It’s safe to say that despite less than a full presidential term in existence, venture firm Formation8 has made quit the impact on the industry.

With a rock star team, stellar early performance with exits from portfolio companies Oculus Rift and RelateIQ, and now nearly $1B in assets under management, it’s no wonder that they were dubbed by Fortune as the “hottest” venture firm since Andreessen Horowitz.

With two successful entrepreneurial ventures in Palantir Technologies and Addepar, along with an executive roles at the Peter Thiel led companies Clarium Capital and PayPal, Formation8 co-founder Joe Lonsdale experience certainly belies his relative youth.

Recently, Joe was gracious enough to share his thoughts about entrepreneurship and venture capital at his home in Silicon Valley.

On the decision to become a venture capitalist and on raising a $448MM first fund

For me it was natural evolution in my career. With the companies I started and worked with, I had an opportunity to work with some really talented people. Unsurprisingly, many of these talented people went off and started great companies of their own. A couple of great examples are PayPal and Palantir, which have spawned at least 15 or so really impressive companies from ex-employees. As people branched off Palantir, I realized that I really enjoyed mentoring these individuals and was fortunate to invest in many of their companies. As I thought about the investing world, it really aligned with where I was already spending more and more of my time. So, it just made sense to start investing and working with founders full time.

At the time we raised Fund I, I didn’t realize how large our first fund was relative to others in the market. I just knew that we were going to invest in big ideas and that thesis was going to require certain levels of capital. Also, the fund size allowed us to write meaningful checks alongside the firms we admire and co-invest with such as Andreessen, Greylock, Accel, and Founders Fund. The first fund was really difficult to raise, but we were fortunate to get great LP’s and we were recently well oversubscribed for our latest fund.

Why you place an emphasis on companies that aren’t afraid to tackle big, complex problems

Well, it’s what I’m passionate about and what I’ve seen in the past.  When I was working at Pay Pal, we met individuals from the Secret Service and FBI and discovered how archaic and dysfunctional their technology was. Many of them actually asked us to interpret data and provide them guidance. After 9/11 happened, we watched the government spend billions building these solutions that were ineffective, broke civil liberties, and had short shelf lives.   This angered us and we decided to start Palantir. The problem was one I was passionate about solving and I knew that if we had the right people working on it, we could solve the issue regardless of how regulated and bureaucratic the industry was. And we did (note that Palantir is now valued at $15B).   The impact both PayPal and Palantir have had on their respective industries have really made me gravitate to founders that aren’t afraid of talking a big swing.

That said, most people probably shouldn’t try to be a founder of a giant, game changing company – and certainly nobody should do it unless they are willing to work at least as hard over as many years as somebody who is training to win the gold at the Olympics. Founding a category-defining company isn’t a fundamentally healthy or balanced activity, but rather it’s one of extreme passion and obsession regardless of circumstance.

For true game changing companies, the mission is usually inspiring enough that they’re attracting the best people. You want companies with really high ceilings that can keep growing for a very long time. When companies are worth tens of billion dollars, it’s usually a good indication of how impactful that company is. Entrepreneurs that aren’t afraid of tackling big problems regardless of how many economic or regulatory hurdles really inspire me. And the ones that make it happen usually end up starting those companies that really disrupt how things are done.

On the massive influx of companies now given capital efficient nature of start-ups

It’s true that a record number of companies are forming now. That’s a good thing, but I think it’s still very expensive to build transformational companies. Palantir needed someone as crazy as Peter Thiel to be the main backer and invest the first 20 or 30 million dollars before we had any real proof of concept. And this was despite the fact that everyone at the company was taking low salaries. My 2nd company Addepar was much of the same where I was fortunate to be able to raise off my track record. Given the complexity of the problem we were solving and the platform we needed to build, we simply could not have gone down the lean start-up route. So, yes there are a lot of lean start-ups, but I still think a significant group of companies require a lot of capital at scale. One of our portfolio companies Wish, which is the fastest growing mobile commerce company in the world needed our fund and Jerry Yang to put in real dollars in to prevent a wind down. As an entrepreneur, if you’re swinging for the fences, be prepared to be a skilled fundraiser as it’s more than likely that the business will need several large rounds of capital.

Whether a dilution of talent exists with so many people starting their own companies rather than banding together 

I really think there are a couple of different profiles of companies. History shows that the vast majority of companies are going to be marginally sized companies and/or lifestyle businesses.  Many of which are great businesses for the founders and their customers. However, that’s not the type of business we invest in. With our team background and our goals for our investors, we‘re looking for companies that, if they execute, have a realistic path to becoming billion dollar companies. And most of these companies, particularly ones that have teams that can evangelize a mission well, have little problem attracting the best people.

That said, it does sometime frustrate me when I see really great, talented people working on projects that might not align with what I think they could be doing.  Of course, its not really fair to pass judgment on them because what can you say is useful or not for a particular person?

I would like to see people create things and go after interesting problems such as fixing healthcare, education, and government. All really difficult things to do, but they are areas that can change our lives for the better.

The growing club of private billion dollar companies

I think in the first half of 2014 there was in the order of 20 companies that raised a round at a valuation north of $1B. I think that number is only going to increase over the next few years as companies stay private longer than ever before. I’m personally involved in some that are at that level now. What makes me nervous is that there’s a lot of money that’s interested but there’s only a handful of investors truly really understand these companies and can help them grow and navigate through tough challenges which inevitably are ahead. Candidly, there are only a handful of these companies that really interest me. I expect to see some blow-ups within a subset of these, and that’s a good thing for our ecosystem. I think capitalism works best when you have downturns every 7-10 years or so. It helps cleanse the system when needed and bring some realism back to the industry. So while I would selfishly love for there to be a bit of a small downturn, I’m worried there won’t be for a while.

Thoughts on venture in general

Having been an institutional VC for less than 4 years now, I’m still working through some of this in my mind.

Rather commenting on the industry as a whole, I’ll just share an observation. I think it’s clear that a very small group of top-shelf entrepreneurs wield the bulk of influence and decision making power here in the valley. The network and ecosystem for the top influencers is very open and not a secret back room set of people. I know that to be successful as an investor the importance of building meaningful and trusted relationships with these entrepreneurs – both as individuals that will want to work with you on their companies, but also as evangelists for you with other great entrepreneurs.

How he sees the tech industry today

I think what people don’t realize is that we’re still on the very early part of this giant exponential curve of change – and in my opinion; we’re only really in the second inning. Many people are saying the market is getting bubbly and perhaps it is in certain areas as I mentioned earlier, but I think we’ve seen nothing compared to what we’re going to see in the next 5 or 10 years. I think it’s actually a little scary because the whole world’s going to become even more centralized around Silicon Valley because of the impact technology developed here is going to have globally.

I think Silicon Valley’s dominance in a decade or two could rival the dominance London exhibited in the mid-19th century. Despite the challenges of immigrations laws, I think that the valley will continue to be a place where the most talented people come to create great technology companies.

If you look at how far technology’s advanced in the last couple decades, you realize that there still remains large gaps and inefficiencies in nearly every major sector. So yes, I think we’re very, very early into a major technological revolution.

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