E443: Why the Next Trillion-Dollar Startup Won’t Be a Software Company

Leo Polovets (0:00)

Building software is becoming more and more commoditized. More people can do it, you can do a lot more with fewer people, you can do it very quickly. Software was pretty scarce before, but now with AI, it feels abundant.

I think it just means more value will move to other areas, and hardware is, to me, the next natural one. It's an opportunity for a lot of companies to basically build the only new entrant in a big space and then dominate the space. Versus in software where I think the competition is just like a lot more cutthroat and crowded.

David Weisburd (0:26)

It seems like Capital suddenly combusted out of thin air to launch and fund these very large capital intensive projects. How would you explain that?

Leo Polovets (0:36)

All the like, X, volunteer, space X test alumni are starting new companies. There's just like a lot of amazing teams and a lot of science that you can build these like hundred billion or even trillion dollar companies. I think those investors are really excited.

David Weisburd (0:47)

Leo, you co-founded SUSE Ventures 13 years ago, and today you're on the sister fund Humba. Tell me about what you've changed your mind on as investor recently.

Leo Polovets (1:00)

The thing I've really grown to appreciate, especially over the last few years, is just how important it is to basically play in your own lane, and to have a lane that's uniquely yours. I think it's true both on the company side and investor side. At SUSE and Humba, we've always appreciated things like moats and defensibility. But what I realize is, even if you have a good moat, if you're in a space that's very crowded, there's a lot of competition, even if you have the best product or the best fund strategy, it's just very hard to stand out.

So just become more and more of a fan of companies doing unique things like funds with very unique approaches. I think that's the best and most predictable way to win.

David Weisburd (1:37)

What's an example of a fund doing something unique?

Leo Polovets (1:41)

To pick one just off the top of my head, I like weekend fund a lot and Ryan Hoover.

I think he's one of the most kind of experimental managers I've met in terms of he's always running experiments on like newsletters, products, ideas for how to raise the fund, how to deploy the fund, how to engage the LP community. I think all of those, maybe not all of them work, but in aggregate, there's a lot of successful experiments there. So I think that's just very different than how most VC firms are run. Then I think when he talks to founders, they appreciate that he's really like a product guy running a VC firm versus a VC.

David Weisburd (2:13)

Oftentimes, a lot of these unique fund models or even unique businesses are downstream of funds or businesses that could actually get funded. So the harder it is to fund the strategy, it gets that much easier to deploy the capital.

Leo Polovets (2:32)

I agree with that. I think that's true, again, like both on the funding company side, like the more off the beaten path you are, the harder it is to convince someone else that this is a good investment because they're used to whatever pattern they see, which is usually like the norm and not the outlier. But then I think you have a better chance of being the outlier if you can actually get the funding.

David Weisburd (2:52)

When we last spoke, you said that quality is downstream of quantity when it comes to venture capital. What did you mean by that?

Leo Polovets (3:00)

It's very hard to pick outlier companies if you just don't take a lot of meetings.

I have friends in venture that try to really scope down. I think I figured out what the pattern is. I just meet one company a week that matches this pattern. But I think you end up missing a lot and not being well calibrated. There's an anecdote here that I like, which is I remember reading maybe 10 or 20 years ago about this pottery class experiment where a professor basically told half the class, okay, you're going to be great on one piece of pottery you make, so just make it really good. Then the other half of the class, he basically said, make as many pieces as you can and you're just graded on quantity.

But that second group actually ended up having the better, more creative pieces like the repetition and learning and iteration. So I think there's a lot of that to venture. There's a lot of stuff that maybe it fits the pattern, so you should meet with them, but there's a lot of stuff that doesn't meet the pattern. You should still meet a good number of those because maybe it expands how you think, maybe you find companies that on paper you weren't sure you'd invest in, but they end up being great investment opportunities. So I think just like quantity of meetings and companies that you engage with is really important.