Justin Fishner-Wolfson — 137 Ventures

Posted on Monday, August 9, 2021

Justin Fishner-Wolfson is the cofounder and managing partner at 137 Ventures. 137 has more than $1.5B assets under management and is known for investing in growth-stage companies by providing custom liquidity solutions to founders.

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I am joined today by Justin Fisher-Wolfson, co-founder and managing partner at 137 Ventures. 137 has more than 1.5 billion assets under management and is known for buying secondary shares or providing custom liquidity to founders. 

Before 137 Justin was one of the first investors at Founders Fund, where he led the investment in SpaceX in 2008.Well done. And led the investment in Spotify was Sean Parker, thanks for coming on the pod. 

Happy to be here.

Great, let’s start with this. You started Stanford when you were 15.

True. I feel like people say this. I’m not actually a hundred percent sure that’s true. I might’ve been 16 or 17. I’ve got to check.

I feel like someone said this and then I didn’t really think about it. And I never, I never like corrected them. And then now it’s like, true, but 

But you were one of the first investors, Founders Fund. Was that true? Okay. 

That, that is totally true. That is totally true, and I did lead the SpaceX investment, so it’s yeah. So, those things are true. It’s just, I feel like, you know, people are giving me more credit for, for sounding smart, cause I went to Stanford when I was very young.

How about another one, a goal. We’re going to fact check this whole show. Did you leave Founders Fund when you were 28, to start 137? 

Okay. There are a lot of age related questions on this. 

Yeah. 

Let’s, let’s go with a different angle, You’d led some big investments at Founders Find you were doing reasonably well. You left Founders Fund though to start 1- 3-7 or 1-37. 

Either is fine. Is I say 137.

Why did you leave Founders Fund and why did you start 137.

It, it was a market opportunity. Right. So if you think back in, in 2010, You know, Facebook was still private. They’d done that, that $50 billion private round with Goldman. I had a lot of friends from college who were working there and had a lot of,and had their whole net worth was obviously at Facebook.

They had a lot of money on paper, but they actually had no money. Right. They They were living with roommates, they were trying to get married and couldn’t pay for a wedding And so I got a lot of calls around, kind of that moment asking and who do I talk to?

I want to borrow some money. I’ve got, I’ve got all this stock, you know, who should I, who should I speak with? And I called around and trying to find the right person to refer them to. And when I ultimately couldn’t find anyone to refer them to, I thought, well, You know, a large opportunity and the thing that, that was sort of controversial at the time, but I think is obviously everyone agrees on at this point, which was, you know, my belief that Facebook, know, being private at that stage, wasn’t a weird anomaly.

It wasn’t a sad, just part of this longer-term trend. And therefore, you know, building a fund that was focused on helping people get liquidity at this at these types of companies would make a lot of sense.

Right. and so isn’t it sort of the same premise as some of the marketplaces, some of the shares post equities in. 

I think the, the underlying need. Is what drives that, drives the overall concept of liquidity. I think the ma the mechanism in which people are trying to go about that is very different. So obviously, anyone who’s trying to, well, the marketplace is doing that on the recognition that like, there’s a need for liquidity, you know, within these tech companies that are staying private.

For sure. You said periods of time, the difference is the marketplace is trying to connect to people and they don’t actually have any money and they don’t have the ability to like, get anyone any money. Right. Ultimately, you know, if someone’s talking with us, there’s someone on our team that literally like presses the button to wire funds.

Yep. 

just a different, it’s a different dynamic, right? I mean, you could obviously call a broker or, we use some kind of marketplace or whatever, but ultimately they’re just trying to connect you to, know, a principal like.

Actually, I mean, that’s an interesting place to start, which is, how do people get liquidity today and how is your solution better indifferent? And I think one is obviously you have the money, you have the big red button to wire the money. 

Yeah, we should, we should definitely get a big red button that would make wiring money. I think more entertaining for everybody. Um, it’s I mean, I think, I think the thing that that has changed is there’s been broader agreement among the ecosystem that liquidity is in everybody’s best interest.

You companies stay private longer funds, generally speaking have gotten bigger. And the outcomes that individual investments need to return have scaled accordingly. And because of that, you want to answer and advise founders and executives to go for the bigger outcomes, which fundamentally means greater risk for them.

And the way to incentivize people to take take those risks is to give them some liquidity. So that way they’re more open to looking for the bigger outcomes and then those bigger outcomes drive fund level returns. And that’s better for the venture investors. I think once I don’t think everyone’s here yet, but many more people are here today than they were 10 years ago.

And so, now that we’ve gotten that alignment, there’s a lot more liquidity for founders executives, early employees, even, angel investors, across the ecosystem now.

Yeah. And how much just, can you tell me a little bit more? A lot of my listeners are founders, know, I assume you’re buying, I don’t know what, like 10% of their overall you’re buying some person. 

Yeah. And can you tell me more about how it actually works? I assume you’re buying some small percentage of someone’s total holding. 

Yeah. I tend not to think about it in percentages,   mostly because it’s a relatively small fraction of their total holdings. Um, you know, the founders obviously own the most of the company cause they were there at the beginning. that, that means that anything they’re doing, even if the nominal dollars, you know, are reasonably large, ends up being a small percentage of their, of their net worth.

And in general, we only want to deal with people who are very, very bullish on their company and therefore functionally, it would only really ever want to get liquidity on a small fraction of, of their holdings.

And so, yeah. Tell me a little bit more about how it works. Like if I’m a founder, uh, you know, I assume this sort of has to be done really the CEO, The major investors have to sort of be aware of this and bought in on this, you know, do they approach you? Do you approach them? How does it all actually play out?

The answer is both. Obviously either we’re getting people who have some kind of life circumstance that’s driving their desire to, to get liquidity, getting married, getting divorced, buying a house, having kids, you know, all sorts of things cause people to, to, you know, need cash to do stuff. And so sometimes those people are coming to us sometimes.

