is small. But in one company, you truly have uncapped potential. In another company, the way that they sell this, it's more like SaaS. We're looking at two to three x annual growth. By the time this growth compounds, it's going to be four or five years before our insane multiple ends up being the normal multiple. That's how we think about the margin of error.
Speaker 2When you were last on the show, we talked about where you're zigging and others are zagging is where you're investing. And a lot of these past successes have been in regions outside the US. Love to hear how that's evolved and the ecosystems of where you're finding founders. The
Speaker 1real story in that is not the geo. Correlation does not indicate causation. We think that the talent is a lot more universal than people give it credit for. It's not the only talent in the world is in the Bay Area. There is an incredibly high density. They're equally smart and inspiring people in other parts of the world. One of the things that I love more than anything else is finding the underdogs. I used to tell my kids when they were five, seven, that I'm Indiana Jones and I'm looking for lost or forsaken treasures in remote parts of the world. And that's sometimes what we do. We didn't invest in Shopify because it was in Ottawa and we had a mandate to invest in Canadian companies. Out of all the e-commerce foundational companies, Toby's vision was the most exciting, the most uncapped. It just happens to be that he's married to a Canadian and he's living in Ottawa. Now you're going to tell him to uproot his family, come to Bay Area. No, we've got to invest in this company because it's in Ottawa. Canva is another good example. It's based in Sydney. One of the overlooked aspects of it, the core engineering team came from Facebook and Google. Each half of the team was responsible for a product that ended up getting canceled. That engineering team was hungry to show the world that they did not work on merely a failed product. They were capable of building something that could be global scale. We're looking for people that have a chip on their shoulder, that have faced incredible adversity and have a world. That tends to be usually people that are outside of Silicon Valley. They're hungrier. They have less ego. They don't have to fight for their employees being poached by other rich companies. That's one of my favorite stories of Felice's is I come from Istanbul and people said, I would never be able to be a good investor. I was able to prove them wrong. Every time we go internationally, we find these founders. I see a little bit of myself in them. They see a little bit of themselves in me and the rest of the team. This is where, we need to be right and not in consensus. Consensus is you can't find these great companies in these geos. We keep finding them. We did a chip company in UK. We did an 8N in Berlin and they said a foundational company, unlikely. Yet Germany has great engineers. We did Rovio in Finland. There was an incredible gaming industry there and they did an amazing mobile company. We have this great security company in Ireland called Tynes. Those are some of my favorite stories. It wasn't like the company succeeded because the founder happened to be in that country. That was a very unique founder that happened to be in that country. We were looking for the right companies and the founders for the right reasons. And we found them outside of the traditional zip codes.
Speaker 2Once you've identified the market, the founder, the company, you're in the deal, you're helping them grow. It's working. Somewhere along the way, we face the exit markets. Would love to get your sense of how you're thinking about that in an exit environment that maybe the IPO market is opening up. Hard to know where all this settles out.
Speaker 1In a niche market, normally the way that you envision exit, I don't even know it would be IPO, but it might be more like a PE style exit. Need to assess the odds and say, okay, because that's a more niche type of exit, if there is an opportunity to take some money off the table with the founder's blessing, we would do that. Part of it is if the market is saying the only way you're going to get exits is you've got to be in these zip codes or you've got to get to this revenue scale in this record time, then our job is to find those companies. Part of it is understand and engineer the exit and imagine and visualize it. That was the example that I gave you. We have this rule of thumb that's almost like a Newtonian law of gravity. Almost all the acquirers, if you look at it, the acquisition price is always around 1% to 2% of their market cap. We have done our homework and visualized and said, okay, if things go well, but maybe not the most well, this is going to be an acquisition. We have visualized it. If things go incredibly well, hopefully it's going to be an IPO candidate. One area that is less talked about is you also have to squeeze every cent on The company did not work out. I just spent six months on a company in Texas. Not only was the acquisition market bleak, there was literally one acquirer. We basically did everything we can, kept the company in business, had to do a lot of hard things, hard decisions. And in the end, we barely got 40, 50 cents on the dollar. We didn't engineer that exit. We were looking at a zero. We have a portfolio. We can handle the adversity. But we also put ourselves in the shoes of that founder and the employees that put five, eight, 10 years of their lives into that company. That was a situation where the trust mattered. The gratefulness of that founder is, to me, the ultimate reward for what I do. It's not always obviously like, oh my God, you made a crap ton of money on that company. Companies like Google, things are going right. And there's not a lot of things that went sideways. There are other companies where everything is going sideways. And if you can still take that and somehow turn it until we still made some return or we still found a home for the company, that is one of the hardest things to do. It takes a big toll on you. Engineering exits is a science. It requires focus and time. One of the things we deliberately do at Felicis is, whether through operational reviews and other stuff, dedicate 10% to 20% of our time understanding, visualizing, and engineering exits, whether it's through secondaries, through saving 50 cents on the dollar, understanding where each company is going to fall into the bucket, not fighting the reality of that, maximizing the probabilities of each company's unique circumstances.
