Tom Hulme: Lessons from a 24x Angel Track Record, 275x on Robinhood & Making Billions on Uber |E1150

Intro (0s)

• Venture Capital is like being a Founder on anti-depressants - highs not as high, lows not as low.
• There are three types of investors: smart and value-adding, passive and non-interfering, and passive but think they're smart and interfere.
• Avoid the last type of investor.

Background (1m9s)

• Tom Hulme's childhood experiences, including being bullied, shaped his mindset.
• He learned empathy and perseverance from these experiences.
• He tends to avoid conflict due to his desire to be liked.
• Honest and direct feedback is often appreciated in the long run, even if it's not initially well-received.
• Some Founders may not want feedback, or they may be overly focused on the market and customers.

Entry into Angel Investing (3m14s)

• Tom Hulme, an angel investor, categorizes investors into three types: smart investors who add value, passive investors who don't interfere, and dangerous investors who think they're smart but interfere.
• Most founders prefer passive investors, especially second-time founders who understand bias and skew towards passive investors or specific investors they've worked with before.
• Structured deals, such as convertible notes, are increasing due to the decline of price rounds caused by people's unwillingness to accept new and fair valuations.
• Founders should accept realistic valuations rather than inflating them to maintain portfolio value, as this can lead to problematic decision-making due to misaligned incentives.
• Liquidation preferences are becoming more complex, with structures that may encourage companies to sell at a low price, potentially leaving employees without returns.
• IPO ratchets are making a comeback despite the uncertain IPO market, providing founders with an option for liquidity.
• Founders should consider the bigger picture, including the terms and conditions of the investment, when selecting investors, rather than solely focusing on price.
• Excessive funding can damage companies by diverting focus from strategy and goals, leading to premature scaling and reduced adaptability.

Tom’s Investment Results (11m20s)

• Tom Hulme's angel investments before 2015 yielded impressive returns, but he acknowledges that the investment landscape has changed, making it harder to replicate those results.
• Accurately predicting the success of startups is challenging, as evidenced by Hulme's inability to correctly rank his portfolio.
• Angels should avoid follow-on investments, as they can lead to inferior returns and increased competition with venture capitalists.
• The most successful investments were in companies that focused on solving complex problems and demonstrated sustained growth, rather than relying on momentum or hype.
• Hot seed and Series A rounds can be misleading indicators of success, as they can inflate valuations and distract founders.
• Liquidity is important for angel investors, and platforms like AngelList and SPVs facilitate the sale of follow-on rights in secondary markets.
• Hulme suggests using a "regret minimization framework" to decide whether to take some money off the table, considering potential regrets in either scenario.

Bad Investment Decisions as an Angel (17m10s)

• Tom admits to getting caught up in momentum and heat when making investment decisions.
• He emphasizes the importance of surrounding oneself with other experienced angels and learning from them.
• Tom warns against outsourcing discipline and due diligence to others, as it can lead to oversights and missed opportunities.
• He highlights the danger of social validity, where a large fund's investment can create an artificial impression of a company's credibility.
• Tom also mentions the mistake of not spending enough time with founders during the decision-making process, leading to a lack of understanding of their thought process and motivations.
• Tom asks founders about how they first made money, believing that great entrepreneurs often show early signs of entrepreneurship.
• He focuses on understanding the founder's unfair advantage and unique insights that position them to solve a specific problem.
• Tom inquires about the timing of the opportunity and why it's the right moment for the founder to pursue their venture.
• He also asks founders about potential challenges and concerns they have, valuing those who openly share their worries and seek help.

Ideas vs. Execution (20m51s)

• Ideas are cheap, execution is everything.
• Don't invest based on an idea alone, there must be a plan for better execution.
• If an idea is good, it's likely been thought of before and the competition will be on execution.
• Market timing risk: there's no such thing as a new idea, it's just a matter of timing.
• Being too early is the same as being wrong unless you can survive until the market catches up.
• Example: VR companies that failed because they were too early.
• Daniel D's story: waited 9 years to raise money and hit an inflection point, then added fuel to the fire.
• Throwing money at an idea too early can be disastrous.