We’re, we’re not, it’s not like we’re specifically calling people and saying, Hey, do you need liquidity? It’s more like, we think your company’s interesting. Just like to learn more. And then, you know, eventually that may spark a conversation when the opportunity arises. I think there are just a lot of parallels to primary fundraising that people don’t, necessarily think about.

So, you know, if you’re raising a primary round, like obviously the CEO of the company and the other investors are sort of involved in that process, they signed off on it. Right. There’s some diligence, you know, whatever. It’s really not any different, you know, for what we do. Like ultimately, you know, even though we’re dealing with individuals, we’re ultimately, you know, investing in the company.

And so we care about, know, what are the numbers and, what is the business and things like that. you know, it’s kind of the same process. And I think it’s like somewhat interesting. If you think about venture, right? Like most of the dollars are in primary investing and you know, less of the dollars are in secondary investing.

if you think about the public markets, it’s actually 99.9 9, 9, 9, 9% are all secondary. And in fact, they think primary investing is super weird. It just sort of flipped in our part of the ecosystem. And so I just, I just think it’s like this funny thing where people think these things are very different, but actually broadly speaking, they’re sort of all the same, right?

It’s like you end up with an equity interest in some company and how you got there might not really matter that much. The question is like, you know, what, which companies do you want to be in? And what do you know about them?

Right. So, so is that trend just going to continue and continue where the markets are going to have more and more liquidity. 

I mean, broadly speaking, I think, yes. I mean the market. The overall, right. Both, I think primary and secondary, like what’s this, just to get something along the lines of like, there’ve been more unicorns created in the last 12 months than there were in the five years before that. And so you’re just seeing this massive acceleration.

And if you compare things to where they were a decade ago, when we started the firm, it’s literally two orders of magnitude bigger. Right? So, so there’s the, the industry and the market has just grown so dramatically.

it seems like a lot of investors are sort of crossover investors, right? So the public market investors, traditionally public market are now in private market companies.

Yeah. I mean, in some sense, if you think back to, where the public markets were 20 years ago, there were small cap tech companies. There are no longer public small tack, you know, small cap tech companies. They have all disappeared from the public markets, but those companies haven’t disappeared.

They’ve simply. You know, they’ve they’ve continued their existence in the private markets. instead of if you were a public markets investor who invested in those types of companies, you know, broadly speaking, there are a lot of similarities, of whether or not you invest in the public markets versus the private markets.

Now, there are, important differences when you have liquidity on a daily basis versus, having liquidity on a, on a maybe once every like five to 10 year basis. And so you have to think about things a little bit differently, but ultimately  category of company still exists.

What about access to information that you get when it’s, when they’re private versus public? 

well, I mean, obviously, you know, if you’re looking at public companies, all the information is, public.

This is public. 

So that’s that’s, I mean, I mean, a distinction. I mean, obviously people do different levels of work and have different levels of knowledge about the industries that that company is operating. So, you know, conceptually they could, they could be better investors than other people, know, in the, in the private markets, the company is fundamentally just, you know, sharing with you their information.

And they’re under no obligation to share that with everyone, because they’re not trying to raise money from everyone. It’s not a public market. there’s a real advantage to having the relationships with the people who run these businesses, because want to share that with people that they trust with people that they like, and there’s a long-term business value to, you know, choosing who’s involved with your company.

And I think people very much recognize that in the private markets, I think they occasionally forget that in the public markets and, your investor base always matters.

Interesting. So you think people care about their investor base more? founders are thinking about it more when they’re private than when they’re public. 

I think if you talk to founders and you, you said, well, Hey, would you take money from this firm at this price or this other firm at a higher price? You know, if the other firm was like crappy that people understood that they would say, oh, we’ll take the lower price. We’d rather deal with these like really great investors who maybe they’re helpful.

Maybe their terms are cleaner. Maybe they’re just nicer people. Like who knows in the public markets, people like seem to totally forget that. And there was like, oh, well, whatever the price is, but it, it totally matters who your investors are. Right. If you have people who believe in the long-term vision of your company and you know, things go down, you have a bad quarter, they don’t dump all your stuff.

Right. They hold on to it. In fact, if it goes down, maybe they add more because they think that quarter is just a, you know, everyone has a bad quarter once in a while, just like life happens. So, you know, I think it really does matter the quality of your investors and. People go public. And like, they only talked about the price where it’s like the only thing that matters and people all the time make price trade-offs in the private markets and no one thinks that’s crazy.

Hm. Yeah. out of curiosity, do you hold then once your positions, once the companies go by. 

You know, we’re trying to hold for a certain length of time, right? So, you know, for, if we’re in a company for a decade, we’re less likely to hold for an extended period of time in the public markets, because we’ve been in that company for a decade, you know, on the other hand, and this would be like a weird edge case.

But if, you know, if we’d only been in the company for 12 months, we would not want to just be out immediately since they went public, because our fundamental investment thesis was not driven on me. Gosh, hopefully they go out in 12 months and we get like a five X cause that’d be awesome. Right? We have some view that over an extended period of time that, you know, the business is going to play out and people are going to recognize that there is really great long-term value there.

So, you know, we’d be w w we sort of have an under when we’re underwriting our individual investments, it’s for a certain duration. And if you know whether or not they go public or not, during that timeframe doesn’t necessarily impact our desire to, to hold.

Yeah. I actually would think you that in a lot of ways, you, when you’re making your underwriting decision, actually get more information than what some of the public market investors. 

I mean, I think all private market do a, I mean, it’s somewhat crazy. And I, I guess I’ve sort of come to terms with this because there’ve been all these conversations about, well, you know, is this being valued correctly in the public markets? And you look at the information that the public markets guys get, like they get an  and maybe like 15 minutes with management, and then they’re asked to value this company.

If you did that for venture investors, they’d be like, so when’s our next meeting and where’s the rest of the data room. 

Right. 

And so it’s, it’s a really big ask of the public markets to get it right on, day one, right? Like that’s what all the articles were about is like, did it go up or down on day one?

You got a lot of smart people who are making an educated guests, but very much a guest because they have very little information and over time, you know, they can build their own models. They can look at the trends in the industry, they’ll get more and more data and will eventually get priced in a rational way, but that’s not like something that people can just do instantaneously on day one.

