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Business, Technology

What Can Angels Learn from Warren Buffett?

May 30, 2023 tremendousblog 1 Comment

Startupland is a mess. Valuations are depressed. Companies are going bust. So today, I went back to basics: Warren Buffett.

No one in history has matched his investment prowess.

Buffett’s net worth stands at $112 billion, making him the eighth richest person alive. Since taking control of Berkshire Hathaway in 1965, he has increased its value by a factor of over 37,000.

This afternoon, I dug into his latest letter to shareholders. While Buffett doesn’t do venture capital, his lessons from 80 years investing are surprisingly applicable.

Wins Matter. Losses, Not So Much.

In August 1994 – yes, 1994 – Berkshire completed its seven-year purchase of the 400 million shares of Coca-Cola we now own. The total cost was $1.3 billion – then a very meaningful sum at Berkshire.

The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Growth occurred every year, just as certain as birthdays. All Charlie and I were required to do was cash Coke’s quarterly dividend checks. We expect that those checks are highly likely to grow.

Assume, for a moment, I had made a similarly-sized investment mistake in the 1990s, one that flat-lined and simply retained its $1.3 billion value in 2022. (An example would be a high-grade 30-year bond.) That disappointing investment would now represent an insignificant 0.3% of Berkshire’s net worth and would be delivering to us an unchanged $80 million or so of annual income.

The lesson for investors: The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well.
Warren Buffett

Berkshire’s investment returns follow the power law.

This rule holds that a small number of wins will provide almost all our returns. It’s the fundamental principle of venture capital.

So whether we’re Warren or not, we can’t worry too much when we strike out. Instead, we have to keep swinging at good pitches until we hit.

Our satisfactory results have been the product of about a dozen truly good decisions – that would be about one every five years.
Warren Buffett

Focus on the Business, Not the Stock

That point is crucial: Charlie and I are not stock-pickers; we are business-pickers.
Warren Buffett

No one knows what a stock will do in the short term. Not even Warren Buffett!

But if we focus on buying into great businesses, we set ourselves up for long-term success.

Tuning out price is hard!

One of my most successful companies is raising a new round right now. The price they got is surprisingly low for a company with incredible growth.

If I wanted markups, this would be a terrible bet. I’d be way better off with a buzzy generative AI company with no revenue at all.

But I want to buy real businesses. So I’m going to take advantage of this mispricing and back up the truck.

It’s crucial to understand that stocks often trade at truly foolish prices, both high and low.
Warren Buffett

All Good Things to Those Who Wait

The world is full of foolish gamblers, and they will not do as well as the patient investor.
Charlie Munger

Many great businesses Berkshire owns have faced hard times.

Had Buffett and Munger panicked and sold, we would not know their names. They’d just be anonymous, mediocre investors.

As tough as venture capital can be, this is one area where we have it easy! Once you invest in a startup, you rarely have an opportunity to get your money out.

So I focus on helping build a great business for the long term.

It’s fun. It’s also the only option I have!

Wrap-Up

When markets are in turmoil, always go back to Buffett. No matter what kind of investments you make, his wisdom applies.

Buffett has never been a VC. But if he were, I’m pretty sure he’d be a damned good one.

Now, let’s go buy into some great businesses!

At Berkshire, there will be no finish line.
Warren Buffett

What have you learned from Buffett and Munger? Leave a comment and let us know!

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Heading Off the AI Cliff

The Too Hard Bucket

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Business, Technology

Heading Off the AI Cliff

May 26, 2023 tremendousblog 2 Comments

With valuations down, this year’s investments should be some of the best ever. But many VC’s are riding AI startups right off a cliff.

Total venture capital investment is down almost 90% from the peak, according to Carta.

Late stage funding has practically ceased to exist. Even seed is down almost 70%.

With valuations and competition down, investments done this year should yield amazing returns.

But the few rounds actually getting done tend to look the same: AI companies with little or no revenue raising tens of millions.

The valuations are often over $100 million. Rewind AI even notched a $350 million valuation.

Fred Wilson at USV has proven that seed rounds at $100 million cannot work. There aren’t enough big IPOs in the world to make money at that price.

Meanwhile, companies without AI at the core are struggling to raise capital.

They have real businesses and revenues. They’re raising at great prices.

But they’re just not cool anymore.

Let’s take a company like Uber. Uber gets you a ride somewhere. Where does generative AI fit into that?

