This is the first of two episodes with Garry Tan, who is co-founder and managing partner of Initialized, a VC he created with Reddit co-founder Alexis Ohanian. Gary chats about a decision that cost him 100s of millions, “I would have been first engineer or co-founding engineer in Palantir which would have been worth 100s of millions at least which is easily one of the worst mistakes I ever made, but now I get to go to college campuses and tell my story.” He also talks about how Microsoft missed the boat while trying to copy Blackberry features for it’s mobile phones, and some of the companies they’ve invested in including EasyPost (a shipping API that gives bricks and mortar retail businesses Amazonian powers), Rainforest QA (QA process automation at scale) and Algolia (search engine technology) whose CEO Nicolas Dessaigne was previously interviewed in this podcast. On Microsoft chasing Blackberry features instead of building it’s own innovative phone; “You have a battleship and the captain is thinking about their next promotion .. not, you know, where the fleet should actually go”
Transcript – Garry Tan, 1 of 2
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Garry Tan
30 people on the team we’re mainly focused on copying the features of blackberry instead of trying to make something new and windows mobile at the time had everything that you would expect from android or iOS. It had full threading, a memory model, an advanced operating system that also was a phone. And so that was a very obvious example of the opportunities that startups kind of have all of the time, because most big companies are sort of stuck in that way of thinking. Like you have a battleship and the captain is thinking about their next promotion not, you know, where the fleet should actually go.
Stephen Cummins
Welcome to 14 minutes of SaaS, the show where you can listen to the stories and opinions of founders of the world’s most remarkable SaaS ScaleUps.
This, this part, one of a two part interview with Gary time co-founder managing partner of initialized. Gary tells us about his worst mistake ever – one of the cost him hundreds of millions of dollars, whether the bay area is still the best place to be a VC, and some of the coolest business models and companies Initialized are investing in right now. Shortly after I interviewed him, Initialized raised its fourth investment fund of $225M. Gary co-founded the financial analysis platform at Palentir technologies and founded and sold Posterous, a blogging platform to Twitter … and … he was a partner of Y-combinator for five years.
Great to meet you here at money can’t, Gary. So who is Garry Tan? Please tell us your story.
Garry Tan
Oh …well … I grew up in the San Francisco bay area and felt like, you know, it’s really the backyard of Silicon Valley. We knew that Apple had started there and, you know, frankly, I was obsessed with Bill Gates as a kid and, you know, learned to code and got my first job by going to the internet section in 1996. And I was only 15 years old. So I just started cold calling because I knew how to make web pages. And so got my first job that way, and then started learning to code – and so I got an internship with one of the first eCommerce agencies. So they were actually creating the first Apple eCommerce store. And, you know, basically got my start by just making web software in 96, 97, 98. Found myself teaching people kind of twice my age how to do web programming and ended up at Stanford studying computer engineering.
And so after that I ended up going up to Microsoft to work on windows mobile. And so they gave me as a 22 year old software engineer, program manager … basically all of the scenarios that would make the iPhone great three or four years later. So it was photos, music and they gave it to a 22 year old our out of college – and they gave me know engineers for it. But that was something that taught me how really big companies sort of think very, very early. 30 people on the team were mainly focused on copying the features of blackberry instead of trying to make something new and windows mobile at the time had everything that you would expect from android or iOS – had full threading, a memory model, it was an advanced operating system that also was a phone.
And so that was a very obvious example of the opportunities that startups kind of have all of the time because most big companies are sort of stuck in that way of thinking like you have a battleship and the captain is thinking about their next promotion not, you know, where the fleet should actually go?
Stephen Cummins
Very good. And you mentioned you live and work in the Bay Area… Is that the best place in the world for a VC to be right now?
garry Tan
I don’t know! You know …. part of it is that crypto is making these projects basically global on day one. So, kinda it almost doesn’t matter where you are in the world and, you know, you could argue that Berlin or Toronto or Buenod Aires or Brooklyn or any of those places might be better.
stephen Cummins
Okay. Cool. You were employee number 10 in Palentir. With the so-called Paypal mafia founding it. That must have been amazing. Could you elaborate a little bit.
garry Tan
Oh, yeah! Well. I was up in Microsoft and friends of mine from college actually started working on a project with Peter Thiel back in 2004 – and I got a call from them and they said, ‘hey, come down and have dinner with Peter.’ And there’s almost no way he remembers this. It’s about the time he wrote the 500,000 dollar check to Facebook. And he’d just opened a French restaurant called Frizon and we sat in the middle of it. I think the restaurant died, the Facebook investment went very well. And here was Peter Thiel trying to convince me to quit my job at Microsoft. I was only a year out. And he said, what are you doing? You’re wasting your time there. Come join us? I’m so sure this is the right thing … and he got out his cheque-book and he said, ‘How much in your do you make at Microsoft?’ I’ll write you a cheque for that right now. And this will be literally a zero risk opportunity for you. And I was 22 years old, didn’t know anything about startups, about funding, about how any of this stuff works. And I said thank you very much miss appeal but I might get promoted in my next annual review. And he got on a plane and went back to Redmond.
stephen Cummins
And he was gonna pay one year.
garry Tan
Oh yeah, upfront. I mean, I would have been, you know, first engineer or co-founding engineer of Palentir …. which, you know, would have been worth hundreds of millions at least. And so that, you know, easily is one of the worst mistakes I’ve ever made. But now I get to go to college campuses and tell my story about.