Like it can’t possibly be true for much less data than any private markets investor

um, I mean, I think that makes the huge advantage of your model, I guess. me a little bit more about your model, which is just broadly speaking, you’re investing sort of in-between price rounds, right? 

potentially. I mean, we’re somewhat agnostic on this issue. Like we’ve definitely, done liquidity with folks as part of rounds. We’ve done it right before rounds, right after rounds. You know, when the company hasn’t raised money in three years, so we don’t really care.  But we’ve definitely done it sort of imitate between rounds.

That’s true.

And does The price that you land on tend to be fairly close to whatever the, recent rounds were done at.

The answer is that’s definitely where deals get done, because it’s very hard to convince people that, you know, their company is worth half as much when someone else just came up with a price and, you know, it’s certainly going to be challenging for them to convince us that we should pay twice as much when someone else just, just paid that price like, you know, yesterday.

so the reality is those rounds are very strong anchors in terms of like a, deal’s going to get done some somewhere around that price. You know, that being said, there are certainly situations where, may think the company is really a great company, but someone came in and gave them a truly crazy price.

And we’re not going to be able to find agreement, you know, in that situation.

Yep. Um, there any disadvantages to doing your strategy versus sort of a traditional primary investor? 

You mean, like, would, would we rather be primary investors than do what we’re doing?

Yeah, or primary, is that the word? I don’t even know what the word was. Um, know, what, are there any disadvantages, you know, the challenges of running your model? 

I mean, it’s just, it creates different challenges relative to being a primary investor. Right? So like, you know, a primary investor can invest if the company doesn’t want any money. Right. But if the company wants money, but none of the people want any money, then that makes it more challenging for me.

Right. So it’s this different version of the same problem, right? Like ultimately if you’re an investor, people have to want the product and the product is being able to write a check. Right. And so, since we’re dealing with individuals, if nobody wants any liquidity, then we’re not like that’s a, that’s a hard thing to do.

And in fact, you know, I always think our biggest competition is people doing nothing because the people we’re doing business with are super bullish. and they feel like they have, I have a lot of information, which they do, and they feel like they have a lot of control, which they probably don’t have as much as they think they do.

But, you know, they still have a lot of things and they want to keep going. 

Even taking out a small percentage, you know, feels like a lot to them. So, I mean, that’s, you know, like these challenges, like they’re different, but they’re also kind of the same, um, you know, they’re, you know, for us, I think we’re, we’re talking to people about something that you’re not everyone is familiar with.

So it’s like people know how to, raise a primary round. And I actually think there’s very little differences in terms of like, dealing with Australia. Like, it’s the same, like I’m going to ask you the same questions, right. but like, people feel like they haven’t done it before, so they don’t know what they’re doing.

Right. Like that makes it a little bit harder to start that conversation.

And I think, I heard your model describes sort of more like convertible debt as in no new equity is being issued. Right. Right. Because you’re. 

Okay. 

that a fair 

Yeah. I mean, fundamentally we’re dealing with individuals, right? So irrespective of how we structure it, right? Like if I’m buying chairs from the founder that doesn’t create any new shares in the company, right. The company is not taking any dilution. Right. We’re fundamentally just dealing specifically with the founder.

You know, we definitely structure transactions, as you said, as like convertible debt, which, tends to be much more tax efficient for, founders, it allows them to maintain voting control of the shares. Things that tend to matter. You can avoid repricing the foreign aid.

I think if, if you do things the right way. So like the structure matters, but ultimately, my earlier point, it’s like, if people don’t want any money, it doesn’t really matter how you structure it.

No, but I think that that to your point about it.

being slightly, more confusing, it’s just a newer thing that people aren’t as familiar with to understand sort of how that happens that they don’t yet trigger new company evaluations or something. So that’s, that’s achievable because it’s sort of a future transaction. 

Yeah. I mean, if you think about it, right. And I’ll just use the primary analogies, because I think people are more familiar with them, right. If you’re a company and you raise convertible debt, right. Most of the time there’d be some kind of cap on that. Right. So if, if you raised, let’s make up numbers, it, you know, $10 million, you know, with a, with a cap at 200 million, right.

That just means that the people who are investing in. That loan right. Have the right to convert in a $200 million valuation in the future. Right. And if your company, you know, ends up being worth $5 billion, they’re totally going to convert. Right. And if it ends up being worth less than 200 million, in this example, they’re not going to convert.

Right. They’re going to be alone. And so, you know, that that financial structure has existed for a very long time. It exists in the primary part of the world. I think people are very familiar with. And the only difference I think in our case is we’re dealing with an individual. Right. 

Hello. 

in my example, right, like you’re dealing with the company in, in my, you know, in our work we’re, we’re dealing with, you know, a founder, 

Yeah. 

That’s the difference.

Yeah. But that’s fascinating. That makes a lot of sense that the valuation doesn’t change. Isn’t triggered that you’re not triggering evaluation change. The voting still stays the same. That’s interesting. 

Yeah. These are things that generally matter to, to founders and senior. Exactly. 

Yeah, no, it’s interesting. I mean, I was going to ask also like, do other secondary funds do that? 

There are definitely some other people that sort of say they do that. it’s a little less clear to me what other people actually do. and there’s a broader distinction in the industry about whether or not you’re getting the company to sign off on the transactions. We do not everybody does. And I think people say things like, well, we’re going to do a forward.

And then it’s like this magical thing where they think it doesn’t somehow transfer restrictions don’t apply, which is not true. They like, that’s definitely right. Um, and I just kind of going back to the earlier conversation, right. And so long-term business, like sure. Can I go do some deals with, and like knock at the company, sign off on them and might I make money?

Possibly. I think it comes with this other problem of how do you get information about the companies? If you’re, if they’re not saying I’ll find it, like that’s weird and awkward, but whatever, maybe you somehow manage to overcome that problem, like going around and pissing off all the companies is not a good long-term strategy.

Right. 