What's the Price Tag for Great Venture Investing? (23m7s)

• The traditional notion that it takes $20 million to learn to be a great venture investor is inaccurate.
• The learning cycle for venture investing is better measured by the number of deals and time spent rather than a specific dollar amount.
• A good learning cycle involves completing five deals over five years to develop the necessary skills and experience.
• Angel investors should start with small checks, such as $5,000, to learn and demonstrate their value before increasing their investment amounts.
• Varying conviction levels by check size is not an effective strategy; it's better to invest the same amount in each deal.
• Many potential investors have never done an angel check, which raises questions about their seriousness about investing.

Founders Investing as Angels (25m19s)

• Founders investing their own money can be great for portfolio companies as they offer expertise and empathy.
• Raising funds through a side fund is concerning as building a company is extremely difficult and managing a fund is like building another company concurrently.
• Raising money from people carries immense responsibility, and founders should consider the impact on existing investors when raising funds from a new group.
• The three core pillars of venture capital are sourcing deals, selecting deals, and supporting portfolio companies.
• The best VCs are good at all three, but as their portfolio grows, they tend to spend more time supporting and less time sourcing and selecting.
• It's important to keep the muscle of sourcing and selecting strong by continuously meeting with new companies.
• A fourth important pillar of venture capital is selling, which includes selling to LPs, founders, and executive hires.
• Venture capital is a people business, and it would be difficult to be successful in the industry if you hate people.

Tom’s Strengths & Weaknesses (28m11s)

• Tom Hulme, an investor, excels in sourcing and networking but struggles with supporting founders due to excessive empathy.
• Hulme criticizes "tourist VCs" for lacking empathy and understanding of entrepreneurship's challenges.
• He emphasizes the significance of networks and connections in venture capital, providing opportunities and insights.
• Venture capital is a game of excess, with investors having more opportunities than they can handle.
• Access to venture capital is not equal, but the industry offers meritocratic opportunities for exceptional talent and success.
• Breaking into venture capital can be challenging, especially for those unaware of its existence or lacking connections.

Creating Environment & Culture (33m23s)

• Venture capital firms should encourage a culture where concerns and ideas can be freely expressed and critically evaluated.
• Successful businesses often go through multiple S-curves of growth, making it difficult to predict all future growth opportunities.
• Scenario planning is important for considering potential upsides and risks, but complete conviction in investments is unrealistic.
• Honesty with founders about potential challenges and risks is crucial for building strong relationships.
• Founders often instinctively collect valuable data without knowing its specific use, recognizing its potential option value.
• A truly great founder with a great team will have a second act if the first is not big enough, potentially parlaying it into a product suite or a new platform play.
• The insertion point of a one to two billion business can capitalize into a ten billion business, highlighting the option value in intellect and a brilliant team, especially if they're well-resourced.
• The probability of businesses reaching a one to two billion dollar valuation is less than 1% of all companies.

Liquidity Concerns Amid Shifting Investment Landscape (38m45s)

• Liquidity in the current market conditions is a concern, affecting the multiplier effect and entrepreneurs' ability to start new ventures.
• The importance of fund returners in VC strategy is debated, with GV's approach being founder-first and focusing on generational companies.
• Advising founders to take some capital off the table when possible is recommended, as seen in Johnny Boufarhat's decision with Hopin.
• The current investment environment resembles the dynamics of 2019-2020, raising concerns.
• Generative AI is a hot investment area, but its rapid commoditization and high investment costs raise questions about its value in growth businesses.
• Meta's significant investment in AI infrastructure and open-sourcing of results pose challenges for startups in the field.
• Investments in AI infrastructure and supporting tools have been made, but direct investment in foundation models is avoided due to concerns about rapid asset depreciation.

Potential in Foundation Models? (46m38s)

• Investing in foundation models can be lucrative but challenging due to the rapid commoditization of the technology.
• Generative AI is a sustaining innovation that will likely be integrated across industries to reduce costs and improve products.
• Cloud providers are likely to dominate the foundation model space by offering the models as a utility and charging for their use.
• Microsoft's recent deal with OpenAI focused on securing a cluster of GPUs for training rather than acquiring the outdated PaLM 2 model.
• It is uncertain if any foundation model companies can establish themselves as standalone businesses outside of the cloud providers.
• Investing in OpenAI at its current valuation is challenging due to the ephemeral nature of competitive advantages and the lack of stickiness in consumer-facing products.
• Unique approaches, such as advancements in memory or agency, could make a foundation model company more defensible and attractive for investment.

