Trae Stephens: Why No Company is Successful Because of their VC | E1135

Intro (00:00:00)

• Trey Stephens, a rural Ohio native, felt like an outsider and preferred the company of adults and philosophical thinking.
• Despite his academic achievements, Trey faced challenges in college admissions due to his school's limited connections with Ivy League institutions.
• After rejections and a breakup, Trey's mother encouraged him to pursue his dream of attending Georgetown's School of Foreign Service.
• Trey's persistence and determination led him to convince the admissions dean to put him at the top of the waiting list.
• After sending a rejection letter to the admissions office, Trey received a surprise call from Georgetown University.
• He met with the university president, who offered him a job in the president's office despite the lack of financial aid.
• Trey worked for the university president throughout his college years, which significantly transformed his life experience.

Transformational Life Experiences (00:05:39)

• Trae Stephens shares his personal experience of being from a lower-middle-class rural community and the challenges faced by such communities due to globalization.
• He highlights the lack of opportunities and support for these communities, leading to populism and a shift in political affiliations.
• Stephens acknowledges that his mother's persistence helped him overcome these challenges and pursue higher education, but he reflects on the limited options available to many others in similar situations.
• Trae Stephens discusses Peter Thiel's views on the distortion of culture and values caused by elite universities.
• Thiel believes that these universities reject applicants from lower-income backgrounds, leading to a lack of diversity and meritocratic outcomes.
• Stephens agrees that there is some distortion that requires correction and mentions recent firings of university presidents for fueling cultural hysteria.
• He emphasizes the need to find ways to generate meritocratic outcomes that benefit everyone, not just certain subsets of the population.

Transition to VC & Joining Founders Fund (00:09:15)

• Trae Stephens, initially uninterested in venture capital, was persuaded to join Founders Fund by Peter Thiel.
• After a year and over 500 pitch meetings, Stephens developed the ability to identify exceptional founders and promising business alignments.
• Stephens believes that learning to be a successful investor requires incurring around $20 million in investment losses.
• He emphasizes that venture capital funding alone does not guarantee a company's success.
• Stephens prefers investing in non-competitive industries with high pricing power and large, established industries.
• He seeks category-defining opportunities in sectors untouched by modern technology, led by founders with deep industry knowledge.
• Founders Fund encourages its investors to operate independently, make decisions without weekly VC meetings, and focus on the most compelling investment opportunities.

Collaboration & Decision-Making in Competitive Deals (00:17:53)

• Founders Fund brings in industry experts to make informed investment decisions and supports individuals with strong conviction in their investments.
• The firm collaborates to win competitive deals due to its strong platform and brand recognition but avoids price inflation in deals, which indicates intense competition and a lack of edge.
• Founders Fund is located away from the main VC hub to avoid mimic contagion and make independent investment decisions.
• Trae Stephens believes that no company is successful solely because of its venture capital funding and emphasizes the importance of communicating expectations and aligning people.
• He criticizes the false sense of scarcity and urgency often created by founders in fundraising situations and manipulative behaviors, such as pressuring investors to make quick decisions with limited information.
• Stephens prefers founders who are respectful and willing to work collaboratively through the investment process.

Lessons from the Crazy Times (00:23:27)

• Trae Stephens criticizes the current venture capital environment for its intense competition, overpriced funding, and unsustainable business practices, which he believes are reminiscent of past mistakes.
• He emphasizes the importance of founders prioritizing long-term value and sustainability over short-term gains and ego boosts.
• Stephens points out that top venture firms often avoid funding rounds with high valuations due to limited ownership percentages.
• He agrees with Doug Leone's observation that venture capital has become a low-margin, commoditized industry, leading to increased competition and concentrated returns.
• Stephens stresses the need for differentiation and avoiding competition as key to success in venture capital and startups.
• Founders Fund's biggest challenge is maintaining access to the network and ensuring they see all potential investment opportunities.
• Stephens believes that successful companies are not a result of smart VCs but rather exceptional founders and their teams, and that VCs should provide occasional advice and introductions when needed rather than being annoying or creating obstacles.
• Founders Fund positions itself between boutique firms with specializations and capital accumulators, with a core strategy of investing in the best founders building category-defining companies through a traditional venture model.

Lessons on Reserves & Downside Protection (00:31:45)

• Reserves are misleading, making it challenging to distinguish between valuable companies and those driven by momentum.
• Founders Fund emphasizes high conviction investments, focusing on companies with massive upside potential rather than downside protection.
• Founders Fund encourages its team to create deal memos with specific numbers, promoting accountability and high conviction investments.
• Market fit is prioritized over founder fit when evaluating investments, as the potential for significant returns is crucial.
• Founders should prioritize strong markets and aim for big visions and impactful ventures to increase their chances of success.
• Not all Enterprise SAS companies are bad, but many lack inspiration and fail to excite investors.