So like, if you want to make a lot of money on this one transaction a maybe, but then you’re building a longterm from your You’re trying to make a lot of money for your quickly. And like, that’s not, I think what we’re trying to. 

where you started was, you know, you’ve had friends at Facebook. imagine you’re mostly not dealing with the run of the mill employee because your transactions are. large enough, you want to put to work? 10, $20 million check. 

Mean we do, but we’re happy to build those positions over time. So it’s not like every single investment we make. We’re, we’re trying to, you know, write a check for $20 million. We’re, we’re totally open to writing checks for, you know, half a million million dollars for companies that are obviously much earlier stage than Facebook, Facebook was back. you know, Having people not have student debt when they’re running a company. Like you don’t, you don’t need people worrying about whether or not they can pay their loans.  Like maybe they don’t have a roommate, but do they need for right.

you know, the bay area in New York and LA, I mean, like these are expensive cities. And so, you know, it’s not that I think you want earlier stage founders to have crazy amounts of money and never work again, but you do want them to at least be focused on the business and not worried about some of the other, you know, day-to-day life, things that, that, you know, take up people’s mental, mental bandwidth.

Yeah. Uh, no, I buy into that entirely. I also think this is a little bit more philosophical. I also think people’s reaction to large amounts of wealth and what large means varies. I think it’s very, unpredictable. 

100%. I totally agree with you, right? I mean, if you give people I think, I think you make an interesting point, right? It’s like, it’s like, what does large mean to you? And large actually changes over time but there’s definitely a number where people, you know, truly never, ever have to think about money again.

And I think what happens to them when, when they get that kind of money, they don’t even know themselves. Right. And they can’t predict, like they can tell you totally, honestly, that they will keep a hundred hour weeks. Like it’s no big deal. And then like the second happens, like there’s a switch and they didn’t know that that was going to happen either.

So it’s not like they ever lied to you. They just don’t know. 

Yeah 

What about for yourself? Anything surprised you?  

Um, Yeah. I mean, I think that there are, you know, I think they’re heuristics on like exactly on approximate dollar amounts for those sorts of things. But I agree with you, you just, you just don’t, people don’t even know how they’re going to behave.

  It’s been fascinating. I was early at Google and it was interesting to watch my friends said change or not change at all. 

Yeah. I mean, that’s the thing, like some people just work as if nothing happened. Other people go to Tahiti and retire to the beach 

and other people, you know, they, they work 50% as much or whatever.

Um,  

I mean, I think, I’ve been doing this for a long time, you know, had some success, you know, for me, more willing to trade money for time. 

Yeah. 

So if I can, if I can spend 

Okay. 

a little bit more money get back time, that’s, to me that like that translates to sleep. 

Yeah. 

 So like, you know, I mean, that’s, that’s certainly something that, you know, I I’m, I’m willing to do these days.

Um, but you know, ultimately I think in this industry, especially, it’s like, if you’re successful and you have more money, it’s like, what do you end up doing? You end up writing more checks into the ecosystem. Right? So I’m in some of my friend’s funds. And then some of my friend’s companies, those checks have gotten bigger over the years, but like that’s sort of the thing that that’s happened.

And otherwise, you know, I I’m, I’m, I’m totally willing to, to kind of spend more money if it means that I can spend more time with, you know, my daughter or my wife or sleep, which in some sense, like I’m probably still doing those two things at the expense of sleep. So if I can get more sleep that little bit.

Um, I remember when I first made enough money to not park in like the longterm, longterm parking lot at the airport. 

Right. Exactly. You know, it’s I hate paying for parking. It’s like the thing that pains me, like everyone has like that random thing. And, and so like, I much rather walk, right? Like I’ll, I’ll park two miles away and walk. 

any other thoughts just on this, what do you think of prices nowadays? What do you think of multiples nowadays? What’s going on? What’s going on? Just. 

I mean, I’m not sure I could tell you all these things definitively. I mean one clearly, you know, valuations have gone up multiples have gone up as an average. I think the challenge with describing everything’s with averages is that they hide all the numbers above and below them.

And 

Oh, 

it’s certainly invest in companies that are, you know, below the average multiples of the moment. you could avoid the companies that are dragging that average off because that’s, that’s going to be hard. think, you know, one thing that the pandemic has really home a lot of people is that, you know, technology really is the future.

All of the trends that we’re going to take five plus years got accelerated to 12 months from an adoption cycle perspective. And the world has in many ways gotten smaller. And so, whereas I think in the past you would have seen, a larger number of decent sized companies. In a market because they were sort of regional players or, you know, there were some, country breakdowns or whatever, or maybe more breakdowns across different kinds of customers.

You’re now seeing more consolidation. So like you have a smaller number of companies addressing, the same size markets. And so the outcomes for those individual companies is much bigger. The growth rates are much bigger. And so you can actually ascribe, you know, higher multiples to these sorts of things.

So it’s, it’s a little bit of like, there’s some underlying fundamental changes coupled with it doesn’t seem totally sustainable. And the trick, I think from our view is being right about growth because if you’re right about growth and the growth rates are high, they have to be big numbers and sustainable and you have to be right about that.

than most things are gonna work out, just.

Um, some of that seems to match kind of my high level understanding of some of the thesis of founder’s fund. Which is I flippantly describe founders on the sort of having this monopoly view is that, you know, like category defining companies. 

I’ve been gone for a long time, so I’m sure I could accurately represent, their view today. But I guess the way that I would say it for us is that, we want to be in businesses that have long-term defensible business models. Right. The challenge is, and I sort of alluded to this earlier, right?

The challenge. Of being a private markets investor versus a public markets investor is you don’t really get to change your mind. Right? You can’t get in and out of these things. So if you’re going to be in them for an extended period of time, you have to believe that the margin profile is going to stay consistent and not get competed away.

Right. Because if it does, then it turns out not to be a very good investment. Right. And in that case, I think you, you end up looking for business models are defensible and you end up with things like, you know, marketplace businesses, you end up with, network effects, businesses, information, asymmetries, economies of scale, right.

