Chapter 1: What are the current challenges in the venture capital landscape?
Ryan, you're a co-founder and a partner at Franklin Park. Tell me where Franklin Park sits at an AUA basis today.
We are about a 21 billion AUA, AUM firm based out of Philadelphia.
And you said last time we chatted, you said it's the most confusing, untethered sentiment today investing in nature that you've seen. That's quite the statement given that you've been in the industry for a while. Why did you say that?
Every week there seems to be some event, some pricing, some scaling thing that I can't, there's no basis for, no precedent for. So things like, A single person getting a $1.5 billion comp package to leave a company that he just co-founded months before, these things have never happened. Trying to figure out trillion-dollar spends on...
data center build outs, the sort of growth and death and retention metrics of some of these companies that are just, you know, a few engineers are creating incredible products for enterprise and consumers. It's just unprecedented. I'm in awe.
The amount of options founders have, seemingly many, but when it gets down to the nitty gritty of those financings and those fundraisers, the has and have not stories seem so insane to me. It's just a very bipolar situation. market, all these little niches. I can't imagine how confusing it is for all the market participants when you have all these really, really spiky events.
Our ground truth has always got to be, why do founders want to give up part of their precious life's work to somebody else? That's kind of at the heart of the venture equation, right?
Adding to this complexity, there's companies like MidJourney. Some report they're at 500 million, half a billion ARR with no outside capital raised. So they've scaled without outside capital. So VCs aren't even getting to those opportunities. Then there's people, I had the founder of HF0, which is a 12-week AI accelerator in San Francisco. It's one of the most interesting podcasts I've ever had.
And they put people in these monk mode modes for 12 weeks. And these companies go from 500,000 to 10 million ARR just in just focused work and development for 12 weeks. They take away all the distractions from their lives. And now they've actually evolved. They used to give a million dollars for a 20 million, take 5%. Now they've evolved. Some people don't even want the million dollars.
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Chapter 2: How is data-driven decision-making evolving in venture capital?
After 23 years for us, for example, we have a rich data set of our own to mine from. But you draw some conclusion. Well, what confidence do you have that it's representative of a population? There are some data sets where, you know, I'm looking at these vintages and it doesn't include this fund and this fund and this fund, like 40 really compelling funds that are just not in the data set. Right.
And you might be led to believe that first time funds underperform or have more risk or have less risk. But the paucity or the N in a particular, the number of observations in a particular year are like four because you were looking at, say, Israeli infrastructure as your slice. And so very hard to do data analysis when the data, I'd say, is problematic.
There is some good news on that front. I interviewed Professor Steve Kaplan from University of Chicago and also Professor Gregory Brown from University of North Carolina, two of the leading researchers in the entire world in space. They both use the same data set, which is the MSCI Burgess, which is LP driven data.
So in order to get the ground truth, GPs, there's going to be, GPs are only going to report their best funds or some GPs are only going to report their best funds. So you have to go to LPs for ground truth. And most interestingly, when I interviewed Professor Steve Kaplan, he had just gotten a look at the Adapar data. So Adapar now is somewhere around $7 trillion in
and assets on their platform from a data standpoint. So they're actually getting very similar data to MSCI Burgess. So completely independent data set is getting to similar ground truth. So that was very promising.
I hope that's published soon. I'd love to see that. Yeah, things like that would be great. But obviously you don't, it'll probably be anonymized. which has its own issues. And then there is that, still there's a bias of, well, you have that, it's nice to hear that there's an independent correlation because you're still gonna then deal with the fundamental LP bias that is driving those portfolios.
So for example, let's just say you got an LP submitted dataset But the underlying LPs were very large FOIA-based investors, right? They would have different access than either the broader market or, say, best-in-class access. And access, of course, is a huge deal in venture. So there are still some problems.
But then there's also the problem of, okay, you make a conclusion about, wow, this group or this segment is interesting, right? Well, OK, it was interesting then, but that this perhaps this group that you've identified there, there are five X the size of when when their peak performance happened. Right. So they're essentially competing in a new market.
So is is the you know, the the dangers of being backwards looking on that data analysis? It could be that maybe the sector has completely gone away or it's overfished. And so the magic was you were on the front end and the valuations were two times revenue and now they're 20 times revenue or whatever it might be.
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Chapter 3: What factors are influencing founders' decisions to seek venture funding?
The first to see wins, the rest follow. Check it out for yourself at alpha-sense.com slash how I invest. You mentioned this word untethered, and I'm wondering whether it actually is untethered maybe on the past, but it is tethered to the future. What does that mean? Meta today is a $1.6 trillion company.
when they're going out and giving these billion-dollar signing bonuses, which they're reportedly not doing anymore, to start their team, they're acting from some pretty interesting first principles. Obviously, I'm not in the boardroom. I'm not talking to Mark Zuckerberg. But it seems like they've embraced a couple principles.
