Kevin Hartz: "How I Lost Airbnb at Seed Because of an Exploding Term Sheet" | E1180

Intro (0s)

• The speaker, Kevin Hartz, believes that Nvidia's rise to the most valuable company in the world is a sign of an impending bubble, similar to historical patterns where a few companies become incredibly successful while most others fail.
• He emphasizes his focus on finding and building companies, rather than selling them, and his intention to hold onto these investments for the long term.
• The speaker expresses his pleasure at being in London and meeting Harry in person, highlighting the importance of personal interactions in business.

Childhood & Background (53s)

• Kevin Hartz describes his childhood as "fairly uneventful" and "idealic," with supportive parents. He attended Stanford University and experienced a "crisis of how I wanted to have an impact on the world" after graduating.
• Hartz attributes his success to being in the right place at the right time, specifically in Silicon Valley during the first wave of technology innovation and the internet boom.
• He emphasizes that he didn't have a strong sense of inevitability about his success, unlike many other founders he has met. He was driven by a desire for learning and a fear of boredom, which led him to the intellectually stimulating world of technology.

Biggest Lessons from Peter Thiel (3m7s)

• Kevin Hartz, a huge fan of Peter Thiel, believes that Thiel's unique perspective on the world has significantly shaped his own thinking.
• Hartz highlights Thiel's ability to see things differently, interpreting situations and ideas in a way that others might not initially grasp.
• Hartz acknowledges Thiel's brilliance, but emphasizes that his unique lens on the world is what truly sets him apart.

Biggest Lessons from Roelof Botha (4m16s)

• Kevin Hartz admires Roelof Botha, a South African investor, for his calm and measured demeanor, especially during times of crisis.
• Hartz describes Botha as a "muted" and "sound" advisor, emphasizing his ability to remain composed even when faced with significant challenges.
• Hartz highlights Botha's exceptional judgment and insights, which stem from his worldly experience and make him a valuable asset to any team.

Biggest Lessons from Pierre Lamond (5m10s)

• Pierre Lamond, a French operator, emphasized excellence and high expectations in all aspects of business. He believed in creating the greatest company possible through rigorous standards and a commitment to top performance.
• Lamond's approach to talent assessment was particularly striking. During a meeting with Kevin Hartz, he demanded a forced ranking of Hartz's direct reports, then proceeded to cross out the lowest-ranked individual, instructing Hartz to fire them. This action highlighted Lamond's belief that even the slightest weakness could hinder a company's success.
• This anecdote demonstrates Lamond's philosophy of striving for excellence and his belief in the importance of having a strong team with no room for mediocrity. It also highlights Hartz's own talent for identifying exceptional individuals, a skill recognized by others in the industry.

Kevin's Unique Talent Discovery (7m35s)

• Kevin Hartz believes that identifying true talent is crucial for success, and he distinguishes it from individuals who are merely good at selling.
• He emphasizes the importance of understanding a person's background and the challenges they have overcome, as this provides valuable insights into their resilience and determination.
• Hartz acknowledges that his own background, growing up in a privileged environment, may not have presented the same level of adversity as others, such as Max Levchin, who faced significant challenges escaping Eastern Europe.

How Kevin Made His First Money (8m18s)

• Kevin Hartz started making money at a young age by selling things on the side.
• In college, he created a Facebook business called "Faces in the Crowd" which involved selling photo books of students on campus with advertising from local businesses.
• Hartz enjoyed school and learning, despite having ADHD, which required him to take a wide range of classes.

The Risk of Early Capital (9m27s)

• Early capital can be detrimental to a company's growth. The speaker argues that too much capital too early can lead to companies spending money without the same level of discipline and oversight they would have if they were more resource-constrained. This can result in companies reaching the same milestones with more capital, but without the same level of efficiency and focus.
• The role of venture capitalists in providing oversight and guidance is debated. The speaker acknowledges that some VCs, like Sequoia and Roelof Botha, provide hands-on support and guidance, while others, like Founders Fund and Peter Thiel, believe in giving founders the freedom to operate without much interference. The speaker leans towards the former approach, believing that the oversight and insights provided by experienced VCs can help founders avoid costly mistakes.
• The importance of a strong, "spiky" founder is emphasized. The speaker argues that while a strong founding team is important, the single most important factor for a company's success is the "spikiness" of the best founder. This refers to the founder's unique skills, vision, and drive, which can be more impactful than the combined skills of a team.