Things that make it hard for other people to just come and replicate your business easily. Right. Um, and so ultimately those are, you know, if those companies are successful, like they end up being really big businesses,

maybe, can we pick on space X which is, I mean, it’s not a marketplace, it’s not some of those things, but I do think 

rarely click on place X.

I mean, in a good way. but space X.

changed pricing, right? 

 tell me about space X and what you’re, what you see and seeing there. 

Well, I mean, I think, I think what you’re referring to is that they dramatically brought down the cost of launch. Right? So historically there were a couple of major, providers who were providing lawn services at very high prices because their whole business was built on cost plus 

I was seeing that change. It’s bringing down the cost of launch, but also just changing the pricing structure. 

yeah. So that business model change that space X. Made it almost impossible for the incumbents to effectively address the opportunity, right? The government was paying them cost. Plus space X came in and said, all right, well, you know, for a fifth, the price, give us the money and we’ll figure out how to make money doing this.

they were very successful at that. And it’s very hard to shift your organization from a cost plus business to a, gross margin business, you know, space X is a vertically integrated business. They have a reusable rocket that, you know, until they landed it, literally everyone said they’d never do it.

I mean, there were quotes in the press from major players, I think a week or two before saying they’ll never land that thing in like one week later, it lands.

 What year was that? And when did you invest? 

so we, so the original investment was in 2008. they hadn’t even successfully launched the Falcon one at that point. Uh, I’m going to be wrong about when they landed it. Uh, I, I almost don’t even want to hazard a guess cause they know I’m going to be wrong. Uh, probably like six years ago, but

So, I mean, But so keep going, but just like, what was it, did they have all of that as part of their pitch that they were going to just, but

they hadn’t done anything yet. Like, I’m curious. What, and where was Ilan in terms of his sort of and credibility or something? 

you’re talking back in 2008. 

Yeah. 

I mean, he was not what he is today. I mean, obviously that was, that was, uh, 13 years ago now. So, so he was, you know, less famous and you know, less rich on paper. Although I do think it’s somewhat funny. He actually owns probably approximately the exact same thing that he did in 2008.

Cause he has like the same percentage of space X and probably like the same percentage of Tesla. So he actually hasn’t, he has not gotten anything per se. I mean, he got like that big, uh, you know, award at Tesla and whatever, but like, I think actually if you just look at the sheer number of shares, of shares he owns probably isn’t that different they’re worth a lot 

Right. 

but he didn’t actually like get anything new.

It’s just, it’s mostly just stuff he had already owned in 2008. That simply became, they became much bigger companies. Um, so yeah, obviously Yuan was the, a lot of 2008 though. Still. I mean, still PayPal, right. There was still a smaller version of Tesla. He had obviously the history was with sip too.

And I mean, he, he was, uh, he was still like pretty famous. It just, not quite the same thing.

Okay. I know this is a long time ago in your past and you moved on to other, well, I guess you still own a lot of space X if I understand it. 

Yeah, no, it’s, it’s probably our biggest holding across everything.

Wow. Um, uh, but it a competitive deal? Can I just ask, like, I’m curious about Elan coming in, pitching founder’s fund. Yeah. 

No, no, no one else was crazy enough to invest in rockets. Everyone thought we were crazy. yeah, I mean now, I mean in fact, the, the reality of that situation, it wasn’t even really a deal per se. Right. It was, you know, the company had a contract with NASA that said if they could raise private money, NASA would give them more money because they had a contract later.

It was basically a milestone contract. And so one of the milestones was, can you demonstrate, you can convince private investors to give you money. And so the obvious conversation, you know, was to come and talk to founders fund, given the historical relationship. And that’s why it happens, right. It wasn’t like broad, I don’t even know if you want pitched anybody else.

Cause he put. You know, all of the original money in, I mean, he put in probably a hundred million dollars of his own money at that point to get the company off the ground.

 it’s so impressive. Uh, what do you find most impressive about Elon, or I assume you do. I know 1 37 is a major owner of space X. 

Yeah, no, it’s, it’s probably our biggest holding across everything. 

Um, does, who impresses you? Does he impress you? Like, 

I think he, Atlanta is a very impressive guy. 

easy, easy question, but like, 

I mean the other, uh, I mean that company has a lot of impressive people. Gwen is very impressive, right? That’s a very impressive team. That’s been shockingly stable for long time. If you look at the senior leadership at space X, right. They they’ve been together for very long time.

And they’ve built things that nobody thought was possible 

And do you look for that?

That build something impossible ambition?

Yeah. I think we’re just looking for people. that really believe in something that may not be that obvious to everyone that actually is important, right? It doesn’t have to be like, we’re going to go to Mars. I mean, that, that is interesting in a different way, but like, there are lots of, there are lots of, you know, things and whether or not that’s, you know, some of the direct to consumer healthcare businesses where it’s like, yeah, no, you really don’t need to go to the doctor’s office and schedule these things three weeks in advance.

You actually can get, you know, treatment at home whenever you need over text and, and like video or photos like this, this is actually pretty revolutionary. And yeah. Still not, not an easy thing to do. And there’s a lot of reasons why it’s hard to copy. So it, you know, it could be, it could be lots of things, right.

It could be in the logistics space with, with Flexport, right. It’s like, it’s its own. The more you learn about the world, the more you wonder how anything works. Right. Like global, global trade is it’s like, it’s amazing. Anything gets delivered. Like the fact that Walmart has stuff on the shelves 

Yeah. 

an incredible, like, it’s, it’s just amazing.

They can accomplish that.

Yeah. I should be more impressed by that. my kids are always impressed with like things grow in the ground here in our backyard in LA.

I mean, I’m, I’m amazed that the lights turn on and that the water is safe to drink. and planes don’t fall out of the sky. I mean, like, it’s really like like we have built a bunch of very complicated systems that. Are relatively hard to understand. And I’m, impressed by a lot of things.

Yeah. Um, here here’s one that maybe I’m more mixed on is our government. not I’m thinking of this with regards to space X, like you see more and more being done by the private sector?   Like how do you, do you have a philosophy on that? 

