SPEAKER_00: i think the chance of winning the lottery and take the mpv of it do whatever you want with it and compare it to like low like bottom quartile venture and it's not as good somebody make a

SPEAKER_03: chart of that i'm gonna that's a really good blog post i should do but like if you took scratch

SPEAKER_01: off tickets and you took the bottom quartile adventure capital better off putting in adventure capital so maybe they should have scratch off tickets and you scratch it off and you get a

SPEAKER_07: certain amount to put into a venture i love it yeah which one that'd be fantastic i'm in scratch it off you got oh i got three sequoias i need one more sequoia to get in there this week in startups

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David Friedberg: weeks all right everybody welcome back this is the final season of what we've been calling angel here at this week in startups you know when i came out with the book angel we would interview angel investors and

SPEAKER_13: seed investors but then as my career grew and i started to have funds and we're on our fourth fund now we thought hey maybe we'll you know retire the angel brand since i'm more of a fund manager now which

SPEAKER_14: is typical in venture capital people start as angels they build a track record they then build funds and so we thought here for the final season of angel we would focus on interviewing lps what's an lp i'll remind you again that's a limited partner lps are the people who give money to a vc firm at the vc

SPEAKER_13: firm you might have a general partner so in the industry you're going to hear this over and over again lps gps gps lps lps give the money they represent pools of capital you've probably know some of these pools of capital it could be a retirement fund it could be an endowment like harvard's or yale's you've heard of it could be a sovereign wealth fund you've heard of like in qatar or uae or the saudi uh saudi's fund which is called pif you have all these different

David Friedberg: funds around the world that have lps who give money to gps that's just a shorthand for our industry and today we have jordan stein he's from crescent partners this is one of the big players in venture capital uh they're what's called a multi-family office that means they manage the investments for a category which you may remember from the we work series ultra high net worth individuals um uh nwi's and these family offices they need help and they're typically trying to

SPEAKER_13: preserve capital and also grow it you know so they they have multiple mandates um and they will help a family typically those families come from you know some matriarch patriarch that built walmart or you know some great company and now they're two or three generations later and they're trying to keep

David Friedberg: uh that wealth in play sometimes to fund non-profit operations sometimes to fund businesses and make investments do all kinds of interesting things in the world so they'll make investments across real

SPEAKER_13: estate private credit private equity and of course everybody the darling of all of private investing is venture capital we'll get into why that is jordan's a director at crescent venture venture capital

SPEAKER_16: jordan is the director of crescent venture capital investment practice so welcome to the program jordan

SPEAKER_13: thank you jason it's uh great to be here yeah so you heard my sort of ramble there i'm trying to educate founders uh you know listening to the pot here and you know catch up people who are angel investors and make sure they understand it you have a very large pool of capital uh from what i understand it's 40 or 50 billion dollars roughly and some percentage of up that the families that you

David Friedberg: represent want to put in venture capital just to educate the audience why do they want to put money

SPEAKER_00: into venture capital yeah so from our perspective the thesis around venture capital was was pretty

SPEAKER_02: simple you know if you look historically last 10 15 20 30 years venture capital has driven a significant amount of returns for big single family offices for institutions like the ones you mentioned uh it's a very powerful place to invest in terms of the category it can also be really really difficult to access right and so if you're not investing with the best venture managers our view is it's probably not worth doing and it's created a bit of a sort of barrier for a lot of family offices a lot of high net worth and ultra net worth individuals in terms of their ability to access and so what we've tried to do is put together a portfolio of these top quartile top decile managers uh who are looking for gps that are you know big and reliable and consistent and hopefully answer the phone uh so that we can provide exposure to these families to our clients as well as other external investors that we have to that type of portfolio and so it's enabled that to be part of as you mentioned a broader diversified asset allocation strategy which is what we really believe in at crescent so when you look at vcs you mentioned

David Friedberg: something very subtle there in your answer which is gps if they answer the phone this is like let's be candid here the people who run venture capital firms are quixotic unique people in all the world and they don't answer to anybody typically if they did answer to somebody it would be a limited partner but the truth is the funds tend to be small and the pools of capital tend to be large so if the venture capital industry could maintain their returns and be 10 times bigger there would be enough capital that

SPEAKER_13: would rush over to it but the fact is we all know there's a certain amount of uh startups created every year it's a finite number and there's a certain number that break out and get product market fit so there are some constraints here what's it like when you build a practice like this and you've been crested it's only been around since 2017 so you're a startup yourselves what's it like getting

SPEAKER_28: those folks to pick up the phone and then i guess you gotta fight to make your case hey we'd like an allocation in a top tier fund and you know some of the top funds i think you're in founders fund a 16z cowboy ventures alien which was just on the program lightspeed etc so let's talk candidly about that weirdness that exists in in venture capital is very weird boutique yet large industry yes um it being