Nowhere I can see. But it’s still a great business.

The next Uber is out there now. But VC’s aren’t looking for it.

Worse yet, many of these buzzy AI companies have minimal defensibility. If you can spin up a service quickly with an API call to OpenAI, so can someone else.

Moreover, AI is evolving so fast that today’s amazing tech is quickly upstaged tomorrow. Deploying tens of millions in that environment is treacherous.

VC funds took a drubbing in 2022. This year, they have a chance to redeem themselves by investing in great businesses at reasonable prices.

Instead, they’re running toward a new hype cycle. And their investors will pay the price.

I think generative AI is a fantastic technology. I use it every day.

But the normal rules of investing still apply. You can’t make money investing in businesses with no paying customers at 9 digit valuations.

So how can you make money?

By investing in businesses with real customers and revenue at reasonable prices. At seed, that’s around $8-20 million.

In a way, I’m happy to see VC funds stampede toward AI. That means minimal competition and low prices for the investments I want to make.

Will AI investments work? Leave a comment and let us know what you think!

Have a great holiday weekend everyone!

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Hard Times for New Funds

The Too Hard Bucket

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Business, Technology, Uncategorized

Hard Times for New Funds

May 24, 2023 tremendousblog 2 Comments

“You’re going to see a lot of emerging managers shut down in the next few years,” said a VC I met with this morning. She couldn’t stay long — she was heading to California to fundraise.

The down market is hitting emerging managers hard.

These VC’s are on their first few funds. Many are struggling to raise capital .

A report out this morning from Ryan Hoover’s Weekend Fund shows just how tough fundraising has gotten for VC’s:

2023 is on pace to have the lowest fundraising total since 2017.

LPs are moving to risk-off in VC, passing on emerging managers in favor of established managers.

Many LP’s are overexposed to venture. Their public stocks have dropped, but many venture funds haven’t taken commensurate markdowns.

That means their allocation to venture as a share of assets has ballooned. The last thing they’re going to do is add more!

Even if they do, it will probably go to a fund they have a longstanding relationship with.

About a third of the 195 emerging managers in Weekend Fund’s survey have cut their target fund size.

Barren coffers at VC firms mean less money for founders:

“Only 6.1% of active startups on AngelList raised a round or exited in 1Q23, the lowest rate ever observed in our dataset. This rate of investment activity is a 1.3% decline from 4Q22’s rate of 7.4%, and a 5% decline from 1Q22’s rate of 11.6%.”

If founders aren’t raising what they hoped, there’s a reason: fund managers aren’t either.

No one wants to admit that. So they keep taking meetings and giving out “maybes.”

One fund manager the Weekend Fund spoke with had a great tip:

“Pay attention to which Emerging Managers are actively announcing new investments and which ones aren’t. We are aware of many small firms that have essentially stopped new investments and are struggling to raise their next fund.”

This way, founders won’t waste time talking to firms with no money to invest.

Perhaps one reason VC’s can’t raise is they don’t have enough skin in the game. 6 in 10 emerging managers committed 2% or less to their fund.

On a $10 million first fund, that’s just $200,000.

Most people who start VC funds are already pretty well-off. Three quarters worked in VC previously, often for years.

A 1 or 2% commitment may not be enough to show LP’s you really believe the fund will crush it.

On the bright side, VC’s that do raise now are in a fertile environment. Valuations are down and many weak companies have exited the market, leaving only the strong.

Some of the funds raised today may be among the best of all time.

What do you think of the fundraising landscape for VC’s and founders? Leave a comment and let us know!

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The Too Hard Bucket

Inflection: Better than ChatGPT?

Uploading Our Consciousness

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Business, Technology

The Too Hard Bucket

May 22, 2023 tremendousblog 3 Comments

Every now and then, I meet a hardworking founder with some great tech. But I know I’ll never invest in their business.

Despite founders’ best intentions, some companies develop serious problems. Those problems can make a startup untouchable for investors.

We put those companies in the “too hard bucket.”* And we move on to the next deal.

Let’s run down a few of those nightmare scenarios so you can avoid them!

Debt

I recently saw a cool early stage company addressing a big market. I was interested — until I found out they were almost $1 million in debt.

Early stage companies must avoid debt like the plague. It will weigh your company down like nothing else.

Investors will not touch an early stage company with debt. We want our capital to fund new growth — not pay for past mistakes!

