Kevin Hartz: "How I Lost Airbnb at Seed Because of an Exploding Term Sheet" | E1180

In a conversation between Kevin Hartz and Harry Stebbings, key themes include the evolution of venture capital, the impact of childhood experiences, and the importance of identifying talent. Hartz reflects on his journey from angel investing to venture capital, highlighting the significance of long-term investment strategies and the challenges of managing capital in a competitive landscape. He discusses lessons learned from influential figures like Peter Thiel and Roloff Botha, emphasizing the value of unique perspectives and steadfast judgment. The discussion also touches on the pressures of modern entrepreneurship and the potential of emerging technologies like AI and biotech.

• Nvidia's ascent as the most valuable company is a precursor to a significant market bubble.
• Historical trends show that while many companies may fail, a few become massive winners, outshining others.

"Nvidia becoming the most valuable company on the planet is just the precursor towards the bubble of all bubbles if you look historically over the decades that if you just sit on all the companies you know and most will go to zero your power law winners will be so massive they'll just DWF everything else."

• Nvidia's rise symbolizes potential market volatility and the importance of identifying long-term winners.

• The speaker had an uneventful childhood but a significant turning point post-university during the tech boom in Silicon Valley.
• The drive for success was not predicated on inevitability but on a desire for learning and avoiding boredom.

"I just had an idealic childhood all the way through you know wonderful parents um and went on to Stanford University I'd say I I hit my kind of life sort of Crisis or or uncertainty post uh University."

• The speaker's background emphasizes the impact of being in Silicon Valley during a pivotal time in tech innovation.

• Peter Thiel: Known for his unique worldview and ability to see things differently, providing deep insights that may not be immediately apparent.

"He just is somebody that he sees the world in in a different manner."

• Roloff Botha: Valued for his calmness and sound judgment, especially during crises.

"In the biggest crisis when uh you know the ship is being thrown left and right he uh is steadfast and calm and you know as Jeff bezo said is is mostly right."

• Pierre Lamond: Focused on excellence and high expectations, pushing for the best in business operations.

"Pierre uh is all about excellence and you know how do you uplevel to be the the greatest company uh in business and operator that you can be."

• Importance of identifying unique talent early, with a focus on overcoming obstacles and maintaining high standards.

"How do you identify true Talent from people who are just pretty good at selling?"

• The speaker's ability to spot talent is highlighted as a key strength, with emphasis on the importance of a strong founding team.

• The speaker's entrepreneurial spirit was evident early on, with ventures like a pre-internet Facebook business.

"In college I actually had a Facebook business pre- internet oh my God that's old uh it was called faces in the crowd."

• The entrepreneurial journey is marked by early ventures and a love for learning, with ADHD playing a role in diverse interests.

• Concerns about the impact of too much capital too early in a company's lifecycle, potentially hindering growth.

"I worry that we have too much Capital too early and that great businesses are being destroyed by too much Capital too early."

• The speaker emphasizes the need for balance between capital availability and hands-on guidance.

• Different approaches in venture capital: hands-on guidance versus trusting founders to navigate independently.

"I'd put rollof and seoa on on you know one side of the spectrum you know which is more Hands-On providing Services providing you know oversight and insights and recruiting and everything else and then Founders fund and Peter on the other end of the spectrum."

• The speaker leans towards a more hands-on approach, valuing oversight and guidance to avoid common mistakes.

• Discussion on the rarity of founding teams sticking together long-term and the importance of individual talent spikes.

"I would argue that very very few great founding teams really truly stick together for a long period of time."

• The focus is on the spikiness of individual talent, which can drive the success of a company.

• A preference for first-time founders due to their creativity and fearlessness, despite the statistical success of serial entrepreneurs.

"I just have a soft spot for first first-time Founders."

• The speaker is drawn to the innovative potential and boldness of young, first-time entrepreneurs.

• Investment in non-obvious ideas like Airbnb, which faced skepticism but had potential for significant impact.

"Why did you do Airbnb at the time it was not obvious it's famed how many people passed and it's a weird idea when you can view it in isolation."

• The speaker's investment philosophy includes recognizing the potential in unconventional ideas that others may overlook.

• Airbnb's founders, Brian, Nate, and Joe, were driven by passion and worked tirelessly to build the company.
• Airbnb is likened to distributed storage for people, creating a global network of accommodation similar to a massive, distributed hotel.
• The company's growth was rapid, reaching a billion-dollar valuation quickly and efficiently without requiring extensive funding rounds.

"I like to think about Airbnb as kind of distributed storage but not for bits or images or sound or video; it's distributed storage for people."

• Airbnb's business model is compared to distributed storage, emphasizing its efficiency and global reach.