SPEAKER_02: capital constrained is it's kind of key to you know gps having their pick of the litter when it comes to deciding which lps they want these top funds that we're talking to almost without exception are all over subscribed and you know they then get to pick which lp they want to join them not all money is green and so for us you know the founding story of crescent here as you mentioned we're kind of a startup we were founded in 2017 and our two main co-founders were ex-private equity guys who were retired and spent a year looking to uh become a client of a multi-family office or wealth management firm and didn't really find anything that they liked and one of the big disconnects that they noticed was if you look at the most successful multi-generationally wealthy family that group you're talking about that's you know second generation third generation go to seventh generation um they're allocating a significant portion of capital to private markets and most single family offices that are you know subscale uh and most wealth management firms and multi-family offices aren't resourced to do this well they don't have the talent they don't have the resources and so they end up woefully short of you know in some cases could be 30 40 50 60 allocations to privates and you see this at harvard and stanford and yale and all those institutions they're able to actually make those types of allocations so from day one we really created two sides to crescent we have crescent asset management which is our wealth advisory group and we've got you know about 130 advisors at this point work with a few thousand clients who as you mentioned are ultra high net worth as well as high net worth individuals and the other side which is where i sit crescent partners and we are basically the group that is tasked with sourcing underwriting and providing institutional quality private investment opportunities and what's been interesting is we started thinking about okay look we're going to do this for our clients it's going to be very connected and over time we ended up getting a lot of interest externally from other family offices other investors who are like wait a second i'm not getting into any of these opportunities can i invest with you and it's been about 65 clients and 35 external so with venture specifically it was the second to last strategy that we've added within crescent partners you know holistically we want to be able to execute across all different asset uh allocations and asset classes and so we've got you know in real estate qualified opportunity zone series of funds some other real estate focused strategies we've got direct private equity strategies fund strategies secondaries co-investments we've got a big evergreen private credit fund um and venture we waited to launch until a couple of years ago which is when we launched our first

SPEAKER_00: venture fund and we waited because we couldn't get into these funds prior to that point we were not

SPEAKER_02: interesting to them and in 2021 we effectively crossed like the 20 billion aum mark our growth story was was kind of crazy at that point you know we had kind of gone from like 3 billion aum in the first year to 6 to 12 to 25 as you mentioned we're now north of 40 today um but that was the time when we felt like okay now we're interesting to some gps and it also helped that you know some of how we've grown it's been mostly organic but some through acquisition and and and merging with other firms one of those groups a firm called true capital management uh their vc practice had been led by uh now my partner guys fantastic name is james danforth uh they managed uh money for athletes

SPEAKER_00: and celebrities and venture capital firms really like athletes and celebrities as you probably know and so they had gotten pretty tremendous access and had built a great roster of relationships but they just weren't quite big enough and so when we launched our strategy back in 2021

SPEAKER_02: i basically sat down uh we have a bunch of what we call sort of centers of influence within our firms people who are just really well networked and reached out to that group along with true to figure out okay who can we get in front of and actually talk to how do we crack open the door so we can tell our story and see if we're a fit and when we tested the waters we pretty quickly got access to andreessen horowitz founders fund and and um actually uh fpv were our first three investments run by wes chan uh who you may know is fantastic first time fun just spun out of felices um and then lightspeed shortly thereafter and cowboy shortly thereafter we're like okay wait we can do this uh and it kind of snowballs from there and you get behind the doors if you will and now you're able to access the ecosystem uh in in a pretty significant way and so it was difficult and we couldn't do it until we had kind of reached that scale and reached that threshold in terms of our ecosystem and our relationships and then since then now it's you know we have this fantastic set of relationships

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SPEAKER_40: terms and conditions do apply and you're also your timing uh in some ways was fantastic because when the

SPEAKER_13: market uh came apart in 2022 we had this crazy recession depression really if you if you're in our industry it was a depression just in terms of the valuations uh coming down for software companies 2023 a year of reckoning and cleaning things up here we are in 2024 you came into the market when hey maybe some lps were lowering their commitments lowering the number of names and so that does open

SPEAKER_42: up uh you know some some slots on the dance cards uh i would assume and people maybe would be

SPEAKER_00: willing to take a little bit more capital etc well i would say i would say yes and no i will say that even then you know all those firms i mentioned and you know uh we're in you know we're in craft we're

SPEAKER_02: in a whole bunch of of these other groups every single one of them was still oversubscribed uh to the point where you know we didn't always get the allocation we wanted being a new first time lp truthfully sometimes it was a little bit lower um and we thought there would be more of a hole to fill and honestly we found there really wasn't as big a hole as we expected so what does that say about

SPEAKER_46: venture capital here in the united states we we had this crazy bust you know after a huge run up

SPEAKER_13: the zurp environment obviously the press is having a field day with all of this but from your perspective you're coming in and talking to the top names in venture and it seems like things are still cranking so maybe what does that say about i don't know the resiliency or how venture capital is viewed by people making thoughtful decisions with large pools of capital i think within venture there's

SPEAKER_00: there's a difference between you know the groups that we're talking about and kind of your average