One is that the best teams and the best 100x engineers, AI engineers, want to work with the best people. This whole concept of talent magnets. Some organizations just absorb this talent. And if you take that to be true, which is a pretty non-controversial truth,
then paying three to $5 billion on these three to 500 X engineers in order to bootstrap a company and a team for a market cap that could go from 1.6 trillion to $10 trillion. If AI plays out, it becomes highly rational, but only when you tether it to the future, not when you tether it to the past.
For me, Untethered just means when I would think about, you know, I was very fortunate. I've said this before on a different podcast, just being very fortunate to meet Josh Koppelman in 05.
And, you know, the beautiful thing there was meeting somebody who had some insights that not a ton of other people had and getting into that first mover community of micro VCs like Idan Sankat or Mike Maples or Manu Kumar or... Steve Anderson, like they were all kind of seeing it. And it didn't really get overfished, become ultra obvious.
I remember a lot of the larger cap VCs at the time really dismissing that strategy. And so you could really there was a kind of a good first principles approach that wasn't being overfished. And so it felt like a very underwritable thesis that didn't did in fact work out here. It's it's it's it's it feels like the consensus happens very quickly.
And so even if you feel like, OK, that that is the future, perhaps, well, everybody has coalesced into that that feeling. And that's where it feels you don't you don't feel like you're always, always making a unique insight that has been has been culled from a massive primary research effort like like we did back in 05, 06. It's just it's just noisier.
That's another way to say it's just extremely, extremely noisy.
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Chapter 4: How are traditional signals losing reliability in investment?
And so it's that question of regime change.
And what you're really saying is top-desk investors that have kept their AUM consistent and have not grown.
And the team, and they've continued to build that alumni network. And the alumni network feels very positive towards them. It's one thing to have just funded 100 things, and we all know groups that have been high-velocity investors, but totally forgettable on a cap table. That doesn't also mean much. It's those folks where, again, I'll use USV, they had conviction.
The founders feel a certain way about them. So all of those things kind of have to work in concert. The other thing that will undoubtedly work, I think, are more emerging, opinionated, thesis-driven, basically the non-consensus and right, but new things. And so we have to also be thinking about those opportunities.
So the next generation of Josh Copelman's news, but today in 2025.
Yeah, but those were, for the most part, generalists. If we look at new managers and, again, crudely bucket them into specialists and generalists, I think the newer generalists are a challenge for us because we're wondering why they might be a sustainable brand in this market where there's 3,000 options for first checks.
There's a meme in the market that today, more than ever, it's about product and distribution. Peter Thiel, this is his paradigm. He calls himself a distribution maximalist, meaning the best example in the last couple of years has been this company, Clueless, that learned how to go viral without necessarily having a worked out product, which is quite impressive in today's world.
To what extent is that what founders should be looking for, which is, can this VC help me with my product, which really is upstream of that in terms of recruiting? Some people will work on product, but that's not very scalable. Or two, can they help with distribution? And just to add to that, so many of the top firms now are investing heavily in media, Andreessen Horowitz.
Eric Tornberg, who co-founded this podcast with me, now has their media strategy. And talk to me about media. And is media becoming a core part of a value proposition for venture? Or is it just some headline grabbing thing that VCs are doing?
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Chapter 5: What role does access and trust play in venture capital today?
I think that's part of the reason we've been a little bit reluctant on the solo GPU front. And that is not a return optimizing strategy. Right. Meaning going back again to like K-9 and Manukumar, there's been fantastic Steve Anderson, been fantastic solo GP funds, and there will continue to be. And absolutely, it works for certain VC profiles.
What we have noticed is that they can engender some operational friction, let's call it, whether it's subsequent fundraisers are a bit more challenging and so they're out of the market for a while, or there's other reasons why they're out of the market for some period of time. The reporting, the portfolio management, perhaps it's a little bit more loosey-goosey. Amendments.
just it tends to not be quite the institutional quality that we'd love to see. And then frankly, we're doing a ton of references on how they behave in tough times through our back channel network, which we've been cultivating now over really 25 plus years going back to our prior employer. So knowing who those people are, how they behave, how much are they committed into that fund
That, in our mind, some of these softer things are going to help mitigate disaster.
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They're revealed preferences, not what they say they're going to do, but what they actually do when the shit hits the fan.
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Chapter 6: How can investors adapt to the changing venture market dynamics?
Usually you would have liked, oh yeah, we knew they were spinning out or yeah, we knew their deals. We knew that she led Pinterest when she was, we knew some of that person's work here. One of the harder things in venture is You really can't be reactive.
You kind of always have to be every day in the market talking to your founder friends and your VC friends about interesting product, interesting spaces, what events, what hackathon. I want to soak in all of these disparate pieces of information about how things are being built and how things are growing.
attaching names to those stories and you build this giant graph of, okay, I'm waiting for this thing to happen. There's actually a very recent concrete example of this with a group called BrightMind in the cybersecurity space. where we knew that we've been feeling for a long time that cyber is a space that benefits specialists.