We’re certainly investing in companies that are doing business with the government. We are investing pounds here. We’re obviously invested in space X we’re best in Andrew. I think, you know, the government is in a wonderful position to do things that have never been done before. Right? Like in the context of space, like we put a man on the moon that that was not an opportunity for private enterprise, right.

There are incredible things from an economic standpoint that came from the space program and putting a man on the moon. But. We don’t need the government to do that with rockets anymore. Right. I think there’s a fundamental transition at some point where if we need to go do something, that’s incredibly hard that no one knows how much it’s going to cost, but it’s actually important.

That’s a great place for the government to step in. 

Oftentimes the transition to letting private enterprise take over and do it at, one thousands of the costs. Like people always hold out a little too long. Right. But eventually it happens, right? I mean, you can see what happened, you know, space X is the easy example of this, right?

Like the cost of launch came down and that’s enabled a whole set of new space-related companies. And, you know, in some sense, just data companies that can use the information that you get from being in space that wasn’t available beforehand. And that’s created a whole new industries right now, which is great, but would not have ever happened.

If the government would have held onto the ability to launch rockets.

Hmm. Hmm. Um, what do I want to go next with my questions? I’m all over the place today, but it’s great. 

I’m happy to talk about it. Yeah.

Yeah.  actually tell me a little bit more about, I was asking him who impresses you? Does he want to impress you? Yes. is, who are your partners and starting? Um, let me ask that question better. me a little bit more about 1 37 and, and, uh, I think you have a partner, Alex.

I haven’t met. Tell me who’s who. 

Yeah. Well, let me shift gears and ask you a little bit more about 1 37, and maybe you could tell me more about the team at 1 37

Uh, so, I mean, we’ve got, we’ve got four investment partners on the team right now, uh, myself, Alex, who you mentioned, uh, who’s been with us since the beginning. We’ve got Nick who, uh, is probably our most recent partner. You know, he joined us as a summer intern and kind of went from there the bottom to the top.

And the only way you can, you know, and the full, the full cycle. And we’ve got another partner, uh, Andy who’s on the investment team, got a couple, a couple of principals, uh, Christian and James, who’ve been great additions. And you know, I think we’ve been doing this now for a decade and we’re trying to. W w we’re working to figure out, how you bring people into the organization, how they kind of you know, with their responsibility over time and how you kind of end up at the top of the organization, because if we’ve done it for 10 years, like how do we then look forward to the next 10 years and build an organization that self-sustaining, 

Yeah. 

not, not a lot of venture firms who’ve done generational change at all.

then, uh, a smaller subset that have, have done it successfully. while, you know, we certainly haven’t necessarily managed that per se. We’re, very focused on trying to make sure that works.

Yeah.

I was just chatting with shrug from threshold ventures. They previously DFJ and we were talking

Yeah.

what’s the ideal number of decision makers actually like how many partners is ideal?

I think it’s somewhat depends. Like, you know, obviously if you’re Sequoia, I, they have a lot of partners. They also have different funds and, you know, there’s a variety of ways to answer that, that sort of question. Then you can also, you know, not everyone has to weigh in on every decision and so you can have different layers of decision-making and, and you’ll give people more responsibility.

So you can kind of parse that out. But I mean, you definitely, you know, the partnership model, you don’t want to have all these consensus driven decisions at every stage because it’s very hard to get anything done. And, and then obviously as the number of people get bigger, it becomes impractical to get anything done.

So it’s, it’s definitely an important organizational design question.

Yep. who are you? where do you fit in? Like, are you the optimistic one? Are you the, the data guy, like. 

 How do your friends describe you? 

that’s a tough question. I feel like that’s the question you should ask them.

I know, I know. Well, they’re not here. I got you. 

you know, maybe the way I’ll answer that is I get asked to be people’s contact and the executor of their trust for their kids. I think maybe more than other folks. So I th I guess maybe I’m the responsible 

one. 

there is. That’s it. That’s what that implies. That’s good. No one, no one.

has asked me to do that. That’s That’s I’ll go. 

I don’t know. I mean, I don’t know. Maybe, maybe it’s a good thing, a bad thing or a random thing. I’m not sure. 

Uh, what do you do for fun? 

I have a, I have a seven month old baby. So I, I think that’s what I do for fun. I don’t really have a lot of other time besides war work in that I’m sort of sleeping. So maybe I sleep for fun.

That’s probably the best answer right now.

I love that answer. Oh my gosh. Someone with a seven month old baby. That’s the most honest answer. I love it. 

Your kids, you mentioned, right? How old are you?

I, um, break down the recycling boxes for fun. That’s my hobby. I turn them into robots. 

Um, any other, let me, let me ask a couple more, two more. do you have any advice for someone who’s just entering venture? 

 as in they want to get into venture, or they’re already invested.

How about someone early in their venture career? Just starting venture. going to put myself in this category. Give advice for me, Justin. 

I think, you know, one, I think it’s people business. So I think he, you know, you want to, you want to spend the time and build the relationships. There’s definitely, I think there’s like this definitely this trade off between like actually having relationships with people and being transactional. And I’ve always just, I’ve always worked off the assumption that people are going to like do the right thing over the longterm.

And so you just kind of want to like, be nice to people, give them time, be helpful if you can, you don’t have to like, go crazy out of your way to do stuff, but just, you know, actually just be like a nice person. Um, 

and 

And there’s a lot more then there’s also a lot more, your friends become competitors in the VC world. That’s an interesting. 

I think we’ve managed to avoid that in some sense, given the angle at which we’re approaching the problem, there’s, there’s definitely like a little bit of, you know, well, you know, I have this really good company. I don’t want to tell you about it sort of dynamic, I guess, but, you know, it’s, it’s more cooperative in venture.

And I think if you have good relationships with people, it’s like a long-term, it’s a longterm business sort of at all levels, whether or not it’s your investors, whether or not it’s other venture people, whether or not it’s entrepreneurs, you know, whether or not it’s executives or employees at companies, it’s like, you never quite know when that person, you know, you do someone a favor, you help them in a way that like wasn’t necessary.

