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I pulled some data together, Nick, if you could pull up the basics. I know we talk about this a lot, but I thought it
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would be good to show the difference between kind of a normal distribution and a power law distribution. like
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venture returns or I don't like to call it venture returns but I do think the returns generally in free markets
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create value creation in a power law distribution which means that a few of the many account for the vast majority
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of the capital appreciation of the the value creation and that's because of the power of compounding. If you build a
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better engine of technology, a better business engine, you will compound and that means that over time you will
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accumulate more and more of the market in an outsized way. As you accumulate more of the market, you actually move
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faster in accumulating more of the market and eventually it becomes a runaway flywheel. No one can catch up.
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That's the key return profile in free markets generally speaking. And a manifestation of that is
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that is also the return profile in venture in technology venture investing because
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when you find that one or two great hit the Uber that has a great network effect
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or the Airbnb or the Google it has a runaway effect in the market and it accumulates all the capital and becomes
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really valuable and you can see this in the return. So if you just pull up this is the latest Carta data. So this shows
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what the irr by the vintage that the fund was raised and then also by the size of the fund and by how the fund has
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performed on a percentile basis. Look just at the 2017 row. So the top decile funds are doing call it 30% versus you
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know the median fund. Hold on. They're not these are all markups paper markup. These are not dist
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these are all numbers. Okay fair enough. But I'll make your case in a second here. And these are not
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DPIs. This is not distribution cash out. This is just marked up value. And this is 8 years old. This is the 2017
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vintage. But just the difference between, you know, call it a 30% IRRa and a 10% IRRa that compounds over 10
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years. So the multiple difference at the end you should expect is the difference
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of making 14 times your money or 2.6 times your money. The difference between 10% and 30%. And that's kind of what
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this shows roughly is that the difference between a 50th percentile and a problem with this data though is this is
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Carter's product is used by a small number of people for a small number of years. That's why the other data we
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showed from Cambridge is much better because the 2018 forward are still in the J curve. So they and to Chimat's
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point they're paper so I knew I knew I knew out there. Okay. I knew we would go down this
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rabbit hole so I shouldn't have shown that but like No, that's okay. There are two key
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points I wanted to make and just pull it up again, Nick. The first key point I wanted to make is because of the power
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law, the job of investing is to find the power law winners. It is not to buy the
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index. If you buy the index, you are losing to the market. Even if these mark even if these numbers are correct, which
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they're not, as we've talked about, you're losing to the index if you're just buying the venture index. And it's
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probably way worse than this. You have to get the winners. And so what this does show though is that the smaller the
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fund, the less diversified it is, which means the more they're likely to capture
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the winners. And you can actually see that the smaller funds generally have better performance than the bigger
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for sure they do because they're getting in earlier as well, Freeberg, and they're paying less value lower
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valuation. So that's but they're also not they're not getting diluted away by the index. And the index
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generally is going to return negative. It's going to be a negative returner. I think I told you guys I went to an LP
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conference years ago. one of the biggest venture funds and they showed that 45% of their capital went into flat or down
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rounds and they had a negative net return on that allocation of capital across 13 funds and if they had put that
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if they had never invested in flat or down rounds then they would have doubled their IRRa overall as a as a fund really
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important point that the the power law matters which is your job is to just find the winners and if you find the
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winners they're going to compound so how does that translate so so go to the next
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slide Nick so this is the one that I shared in 2023 three that Gokul Roger uh published on Twitter and that's where I
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first saw this which is if you buy just the top 10 companies in the NASDAQ and you just held it, you would have made a
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24x multiple over a 24-year period versus if you had just bought the the NASDAQ. So just owning the best
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companies in the NASDAQ is by far the best way to drive multiple of return over a 10-year period. you made a 9x
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multiple 9x just by owning the top 10 companies in the NASDAQ. And this was through roughly the end of 2023. So now
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let's pull this up. I pulled this analysis together this morning for our conversation. And this shows that the
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venture returns don't stop when you stop being a private company. That the real return and this highlights the point
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that most of the value when you find that power law winner, most of the value is created when they are a public
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company. So, Palunteer went public after 17 years and their market cap was 16 billion. So, they created 16 billion of
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equity value over a 17-year period. Since they've been public in 5 years, they're now worth $436 billion. So,
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they've created another $420 billion of equity market value in just the last 5 years, probably eclipsing all venture
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returns that have been made during that same period of time. Airbnb went public after 12 years, worth 47 billion. In
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just 5 years, they added another, call it roughly 30 billion. Uber went public 75 billion after 9 years as a private
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company and now they're worth 190 billion. So they've added 120 billion of value in just 6 years since being
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public. And Spotify, another good example, 27 billion market cap when they went public after being private for 10
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years. And then they added another 120 billion of value in the seven years they've been public. And I've got the
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whole list here. This is all these companies that have 100red billion plus market cap. And when you find the power
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law winner, the value continues to accrete. It continues to compound. And you're better off just buying the public
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stocks. And I think that this was my my big kind of conclusion as I went through
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all this data. Like Chimath is exactly right. When you're in the venture market, you learn a lot. And
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ultimately, I think you probably want to learn a lot to then allocate your capital more wisely into what you've
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identified are the power law winners where most of the value continues to accumulate whether they are private or
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public. And having an IPO is just a transitionary event for these companies. Their their compounding engine will
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continue as a public company if you've identified them. Facebook such a great example. Eight years as a private
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company, 100 billion market cap at IPO added another two plus trillion dollars in the years since. Yeah, I think you
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Freeberg you've cherrypicked all the winners in hindsight, the biggest winners for that list. What if you were
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just to create a list of every IPO tech IPO and how it's fared afterwards, right? No, it's a fair point. There be a
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lot of stinkers in there that you haven't But my point, Sax, is just find the power law winners and then that's where
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all the the value improves. Well, I mean that that's hard, too. Yeah. Here's the I think you have to
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look at how we got here. I I started doing this just, you know, in my second decade
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and companies decided to stay private longer. That was the big trend. And then there was a lot of reactions to that.