SPEAKER_02: venture firm right and so i think new uh new venture firms uh people who are not as branded as uh well networked as accomplished as a founder themselves people like that have struggled mightily to fundraise and i know plenty of very good firms frankly that just aren't able to get the capital i think at this upper echelon you have a fear from lps that if i don't reallocate in some way shape or form i may not be able to reallocate the next time and i don't want to change my whole strategy and get worried about being crowded out um i'm gonna have to sort of lean in here and so instead of cutting my allocations to you know the founders funds and the fpvs and the cowboys and uh crafts into the world right they're like i'm still gonna re-up to those but i'm investing less in the category so i'm gonna cut out new managers and i'm gonna cut out some of the you know maybe fluff underneath yeah that tracks i

SPEAKER_40: mean if you if you think about it there was a firm that left sequoia at one point because they had

SPEAKER_13: expanded i think with their china strategy people can look it up it was a lot of news in the venture community and then there was one firm um and that was also news that left benchmark you know during i think the great recession maybe or dot com i can't remember which one it was but i think great recession and those people then if you're a gp and you think about it somebody doesn't believe in you you know when the market uh has a rough patch but you've made money for them before and you're theoretically uh if you if you work hard going to make money for them in the future and they're not loyal to you in that down market yeah why would you bring them back to you know selectively cherry

SPEAKER_42: pick funds or something like that you're looking for some consistency right um there were a lot of

SPEAKER_13: venture tourists a lot of uh hedge funds and people kind of coming down into dipping into the category maybe they ran up uh the valuations of these companies in an unsustainable way and then you maybe had some venture tourists starting their micro funds 10 to 100 million dollar funds or it would have been a seed fund i think in the past so what's the state of sort of venture tourism now uh and you know how do you look at the portfolios you're in and you might have caught the tail end of some of these overpriced rounds and then markdowns and how are you managing that with your clients and the gps because you sit between a bunch of high net worth individuals who yeah hey i'm just

SPEAKER_28: picking a name out here maybe they were investors in stripe or instacart you know two names that have reset their valuations that instacarts was pretty pretty brutal uh and i think stripes was maybe 50 percent uh at some point and and i think instacart maybe was 30 or 40 billion depending on 20 30 40 billion when you got in and then probably trading at 7 billion this is pretty disheartening i guess so

SPEAKER_13: how do you manage that or does it not come up with the you know your your customers as it were the families you're managing money for when they see these incredible investments that they thought were

SPEAKER_00: going to the moon and they get a massive haircut yeah no it absolutely comes up and i think uh i always you know go back to the warren buffett quote when uh when others are fearful be greedy and

SPEAKER_02: when others are greedy be fearful and i think that very well encapsulates uh sort of risk off environments like you know you mentioned earlier we got very lucky in terms of our launch timing uh we made our first commitment in early 2022 and things were still hot in early 2022 in terms of like overpriced rounds uh but and our fund is closed now uh we're gonna launch our next strategy here shortly but we're 30 percent deployed there about right and so most of that was over the last 12 months as opposed to very little happening frankly in in 2022 and so we we got very lucky if we had if we had crossed that threshold and we're not believers in necessarily trying to time the market right our idea is hey mr mrs client you should have a consistent allocation to venture just in the same way you'd have a consistent allocation to private credit or private equity or whatever and you may rebalance here and there over the years but the point is you're gonna have up cycles you're gonna have down cycles and you kind of want to be consistent throughout because timing the market's really hard but we did get lucky and i think it is resonating with our investors certainly now uh who always start with the question of well you know how much 2021 exposure do i have like what are we talking about here in terms of these haircuts and we're fortunate enough to be able to say none uh effectively everything is net new 2022 and even though 2022 is still probably a little bit high that's five ten percent of of your broader portfolio it's not 10x no uh and pitchbook has done some work recently on this looking at you know sort of a pendulum of investor friendly versus founder friendly environments and 2021 into 2022 was the most founder friendly environment of the last decade and that means valuations were stupid high uh diligence was stupid fast and terms were really really friendly to founders that is fully shifted back the other way according to their research such that now the opposite of true and is true and we are seeing the most investor friendly environment we've seen over the last decade and i think that's intuitively um something that our clients and a lot of investors do understand when presented with that information in the data it's okay yeah this makes sense there's been a reset and then i think coupling that with what we're seeing in ai uh you know which we can talk about and i think we'll have a lot of winners and losers kind of like an internet or mobile or uh whatever trend or super cycle you want to go back to uh is creating a significant opportunities again for these top echelon fund managers

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David Friedberg: and you have a co-invest program um maybe you could explain to the audience what that is and why it exists because if you're betting on managers to do all this work and then managers understand what the winners are because they work with them on a consistent basis

SPEAKER_13: and they have more money to deploy to deploy then you know i've always wondered well why why why not stick with that why try to do the job of the gps you know that you are working with so maybe you could give your best explanation for that because i hear different you know people could steal me on it and