Speaker 2When you bring this all together, how have you thought about the appropriate amount of capital that makes sense for a Felicis fund?
Speaker 1The buck has moved so far from when we started and our first fund was 41 million. These days, given how much capital is concentrated to how few companies, and also this new trend of more capital-intense companies and champions out there, it is important to have minimum viable scale, half a billion to a billion dollars. Then the big question is, do you want to be a mega fund? There are some interesting stories being developed of funds that are 5, 10, 15 billion dollars collectively across multiple products. Each manager has to be able to answer the question of, if I have access to that capital, what are my odds? How can my strategy multiply that capital? I don't think you can look at it and say, the right number is 5 billion, 10 billion. For each manager, the answer is, we feel at our scale, sub-billion or close to a billion dollar size. We have seen companies getting to scale 10 times as fast and 10 times as much scale than we imagined before. We feel we can multiply that number and make those 3, 5, 7x funds. Once the numbers get to a certain level, you're essentially fighting the public index. You're fighting for some BPS rather than multiples of capital. That's why we are in the current size that we're at.
Speaker 2Have you thought about participating in fall one rounds with your existing portfolio companies as they grow?
Speaker 1This is one of the areas that I'd like to be humble. We are good first check writers. We're trying to get better on follow-on checks. In hindsight, you can always say, why did you not concentrate more capital? We try to change the odds a little bit. In hindsight, it's easy to say, you should have had a lot more of your capital in this company. We try to do that. And a lot of our great companies, especially when things are not obvious, we try to increase our ownership stake. It's important to have a resilient portfolio. It's important to have a resilient portfolio where I also don't want to have so few bets. If something happens to the fundmaker company, now the whole fund is at risk. On the follow-on capital, the most important thing that we have come to realization is that we need to allocate special reserves for only the top three or four companies where things are going wildly right to a point where this is not even a 1% company. It's more like a 0.1% company. The reserves, especially if we're leading deals, we basically have an arrangement where we always think of it as at least a two-round. We have to continue doing our parada in the follow-on rounds. What I have also seen is that when you're extremely equitable on reserves, that is not going to always result in overperformance. We keep relentless benchmarks on our companies before a fundraise and before anything. No matter what happens, we tell them, we've got to be honest with you, if you're at the 50th percentile or below 50th percentile, our ability to keep following on with capital is a lot less. So we might not. We might not be able to do it. In our fund size, we have limitations. We're upfront about it because we're using data and we're making it clear. Absolutely, if you're overperforming, we're more than happy to go more than one pro-rata round. If not, we're also responsible for our LP's money. So we need to be diligent with that. At least it's based on data and not opinion and emotions.
Speaker 2As you continue to try to evolve yourself and your firm and your investments, what are you leaning into over the next couple of years?
Speaker 1The thing that I care about the most is how can we increase the success density without increasing the team size or the AUM by as much? I have an internal plan that I call 10x releases in 10 years. There is a 5x in five years version, but the idea is that I want to double or triple our success ratio without doubling or tripling the capital base. The yield is what matters the most to me. How can we make better bets? The most important element. As long as we're seeing a lion's share of the great companies, then we need to improve our process so we can say yes to more of the great companies that we have seen and invest in or win more of them. The only way to do that is giving a lot of agency to the team members, but also process. You can't control the outcome, but you control the process 100%. All our attention is on the process, how we use data, how we use AI, how we structure things internally, how we organize it. How can we? How can we change the decision-making process by reducing the surface area at times, which also help us to move with higher speed and higher conviction? All of these things are little things compound to a big difference over time.
Speaker 2What are some of those incremental changes you've made to data, use of AI, decision-making speed, everything that goes into improving the process?
Speaker 1One of the things we used to discuss in investment team meetings is company X, company Y, and people make a case and there is a memo and all of that. One of the things that I realized is we're not making these decisions in isolation one at a time. We're also making a ranking. We have a pipeline. We have five companies we can invest into. Are these the right two companies? Have we done the right thing in terms of ranking these companies against others? We have come up with this interesting visual metaphor of when somebody makes an argument, we change something in real time and all of a sudden, this company is superior to these other companies. Some of this stuff has been effective, relentlessly changing how we make decisions, how we treat data, how we capture data in terms of how it helps the decisions. One of the things where I have to give you credit, I have done this research internally. I was obsessed with some of the companies we ended up passing and then other VCs have led it. What I found is not that the company was not great, but our internal narrative was not great. I met Matthew Dix through you. One of the things that we're doing is to do an internal narrative workshop because we realized that our investors were smart. The companies were good. We did. We did not narrate or capture the right insight about the company. Even a minor difference in that could be the difference of saying yes or no. If we said no to the right company, that's a huge loss. If narrative can fix that, that could be important. And the way I found that out is I would look at our notes and then I would go, wow, we pass on this company. And then like Iran would get announced. Then I go to the winning VC and I'm like, hey, can you tell me what was the thesis on this company? I found that their narrative of the same company was better than ours. Our narrative. This is a growth mindset. Sometimes it's stuff that you have to be humble and say, wow, somebody else did a better job. It's the only way you can reset your priors and elevate yourself. I don't see that a lot necessarily in venture. You have to be able to go back and say, no pride, no ego here. We have to go back and improve our process.
