Why does Steve Vassallo of Foundation Capital choose to invest early?

**Scott McGrew** (0:12)
As long as we're playing the guess who said this quote sort of thing, speaking of universities, this one's from a college professor. In any group, there are people who make things happen, people who let things happen, people who help things happen, people who won't let things happen, and people who wonder what happened. Any guesses who's that is?

**Steve Vassallo** (0:34)
Sounds like something my mom would say.

**Scott McGrew** (0:35)
It is your mother.

**Steve Vassallo** (0:38)
Yeah, my mom is the force of nature.

**Scott McGrew** (0:47)
I'm Scott McGrew, welcome to Sand Hill Road. This week, Steve Vassallo of Foundation Capital, longtime investor, and before that, a designer at IDEO. So you are at Foundation Capital, where the team recently decided to create a new rule, no phones at pitch meetings. Tell me about the decision to, what was, were people really on their phones as somebody was pitching?

**Steve Vassallo** (1:29)
Oh, yeah. I mean, folks, it's not uncommon in any meeting. I don't think it's unique to Venture Capital, where folks will get drawn to the notifications that are, you know, ringing away on their phones and their watches and iPads and laptops. And so we basically decided, hey, you know, one of our core values is respect for entrepreneurs and entrepreneurial journey. And it was, how do we actually do what we need to do, which is take notes in meetings. Some people are using these devices, of course, to take notes and not have anything digital in between us and that honest conversation. And so we assigned basically one individual to take notes for us and-

**Scott McGrew** (2:05)
Like an old-fashioned meeting.

**Steve Vassallo** (2:06)
Yeah, have an old-fashioned meeting, exactly. I can't say we're 100% on it yet, but I think we're definitely getting better.

**Scott McGrew** (2:12)
And you're taking these pitch meetings because you are investing at very early stages. This is part of the thesis, right?

**Steve Vassallo** (2:19)
We're typically the very first institutional investor for about a third of our founders, meaning they haven't had any angel capital, seed around prior to us. That's probably close to 40% of what we do.

**Scott McGrew** (2:31)
Why?

**Steve Vassallo** (2:32)
Well, I think it actually gets down to basic venture math. You know, venture returns follow a malnormal distribution. It's a power law, right? About a third of your companies will go away, go out of business. A third of them will return one, maybe two, three X capital. And hopefully, if you're doing it right, a third will return 10, 100, maybe even 1,000 X. And those make up for all the holes from that kind of first third, if you will. And the math basically is pretty simple, which is you've got to own as much of those winners as you possibly can, because what happens if you're the seed investor, the series A investor, let's say you own 20% of the investment of the company at that initial round, they'll raise a series A and a B and a C and be fortunate enough to go public at some point. And across all of those rounds of financing, even when it goes well, you're taking somewhere between 10 and 15, maybe 20% deletion.

**Scott McGrew** (3:24)
Now, will you do a follow on round if you believe in it?

**Steve Vassallo** (3:27)
Yes, we will.

**Scott McGrew** (3:28)
Because the other argument is, no, no, no, let's save that money to do yet more really early investments.

**Steve Vassallo** (3:34)
We try to own north of 20% of our investments at the initial check. And those that are really cooking, we will do our full pro rata at the next round. And depending upon sort of how much capital we have in at that point, we'll invest even more at a subsequent round. We also have another vehicle which we call our leadership fund vehicle, which is to back basically the Greatest Hits album, back to the best companies of the early stage flagship funds. So we have plenty of capital to be able to continue to own as much of those companies as we possibly can. And that's the key to this recipe is you want at the end of a fund, when you look back, you want the vast majority of your capital and your time to be spent on the winners.

**Scott McGrew** (4:15)
You are enthusiastic about crypto and you lead some of the crypto investments. But before we talk about crypto, let's define our terms. Are you enthusiastic about the blockchain, about coins? What is it about crypto that you think is worthwhile?

**Steve Vassallo** (4:32)
So crypto in my opinion is very interesting because it offers an alternative to the web infrastructure that we have today that really doesn't allow for alignment and financialization of interfaces. So and what I mean by that is, if I'm building a next-generation application, let's say I want to build the next Facebook. If I am trying to incentivize users to contribute content, one way to do that would be to actually pay them. Literally to, if you're going to put more posts up on your next generation LinkedIn or Facebook, and you turn out to be a super user and people want to read your content and consume it, then you should participate. Today, if you're a user of Facebook, you give a lot of content, you are rewarded with more advertisements.