A Star closes $450M Fund III to back AI application layer and seed-stage founders globally

Speaker 2: He's A Star.

Speaker 1: He is A Star. Is that why he named it A Star? He's like, I think of myself as a bit of a star. Kevin Hartz, welcome to the show. How are you doing?

Speaker 9: Hey, guys. I'm doing great. So great to see the both of you. First time on the show.

Speaker 1: Welcome to the show.

Speaker 4: That's that's

Speaker 1: crazy. I feel like We've talked about so many we we've talked about so many of your investments and so many of the projects you've Well,

Speaker 9: it's funny you say that because I'm I'm I'm sandwiched between Sam in Monaco and Judgment Labs and we have a A Star has a small check-in each one of those.

Speaker 1: So, it

Speaker 9: feels very very comfortable in

Speaker 1: this position. The man The man behind the curtain. With the curtain behind him actually. But that's not we're not here to talk about Judgment Labs or or or Monaco. We're here to talk about A Star. Give us the latest news. What is the update with the fund?

Speaker 9: Well, we've we've just announced today that that we've raised our third fund. It's 450,000,000. Let's do it.

Speaker 1: Okay. So seed fund, $450,000,000. So, like, one AI lab. Is that the plan? Or you're gonna split this up between, like, two companies these days? I mean, valuations are high, but what's the strategy?

Speaker 9: It's it's a good point. It it would be, you know, if if it was a a lab, it would probably be just about one company. No, we are sticking to our knitting. We are generalists. So, we're looking at all different types of businesses. Certainly, in this super cycle that we're having right now, it's driven by AI and the application layer of AI, and we're investing pretty aggressively in that space. But our checks tend to be 3,000,000 to $5,000,000 although we go higher up to 10 and so on. Now, certainly, there's a NEO lab that will raise a big round, but that's really in the 1%. We're still in this this core market.

Speaker 1: Yeah. Where where where are you fishing? Where what lakes are stocked these days? Are you fans of the mafias or the or the, you know, universities or the dropouts? Like, there's so many different pools of entrepreneurial talent. Where are you finding success at Seed?

Speaker 9: Yeah. That that's the right question is is how to source, this talent, how to be in front of everyone else, how to meet these founders when they're still working in their gigs or still in college or in sometimes even high school. I I will say ages have declined on average, you know, like you're now seeing more and more founders that are teenagers. Yeah. And, you know, I like to think of it as having, you know, seen like, you know, we had Bill Gates and Steve Jobs in the seventies when they were teenagers, they started their company and that was such an anomaly. And you fast forward to today and it's really dramatically changed. So, to answer your question, I think of folks like Corey Corey Levy Yeah. At Z Fellows who's just terrific at finding dropouts. And, you know, more and more, they're high school dropouts as much as they are college dropouts.

Speaker 1: Yeah. It's remarkable when you meet a founder and it's like Corey did the deal like three years ago and you're like, just getting started. He's a

Speaker 2: How are you thinking about incubations with this new vehicle? Is that gonna be opportunistic? Yeah. Do you do you expect to have it or do you expect to have a certain amount that you're aiming for? What's the philosophy?

Speaker 9: Well, incubations are I I don't like the term incubation. It kind of sounds like this sort of contrived venture. We like to find founders and spend time with them and help them kind of develop ideas. And we've done this a couple of times. We did this with a mortgage AI business that's run by a founder named Michael White who came out of Block. And that business has grown substantially. And we've done that very recently with a company called Soron, which is a physical So, security starting in the high end of alarm systems or monitoring systems. That is really just a bet on, you know, you see all this stuff happening in autonomy, autonomous cars and robotics, And a lot of money is invested in that space. And when we see that happen, know, that usually means there's, like, dropping price of LiDAR, cheaper sensors and the like. And, you know, that means an opportunity, in this case, in the home security space.

Speaker 1: Wait. Is there an application for LiDAR in home security that I'm not aware of?

Speaker 9: Absolutely. You if if you have sensors around LiDAR sensors, you can know exact distances. You can track objects more effectively in different weather. Okay.

Speaker 1: You see in the dark That

Speaker 9: doesn't become available when they're so expensive, but it absolutely becomes a very meaningful aid to understanding a scene when the price drops.

Speaker 1: That's fascinating. You're obviously have an incredible track record in Silicon Valley. But I'd love to know about the mood in among LPs around a $450,000,000 seed fund because we talked to a lot of the mega funds and then we'll talk to solo GPs. We had one on the show last week that raised a $50,000,000 fund. And I'm wondering about are LPs looking for a particular strategy with that size of fund? What's the appetite? Like how do you talk about like where you're positioning for the long term? Just any of the dynamics around that particular fund size at this particular time in the market.