"They've built the kind of perfect massive distributed Hotel throughout the entire planet."

• The scale and success of Airbnb are highlighted, illustrating its transformation from a small idea to a global enterprise.

• The speaker reflects on investment strategies, including the importance of holding on to investments for long-term gains.
• There is a distinction between managing personal angel investments and managing a venture fund with institutional money, which requires showing liquidity.

"If you just sit on all the companies, you know, and most go to zero, your power law winners will be so massive they'll just dwarf everything else."

• The strategy of holding investments long-term is emphasized, focusing on the potential of a few massive winners.

"If it's your angel money, let it ride, you know what, fine, but if it's fund money, sometimes you'll need to show liquidity for the next fund."

• The need to manage liquidity in venture funds is discussed, highlighting the differences from angel investing.

• The speaker describes the transition from angel investing to venture capital as a natural progression and a new challenge.
• The mindset in venture capital is focused on the next investment, rather than resting on past successes.

"I love and loved Angel Investing, but it's just time, you know, to graduate up to the big leagues."

• The transition to venture capital is seen as a step up, presenting new challenges and opportunities.

"We're only as good as our next investment, and you know, that's the mindset."

• The importance of focusing on future investments rather than past successes is emphasized.

• The seed market is seen as highly competitive, with multi-stage funds and successful founders creating a challenging environment.
• The speaker discusses the importance of focusing on team quality over market size in investment decisions.

"I think Seed Market right now is not a good place to be investing."

• The current competitive and challenging nature of the seed market is highlighted.

"Great teams always find their way to kind of slingshot from a market from the small Market to the big Market."

• Emphasis on the importance of investing in strong teams, as they can navigate market changes effectively.

• The venture capital space is described as having less cooperation and more competition, with high stakes involved.
• The speaker discusses the role of operators as investors and the empathy they bring to the table.

"It does feel like a period of less cooperation, and there needs to be a very specific reason why funds would work together."

• The competitive nature of the venture capital environment is noted, with less collaboration among funds.

"Operators are the best, and there used to be a vibe in the valley that said, oh, you got to be an operator to be an investor."

• Operators as investors are valued for their empathy and understanding of the challenges founders face.

• The speaker stresses the importance of aiming for extraordinary outcomes rather than settling for moderate successes.
• The unpredictability of market expansion and the potential for companies to exceed expectations are discussed.

"We're looking for those extraordinary outsized outcomes."

• The focus on aiming for significant, transformative successes in investments is emphasized.

"The Internet space just expanded beyond our wildest notions, and these markets expanded dramatically."

• The unpredictable nature of market growth and the potential for companies to achieve unexpected success are highlighted.

• The speaker shares personal insights on the importance of sincerity in dealings with founders and the venture community.
• The challenge of selecting the right investments and the inevitable regrets over missed opportunities are acknowledged.

"I can only be kind of sincere in what I offer."

• The value of sincerity and authenticity in interactions with founders and partners is emphasized.

"It's always a sin of omission, you know, you always think about the ones that you let through or didn't pursue."

• The difficulty of making investment decisions and the common experience of regretting missed opportunities are discussed.

• Maintaining a positive and open mindset is crucial, even during difficult times, as it can lead to unexpected opportunities.
• A single meeting or interaction can significantly impact your life and career, emphasizing the importance of being receptive and attentive.

"Your mindset is always to be positive and open-minded...one single meeting can change the life of you, your family for many generations."

• The speaker highlights the transformative potential of maintaining a positive mindset and the importance of being open to opportunities.

• Providing honest feedback to founders is essential, but it must be balanced with constructive suggestions.
• Being too blunt can be counterproductive; it's better to offer guidance on potential improvements or additional expertise.

"It's sometimes it is the founder that is the problem...there's always good things to say to that you could say like why don't you look for some complimentary expertise."

• The speaker discusses the importance of honesty in feedback, suggesting that constructive criticism can help founders improve their ventures.

• Exploding term sheets are controversial, with both positive and negative implications for investors and founders.
• Founders are expected to explore the market, and investors must navigate the complexities of these practices.

"Exploding term sheets have a horrible signaling name...but you would hope that you found a partner that's not going to shop it."

• The speaker explains the contentious nature of exploding term sheets and the expectations of both parties in investment deals.

• Patience is vital in investment, as some ventures take time to succeed while others show promise from the start.
• Understanding market timing and looking ahead are crucial for making informed investment decisions.

"The most important thing is just patience...you just have to see patience because you just see time and time again."

• The speaker emphasizes the importance of patience in investment, as time can resolve many challenges.