For companies like this, the best option may be bankruptcy. Into the “too hard bucket” it goes.

Cap Table Problems

Cap table problems won’t bankrupt you, but they will stop you from ever raising a dime of venture capital.

Some startups give a huge slice of equity to a dev shop or venture studio. If someone other than founders and investors own 40% of the company, it cannot be financed.

The founders own way too little to be incentivized. And if they’re not incentivized, how will we make a return?

Maybe the cap table could be fixed with the right agreements. But most investors will put that in the “too hard” bucket and move on to the next deal.

Down Rounds

At the peak of the market, countless companies raised at huge valuations with little or no revenue.

Now, it’s time to pay the piper.

If a company raised at $100 million, it will need around $10 million a year in revenue to keep that valuation today. Otherwise, it’s looking at a down round.

Many venture firms don’t want to deal with down rounds.

Let’s say the new price is $50 million. The founders and all the prior investors will hate the new investor for “taking away” half their paper wealth.

Who wants to walk into that situation?

So, many firms put down rounds in the “too hard bucket”. Now, the formerly hot company can’t even raise a down round.

They can’t raise at all.

Always keep your valuation reasonable. And make sure the money lasts long enough to hit your milestones.

Wrap-Up

Founders have to understand the investor’s perspective. At any given time, there are 20 deals in the investor’s inbox.

If your company has serious problems, an investor isn’t interested in how they can be fixed.

He just puts your company in the “too hard bucket”. On to the other 19 deals…

So stay out of debt, keep a clean cap table and raise at reasonable prices. That gives you the best chance of success!

What kind of companies are in your “too hard bucket”? Leave a comment and let us know!

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From $10 Billion to Zero — Late Stage Ice Age

*thanks to Chamath Palihapitiya for coining this term

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Life, Technology

Uploading Our Consciousness

May 19, 2023 tremendousblog 1 Comment

The year is 2166. I am 180 years old and my body is beginning to fail. Time to upload my memories.

Advancements in biology could soon have us living much longer than ever before. But even if our bodies can’t reach immortality, perhaps our minds can.

Imagine a future in which an LLM trains on everything we see, do or say.

It reads all my blog posts. It hears me comfort a friend after a breakup.

My life is the training data.

In time, it would begin to reason and speak like me. The better the model and the more data it digests, the closer to me it would become.

After it had some time to practice, I could sit down alongside it. You could ask me a question then ask FrankGPT the same question.

When there are differences, we correct FrankGPT. Soon, the answers would be the same.

What we’ve created is a model of my consciousness.

And if it knows what I know, sees what I’ve seen, and thinks what I think — is it not me?

Perhaps uploading our consciousness sounds fanciful.

But even today, a startup called Rewind can record all your online activity. You can then ask the AI questions, simulating a perfect memory.

Attach this to the AR headset Apple is about to release, then pipe the data into GPT-4. You now have a basic model of consciousness.

If this is possible with 2023 technology, what will be possible in 2166?

Not everyone wants to live forever. But I do — and I’m pretty sure I’m not alone.

Existing as a consciousness on a chip is not the same as our current life. But it could be a fascinating and rewarding existence.

From our position in the cloud, we could watch humans with bodies conquer the most remote parts of the solar system. And in time, maybe they’d even figure out how to get us a new body.

If I’m lucky, my next one might even have hair!

Do you want to upload your consciousness? Leave a comment and let us know!

Have a great weekend everyone!

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Woz Calls for AI Regulation

Inflection: Better than ChatGPT?

Bard vs. GPT-4

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Business, Technology

Bard vs. GPT-4

May 15, 2023 tremendousblog 1 Comment

Last week, Google debuted its latest challenge to OpenAI: the new Bard. The waitlist is gone and Bard has some great new features. But can it beat GPT-4?

Today, I put both bots to the test.

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Bard now integrates with search and maps and can access the internet. So I tested it against its closest GPT-4 equivalent: Bing Chat.

Bing Chat uses GPT-4 and has internet access. It’s integrated into a search engine, just like Bard.

And unlike ChatGPT Plus, it’s free! (You have to use Microsoft Edge, but it’s a pretty good browser.)

I posed identical questions to each bot. These are real questions I actually need the answer to.

Let’s see how they do!

One of the main things I use GPT-4 for is help finding blog ideas. Again this morning, it performed well:

The stories are interesting and relevant. The links don’t work, but hey, it’s new technology right?