And like that comes back to you and maybe it comes back to an eight years. Right.   And you really had no idea. Um, but it really ends up mattering and some people are not so great. And, you know, hopefully they get drummed out of the ecosystem, right? Like, like, you know, I sort of, I think my advice. You never quite know what’s important or who’s important.

And you should just sort of assume that everything is important and all the people are important. I would like, I always like remind my people. It’s like, the most important people are like the assistants, 

right? Like it’s like, like they, they control everything. So I mean, you should be nice to everyone anyway, but like, you should definitely be really nice to them.

forget that all sorts of people end up driving the decisions that end up mattering right. In direct and indirect ways.

People who manage other people’s time, it’s very, very important. Um, and also it’s a big art, you know, the people on the top, on the bottom, you know, it changes. 

Yeah. And it it’s, I mean, in some sense, like it’s the quintessential story of like the J curve and venture, right? Like all the firms start out and like you raise a fund and like, inevitably it looks not so great for a couple of years because. You know, nothing really happened with the portfolio and then it starts to turn out well, because the companies, you know, people start to recognize externally that the companies are doing well.

Um, you know, all it takes is, you know, six or 12 or 18 months for the storyline of a company to be to change. Which obviously that means, you know, the founder goes from, people say, oh, that’s not so great to holy crap. It’s amazing. You’re the best founder ever. And then that obviously trickles down to the investors who were in that company and then the LPs or the funds of those investors, you know, everyone goes from like, oh, you’re not that smart to like, oh, you’re a genius.

And it’s like, nothing actually changed except a little bit of time passed.

Yeah.

And how do people learn more about 1 37 and specifically founders who might be thinking more about their liquidity options?  

And for what it’s worth. Like, I don’t, like, I don’t do a lot of marketing. Like we don’t, we don’t really do much. We’re trying to do a little bit more of these sorts of things, but a lot of, you know, when I say like, just kind of give people time and be nice. And I was like, I’m happy to talk to like all of these people.

It’s like, why don’t we do business? It doesn’t really matter the short run because like, I’m happy to help you. We’ll think about how do you think about liquidity for your company, right. It’s not, you know, sure. That includes you. You know, it also includes, you know, your employees, if you want to set up tenders, what are the rules that you want to do?

Because like, there are all these, like things that people have learned over the last, 10 plus years, There’s no reason for them to repeat the mistakes of the past, let them at least make new mistakes. 

Yeah. Um, one other thing to clarify is I, I do this podcast. I only have LA based investors on, and I had met Christian

Yeah.

is in LA and he’s like, oh, one of the co-founders is based in Southern California. That must be Alex. Right?

Yeah. Alex, I mean, in the pandemic, I don’t really know where anybody is. 

No, no, no. Does anyone 

So, I think you’re going to have to expand your LA, focus if for no other reason than who knows where anybody is at any given moment until like  📍 at least offices are open 

that’s it? That’s true. And we just changed our virtual backgrounds to, you know, I think you’ve got a real Palm tree bed. 

Yes, it is. But this one’s actually in San Francisco.

Well, fair enough. Fair enough. Um, well, great. Uh, does anything else I should really hit on? Um, otherwise I will. Thank you. It’s uh, one question I didn’t ask. I was curious like how your approach to money has changed, where you’re talking about how money has changed people, but a little personal of a question.

Uh, I mean, I think, I’ve been doing this for a long time, you know, had some success, you know, for me, more willing to trade money for time. 

Yeah. 

So if I can, if I can spend 

Okay. 

a little bit more money get back time, that’s, to me that like that translates to sleep. 

Yeah. 

 So like, you know, I mean, that’s, that’s certainly something that, you know, I I’m, I’m willing to do these days.

Um, but you know, ultimately I think in this industry, especially, it’s like, if you’re successful and you have more money, it’s like, what do you end up doing? You end up writing more checks into the ecosystem. Right? So I’m in some of my friend’s funds. And then some of my friend’s companies, those checks have gotten bigger over the years, but like that’s sort of the thing that that’s happened.

And otherwise, you know, I I’m, I’m, I’m totally willing to, to kind of spend more money if it means that I can spend more time with, you know, my daughter or my wife or sleep, which in some sense, like I’m probably still doing those two things at the expense of sleep. So if I can get more sleep that little bit.

Um, I remember when I first made enough money to not park in like the longterm, longterm parking lot at the airport. 

Right. Exactly. You know, it’s I hate paying for parking. It’s like the thing that pains me, like everyone has like that random thing. And, and so like, I much rather walk, right? Like I’ll, I’ll park two miles away and walk. Like I just, I don’t care. Um, but you know, it doesn’t always totally make sense to do those things.

Right. thank you for coming on the podcast and also, thanks for doing all you’re doing for this ecosystem. I think what, what, what do you feel at 1 37 is really important and 

Oh, I appreciate that. well, thank you very much. Thank you for having me. And, I will see you in person one day.

Fantastic. I like it. Great. thank you, Dustin is such an interesting model and built something so fascinating. I could really, like, wanted to ask all the nerdy, technical questions about how the convertible debt converts in that, but then I was like, no, that’s we don’t need to. 

Talk about it. I’m not sure. I mean, at some level of detail, it’s like, that interesting, I mean, really it is just convertible debt. Like if you really think about it from the company level, it’s like, think about it. if you’re raising a convertible note for the company, you are literally pledging all of the assets of the company.

I eat like all the stock, right? Everything is collateral for the loan and then some conversion price, which will translate into a per share price, right on the documents, like $10 a share or whatever. And if it goes above that people are going to buy the shares at $10, because know, th the shares are sensibly worth $20 at that point.

Right? The counterparty in that example is obviously the company, right? If you think about what we do, it’s like our counterparty is the founder. 

Yep. 

And, you know, they’re not pledging the whole company, they’re pledging some number of shares they own, right. what we’re going to negotiate, what that number is.

And then we have the 

yeah, 

to buy some of those shares at some valuation, which once again, just gets translated into a share price, like $10. And if the stock ends up being worth 20, we’re totally gonna buy those shares. Right. 

yeah, 

in at 10 and they’re actually worth 20 and that’s how we make our money.