Serial Entrepreneurs or First-Time Founders (15m16s)

• Serial Entrepreneurs vs. First-Time Founders: Kevin Hartz prefers serial entrepreneurs due to their experience and ability to avoid past mistakes. However, he also has a soft spot for first-time founders, who often bring a fearless and creative energy to their ventures. He compares them to young Marines, who are fearless and go for it, and to Nobel Prize winners and the Beatles, who achieved their greatest successes at a young age.
• The Seed of Airbnb: Hartz explains that Airbnb was a non-obvious idea at the time, as it involved strangers staying in each other's homes. He compares it to distributed storage for people, where the platform acts as a massive, distributed hotel across the globe. He was drawn to the passion of the founders, Brian Chesky, Joe Gebbia, and Nathan Blecharczyk, and their relentless work ethic.
• Investing in Airbnb: Hartz invested in Airbnb's seed round, though a larger investment from Sequoia Capital ultimately secured the lead. He believes that Airbnb's success was due to its efficient business model, which didn't require large rounds of funding. He also notes that there was very little secondary trading in Airbnb shares, which he sees as a positive sign.
• Holding vs. Selling: Hartz prefers to hold onto his investments, believing that the power law winners will dwarf the rest of his portfolio. He acknowledges that he could have sold some of his investments, but he feels that holding onto them is the best strategy for long-term success.

Why Kevin Moved from Angel to VC? (20m40s)

• Kevin Hartz's transition from angel investing to venture capital was driven by the need to manage other people's money, particularly institutional funds, which often require liquidity. This contrasts with angel investing, where investors can hold onto their investments for longer periods.
• Hartz emphasizes the importance of "surviving longer than anyone else" in the media and venture capital industries. He cites Jason Calacanis's success with Uber as an example of this principle.
• Hartz's venture capital firm, which is currently in its second fund, focuses on pre-seed, seed, and select Series B investments. This "barbell approach" allows them to invest in companies at different stages of development.

Market Sizing & Scenario Planning (23m45s)

• Market sizing and scenario planning are important, but Kevin Hartz believes that focusing on the team is more crucial. He argues that great teams can adapt and succeed regardless of market size, and that a small market can be a stepping stone to a larger one.
• Hartz believes that the seed stage is currently a challenging environment for investors. He cites the increased competition from multi-stage funds, traditional seed funds, and even individual investors like Dylan Field and Daniel Gross. This competition has driven up valuations, making it difficult to achieve significant ownership in promising companies.
• Hartz acknowledges the shift in ownership dynamics in the seed stage. He notes that the days of traditional funds requiring large ownership stakes are gone, and that funds are now more willing to accept smaller ownership positions in exchange for working with exceptional founders. This shift has led to a more competitive environment, with funds vying for the best deals and potentially using smaller check sizes as a point of leverage.

Are Operators as Investors Tougher on Founders? (26m59s)

• Operators as Investors: The speaker believes that operators who become investors are tougher on founders than traditional VCs. They are more empathetic because they've been in the founder's shoes and understand the challenges of hitting revenue targets.
• The Evolution of Venture Capital: The speaker notes that the traditional view that only operators could be successful venture investors has changed. There are now successful investors from various backgrounds, including journalists, bankers, and those who have never operated a business.
• The Importance of B-Round Investments: The speaker highlights the potential of B-round investments, especially in a market downturn. He emphasizes that B-rounds can be a great opportunity for investors, as they often offer attractive valuations and strong growth potential.
• Capital Constraints and Patience: The speaker acknowledges the challenge of finding good investment opportunities and the need for patience in waiting for the right companies to emerge. He believes that capital constraints can be a good problem to have, as it forces investors to be more selective and disciplined.
• The Value of Contrarian Thinking: The speaker encourages investors to be contrarian and to look for opportunities in areas that others may deem "dead." He believes that there are always great companies to be found in overlooked sectors.

