E455: Hunter Walk on Why Venture is Getting Harder, Picking Great Founders, and Investing Against Consensus

Hunter Walk (0:00)

The incentive model of the large firms has created a huge white spot for new investors. As you go from a $500 million fund to a $5 billion fund, you just don't care only about the multiple, you care about how much capital you get into these companies. Because would you rather put $20 million into a startup and get a 10x, or $500 million into a startup and get a 4x?

The reality is, your job is to do the latter.

David Weisburd (0:22)

You're the first venture capitalist across 450 episodes I've interviewed that decided to give back money to institutionalities and invest his money along with your partner. Why do that?

Hunter Walk (0:33)

It was really a combination of offense and defense. When we started in 2012 for $750,000, a million and a half, we could get that 10-15% ownership. By 2022, you're talking three, four, five, six million dollars to get that type of ownership.

Do the math on the spreadsheet, all of a sudden, we're going from being a $90-$95 million third fund to a $250 million, $300 million fourth fund. Now, raising it's not a problem. Our LPs, we'd earn the right to do that if we wanted, but returning it, I think, would have...

David Weisburd (1:04)

Hunter, you co-founded Homebrew, which is one of the most prolific seed investors in the world you were early to chime. Cruz, Plaid, Gusto, Shield AI, a lot of these companies before the entire industry was coined.

Hunter Walk (1:17)

That's what I always joke. I'm like, the job of a seed investor is to invest in the company before the market map comes out. So we did Chime before Neobanks and FinTech became popular, obviously now a double digit billion dollar public company. And we did Shield AI, one of the top three most highly valued defense tech companies, before American Dynamism and Defense Tech and so on came forth. If you're doing it after the market maps come out, then you're just a pundit. If you're doing it before, you're a seed investor.

David Weisburd (1:42)

So that's the difference between Beta and Alpha.

Hunter Walk (1:44)

Yes.

David Weisburd (1:46)

What do you think about the funding environment today?

Hunter Walk (1:49)

Wow. So I used to think that my job as an early stage investor was to truly be non-consensus and then bet that those companies could convince the next round of investors that this matters. I almost think now the job is to be pre-consensus, not non-consensus, because there is so much crowding into the trends, mostly driven by AI.

Some of that might be quite logical, bigger outcomes, lots of capital needs, but I think a lot of it is actually based upon the incentive model of the investors, and I'm not sure that that's actually good for startups.

David Weisburd (2:23)

I want to double-click on that, because unlike probably 99 plus percentage of VCs, you invest now your own money in Homebrew.

Hunter Walk (2:32)

So in 2022, we switched from a traditional model, we had raised funds from endowments, foundations, great outside investors, to investing our own capital. So Homebrew 4, which I call Homebrew 4 Ever, since it's an evergreen vehicle, see the marketing guy, is 100% of investments begin with our own capital, from my partner Sacha Patel and I. I joke that if I want to seem humble, I call it a bootstrapped VC firm. If I want to pat myself on the back a little bit, I call it a dual family office, you know, some fancier structure. But yes, we're investing our own capital.

David Weisburd (3:04)

Going back to what you said before, which is this consensus is largely driven by incentives. What are those incentives?

Hunter Walk (3:12)

If you are a venture firm, it's crazy to think that you're not influenced by the incentives as an individual GP and as a firm. And so of course, you want to pick the best companies with great outcomes and so on and so forth. But when you think about the near term incentives, they're not always aligned with that same type of patience to bet on a company when others don't believe and to be able to wait a long time for that to come true. You might tell folks, folks might say that, well, I got to be in the hot names. Even if maybe there's some outcome risk down the road, because if I'm not in the hot names, I don't build the brand. If I don't build a brand, I don't get to see the next good company, so on and so forth. So I truly think if you gave lie detector tests to some of the investors right now and you said, you can be, choose one, you can pick either a hot name that's going to inflate a lot over the next few years that you get credit for being associated with, but there's greater risk in the actual outcome, or something that kind of is under the radar for the next two, three, four, five years, but ultimately produces returns.