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Secondary transactions started occurring and then you just couldn't get DPI. you
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had to hold it forever. And now the industry is responding to this. So now we have something called strip sales. We
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have people creating continuation funds, ways to take those early investors and get them out into a new vehicle or to
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create some liquidity. And Chimat's point is really important because you do get so much intelligence. And what I
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learned having been an investor in Uber and Robin Hood when they were $5 million
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and $20 million companies. I was like first investor into those companies is when they crashed in the market. When
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Uber hit 30, I bought up a bunch of it as a public investor. Even though I had a ton from when I was an angel investor
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and I did the same for Robin Hood at $12 because I knew the management, I knew Vlad, I knew Travis, I knew Dara and I
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had that understanding of the market. And the same thing I did with Facebook, having listened to Chim talk about it
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all these years and Brad Gersonner talk about all these years, I backed into it when it was $92. So what's happening now
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is what RUF did with his continuation fund and holding the private ones is in the theme song of this podcast famously
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when Zach said, "Let your winners ride." That is the overarching thing here. The
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industry, the venture industry is in in massive transition. It's going to start looking a little bit like private equity
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and a little bit like Gavin or Brad where they're private and public market investors and you're seeing buyouts
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occur. So people are saying, "Hey, this SAS company's undervalued. We're just going to buy the company. We'll start
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operating it." So venture is in a massive transition, but I think what comes out on the other side is something
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that looks a lot more like public private investing like Ruof pioneered at Sequoia and we're going to talk to him
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about that at the summit. I'll just respond to your last comment and Jal I appreciate you saying that because yeah
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Roloff is coming to the summit to talk exactly about this which is going to be great but that is the job of being an
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investor to your point you're like hey you know you cherry pick the winners but I think that's the point the point is
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that the returns acrew to these power law winners and the job of being an investor shouldn't be to index a market
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anyone can index a market the job of being a great investor is to find those winners and
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the question is how how hard that is or easy it is and I think your just makes it sound like, oh, all you have to do is
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wait for these companies to go public. Sorry, that wasn't my point. Yeah, that wasn't my point. I kind of came across
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that way, too. Yeah, sorry. I was just saying that the power law winners continue to acrew. In fact, not only do
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they acrew as private companies and then you if you get one of them, you you have
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these 14x funds, but as a public company, they continue to acrue. And so, you know, this isn't just limited to
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being a venture investor. pretty much anyone has access to the public markets and can make the decision that they've
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made a bet on a power law winner. There were a lot of people who were very vocal
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supporters of Palanteer, very vocal supporters of Uber, of Spotify when these companies went public and a lot of
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people said no, they're naysayers. I think the problem that you would have had trying to implement this strategy is
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it would not have been clear what you would have been underwriting. What would you have been underwriting at Nvidia
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for, you know, not the last five years, but the many years before then? You would have been underwriting video
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games. Video games. Yeah. And you would have had this like very odd data center business that didn't
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make sense that, you know, Jensen took a lot of heat for that he had to defend and it it didn't actually make a lot of
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financial sense. So, I I'm not sure. I will give you a counter to that and I'll I'll call him out and I'll make fun
00:10:38
of him. Now, my co-founder at Climate Corp, his name's Siraj. is probably listening right now. He bought Nvidia
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years ago on the thesis that these GPU chips would eventually be used for AI models because he did all his work at
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Stanford in distributed computing. He did early work in AI. He was very close with
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that's different than what you were saying before. I get it. He's a smart guy who made a huge winner. But I'm
00:10:57
saying but no, the pro the problem was he sold Nvidia too soon because he's like, "Oh,
00:11:00
they're not actually." Okay. But I'm just saying like there was probably a person that was as smart as
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Siraj and bought Intel. Then there was another person that bought AMD. Like I'm I'm not sure what the point is. Here's
00:11:08
the point about venture that I think is worth noting. It's an exceptional market that gives the practitioners
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an incredible edge if you build a business around the information asymmetry that occurs.
00:11:23
Yes, that you can monetize. After that, the only business model is building an asset
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gathering machine to generate fees because even the consistency of being able to generate these power law
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distributions in successive funds doesn't exist. And you can look at all of the data. Cambridge has done this. A
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lot of these guys have done this. All the big LP fund of funds like Horses Bridge have done this. Having a killer
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fund has zero correlation with your ability to then have a next killer fund as an
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LP. And I showed these returns on screen, although we blanked out the names, and I'm in all of them. It is
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really hard to be consistent.