Backing Founders Despite Disliking Their Ideas (00:38:18)

• Despite disliking a founder's idea, investment can be made if the founder and their team are strong.
• A great founder and team can pivot their way into a strong product-market fit, while a great idea with a weak founding team is likely to get stuck and fail.
• Founders should build a diverse set of skills around them with the rest of their founding or executive team.
• A single brilliant person is not enough to make a successful company.
• It's important to see the depth and bench strength of even the best founders.
• Momentum is the most important thing in startups.
• You can get a sense of a company's momentum in the first six months.
• Companies that struggle for a long time and then suddenly hit an unlock are rare.
• Most successful companies are the best companies at every stage of their growth.
• Some companies, like Figma, HubSpot, and Viva, were not hot in the early rounds but went on to become very successful.
• There is often a trough of disillusionment that companies go through in the funding markets.
• These examples are less common than the ones where momentum drove companies all the way through.

Role of Market Timing in Investing (00:42:29)

• Venture capitalists (VCs) should not rely solely on market timing when evaluating companies for investment.
• Founders should effectively communicate the relevance of market timing to their business.
• A strong investment thesis should be based on the strength of the companies that pitch to VCs rather than personal predictions.
• Instead of investing broadly across an entire category without absolute assessments, VCs should focus on high-conviction investments in exceptional companies.
• VCs believe that founders are highly intelligent and capable of changing the world, and they consider themselves fortunate to be involved with these founders as investors and support their endeavors.

Need for Software-Defined National Security (00:47:12)

• Trae Stephens, a former intelligence community member and current partner at Founders Fund, believes the US should shift its national security focus from counterinsurgency and counterterrorism to great power conflict.
• Customer education is challenging when selling to governments due to limited knowledge of the latest technologies.
• Building a successful company in the national security sector requires expertise in government relations, lobbying, and effective communication with agency heads, decision-makers, and potential users.
• Billionaires as co-founders provide a capital advantage for startups, allowing them to raise money during difficult times and finance long-term goals.
• The incentive problem of buyers, particularly government bureaucrats, hinders the adoption of innovative products.
• Andrell's early success came from solving clear software problems, demonstrating capabilities, and shifting the risk from the government to the company.
• Andrell's founding in 2017 was based on recognizing the limitations of globalization and traditional strategic deterrence, not on predicting global conflicts.
• Putin's interest in artificial intelligence and technological development in Russia predates the invasion of Ukraine.
• Trae Stephens expresses concern about the state of Western political systems and the lack of impressive leaders, suggesting talented individuals should consider running for office to improve society.
• Government relations and lobbying are crucial for success in the national security sector, often overlooked by startups.
• Investing in hard tech requires a different skill set compared to traditional sectors, and successful companies often have a skilled business leader alongside the technical founder.
• Anduril, a company producing advanced defense technology, is subject to US government controls on who they can sell to.
• Anduril's co-founders, Palmer Luckey, Brian Schimpf, and Matt Grimm, have distinct roles within the company.
• Trae Stephens effectively manages his time and balances his work at Founders Fund, Anduril, and Soul while prioritizing his family through boundaries and a support team.
• Trae Stephens emphasizes the importance of a talented executive team and high trust relationships among team members.
• His flexible daily schedule involves various meetings and tasks, but he relies on his support team to identify priorities and stay on track.
• Being an active founder enhances Trae's knowledge and keeps him updated with the latest technology and trends, valuable for his role as a partner at Founders Fund.
• Venture capital firms could benefit from having more former founders or operators as investors due to their valuable advice and insights.

Quick-Fire Round (01:08:51)

• Trae Stephens, a former partner at Founders Fund, shares his insights gained from his experiences in fatherhood, working with Peter Thiel, and his spiritual faith.
• He emphasizes the importance of being strategic in choosing opportunities and avoiding hype, as well as the accessibility of smart people regardless of their positions.
• Stephens believes that money alone cannot provide core meaning or fulfillment, and he seeks to avoid investments that may lead to negative societal outcomes.
• He expresses his confidence in Anduril's potential to surpass Lockheed Martin's valuation due to its higher margins and faster growth rates.
• Stephens cautions against relying solely on venture capital for success and highlights the risks of government cultural resistance to Anduril's business model.
• His long-term goal is to return to public service for the betterment of the nation and its allies, while remaining open to re-entering the private sector in the future.