SPEAKER_45: you know argue each side so argue argue the side i guess of having a co-invest program yeah and i think

SPEAKER_02: it's been an interesting trend to watch where most strategies that are you know say primarily a fund of funds type strategy are doing this in some way shape or form for us our co-investment program right now is a part of our overall fund strategy so 10 to 20 percent of our fund will be for co-investment opportunities uh what does that accomplish for us well it has the benefit of a few things number one it usually blends down fees a little bit right and so if a manager charges say 2 and 20 or a little bit higher depending on the manager uh at the baseline for their fund it might be zero and 10 or one in 10 or zero and 20 there's any range of outcomes there so it does help blend down fees a little bit and it creates faster dpi i think one of the most difficult elements of venture is it does take a long time and and frankly it's gotten longer in terms of that time frame uh the way companies are staying private uh for a longer period of time and it's double-edged sword because they're private for longer you want to access them in private markets where more creation more value creation happens but it can take a little bit longer to to ultimately end up with an exit and so if you include a bit of co-invest into your portfolio construction then you'll be able to hopefully

SPEAKER_00: generate some faster dpi uh for our investors so that's that's a big part of it i think the second element is you know we when we're talking to fund managers and this should be true across asset classes

SPEAKER_02: and you ask the question like what's your right to exist why should i give you my money with every investment i make there's an opportunity cost where i'm not investing in someone else we look inwards and ask ourselves the same question you know why should people trust us in the venture category because we've got pretty unique access and what i think is a fantastic portfolio why should they trust us in the co-invest category i'm not going to pretend that we are as good as many of our our i'd expect probably any of our uh gps that we've invested hopefully not that would hopefully not uh that would

SPEAKER_40: be like a misalignment if you suddenly became better than the gps there'd be like the

SPEAKER_42: yeah manager of the restaurant being better at cooking the steak yeah not the way it should work yeah

SPEAKER_00: no no chance but uh but what i'll say is you know we also get the benefit of that ecosystem so i'll give you an example without mentioning names specifically but you know we looked at a co-investment opportunity uh in a really interesting business just a couple months ago and within five days we had talked to uh five of our fund managers and a few others about the opportunity many of which who had

SPEAKER_02: seen it many of which had looked at it in an earlier stage and so we can actually kind of extend beyond the talents of our team and benefit from the broader ecosystem that we're now a part of in terms of really selecting the best co-investments and that's important because there is adverse

SPEAKER_00: selection within the co-investment world if you are a gp you're not always going to want to give away your best deal you want to back up the truck and to the extent that there's any additional room then sure and so part of the magic the co-invest is we don't really want the stuff that gps aren't fully leaning into we want the things that okay they are fully leaned into but this is the allocation they

SPEAKER_02: got or you know there's more no more room left in the fund their concentration limits or whatever and having that benefit of being able to discuss that with the ecosystem really helps us hone in on that

SPEAKER_13: yeah and this is the great paradox of what we do for a living we deal in you know an asymmetric information environment where people are making trades on insider information legal in public markets in private markets that's the entirety of what we do is you know private companies do not give their information to the public they're not out there and it's hard to to get that information so if you have five fund managers three of them own the shares in this company they did this the seed round the series a the series c and you're trying to do the series d man what an advantage is that is you have the two people who passed on the d or this car around and they tell you you're thinking pretty pretty amazing but you know there's also something there it could be adverse selection but i think you have to double click on it don't you because it could be well if i was the seed investor and i own 10 of the company and i'm up 200x 400x do i really want to add on to that position there might be a case for it there might be a case for that seed manager to deploy that company in what they think is the

SPEAKER_40: next uber robin hood yeah coinbase doordash whatever it is right so it does take absolutely

SPEAKER_00: double click and you get into you know reserve math too where there's a lot of seed and series a

SPEAKER_02: who you know firms or pre-seed firms uh all of these groups who have some sort of capital reserve to follow on investments right and that also may be an area where hey we'll invest in seed primarily and then we'll do follow-ons at a but we're not doing anything after the a it's just not consistent with our strategy our opportunity cost if we do b's and c's is that we can't put it back into finding the next uber uh or the next doordash or whatever it whatever it is and so that's absolutely a factor it's not always adverse selection there can be a number of things but to your point yeah

SPEAKER_13: you really got to drill down and understand it yeah i mean it's i've been having this conversation a lot as a pre-seed and seed investor with our fund because people are the question i'm getting from a lot of lps is when do you start liquidating and you know my answer to them is when we have the opportunity and we're up 50 100 200 x we're going to take 10 off the table even if we think it's still a rocket ship because my experience with robin hood with uber you know a company worth 14 billion 150 billion is you know if you can take off 10 in your six in your nine in your 12 and get that money into the pockets and get that dpi locked in you know that the cash on cash that a lot of investors are looking and you know how much did i invest in this firm and then how much did they actually give me back in cash we're really you know cognizant of that as one of the wonderful things i would just you know during this holiday week a lot of people are off um i've been given some thought to this my lord it's incredible how functional our ecosystem is the