Um, so like the map is actually the exact same. It’s just, the counterparty is different.

Yep. Yeah, no, it’s interesting. I mean, I was going to ask also like, do other secondary funds do that? 

There are definitely some other people that sort of say they do that. Um, it’s a little less clear to me what other people actually do. Um, and there’s a broader distinction in the industry about whether or not you’re getting the company to sign off on the transactions. We do not everybody does. And I think people say things like, well, we’re going to do a forward.

And then it’s like this magical thing where they think it doesn’t like somehow transfer restrictions don’t apply, which is not true. They like, that’s definitely right. Um, and I just kind of going back to the earlier conversation, right. And so long-term business, like sure. Can I go do some deals with, and like knock at the company, sign off on them and might I make money?

Possibly. I think it comes with this other problem of how do you get information about the companies? If you’re, if they’re not saying I’ll find it, like that’s weird and awkward, but whatever, maybe you somehow manage to overcome that problem, like going around and pissing off all the companies is not a good long-term strategy.

Right. 

So like, if you want to make a lot of money on this one transaction a maybe, but then you’re building a longterm from your bill. You’re trying to make a lot of money for your quickly. And like, that’s not, I think what we’re trying to.

Yeah, no, I mean, I hear the model and I’m like, oh, I would send you, like, I think we’re, we’re seed investors, but we’re just having our first couple of unicorns coming up soon. And I was like, oh, I would send them your way. Like makes a lot of sense.

And for what it’s worth. Like, I don’t, like, I don’t do a lot of marketing. Like we don’t, we don’t really do much. We’re trying to do a little bit more of these sorts of things, but a lot of, you know, when I say like, just kind of give people time and be nice. And I was like, I’m happy to talk to like all of these people.

It’s like, why don’t we do business? It doesn’t really matter the short run because like, how do you, it’s like, I’m happy to help you. We’ll think about how do you think about liquidity for your company, right. It’s not, you know, sure. That includes you. You know, it also includes, you know, your employees, if you want to set up tenders, what are the rules that you want to do?

Because like, there are all these, like things that people have learned over the last, you know, 10 plus years, There’s no reason for them to repeat the mistakes of the past, let them at least make new mistakes. 

Yeah. 

always the unintended consequences people don’t think about, obviously. Cause they’re unintended, like you go back to what happened at Facebook and they had this policy where it was like, you’re not allowed to sell stock if you’re at the company.

Like they would as if they don’t fire you effectively, if you, if you sold stock. So you know what happened, people quit. 

Yeah, 

And like, that was like sort of obvious, like, you know, after I’m sure like someone like made that decision without thinking about it too hard. And then like the consequences, like pretty obvious, I’m sure like a weekend or week or two later, but it’s like these sorts of things where, you know, it’s like, like you don’t need to repeat that.

Right? Like it’s like, it’s, you know, I can tell you not actually the right answer for your company, but I can tell you all, like you tell me what you want to do. I’ll tell you all the trade-offs then you can decide if you want to change it. Right. Like that’s it. And I’m not going to be the one to tell you.

I think if you have your investors telling you how to run your company, You’re either really bad at running your company or your investors are really bad. And either one is not a situation I want to be involved with. 

Yeah. 

Um, but like this stuff is not unique to your business, right. This isn’t the same thing that everybody goes through and I can absolutely make your life easier.

Yeah, there’s some subtleties that you’ve figured out, um, that are settled to some, to founders who haven’t done it all before. So

Yeah, absolutely. Right. So, but anyway, I’m like any, any, any of your people or your friends or whatever, like I’m happy to, I’m happy to talk to them generically.

yeah. Well, that’s wonderful. Um, and sadly, one of our CEOs shortly, so, uh, um, I really appreciate it. Like, I, I, the more I learned about 1 37, I was like, I, I wish I had known this actually when I was a founder. I didn’t even ask you about specs. We just went public via spec, but some of that was because we really wanted liquidity. 

Oh, you just went public vs back.

My company. Yeah. So I just became a VC, but before I was running a used car company called shifts. 

Yeah. Yeah. Yeah. I saw that. I did not realize that. Um, cool. We’ll 

Yeah. Well, I had left when, so I, I did it for many years and then my co-founder George, uh, was, uh, you know, he’s still there. He’s still running the company, but, um, but yeah, I left and moved to LA. 

Cool. Did the SPAC already close? Cause this back marketplace has gotten more complicated.

It’s now, I mean, my George, who, you know, worked for me at Google for many years. He, uh, he’s now a public company CEO and you know, it’s, it’s cool. 

Yeah, yeah. Yeah. I mean there’s 

That’s how it happens. I know. 

one day you’re not, and the next day you are.

Totally. Um, well then it has a dozen. Thanks for taking the time. Great to meet you. Um, let me give you your time. It’s it’s time.

This was wonderful. This will be an amazing episode. I can send it to Chang. I always do actually send the draft ahead of time. So send it to you and to her and you guys can listen, but it’s going to be amazing. You’re a great guest. 

Oh, well, I appreciate that. Well, thank you for having me. I’m looking forward to meeting in person many.

Yeah. Great. Tell me if you’re in LA, if I can do anything from here. 

Well, absolutely. Uh, yeah, I’ll be down there in a couple of weeks for like,

Well, great. Um, always drumming note. If you have extra time, love to have a coffee, anything, you know, throw you a happy hour at our new office, we just opened our office. 

wow. You have an office. That’s like a new concept.

is well, it’s on the beach. It’s like, I couldn’t help myself. It’s on the beach. It’s kind of funny. Like it’s got surfboards.

It’s like, I couldn’t, I couldn’t help it. 

It 

sounds expensive, but all right.

It’s a complicated thing. I actually own the house already, so I just made it an office. 

Oh,

Okay. It was an excuse to get a beach house tested. 

now it sounds like a tax deduction.

Yeah, it’s a anyways, you’re welcome to come to our lovely surf, uh, house slash office. 

That’s a nice invitation. I’ll take you up on that.

Okay. Great things that might Jessen. 

Bye.