Speaker 9: Yeah. Great question. It it was a step up. Our first two funds were about 300,000,000 each. Yeah. And we went up to 450, but we do have five of us on the investment team, and we're expanding the team. So, if you look at kind of divide the amount of capital by the number of those putting that capital work over the period of time over a couple of years, we've been successful and our first two funds are in top 5% kind of category. Thank you. I'm a venture capitalist, so I have to brag a little bit. But we've been very good at sharpshooting, like meaning, like we haven't plowed money and we've really waited for the right companies and spent the right amount of time with these companies and helping them grow. You know, it's kind of expressed in, like, we have an incredibly high conversion of seed to series a, which if you would imagine, like typically most companies don't even make it past the seed stage, the zero to one phase. And so, don't want to disassemble our model by spraying capital out there. We think that's very different from the multi stages that have almost this incentive with the fees against very large capital bases. We're very opposite of that.

Speaker 2: How do you how do you how do you stay collaborative? Or is are there are your elbows getting sharper with this fund? I mean, we have a we have a mutual friend who has this like a similar size seed fund. I know you guys have collaborated a ton on deals in the past, but, I know, you guys are also both very competitive and wanna put up, you know, top funds. And I'm sure it can get, you know, tempting at certain points of, hey, I could get 20% ownership in this company and I don't necessarily want my my buddy, you know, because it doesn't necessarily benefit my fund to to give 10% to someone even if they're a great friend and could also help the company.

Speaker 9: Yeah. It's challenging. Our partner, Gautam, his wife is Christina over at the GP over at chemistry. Uh-huh. And, you know, if he wins a deal over her, you know, like I could only imagine what would happen. So, you know, it's tricky, but it is, you know, we see a lot of new funds. I spend a lot of time backing new funds and helping, you know, these fund managers kind of grow. And then they get to a point where you can no longer kind of even co lead deals, the funds get so big. So, and we're going into this like massive super cycle of incredible amount of fast paced and a lot of capital invested. So, it's I wanna say that it's it's always on our shoulders to find, you know, the founders early enough and be the first ones there and just not be in those situations.

Speaker 1: Mhmm. How are you thinking about services as a software, the AI economy expanding beyond software and IT spend? I mean, Sam Blond was just talking us talk to us talking to us about, like, the forward deployed account executive, and we talked to Long Lake about buying companies that are heavily service oriented and infusing them with AI. And I'm just wondering if there's going to be a boom in de novo companies that are more services sector focused and what you're seeing in that category right now.

Speaker 9: Yeah. Well, you you really have to turn towards Palantir and just give them a nod because this for deploy engineer thing back in 2004 or 02/05, you know, was like universally, hated by the world and the investors and so on. And they really gave us twenty years of a look at how to make that incredibly effective. And generally though, I think that it's in the early stages that this kind of custom work is done and that may lead to kind of automating things over time. And then the flip side that, you know, to critique it would be simply that, you know, if you look in other kind of boom eras, the consulting services really did well. When the markets pulled back, they were hit almost the hardest. So, there's certainly a trade off there. But to get new services into these old markets, we're just going to have to get our hands dirty. But you know, I'm old, so I look at the services industry as this, like, really tough thing we wanna replace by software.

Speaker 1: Yeah. It's tough. Second best city to invest in? I assume you'd say SF It has to New York. New York.

Speaker 9: Yeah. I've been very impressed with New York. We have a number of companies there from a company called WAP in the creator services side

Speaker 4: Yep.

Speaker 9: To Antioch, which is physical AI robotic infrastructure. Cool. And and I'm just amazed every day of it. But I guess it makes sense that you're able to pull talent from the Northeast to have college and it's still a big financial center. There's a lot going on. So it very much in my mind is a number two. Nothing's even close. Not Austin or anything else.

Speaker 1: Yeah. That makes sense. I agree.

Speaker 2: How how often do you find yourself backing teams that are building things that you know are on that or you you expect could be on the road map of the labs? Because in certain instances, even if the labs care about a certain part of the application stack, that doesn't mean you just shouldn't still back a team. Right? It's just a new version of what if Google does this or something along those lines.

Speaker 9: You know, I want to say that the startups, you've always got to like hope and pray and expect that the startups are going to win. This is the big question of our era is, you know, do we go ahead and build all these put all these apps forward or build all these applications only to be steamrolled by the big labs. We saw that happen in the 90s. Bill Gates and Microsoft would watch and see what people would build on Windows and then they build their own disk compressor and give it away for free. So, this is like a pattern that these monopolists do in this case. And you know, our our companies need to show that they can stand on their own two legs. You know, we're we're in businesses like Decagon, which is AI customer service. It is the best product in the market, and they have to stay the best. Mhmm. And we know they can do it.

Speaker 1: Yeah. That makes a of sense. Well, thank you so much for coming on the Congratulations on the round and we have Great.

Speaker 2: Thanks, guys. That you got some more Great to see it.