David Friedberg: seed investors are making these crazy bets pairing their positions but then there are these later stage investors who want those shares and then there's a public market after that and then there's co-invest and you know in some ways it's it's so vibrant and the transactions are happening at different stages

SPEAKER_13: with different um goals i'm not saying it perfectly but you know now that i've been doing it and going

SPEAKER_03: into my second decade you start to see the chessboard a little bit more and it's beautiful it's just a beautiful symphony of risk-taking you know like unbelievable insane risk-taking which is what i love about it the fact that we can tell people with a straight face we're going to invest in 100

SPEAKER_13: companies two of them based on the power law are going to be 95 of the returns and they're like which too and i'm like i mean i could tell you what i think but if i if i'm being candid historically when i look back on my track record you know the idea that a taxicad company and a stock trading company where you don't pay to trade stocks and a meditation apcom would be three of our biggest returns i would be like kind of lying you know we thought they were really great teams don't get me wrong we we it was clear they were going to be winners but it wasn't clear the extent of the win and how do you think about the power law because you're investing in so many different funds you're you're actually in some ways trying to capture you know the average maybe and then some uh you know because you're managing entire portfolios how do you think about

SPEAKER_59: that and risk generally speaking we you know the power law definitely exists i think there's no doubt

SPEAKER_02: about it and it's hard to find evidence the contrary and i echo what you are what you have found within your own portfolio like i have yet to meet very many managers who at the precede seed stage can predict with significant accuracy the winners it's very very difficult to do and so the way we think about it is in the context of a complete portfolio right and so we have kind of a barbell if you will where you know funds like injuries and horowitz or founders fund or light speed uh they're a little bit bigger and so they're not going to benefit quite as much from the power law uh i think they're going to generate fantastic returns for us and i think they're absolutely brilliant do they have a shot at the you know 50x i think it's a lot harder the math is a lot harder to get there uh to

SPEAKER_13: take a billion dollar fund to 50 billion is really just it's not going to happen folks you know you you're investing at much later stage companies when you know it's pretty clear they're a winner

SPEAKER_49: you know to a certain extent yeah and even if you're really leaning in i mean if you've got a billion dollar fund to 50 exit to take that extreme example generating 50 billion you know if you own say 10

SPEAKER_02: at exit you're creating 500 billion dollars of enterprise value that is like really really difficult to do uh in terms of ipos and so yeah it's just not just to explain that to folks

David Friedberg: to go from 1 to 50 billion is not the total value of the companies you invest in

SPEAKER_13: in the best case scenario as you're correctly pointing out here you might own 10 on average of the companies so that 50 billion if you were theoretically able to get it would be 10x in market capitalization 500 billion in market capitalization it's that would be like hitting apple tesla uber and google like it's just you know it has happened at the seed stage you know instagram which was actually kind of a smaller uh you know outcome at a billion but instagram and uber and twitter which was the larger one we're all in chris saka's eight million dollar fund and you know you do get those 200x funds from time

SPEAKER_00: to time 100x fund but they generally happen at seed is what you're saying yes uh and and the counter i guess is unless you can generate a ridiculous amount of concentration and ownership and i've

SPEAKER_02: only seen a few do that really well i will tell you you know orin zev is a solo gp on the west coast that i have like the most respect for uh we're an lp in his fund and he has the most incredible returns and he is not necessarily invested in you know hundreds of companies um but when he does he has super high conviction and doubles down and triples down and that has worked really really well

David Friedberg: and you start to get into those upper echelon numbers um so he's able to or and watch the seed investments he makes and then determine they're a definitive or likely winner in some way and get

SPEAKER_88: that second and third bet in the series a and the series b right right and uh and but it's really

SPEAKER_89: you know there aren't that many out there who do it well and i i frankly haven't seen anyone have done it as well as the founders fund's actually very very good at this too um but but we just had brian

SPEAKER_13: singerman on for the same series and he was talking about i don't know if you saw the episode but he was talking about uh airbnb spacex andro i don't know if andro was in that short list yet i think that's his future list he believes that will become one i think that's pretty good logic there but i think it was pal no it was palantir airbnb and spacex where they backed up the brink truck 15 of the fund

SPEAKER_02: 20 of the fund into one of those names which is bold yeah but it when it works it works really really well and i think the folks at founders fund are are some of the smartest out there i mean they've really built an incredible program uh and there is something to you know again there's not many but they definitely have a little bit more predictive ability i think than others um so that is kind of one side of the portfolio and then you layer on the emerging managers who are going to be you know in some cases you know 500 million dollar funds in some cases uh you know we're an investor in a 60 million dollar fund uh and everything kind of in between and you have a little less volatility with the andresons and the founders and the light speeds of the world at their size with their coverage with their expertise they're not going to lose money they're going to generate you know two three four something that's very solid uh and then you can layer on these emerging managers or what we call established a little bit more under the radar managers and define that as more under the radar for like our client base who's not intimately familiar with venture um orin would be an example of that but everyone in venture knows orin uh or ray tonsing a caffeinated capital you know there's a number of examples there and so that type of portfolio construction we believe can create this really uh strong risk return profile where you've got a little bit more vol uh but increased potential for that you know 10x 20x whatever x fund on the one side butt rest with the more established managers who are a little bit bigger and are going to generate more stable uh returns right now startups have

