E1067: Garry Tan, Managing Partner & Co-Founder of Initialized Capital, on dealing with downstream investors as a Seed-stage firm, software companies acting as governments, possibility of building IPO-level companies while fully-distributed & much more!

Episode Summary

Executive Summary: In this podcast, Jason Calacanis and venture capitalist Gary Tan discuss the impact of COVID-19 on startups, remote work, and venture capital. They explore how portfolio companies are adapting, the importance of follow-on capital, and the shift to remote work. Topics include the three categories of startup impact, VC behavior during crises, the value of seed-stage investing, and the societal implications of the pandemic. Gary shares insights from Initialized Capital, emphasizing founder support and long-term thinking.

Main Topics: COVID-19 Impact on Startups (Priority: 5/5): Gary categorizes startups into three groups: severely impacted (e.g., travel), moderately impacted (e.g., Zeus Living growing slower), and those relatively unaffected. He emphasizes survival strategies, retooling, and the need for 24 months of runway. Venture Capital Dynamics During Crisis (Priority: 5/5): Discussion on how VCs are circling wagons, forming alliances, and the potential for a 'bloodletting' in the industry. Gary notes the importance of pro-rata commitments and transparent communication with founders. Remote Work and the Future of Offices (Priority: 4/5): Analysis of how companies like Facebook and Twitter are adjusting salaries for remote workers, the potential savings on real estate, and the debate on whether all-remote teams can build billion-dollar companies. Product-Venture Capitalist Fit in Consumer Social (Priority: 3/5): Using Clubhouse as an example, the hosts discuss how exclusivity and VC engagement drive early adoption, and the challenges of scaling such platforms while maintaining quality. Wealth Inequality and UBI (Priority: 4/5): Gary shares his background with food insecurity and discusses the structural causes of wealth inequality, the role of fiat currency, and the potential of UBI or platforms like Patreon to empower creators. Founder Resilience and Investor-Founder Relationships (Priority: 4/5): Covering the importance of pro-rata, managing downstream investors, and the long-term mindset needed in venture capital. Gary advises founders to ask about follow-on criteria upfront.

Key Arguments: Startups should aim for 24 months of runway to weather potential downturns, as many will face a 'bloodletting' in the next 15 months. VCs will increasingly form alliances and rely on pro-rata commitments; founders should discuss follow-on terms early. Remote work can reduce costs and expand talent pools, but may make it harder to build giant companies; hybrid models are the most challenging. Wealth inequality is a feature of fiat currency systems; UBI experiments like Give Directly show promise, but the long-term effects are unknown. Consumer social platforms like Clubhouse benefit from exclusivity and VC engagement, but scaling without losing magic is difficult.

Data Points: Zeus Living occupancy drop: From 85-90% to 70% - Gary uses Zeus Living as an example of a startup in the second category that retooled and maintained high occupancy during COVID-19. Initialized Capital check size: $1 million to $5 million, with typical ~$2.5 million - Gary describes the typical investment range for his seed-stage fund. Pro-rata reserve set aside: $1.25 million - Gary explains that Initialized sets aside half of the initial check for follow-on investments. YC interview duration: 10 minutes - Gary describes the YC interview format used to assess founders quickly. Percentage of companies going fully remote: 20% - Jason cites a Twitter poll showing only 20% of companies plan to be fully remote post-pandemic.

Pivotal Quotes: "If the advice three months ago was 18 months of runway, then we're at 15 now. And when we come out, you're going to be at 3 or 2. Or if it doesn't happen in 15 months, then what do you do?" — Gary Tan: Gary warns that startups are burning through runway faster than expected, and many may run out before the recovery. "We'll make space for each other as heroes here. And I think it goes to politics, it goes to people freaking out about masks or not wearing masks, refusing to wear masks, sort of both sides just get so dug in." — Gary Tan: On the societal divisions exacerbated by COVID-19 and the need for empathy. "I want people to be able to create wealth. I know that that's the core of what you're doing too. And I think that that's why I'm actually a venture capitalist." — Gary Tan: Gary explains his personal motivation for investing, rooted in his background with food insecurity.

Implications: For founders: prioritize runway, discuss follow-on terms early, and consider remote work's trade-offs. For VCs: alliances and pro-rata commitments will be crucial. The pandemic may accelerate wealth inequality debates and UBI experiments, while consumer social platforms face scaling challenges.