Tod Sacerdoti (Flex GP and Pipedream CEO) on seed at scale and SaaS mispricing

**Auren Hoffman** (0:00)
Hello, data nerds. I'm Auren Hoffman. This is Summation, formerly known as World of DaaS. My guest today is Tod Sacerdoti. Tod is the CEO and co-founder of Pipedream, which recently sold to Workday. He previously founded BrightRoll, a programmatic video advertising platform that will sell to Yahoo for $640 million in 2014 Tod is also a general partner at Flex Capital, where he's invested in over 400 companies, including Apple Oven, Chime, Vercel, Replit, CodeRabbit, Mercury, and many others. And he happens to be my business partner for the last 20 years at Flex and many other ventures. And he's one of my closest friends. So Tod, welcome to Summation.

**Tod Sacerdoti** (0:39)
Thanks for having me and finally get to be on the pot. It's awesome.

**Auren Hoffman** (0:43)
I'm really excited to dive in. We're going to talk about, we're going to start off talking about just like seed at scale. Like why the focus on seed stage investing?

**Tod Sacerdoti** (0:54)
I mean, I think fundamentally seed investing has always had the highest annualized returns of any asset class with Inventure. And so it's where everyone would like to put the majority of their capital if they could. And obviously the reason is because you're investing earliest at the lowest price and you get the largest ownership for the smallest check. And so if you can get in the marquee companies, then it's the single best place to be.

**Auren Hoffman** (1:16)
It outperforms Series A, it outperforms Series B, outperforms Series C. Why do you think it does outperform? Because you have so many that do go to zero. Obviously you occasionally get 100X or more. But why does the math work out usually?

**Tod Sacerdoti** (1:31)
Well, I think first and foremost, each additional round in Inventure today gets more competitive because more risk is removed from those businesses. And I would say that you just think of all the tooling that has been created around investing over the last 20 years.
It's easier and easier for people to identify companies that are breaking out. So essentially, any company that has any traction could be as little as a large number of credit card swipes in a platform like Ramp, you know, can identify a company far earlier than it could have at any time in its history, all the way towards the more obvious and at scale identification technique. So each one of those rounds is becoming more competitive and you would argue sort of price more efficiently. So seed is essentially the least efficient of all the categories. So it has that opportunity for outsize returns. And I think we would also agree that many of the real marquee breakouts were not obvious at seed and therefore the prices were reasonable. It's a power law business. So if you get in a few of those at seed, it changes the economics for all.

**Auren Hoffman** (2:33)
So few VCs, almost like none of the super well-known VCs do seed investing. Like is it just because it's so operationally hard to do?

**Tod Sacerdoti** (2:44)
I mean, I think there's a lot of reasons they don't do it. I'd say, well, first of all, it is absolutely operationally challenging. You need to see far more companies, you know, probably 10 or 25 times as many as you would at a sort of a later stage firm. Obviously, you're saying no a lot. And so that's just extremely meeting heavy and operationally intense. I would say second of all, you also have to have access to those entrepreneurs to even have those conversations in the first place. Maybe 20 years ago, you could get a large chunk of those meetings just by sending out repetitive emails like that obviously doesn't work in today's market. And so I think access becomes like a huge problem. And then I think third, which might be like the cornerstone reason is just most of these funds today are large and they need to put a lot of capital to work. And if you're ready, even a large seeds check today, say a couple million bucks, you can just do the math. If you have a billion dollar fund, you have to do a lot of seed investments to fill that fund up. So most venture investors just standardize on, we'll take fewer meetings, we'll relate larger checks, and we'll take larger ownership in fewer companies. And that seems to have been the most standard model pursued by larger firms today.

**Auren Hoffman** (3:56)
So these venture firms, also, they've got an ownership requirement.

**Tod Sacerdoti** (4:00)
Absolutely.

**Auren Hoffman** (4:00)
Walk us through like why it's hard to have an ownership requirement in seed stage.