Invest Like The Best - The Gift and The Curse of Staying Private

“When you overfund, you do everything. There's tons of great articles and research about constraints lead to creativity, and you're better off choosing one or two primary product initiatives. But when you have that much money, you do seven. And I think we had a mini correction in 2022, 23. Most of them ran towards break-even. So when you run to break-even, you stop doing those seven things. You go down to the two things.”— Bill Gurley

Broken Incentives, Bad Outcomes · p. 5

Strategy & Decision Making · Operations & Execution · Business & Entrepreneurship

DUR_ENDURING

Overfunding kills focus and quality

“Let's say you were expecting to get $100 back from an investment in year 10 and you want to delay it to year 15. If you just take that 10% compounding, it now needs to be worth $160 in year 15. If you make the argument that these people invested in venture to get a big return, then your cost of capital is not 5, that's the risk-free rate. It's 15 and then it's 20% a year, 15 plus the 5 from the equity dilution. And now if you wait five more years, guess how much money you need instead of $100?”— Bill Gurley

The Dilemmas Facing GPs and LPs · p. 16

Economics & Markets · Business & Entrepreneurship

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Time delay kills returns via compounding

“The thing people may not realize is, the managers of the VC group at the large endowments have no incentive to try and right-size this number. In fact, many of them are bonused on paper marks. So if anything, they have the reverse incentives to get them right.”— Bill Gurley

The State of Private Markets · p. 3

Economics & Markets · Psychology & Behavior · Business & Entrepreneurship

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Reverse incentives: bonused on inflated marks

“The fact that Yale is the one doing it is super important and super interesting, from a historical perspective. I would argue no single institution has had a bigger impact on the strategy of endowment management than Yale. David Swensen is the historic godfather of this model. And the Yale model is, put a lot more money in illiquid assets than liquid assets. The fact that Yale, which led us into this strategy, is trying to get out, I find super interesting.”— Bill Gurley

Why the Deal Window is Closed · p. 7

Economics & Markets · History & Geopolitics

DUR_ENDURING

Yale exits the Yale model

“Howard Marks famously said, you make a lot of money when you do something non-consensus and accurate. But what if everyone copies David Swensen? What if everyone goes to 50% illiquid? Will it still work? I think that's a provocative question, but I think that's what happened for sure.”— Bill Gurley

Why the Deal Window is Closed · p. 7

Economics & Markets · Strategy & Decision Making

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Consensus adoption kills the edge

“When these firms go to a company like Databricks or Stripe and encourage this round, they can get 30%. So they can get a bigger ownership percentage than they would get through a traditional IPO process. And in fact, they share a lot of these deals. So kind of an oligopolistic opportunity to hoard the public IPO growth years and take it away from the public markets.”— Bill Gurley

Private is the New Public · p. 10

Economics & Markets · Strategy & Decision Making

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Private investors hoard public growth years

“The amount of money you raise in aggregate, just the raw number, becomes your liquidation preference. And in M&A outcomes, the investor can choose to take the liquidation preference and not convert to common, so they can get their money back. And so if a company's raised $300 million and they're worth $2 billion, LiqPref doesn't matter that much. If the valuation is now $400 million, then the LiqPref could take 75% of the company in a sale.”— Bill Gurley

Broken Incentives, Bad Outcomes · p. 4

Business & Entrepreneurship · Economics & Markets

DUR_ENDURING

Overfunding creates liquidation preference trap

“The minute there's a company that has any amount of excitement about it whatsoever, someone's knocking on the door, trying to give them 100, 200, 300 million dollars. I think for founders that have struggled their whole life to raise money, this must sound like the most ridiculous comment ever. But it's a reality. And what that does is it forces everyone to go all or nothing, swing for the fences.”— Bill Gurley

How to Play the Game on the Field Right Now · p. 13

Business & Entrepreneurship · Strategy & Decision Making

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Capital surplus forces binary outcomes