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SPEAKER_13: visit lemon.io twist so tell me how do you evaluate emerging managers emerging manage and how do you define emerging managers so maybe for the audience we could start with how you define what an emerging manager is and then since it's emerging you don't have 20 year track records you don't have 10 funds to

SPEAKER_00: look at how do you determine where to place a bet yeah so uh it's definitely tricky and the way to start with uh the definition here and it's changes a little bit uh you know we've again bifurcated into kind of

SPEAKER_02: established established but under the radar and then emerging and we view emerging managers as you're on fund one two three maybe four kind of depends your size and your network and your brand um for us we have generally been looking for groups that have uh spun out of institutional players and so i mentioned you know west chan at fpv who spun out of felices before that google ventures before that google uh it does give us a track record and attribution can be a tricky thing uh but we can get comfortable that okay this is someone who's been doing this for a long time and we think can continue to generate these types of returns uh you know tomas tungus from theory spun out of redpoint we're an investor in his in his new fund uh same type of idea right we can get comfortable so that's easy they had a track

SPEAKER_97: record they were at a great firm you can kind of look back into what they had their fingerprints on and

SPEAKER_40: then there's folks who and i have a little bit of that to a certain extent because i had sequoia uh scouts portfolio that people could look at so what do you do for somebody who's hey i'm just this is

SPEAKER_13: my first fund this is my second fund just get to know them and we'll talk to you on your third fund

SPEAKER_44: or not necessarily not necessarily so i think you know we think about answering a few basic questions

SPEAKER_00: right so is this individual or or fund and usually it's individual i feel like ventures become very

SPEAKER_02: individualized in terms of uh there's been a movement that i've observed i'm curious if you agree with this where people uh founders are are often interested in working with specific investors right within brands or otherwise versus like i just want you know fund x sequoia whatever yeah you want

SPEAKER_42: alfred lynn at sequoia you want stephanie you want rule off on your board yes that is the thing yes

SPEAKER_87: people start to identify the the individual and their traits and their reputation and their network yeah

SPEAKER_00: so that first question is okay are you someone that's going to see the best opportunities and the best ideas right are you getting that kind of coverage and then the second layer is can you win investments into those businesses because that is equally important you could have like the most crazy crm system in the world and you could get in front of every great founder before they even launch but if that founder doesn't want your capital then it doesn't really matter right so are you actually able to get into these really eye-popping opportunities and then how do you demonstrate that and that third piece is the most difficult so the way that we will go about underwriting for a new fund manager who

SPEAKER_02: we don't really have full track record for is you know we certainly aren't going to invest in someone if they've never made an angel investment or an early stage investment like that's that's kind of a non-starter but we think network is probably the most powerful thing in venture capital and at the core of that is trust and so we will go talk to and we'll do this really for any fund we talk to but it's uh weighted

SPEAKER_00: higher if you will for for these types of managers other gps we'll go ask andreessen horowitz or founders fund or any of the groups i've mentioned right hopefully someone who shares a board with this uh individual and say hey what's your view of them how's it been working with them are they really sharp uh does the founder respect them etc we will go to the lp community talk to other you know institutional investors or family offices who have broken through and say hey you know what are your views on this lp you're an investor what made you get excited about this and then arguably one of those critical pieces is we'll talk to founders and we'll say okay tell us in a demonstrable way like what has so and so done in their relationship with you starting from the beginning how did they find you why did you pick them and what have they done since and then you're really looking for the core question which is if you've got a founder friend would you recommend them and would you recommend them over one of the other folks that you've mentioned and that we've talked about right and if we can't get comfortable that gps think this person is rock solid i would bring them into any deal that i have and be happy about it lps are able to say okay you know we've because we could do 10 references and another tell lps can do another 10 another 10 and you start to you know benefit from

SPEAKER_02: that scale um and then the founders right if we can get comfortable across all three of those lenses and it makes sense from a portfolio construction perspective because we're looking at stage we're looking at size we're looking at sector uh then great that's that's how we would get comfortable but it's it's not as straightforward as you know looking at one of these great firms that's been doing

SPEAKER_108: it for a while yeah it's um i'm in 20 funds that are not my own 24 including my own and yeah i i