Speaker 2If we sit down to do this another five years from now, what would make you happy over the next five years at the firm?
Speaker 1The next five years, the most important thing to me is. If we can increase the success density, while the capital and the number of people are increasing at a much lower rate, I would call that pure success. This is my dream. This is my life's work. I also want the people at Felicis at any given time feel like they're doing their life's work. This platform, instead of taking away, is accelerating their career and their success. Investment firms, there is the element of the team and there is the element of the platform. One thing that not many people know about is that there is a lot of money in the bank. When you look at a venture firm, is the platform making the investors better, helping them maximize their potential, or is the platform and the rigidity of it takes away from the investors? I could be 100%, but because we never change our decision-making or we're still using stodgy thinking and we refuse to revamp ourselves or change how we make decisions, now every investor is performing 30%, 40%. The rest is wasted in friction of decision-making and stodginess and automation. I always want us to be the unorthodox venture firm where we're not afraid to reset the priors and always trying to let argument and debate rule how we get to the truth and never be afraid of change.
Speaker 2I want to make sure I get a chance to ask you a couple of fun closing questions that are different from the last time. What is the most rewarding thing you do outside of work?
Speaker 1There are two things. One, family is important to me, so every free time that I have, every minute, every hour, I love. doing things with my family, whether it's travel, sports. I have many hobbies, but I find it more rewarding when I do it with family or when I do it with friends. The second element, we are lucky to be living in this amazing age. I feel grateful for my firm and for the little bit of success that I had. It's important to give back. The way that my wife and I do that is we sponsor a couple areas of research, including brain research. The second thing is giving back to the schools that helped shape my career. Without the schools that I attended, I wouldn't be in California and Silicon Valley, and I wouldn't have gotten that first incredible job at Google, which then ended up saving me for life, was the foundation that helped me start Felicis. If something truly helped you, make sure to give back. Make sure to pay it forward for the next generation, whether it's scholarships or helping the schools in any way. I never forget the difference they did for me. One of the most rewarding things for me is just to give back and help the next generation of people.
Speaker 2What have you changed your mind about in the last few years?
Speaker 1We're always a product of our backgrounds. Having worked at Google, I thought, isn't software beautiful? If you're an investor, you should always invest in things that are asset light. One of the things that I changed my mind is that sometimes when something is not asset light, and in fact, very CapEx heavy, it can still be beautiful. I have to give Elon Musk a lot of credit here, and even Google. I never thought Google would get into the Waymo business, and I never thought Google would get into the Waymo business. I never thought Google would get into the Waymo business. I never thought we basically came from the world where software ruled everything to now an era where we are starting to tackle impossible problems. If I basically told you, hey, Ted, we're going to be in an era, not only are we going to have rockets that go into space, the rockets can then land themselves, you would say, wow, that sounds pretty impossible. Lo and behold, Elon Musk gathered these group of people. Next thing you know, they have rockets landing themselves, more recently, cars that can fly. We were joking about it. This is never going to happen. Look at the beauty of humanity and our creativity. These things are literally happening in front of very eyes. But the biggest realization for me is that a lot of these things are not capital light. These are hard problems. It's going to require a lot of capital to solve. It's going to require a lot of effort to solve. That can also be beautiful. Sometimes the most interesting markets and the most expensive businesses, that is not necessarily bad. Things that I used to be afraid of and I used to be skeptical, I have changed my mind and I'm embracing them.
Speaker 2All right, Aydin, last one. If the next five years are a chapter in your life, what's that chapter about?
Speaker 1I have a simple formula of happiness, which is if I can free up more time to do things I want to do at the time I want to do and do fewer things that I have to do, I'm going to be able to do more. I'm going to be able to do more. I'm going to have more time to do things that I have to do that I don't necessarily want to do. And you know this as a business owner and principal and mentor, we have to spend time sometimes, even if it's not the most ideal thing or our most wished thing. The formula for success is simple. More time for the things you want to do with the people you want to do them, less time spent on things that are obligations and things you feel like you have to do.
Speaker 2Aydin, thanks so much for sharing your enthusiasm in this great, exciting update on Felicis.
Speaker 1Thanks, Ted. We appreciate the opportunity. To be on this podcast again with you. I love the questions.
Speaker 2Thanks for listening all the way to the end. If you made it this far, how about one ask for me? Tell one friend about the show. It's the best way to keep growing this incredible community. Thanks so much. And until the next one, stay curious and keep compounding knowledge, relationships, and capital a little bit at a time.
Speaker 3And podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of capital allocators or podcast guests may maintain positions and securities discussed on this podcast.
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