Now, let’s try Bard:

Bard refused my request entirely, outputting nothing.

GPT-4 has saved me hours in research time. But for this application, Bard seems useless.

I’m attending a demo day for Australian startups tomorrow. Maybe my new friends can help me prepare?

GPT-4’s answer was outstanding!

It told me things about Australia I never knew. I had no idea the culture was conservative.

It also gave me some ideas for questions.

Perhaps I should ask the startups about their international expansion plans. I rarely ask an American startup that since our domestic market is already vast.

Next, Bard’s turn:

Bard’s answer was good, but less complete than GPT-4’s.

It homed in on the risk of Australia’s small market. But it didn’t take the next logical step like GPT-4 and tell me to find out what a startup’s international expansion plan is.

Time for our third and final question.

I’m doing some research on the US meatpacking industry (long story). So I wondered, how many meatpackers are there in America?

Let’s ask GPT-4:

Excellent answer! It found an exact number and provided a source.

But it also called out something beyond the numbers. This is an unusual industry, with huge concentration.

GPT-4 made sure I’m aware of that. Nice work, GPT!

Let’s give Bard a shot:

Bard’s answer doesn’t seem accurate.

It gave a number only half the size of GPT-4’s. Maybe it’s valid, but without a citation, I’ll never know!

It did correctly call out the weird feature of meatpacking — massive concentration.

So far, Bard looks like a bust.

However, I’m sure Google will keep working on it. In time, it may catch up with GPT-4.

But for now, Microsoft and OpenAI have a heck of a headstart.

Have you tried Bard? If so, what did you think?

More on tech:

Inflection: Better than ChatGPT?

Woz Calls for AI Regulation

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Business, Technology

Inflection: Better than ChatGPT?

May 12, 2023 tremendousblog 4 Comments

ChatGPT is incredible. But this might be even better.

Reid Hoffman’s new startup Inflection AI released an incredible tool last week. It’s great at answering your questions. But uniquely, it also asks you questions!

Today we are announcing the release of the first version of @heypi_ai, your personal AI.

Pi stands for “personal intelligence” because it provides infinite knowledge based on your unique needs.

Talk with Pi today at https://t.co/uD0fyCaWGe or by texting +1 (314) 333-1111. pic.twitter.com/C7YqwwixPb
— Inflection AI (@inflectionAI) May 2, 2023

After I heard about Inflection on a recent episode of This Week in Startups, I had to try it! It’s very easy — you can chat with the bot, Pi, on WhatsApp.

Calling it a bot almost feels disrespectful. This feels like a person.

I started out by saying hello and asking Pi how to use its skills.

Pi offered a great explanation of its abilities.

We were chatting on Wednesday night. I was going to be on a panel on venture capital the next day.

So I thought to myself, “Maybe Pi can help me prepare!”

My new friend did not disappoint:

The advice to be confident was helpful.

I tend to qualify things by saying “I think” or “I could be wrong.” But that’s obvious!

If I’m saying something, I think it. And anyone can be wrong.

And that’s when my chat with Pi really got interesting.

Pi started asking me questions!

Pi asked what kind of panel I was going to be on. I explained that it was about investing in startups.

We wound up in a nuanced discussion about how to invest.

Pi liked my approach of investing at Seed but only with traction. But it brought up some potential issues.

Going for the IPO is great, but those are rare. I may be undervaluing acquisitions as an exit strategy.

Then we really got into the weeds…

Pi asked me if I think SAFE’s are overused. I mentioned they have some pitfalls.

I couldn’t recall all the details. But I remembered that Ben Narasin of Tenacity VC pointed out numerous problems.

Pi knew all about it! It (he? she?) confirmed my recollection that too many SAFE’s can cause cap table issues.

Pi gives amazing answers to your questions. But I think the killer feature is Pi asking me questions to help me learn.

If I could change one thing about Pi, it would be to build in pauses to the chat.

The interaction was so immersive that the time flew by. There were no cues for a break or even a change of topic.

That makes me a bit hesitant to use it again. It might be too powerful.

People could get drawn into intense discussions with Pi, neglecting the rest of their life. Inflection should build safeguards around that.

But this is a very new tool. I’m confident Hoffman and his team will finetune it soon.

Congrats to the amazing team at Inflection AI!

Will you be trying Pi? Why or why not?