Sustainable Value in the Application Layer (51m45s)

• Synthesia, an AI-powered synthetic video creation platform, stands out in the application layer due to its proprietary data and enterprise-ready solution.
• When evaluating AI applications, consider whether they would benefit from a significant improvement in foundation models to assess their long-term value creation potential.
• Successful AI businesses require founders with both technical proficiency and the ability to iterate quickly and create value, as commercialization experience is crucial.
• It is predicted that most foundation models (90%) and application layer investments (70%) will yield zero returns, while only 20% of incumbent investments will share the same fate.
• Despite AI's transformative potential, incumbents like Microsoft, with their strong data and distribution capabilities, are well-positioned to capture a significant portion of the value.
• Vertical providers claiming marginal improvements over incumbents may struggle to compete due to insufficient differentiation.
• Fear of missing out (FOMO) and fear negatively impact industry and VC returns, leading to irrational investment decisions.
• During COVID, the speaker's firm invested $100 million in Stripe at a $32 billion valuation, despite prevailing fear and uncertainty.
• Stripe is considered an extraordinary mutual fund on technology and is projected to grow significantly in the next decade.
• The speaker acknowledges the substantial opportunity cost associated with investing in Stripe at such a high valuation.

Founder Perspective: Naivete vs Insider Knowledge (1h0m0s)

• Founders can be either naive outsiders or knowledgeable insiders, and both approaches can be successful if they have the humility to learn and bring in specialists when needed.
• Speed of execution and velocity (speed in a given direction) are crucial in moving from zero to one, and founders should focus the organization's effort on a specific problem rather than running for the sake of it.
• Perfection is the enemy of progress, and the best founders are pragmatists who run the scientific method.
• Founders should charge their early adopters, design partners, and ICPs for their products to get valuable feedback.
• Technical debt is less of a concern over time, especially with the advent of generative AI, but cultural debt can lead to a slow-moving, negative, or untrusting company culture.
• Bloated companies with less accountability find it challenging to retrospectively implement cultural changes.
• The best founders aggressively address cultural debt through significant cuts, using the burning platform as an opportunity to shift the culture and move cultural debt aside.

Remote vs In-Person Observations (1h6m38s)

• Native remote businesses like GitLab, which was designed for remote work from the start, can be successful.
• Many companies that were forced to go remote during COVID-19 struggled with innovation, junior employee learning, and morale.
• The hybrid model, where employees come to the office two days a week but lack synchronicity, is not ideal.
• Tom is suspicious of ambitious young people who insist on fully remote work because they miss out on important learning opportunities and feedback from colleagues.
• In-person work provides valuable learning opportunities, such as observing and interacting with colleagues, and receiving immediate feedback.
• Remote work can limit opportunities for informal learning and feedback, which can hinder career growth.

Quick-Fire Round (1h9m53s)

• Tom Hulme praises Nothing, a hardware company founded by Carl Pei, for its global presence, customer-centric approach, and impressive sales.
• He emphasizes the need for climate change to receive more attention and resources compared to existential risks like AGI.
• Hulme observes a correlation between the aggressiveness of AGI predictions and the amount of capital companies need to raise, with more cautious companies like Meta and DeepMind requiring less funding.
• He recalls memorable founder meetings, including one with a founder who brought their life coach and another with Elon Musk's Neuralink, where they discussed the potential of the human-machine interface.
• Hulme has revised his opinion on robotics, seeing their potential for generalization and opportunities in combining computer vision, large language models, and affordable components.
• He holds the unpopular view that collaboration with the military is important and will become more crucial in the next two decades, despite acknowledging the military's potential unpreparedness for such partnerships.
• Hulme expresses concern about geopolitical threats and their impact on future generations.
• He recognizes the significance of large companies in military innovation and procurement due to the need for in-house expertise and agility.
• Having children influenced his perspective on nature versus nurture, leading him to believe that personalities are predominantly natural and that the role of parents and investors is to support and nurture rather than fundamentally change individuals.
• Tom Hulme's latest publicly announced investment is in the stealth startup of Guy Pani, a founder he greatly admires and has collaborated with for years.