How Investment Preferences Shift from Angel to VC (30m48s)

• Kevin Hartz explains that the investment preferences shift from angel to VC, meaning that the desired outcome changes. While angels may be happy with a successful company, VCs require a much larger return on investment to ensure the fund's success.
• Hartz emphasizes that he has always been surrounded by people with high standards and aspirations, aiming for extraordinary outcomes rather than just a good business with cash flow.
• He acknowledges that predicting the future success of companies is difficult, citing examples like Airbnb, Snap, and Shopify, which all exceeded initial expectations due to the rapid growth of the internet and specific markets like remittance. This reinforces the idea that staying independent and compounding growth can be a successful strategy.

Prioritizing Sourcing, Selecting, Servicing (32m50s)

• Kevin Hartz believes that sourcing, selecting, and servicing are the three core pillars of a successful venture investor.
• He considers himself to be weak at selling, preferring to earn the right to work with founders rather than "duping" them into signing a deal.
• Hartz believes that sourcing is a matter of building a strong network, while selection is a constant process of reflection on missed opportunities.

Reflecting on Missed Ventures (34m40s)

• Kevin Hartz reflects on missed opportunities, including his initial skepticism towards YouTube and his decision to step down as CEO of Zoom. He emphasizes the importance of maintaining an open mind and being receptive to new ideas, even during challenging times. He believes that a single meeting can have a profound impact on one's life and that it's crucial to always be engaged with founders.
• Hartz discusses the challenges of providing honest feedback to founders. He acknowledges the difficulty of expressing doubts without being discouraging, but believes that it's important to offer constructive criticism and guidance. He also shares his experience with "exploding term sheets," where a term sheet is circulated to multiple investors, potentially leading to a bidding war. He believes that while this practice can be beneficial for founders, it can also create a sense of pressure and uncertainty.
• Hartz explains his perspective on exploding term sheets and the delicate balance between investor and founder interests. He acknowledges that founders have the right to explore their options and assess the market, but also emphasizes the importance of finding a partner who is committed to the venture. He believes that both investors and founders can engage in behaviors that can be detrimental to the relationship, and that it's essential to navigate these complexities with transparency and respect.

Assessing Deal Success Quickly (40m25s)

• Kevin Hartz emphasizes the importance of quickly assessing whether a deal is working or not. He acknowledges that some deals are clearly problematic from the start, while others take a long time to develop and may even face doubts from investors.
• Hartz highlights the crucial role of patience in navigating these situations. While maintaining a sense of urgency is important, he believes that time is often the key to solving problems and achieving success.
• He also points out that some deals work seamlessly from the very beginning, demonstrating that success can manifest in different ways and timelines.

Kevin’s Top 3 Value Drivers (41m14s)

• Kevin Hartz identifies Airbnb, Pinterest, Bitcoin, and Uber as his top three value drivers.
• He mentions that he invested in Bitcoin in 2011 after a conversation with Wes Kasaris.
• Hartz also highlights PayPal as a significant investment, noting that its initial public offering provided a relatively mediocre return, but its acquisition by eBay led to a substantial increase in value.

Lessons from the Biggest Zero (42m25s)

• Kevin Hartz shares his experience with Talkbox, a live streaming company he invested in early on. The company faced scaling issues and market fit challenges, ultimately being acquired for a small return. This experience taught him valuable lessons about the challenges of building successful businesses, especially in the early days of emerging technologies.
• Hartz highlights the importance of understanding the history of technology and recognizing patterns in successful and unsuccessful ventures. He believes that there is a valuable opportunity to incubate businesses based on past successes that failed due to avoidable reasons. He suggests bringing back products like HQ Trivia and Mad Bid, which were successful but ultimately failed due to factors that could be mitigated today.
• Hartz emphasizes the importance of market timing and the need to look beyond current trends. He cautions against simply mimicking successful products and instead encourages entrepreneurs to focus on building businesses that address future needs and opportunities. He believes that focusing on the attention economy and understanding how to capture headlines is crucial for success.