SPEAKER_13: i am almost exactly parallel to yours do they have some unique deal flow right and then can they compete for a deal now i tend to do seed stage deals seed stage funds and i do precede and seed the the great thing about that is by the time people get to series a there's between 30 and 50 names so the the competition is not as dogged as people perceive it to be because they're used to series a and series b competition most lps don't understand at the seed stage because there's no you know evidence here or the evidence is not as clear as a series a or series b investment you don't have one person backing up the truck you have people going huh i would like to put 250 or 500k into this 1 million dollar round and they're like the founders like just to take the whole million and they're like yeah maybe i pass the hat here and spread the risk a little bit um and then i'll put more money into the next round so it's it is definitely competing for deals then i think this doubling down strategy your decision making strategy is super important and some people have great decision making some people don't um and i think you know your doubling down strategy is critical as we talked about earlier and that's the one i am obsessed with right now yes because we do precede and seed we just get people to send us monthly reports quarterly reports roll them up and then we have some secret sauce some of it should be obvious like revenue or you know what's the level of the investor who's interested in the next round and which investors are inbound to them or which ones respond to our introductions you know sequoia and craft and you know whoever benchmark uh are really interested in meeting with the firm man that's pretty good for us like yeah maybe we need to if a top tier fund is going to give them a term sheet at series a maybe we need to take that option and put another 500k in so i i have really gotten obsessed i have a framework now i guess i could share it if you're

SPEAKER_03: interested yes um well i like to vet them and i like doing it publicly because i don't feel i'm in

SPEAKER_13: competition with anybody we we have the second largest amount of inbound of any firm you know it's like yc and then us 45 000 applications and we get 20. so with all these applications coming in like we don't really feel like if we lose a deal it's our fault not that we didn't get to the company you know um so i've now defined likely winner and definitive winner coming out of the seed stage so these are my criteria likely winner definitive winner now that doesn't mean definitive dpi ipo parade you know pop the champagne but coming out of seed to series a likely they tend to have a party round going on and there's you know two or three leads so multiple leads putting in money when it's a definitive winner it's usually a known vc firm okay so you can compare those co-lead multiple co-leads one person a convertible note in the likely winners a price round in the winners definitive winners so just the legal instrument because somebody's putting in three million five million whatever they're doing in the definitive winners they're just like i want to price these shares and because there's three people leading this one and a couple of angels or whatever doing their pro rata they just do a convertible note okay so you got two criteria there and then on the on the third criteria um governance in the first one the likely winners there may not be a governance change they may not have started the board meetings nobody wants to take the board seat then when you get to the definitive winners somebody specifically wants a board seat so that's how i've now parsed the world and when i see a likely winner i tell my team

David Friedberg: which bucket does this feel like more and they tend to have the same growth could be two or three four x growth year over year they had 100k in year one year two they have 500k where they went from

SPEAKER_13: 200 to 600 but it's that um it's how seriously you know the round is the next round is coming together and is the organization becoming properly governed you know with the right investors now it's not perfect but it definitely signals it and they just say tell me if it's a likely or a definitive and it's so rare that you see the definitive set as i've outlined it it's rare but you do see a lot more i would say it's 10 to 1. we'll see a note come together for 3 million bucks and then the definitive you know 5 million bucks comes down from craft or whoever gets greedy and wants the whole round and they want to be on the board and they want to you know i use greed as like the good type of greed yeah like

SPEAKER_114: i want to see this succeed you know the passion come in i don't know what do you think of that

SPEAKER_116: i like it i think it makes sense the one yeah if anything yeah i mean so yeah this is a working

SPEAKER_103: theory i'm still working on it i'm about 70 of the way they are with this theory that's pretty good

SPEAKER_00: that's pretty good i i think uh there's a few things one thing that's interesting is you'll hear

SPEAKER_02: a lot from vcs that in order to make the highest returns you need to be contrarian and so interesting within that context of and i think it fits well actually if you have one strong lead and you don't have others at the table who are trying to co-invest you kind of could have that contrarian view yes so that's really interesting i think that fits well and makes a ton of sense i think the one piece you know there's some firms out there goodwater for example or an investor in goodwater i think they're really really smart um they are more data driven and one of the things that other than the obvious right that sort of stanford uh computer science graduate who has already built a billion dollar company and is starting his next one or her next one how do you figure out the

SPEAKER_00: opportunities that other people will miss uh and so actually i think that fits into your framework well too uh but the interesting question is i don't know that the the founders funds the andresens those folks of the world maybe they do uh are willing to take as big of a risk on someone like

SPEAKER_02: that who may create a different category and maybe you know a dentist who may be uh you know someone who doesn't fit the traditional bill um now i'm talking myself into a circle here back to actually thinking if you've got one lead that's actually a huge uh a good positive signal yeah it's conviction

SPEAKER_01: right so it could be contrarian i was thinking conviction but i like your punch up there that it's

SPEAKER_13: like it's conviction and also contrarian like it's not like there's four people five people everybody's group thinking okay this is some ai startup yeah we all gotta put 500k into it everybody talks themselves into it everybody's taking a little bit of risk not a lot of risk so it's like when you have whatever size fund you know the 500k check you can get a little frisky but the five million

SPEAKER_00: dollar check gotta think it through people are gonna notice that bet 100 how do you think about uh you know that's kind of pure signal from who's investing uh the other side of the coin might