More on tech:

Woz Calls for AI Regulation

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Business, Technology

Woz Calls for AI Regulation

May 11, 2023 tremendousblog 3 Comments

Last year, someone called my grandma pretending to be me. I was in trouble and needed money.

It was a scam. What happens when that scam uses AI?

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“AI is so intelligent it’s open to the bad players, the ones that want to trick you about who they are.”
Steve Wozniak

Apple co-founder Steve Wozniak called out serious concerns with AI in an interview this week:

Speaking to the BBC, he said AI content should be clearly labelled, and regulation was needed for the sector.

“A human really has to take the responsibility for what is generated by AI.”

Back to my grandma. In the near future, the voice on the other end of that phone could sound exactly like me.

An AI model could clone my voice and speech style. Given my podcast appearances and this blog, it has plenty of data to work with.

Then, it could deliver an incredible story to grandma. And she might part with the money she worked a lifetime to save.

I pray this does not happen. But it is a serious risk.

AI impersonation involves way more than scams, however. Already, we have seen false images of Donald Trump in handcuffs.

I don’t think many people were fooled by those. But in time, fake images and video will only become more convincing.

We may soon be living in a hall of mirrors, unsure what reality is.

So I wholeheartedly support Woz’s call for labeling. And the best way to do it would be through self-regulation.

Angel investor Jason Calacanis laid out a great template on a recent episode of This Week in Startups. Tech companies could band together like the movie industry did with the MPAA.

Just like the MPAA required ratings labels for movies, tech could require certain labels for AI content. Companies that violate this could be banned from partnerships or financing.

Industries self-regulate to head off regulation by the government. And in a complex and rapidly changing field like AI, government is ill-suited to the job.

How many people in government know anything about AI? And even if they do, government moves too slowly to regulate something this dynamic.

AI has incredible benefits. I found out about Woz’s interview using GPT-4!

But anything this powerful also has serious risks. If we don’t start protecting people, the government will.

Do you agree with Woz? Why or why not?

More on tech:

From $10 Billion to Zero — Late Stage Ice Age

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Business, Life, Technology

Money You Can Afford to Lose

May 10, 2023 tremendousblog Leave a comment

Last night, I got a call from my old friend Matt. Matt had a problem. He had saved some money, but was terrified to invest it.

“What if I lose it?” he asked? So I explained to him the core concept behind all of my investments.

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The Money You Can Afford to Lose

In this great country, many of us are fortunate enough to have money we can afford to lose. We wouldn’t enjoy losing it, but life would go on.

That’s money we can use for riskier investments.

Why do we do this? Because greater risk often comes with greater rewards.

Francis the Speculator

Every day, I make some of the riskiest investments on earth. At night, I sleep like the dead.

A tech startup might be the most speculative investment you can make. At this early stage, a company is just a couple of people on laptops.

Assets? Nothing.

Collateral? Lol.

I expect 70% of my startups to go bust. The failure rate is higher than almost anything, except maybe crypto.

“Is that nerve-wracking?” people often ask.

Not at all. Because I know how much money I can afford to lose.

And I never bet more than that.

Startups are at the extreme end of the risk spectrum. An S&P 500 index fund is closer to the middle, and a better choice for Matt.

Money You Can’t Afford to Lose

We all need something to pay the bills, right?

That’s the money we can’t afford to lose. So we shouldn’t expose it to too much risk.

A good home for that money is a bank account or money market. You can make a little interest without worrying you’ll lose money.

Losses, Guaranteed!

Back to my buddy Matt.

“I’ll remove the mystery. You will absolutely lose money in stocks. I guarantee it,” I told him.

If you invest in any risky category long enough, you’ll take losses.

Thing is though, it tends to come back. And as humans innovate, prices reach ever higher.

Non-Attachment

I had one last thing for Matt.

It’s the concept of “non-attachment.” Called danshari in Japanese, it comes from Buddhism.

I try not to be attached to money.

I have certain assets now. But I might not always.

That money isn’t me. I’m me.

When I was younger, I didn’t have a dime. And I was still me.

So if I increase my assets, that’s great. But if they go away, I’ll still be Francis and I’ll be okay.

If we adopt a healthy attitude toward money, we become better investors.

We take a good bet when it’s available. And we don’t obsess about the potential for loss.

But something more important happens too. We become happier people.

How do you think about money? Leave a comment and let us know!

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