Time Allocation in Venture (47m45s)

• Time allocation in venture capital is a complex issue. While it's tempting to focus on winning companies, it's important to remember that building a reputation requires investing in companies that may not succeed. Kevin Hartz believes that it's natural to spend more time with winning companies, but he also has a soft spot for all founders and doesn't shy away from pushing them to work harder.
• Hartz believes in the power law of venture capital, where a few big winners drive the majority of returns. He acknowledges that he missed out on a potential opportunity to sell some of his OpenSea shares during its peak valuation, but he believes that the astronomical returns from seed investments justify taking some profits off the table. He also highlights the importance of conviction and going all-in on investments, citing his experience with PayPal and his regret for not joining Peter Thiel's new venture.
• Hartz emphasizes the importance of conviction and a strong belief in a company's potential. He believes that voting structures in venture capital are unnecessary and that a strong partnership should be based on trust and shared goals. He admires Founders Fund's conviction-driven approach and believes that it's crucial to have big winners in a portfolio. He also shares his experience with Brian Singerman, who encouraged him to go all-in on Airbnb, and emphasizes the importance of being supportive of founders when things are going poorly and pushing them when things are going well.

When to Push and When to Support (56m48s)

• The best support depends on the individual and the situation. While being supportive is generally helpful, sometimes tough love is needed, especially when someone is struggling. The key is to understand what the person needs in that moment.
• Personal experiences highlight the importance of individual needs. The speaker shares their experience with their daughter's eating disorder, emphasizing the unique challenges and pressures faced by young people today. They also mention their own mother's struggles with alcoholism, highlighting the difficulty of watching loved ones suffer from addiction.
• The speaker emphasizes the lack of effective treatments for eating disorders. They express frustration with the limited options available and the agonizing nature of family-based therapy. They also mention the potential of treatments like transmagnetic stimulation, suggesting a need for more research and development in this area.

Investing in Mental Health & Wellness (1h2m29s)

• Kevin Hartz expresses concern about the lack of attention given to eating disorders, particularly among young men. He also highlights the growing issue of depression and loneliness.
• Hartz acknowledges the difficulty in finding businesses that effectively address mental health and wellness, as they often lack the traditional characteristics of successful investments.
• He believes that the next major challenge in healthcare will be tackling neurological issues like Alzheimer's, dementia, and bipolar disorder. He advocates for increased investment in developing therapeutics for these conditions, drawing a parallel to the "war on cancer" declared by Richard Nixon in the 1970s.

Quick-Fire Round (1h4m6s)

• Kevin Hartz believes the rapid evolution of the defense segment is a significant change in the last 12 months. He highlights the unpreparedness of the United States in this area.
• Hartz admires the style, pace, patience, and wisdom of V Capital, specifically Alexander Toas and John Hering. He agrees with their focus on upside maximization and believes they are a "Fuego" fund.
• Hartz's advice for someone entering angel investing is to set aside money they are willing to lose. He emphasizes the importance of taking risks and learning through pattern recognition. He also recommends writing the same size check for every deal, regardless of conviction level.
• Hartz believes Andreessen Horowitz has a consistently successful venture model. He acknowledges that they are often criticized, but they continue to produce incredible companies. He also mentions Gary Vaynerchuk's return to the firm and his past investment in Posterous.
• Hartz believes now is a good time to be a founder due to abundant capital and the emergence of new platforms. He acknowledges the potential for a bubble, particularly in AI, but sees it as a positive force for innovation. He highlights the growth of crypto, fintech, clean energy, and industrial biotech as examples of emerging platforms.
• Hartz is optimistic about venture returns in the future. He believes the increased capital and new technologies will lead to better returns than the "catastrophe" of 2021 and 2022.
• Hartz wishes he was asked about his mental illness in interviews. He believes people often give insincere answers about their weaknesses and would prefer to be honest about their struggles.