stephen Cummins
It’s a great story.
garry Tan
Don’t do as I do. But, you know, what I didn’t understand at the time was how powerful very smart sets of engineers really are. If you are at the founding team of something that goes on to really, you know, put a dent in the universe, then that’s like the most highly leveraged sort of situation possible. And it was with some of my closest friends who I had worked with – who I trusted very implicitely. So sometimes the universe comes and knocks on your door and its opportunity and basically, the right thing to do is say, yes.
stephen Cummins
These days, some VCs have upgraded their public image from boring to sometimes quite impressive. I love the Sequoia website for example – like a roll call of inspirational success. Initialized has a beautifully designed website with a very clear brand and beautiful graphics. And you describe yourselves as the Honeybadgers of venture. Now I know investors will look for bad-ass, fearless, thick-skinned, agile startups. But are you saying you as a VC is living those qualities too?
garry Tan
Yeah, trying to. And we think of ourselves as founders of our own and, you know, this is merely our… our newest startup that, you know, frankly, we hope will last 100 years. That’s one of the internal sayings that we have but, you know, let’s build a system for funding startups that is different. We want the website to reflect how we want to operate – as VCs sitting side by side with founders and trying to help them.
stephen Cummins
I love the 100 year vision to create long-term companies which of course is a real challenge these days. Can, you mentioned your investment in Algolia, a company that is right up there at the top right hand corner of the enterprise software search on G2 Crowd. I interviewed Nicola Dessaigne – he was the second person interviewed on the series. I have the feeling it’s going to be a huge play. What, attracted you to Algolia?
garry Tan
Well for us being software engineers … it actually helped us a lot because I got to use it as a part of the software I built. So when I was at Y-Combinator actually working with Nicolas, I ended up implementing it for our internal software – the internal social network that I built for Y combinatory. And it’s just exactly what you want. I’d fought with Sphynx. I’d fought with Elastic Search. It was by far and away the easiest way to get search going. It just worked out of the box and you never have to think about it. And so – just on the strength of the product alone, we just knew it was going to be very special. And since then he’s built a very world class team to bring it to the world.
stephen Cummins
And he’s built that team in Paris. Is there a lesson to be learned for companies in terms of being able to build engineering teams quickly in a cost-effective way? It’s so expensive to hire people in the bay area.
garry Tan
Yeah, absolutely. I think, you know, one of the things we’re most worried about in San Francisco is actually housing prices are obviously out of control. And so, you know, venture capitalists or raising larger funds. They’re investing into larger rounds into the companies that turnaround and have to pay more to engineers – who then pay their landlord. So, I think that we’re reaching some sort of a tipping point where Silicon Valley, in terms of policy, needs to change the way they approach housing in particular. But at the same time that means it’s a very good time to start a company or grow engineering teams elsewhere outside of… outside of the Silicon Valley.
stephen Cummins
Can you mentioned any other SaaS companies on your books that you’re interested in right now?
garry Tan
Absolutely! One of the things that were most excited to see is a company like Easypost – where they start off with something very simple, which is the easiest way to get shipping labels printed. But they’re working in a space that is so big – they have a non trivial percentage of parcel shipping in the United States going through their system. And that gives them the tracking and pricing data – not on just one carrier, but every carrier that exists. And so what that allows them to do is offer the same sort of data analytics and scale to SMBs and enterprises that are not Amazon that Amazon frankly has. That’s one of the biggest sort of broader tech trends that we’re seeing right now in the marketplace that, you know, the past four years have been this crazy time, Facebook, Amazon, Apple, Microsoft, Google growing in two trillion dollars worth of market value.
And then precisely at the same time, you know, every public company every public company that exists today – one quarter to a third of them will actually go out of business or be acquired in the next five years. And so we feel like, you know, the rise of big tech – these huge tech juggernauts that have both the data and the software engineers to build far better, you know, decision making tools in the form of machine learning – that’s existential now for the rest of every industry. And eCommerce is certainly one of them. So now we’re seeing the biggest opportunities are kind have like Easypost – actually enabling everyone else who sort of has to go against Amazon to have tech and tools and data that is as good as what Amazon has.
stephen Cummins
Interesting. Any others?
garry Tan
Yeah. I mean beyond that I think there’s future of work. Rainforest QA is one of our favourite companies. What they do is make it easy to crowdsource all of your black box testing for your software. And so you might have a 1,000 test cases that a single team of one or two people might take days to do. But instead Rainforest allows you to basically do all of those test cases within hours or sometimes, you know, less than an hour. And they do that by actually leveraging the full set of sort of 10 or 20,000 software testers out there who can all sort of operate in parallel. And so it’s very interesting and sort of remaking the way software is being made.
Stephen Cummins
In the second and concluding episode with Gary, he’s going to tell us whether he’s on the love or hate side of the most polarizing technology in the world today – blockchain. And he’ll let us know about how he goes about discovering systems to be disrupted.
You’ve been listening to 14 minutes of SaaS. Thank you to Ketsu for music provided under a creative commons license. This episode was brought to you by me, Stephen Cummins. If you enjoy the podcast, please don’t forget to share it with your network, subscribe to the series and give the show a rating.