The way those founder communities, the way they're sold, it's not as accessible to generalists. Sure, there are some, but even at the generalist firms, there tend to be partners who specialize in cyber.
It's idiosyncratic. You can't just apply a generalist framework into cyber.
There are people preferences in cyber, kind of like how there is in drug discovery as well. What do you mean by that? Meaning I'm used to working with these sorts of I'll overweight somebody who's taken a drug through or somebody who's sold a SIEM product that I know has worked.
People lean on heuristics, I would say, which are self-reinforcing then for the type of people involved in those spaces.
So in other words, there's not many 18-year-old VCs in cyber.
And so we had built a list of... These companies that were just tracking at an incredible rate. And this is, you know, a while ago, you know, Wiz and Abnormal Security and Cribble and a bunch of others, Huntress and blah, blah, blah. And then it's easy enough. I mean, the access to data now and through our network, you start having these conversations. Well, tell me more.
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Chapter 7: What is the significance of relationships in venture funding?
So they tend to also, if you get what I'm saying, kind of opt into the long road. And so if I think about, you know, Franklin Park's broad universe of friends of the firm, they also kind of have that, hey, it may not work out now, but I'm going to call you when our company has a fundraising need.
And I trust you to help me think about, even if it's not for my immediate benefit or your immediate benefit, Somebody who's thinking about blood brain barrier technology solutions and, okay, well, I happen to know somebody, so let's get them on the phone and talk about it. And these sorts of not immediately obvious transactional sorts of things, there is a kind of a mutual opt-in to that style.
So I think there is something to the style begetting success, I think.
I think that's one of the hidden luxuries in venture and private markets is that if you're naturally a long-term relationship building person, the model works. If I was selling a product that's $1,000, I couldn't spend 15 years building a relationship with you, even if I loved you. It just doesn't work. The business model doesn't work. But it's such a luxury to be in an industry where...
You could spend 15 years with somebody and then they end up writing a $20 million check. Rahul Mukdal, I don't know if you know him. He's one of my favorite episodes, episode 199. And he builds these decades long relationships. And I've seen it with my own eyes. He sends me these handwritten cards, which is epic. I don't even get cards, period, let alone handwritten cards.
But it is one of those hidden luxuries where the stakes are so high, at least the business model works. Then it's a question of whether you have the patience and the stamina to stay in there. But the business model rewards those people that are long-term.
Which is interesting, right? Because, gosh, we're going to circle back to the sort of the regime question. When you look back to people who came into the industry, again, I'm hitting with a very broad brush here, but in that 1920, 21, and perhaps we're back into it, but the period when...
capital deployers really scaled like crazy in terms of their AUM and the velocity of how many deals they were doing. And they re-engineered their orgs to be high velocity. Like, hey, we can't be diligencing this opportunity for a month. That's now a competitive disadvantage, perhaps. And so we're going to reorient our firm to be hypervelocity. You reorient to... get money out the door.
And then the people who come in, of course, they love this because it's just option value, right? It's just, if, if I can, if I can early in my career, make 50 bets and they viewed them as, as best, you know, if one of them hit, now I have a halo deal. Now I have some credibility and now I have something I can take to my, to my next position or that's my track record. Right?
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Chapter 8: How do founders and VCs navigate the complexities of today's market?
But if they don't, it won't mean anything.
One other ground truth that both Professor Steve Kaplan and Gregory Brown and other researchers believe in venture is that it's idiosyncratic in the way that the founders are actually the ones picking the VCs. That seems to be ground truth as well. It's not actually VCs that are going out and picking. The returns go from actually being picked in this kind of post-seed.
That's an interesting question. I would love to have a chat with them.
I feel like there's a correlate of time and company progress. When it is, say, like you've heard stories of companies that start with one idea, completely pivot from a consumer app to an enterprise app.
The most common from elite seed investor mistake that they make is that very mistake, which is I was bullish on the person, thought the idea was bad, didn't realize he would have iterated one, sometimes two times into success. That's the number one. It's not actually picking wrong. It's not picking the wrong company. It's the person was right. The business was wrong.
I should have invested anyways, knowing that was wrong. And because the power laws are so great, because a great person can return 100x, if only 20% of times they end up iterating, it's still like a great investment, which is also a hard thing to put your head around.
Right. And so I don't know. It's kind of the question of what is knowable at the idea or pre-idea, even at the wireframe stage. And so I wonder about the VC founder, Mutual Opt-in. I'll mention another story, kind of, again, going to our ground truth exercises. We love to interview founders just about what are their priorities.
There was a time where we wondered, would the whole industry move towards kind of platform service companies, meaning everyone would look like an Andreessen. And to some extent, the service offering at big scale, that has kind of played out a little bit, probably not at the Andreessen scale, but
offering talent partners, media strategy, capital markets professionals, that kind of has existed, but they're all playing at a different stage. At the early stage, Founders keep telling us, and hopefully we keep asking and we keep engaging and we keep refreshing this research, but they keep telling us that they care about sort of a minimal brand, firm brand viability. So they're not optimized.
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