“There's nothing about a founder in the way they're born that makes them capable of leading a thousand-person organization. And there are people that have studied what it takes to be good at that their whole lives. There's a handful of founders, maybe 30, that got to work with Bill Campbell to help coach them on what it means to do that. But it doesn't come natively, it's not for free, and you have to want to do that.”— Bill Gurley

Bill's Advice for Founders · p. 24

Leadership & Management · Psychology & Behavior

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Leadership doesn't come naturally

“Reid Hoffman wrote about Uber, this pirate-navy metaphor where he said all startups are born as pirates, but they eventually have to become a navy. And that's true. I think it's an uncomfortable transition for some, but you have to figure out a way to do it.”— Bill Gurley

Bill's Advice for Founders · p. 24

Leadership & Management · Business & Entrepreneurship

DUR_ENDURING

Pirates must become a navy

“Never in my history of paying attention to the capital markets or being in venture capital do you have a successful NASDAQ market in a closed window. That was what was correlated. And so something else is happening.”— Bill Gurley

Why the Deal Window is Closed · p. 5

Economics & Markets · History & Geopolitics

DUR_CONTEXTUAL

Strong public markets with closed IPO window

“If you've got a human in the loop, you're going to notice the failure points and then you're going to improve the model. And those kinds of things could lead to someone that has an early lead having an even bigger lead in the long term if there's constant improvement of the model.”— Bill Gurley

Bill's Advice for Founders · p. 24

Technology & Engineering · Strategy & Decision Making

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Human-in-loop creates compounding advantage

“All Michael and I's time at the Santa Fe Institute is basically tied to the theory that systems behave differently than their individual components. And seeing across systems, it's not easy, it's a difficult thing to do. But as we dive in, I think a lot of the components of the industry are bouncing into one another, and it's the aggregate effect of all those things that's super interesting. And so you have to step back and look at it from far away.”— Bill Gurley

The State of Private Markets · p. 1

Philosophy & Reasoning · Strategy & Decision Making

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Systems behave differently than component parts

“M&A is a bit harder to unpack. Everyone blamed it on Lina Khan, but she's gone and we didn't have record M&A in the first five months of the year. It's likely Mag7 related. Those seven companies are sitting on an ungodly amount of cash, and in any natural universe that would lead to massive M&A and I'm sure they would love to use it for that. I think they buy back stock because they can't. But Washington's not excited about it.”— Bill Gurley

Why the Deal Window is Closed · p. 6

Economics & Markets · History & Geopolitics

DUR_CONTEXTUAL

Regulatory bottleneck blocks natural M&A flow

“Where you go at companies that were already on the list to go public and you present them with an offer that I don't know if you want to call it too good to refuse, but something of that nature. And founder liquidity encourages employee liquidity, it might encourage angel liquidity, and you basically encourage the company to stay private.”— Bill Gurley

Private is the New Public · p. 9

Business & Entrepreneurship · Economics & Markets

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Liquidity offer delays public market entry

“It is a unique set of cards to be playing, and it's super high-stakes poker with strategies that you're not going to read about in Good to Great. This isn't how people traditionally ran companies and made them great. All the stuff you read in every Buffett letter will not apply in that world of capital competition.”— Bill Gurley

The Dilemmas Facing GPs and LPs · p. 16

Strategy & Decision Making · Business & Entrepreneurship

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Traditional playbooks fail in capital wars

“I saw an interesting interview between Friedberg and Sundar where he asked him if he had ever read The Innovator's Dilemma and he admitted not. So when your company's crushing it, those kind of things, those were for somebody else. But yeah, maybe now he should read it.”— Bill Gurley

Thoughts on the AI Platform Shift · p. 18

Strategy & Decision Making · Psychology & Behavior

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Success creates blindness to disruption

“There's a whole bunch of firms that have moved up market, and then they've also created different industry-specific funds and things like that, all leading to much more capital under management from many of the brands. And then there's a ton of parties that have entered the late-stage market with different approaches, and some of those have always been there.”— Bill Gurley

The State of Private Markets · p. 2

Business & Entrepreneurship · Economics & Markets

DUR_CONTEXTUAL

Mega funds dominate late-stage