• Key value drivers in investments include identifying promising ventures early and understanding market potential.
• Successful investments mentioned include Airbnb, Pinterest, Bitcoin, and Uber.

"What have been your top three value drivers...Airbnb, Pinterest, Bitcoin."

• The speaker highlights successful investments and the factors contributing to their success.

• Learning from failed investments is crucial, as they offer insights into potential pitfalls and market dynamics.
• Market timing is a significant factor in investment success, requiring foresight and strategic planning.

"It was a kind of classic Sequoia investment...everything that could go wrong went wrong."

• The speaker reflects on a failed investment, emphasizing the importance of understanding market timing and dynamics.

• Capturing and maintaining consumer attention is more competitive than ever, emphasizing the need for innovative strategies.
• Reviving past successful concepts with modern twists can attract attention and drive business growth.

"The only thing more competitive than compute economy is the attention economy."

• The speaker discusses the challenges of capturing attention in today's market and the potential of reviving past successful ideas.

• Taking calculated risks and allowing investments to compound over time can lead to significant returns.
• Younger investors should consider taking more risks to maximize growth potential.

"You should be just comp in like your your winners just like keep them growing and growing."

• The speaker advises younger investors to take more risks and allow their investments to compound for greater returns.

• Discussion of the acquisition of PayPal by eBay and the subsequent creation of Palantir.
• Peter Thiel's vision for using PayPal's fraud algorithm for counterterrorism.
• Initial skepticism about the privacy implications of Palantir's mission.

"Peter had resigned and I met him up at the sundu restaurant... and he said, 'Kevin, I'm working on this business... we're going to use this to catch terrorists.'"

• Peter Thiel's ambition to repurpose PayPal's technology for national security purposes.

"I said, 'Peter, like you're a Libertarian, why would you want something so invasive of one's privacy?'"

• Initial concerns about privacy and the ethical implications of Palantir's mission.

• Emphasis on conviction-driven investment strategies.
• Importance of individual decision-making within venture capital firms.
• Discussion on the power law and capital concentration in investments.

"It is very conviction-driven... it is the emanation of the power law."

• Highlighting the importance of strong conviction and focus on big winners in venture capital.

"The enemy of great Venture returns is capital concentration limits on a per company basis."

• Argument for significant investment in high-potential companies to maximize returns.

• Different approaches to supporting founders during challenging times.
• Importance of understanding individual needs for support and motivation.
• Role of tough love when companies are performing well.

"When things are going really poorly, that's when you're supportive and nurturing."

• Importance of providing support during challenging times rather than criticism.

"Tough love is needed when it's doing extraordinarily well."

• Suggestion that tough love and critical feedback are more appropriate during times of success.

• Discussion of the pressures faced by youth, particularly in high-pressure environments.
• Personal story of dealing with a child's eating disorder and the challenges involved.
• Critique of the lack of effective treatments for eating disorders and mental health issues.

"She was a straight-A student... she just stopped eating and she's ended up in the hospital now three times."

• Illustration of the severe impact of societal pressures on youth mental health.

"The treatments are for Eating Disorders are just nonexistent... it's like having a phobia."

• Criticism of the inadequate treatment options available for eating disorders.

• Recognition of the need for advancements in mental health and neurological disorder treatments.
• Comparison to historical efforts against diseases like cancer.
• Discussion of the potential for therapeutic developments in this area.

"The Challenge of this era is neurological issues... there need to be Therapeutics developed for it."

• Urgency for the development of treatments for neurological and mental health disorders.

"We need to go after these neurological disorders that are becoming so prevalent in our society."

• Call to action for increased focus on addressing mental health challenges.

• Observation of the rapid growth in the defense sector and its implications.
• Identification of key venture capitalists and their investment styles.
• Advice for new angel investors and insights into portfolio management.

"The rapid ENT of the defense segment... how the world has dramatically changed."

• Noting the significant changes and opportunities in the defense sector.

"Rope off some money you want to lose... you got to start learning and pattern recognizing."

• Advice for new angel investors to expect losses and focus on learning.

• Prediction of an impending AI bubble and its potential impact.
• Discussion of emerging platforms and technologies as investment opportunities.
• Optimism about future venture returns due to new technologies and platforms.

"We are blessed with the capital Gods... we're in the early years of the biggest bubble."

• Belief in the potential for significant gains from the emerging AI bubble.

"There'll be much better than that 21 22 kind of catastrophe that we just saw."

• Optimism about improved venture returns compared to recent challenging years.

• Reflection on personal weaknesses and mental health challenges.
• Emphasis on the importance of honesty and self-awareness.

"Everyone always answers insincerely about what their weakness is... what is your mental illness?"

• Encouragement for genuine self-reflection and discussion of personal challenges.