SPEAKER_02: be you know say product market fit right and so uh one of the interesting concepts i've heard from uh one of our fund managers is you know i'm really looking i get excited when i see extreme product

SPEAKER_00: market fit right huge growth with no marketing uh and so there's a term for that yeah it's market pull

SPEAKER_13: is what andy ratcliffe from one of the benchmark founders called has called it and um market pull is you know it when you see it it's like the stuff is flying off the shelves faster than you can do it and your issues become customer support you know your issues become customer success salespeople just yeah you know the number of requests coming in servers it's just the whole nature of the startup changes like the problem set moves from you know okay let's come up with a great hamburger and a great you know way to present it to oh my god we're out of napkins you know like there's just too many there's too many people online we're gonna run out of iced tea you know it's it's that kind of thing if you thought about it like a hamburger stand it's kind of like what are shake shack's problem shake shack's problem is the line's too long you know when you go to madison park it's like that line's too damn long okay let's put a camera up so people can see when the line's shorter and they can time it or you know whatever yeah we'll we'll tweet out when the line goes under 30 minutes or something that's a different

SPEAKER_28: problem so we do look at that yeah absolutely and you know at the seed stage you have to you have to start talking to customers that was the thing i found very disturbing in the zerp environment that last three or four years to see people not want to join the board

SPEAKER_13: and own a higher percentage than we did so we might own when we own over five percent we want to be a board observer or have a board seat we think that's reasonable yeah um and we really don't care if it's an observer or a full board seat in most cases because in my experience i've never seen in a startup like the board vote be some dramatic television hbo movie where like oh my god

SPEAKER_03: the future of this startup is based on that it's very very rare it happened with uber it has not

SPEAKER_129: happened a second time in 400 it almost happened with open ai right to a certain degree yeah so

David Friedberg: that the reason these are notable is because they're rare yeah um and really what you want to know when you're on the board is when's the next round when is the next round happening so you

SPEAKER_13: don't get left out of it and are they going to sell the company or not right and like just having that early signal like hey they're thinking of selling the company or are there secondaries occurring just like there are major financial transactions occurring and if you're a vc firm who owns over five percent you own eight percent twelve percent six percent whatever it is that could be a very meaningful moment for you to expand your position to clear some of your position to take your pro rata to not and if you know about it early you can really make a more thoughtful decision so that's always been very troublesome to me people not calling customers and no governance those are my two huge red flags and man i saw that happen it was one vertical where it happened

SPEAKER_134: more than others it was crypto yeah i was just thinking that i mean this ftx in a nutshell

David Friedberg: i mean it was so weird to see these companies come in and i'd say who's your customer and they'd be like you and i'm like no no i'm an investor you say yeah yeah no we want you to invest in the token

SPEAKER_13: i'm like yeah but what does the token do oh you know it helps you render there was like a render coin it's actually done pretty well it helps render videos whatever i'm like okay it's a really novel concept in the world i appreciate on a technical basis but who are the customers like we'll find out

SPEAKER_14: but your value in the company at a billion dollars and we'll find out like how about we find out

SPEAKER_28: lean startup style ask a customer get them to use the product and then see if they'll give us their credit card after the trial or take their credit card and say on day 31 it's going to get charged like there are some founders who do that you can use it for 30 days but i need your credit card day 31 if you don't cancel by day 31 it's going to charge it and you can cancel after that but you know you're at least going to get that one month out of you some founders are afraid to do that it's interesting

SPEAKER_00: i mean you can do there's this concept of you know painted door tests too right where like even before you launch uh you know you could say okay we want to see if this is product that's going to resonate with the market and so we're going to create a website we're going to create basically like the minimum amount of stuff we need to do to have it be there and then let's see if we get pre-orders

SPEAKER_89: let's see if we get website visits so we can drive traffic i never heard it as the pre or the

SPEAKER_03: painted door test is a really good evocative name yeah that was you know a lot of steve blank and eric reese you know started this lean startup movement over 10 years ago and the the science of

SPEAKER_13: it and yeah just put up a landing page with the name of your product sign up for 49 ask people to put their credit card in and say yeah we'll charge your card when the product comes out we've put you on the mailing list we're going to send you 30 days and then they wouldn't even start it but you

SPEAKER_01: at least see if people have any inclination that was the thing i liked about kickstarter it's too bad

SPEAKER_13: hardware sucks as a category yeah it's a lot harder i mean have have we seen any hardware consumer hardware company have a great venture outcome in the last 10 years name your top three i i mean it's

SPEAKER_134: it's tricky because yeah okay okay i found i was i was going to just dodge your question there but

SPEAKER_74: i'll think about it for a second bought by google for nest whatever that was drop cam became nest i

SPEAKER_13: guess that was 500 million i mean i i've been down this road so many times it's really hard to find

SPEAKER_02: consumer hardware that works well i think it goes to the exception proves the rule back to the earlier point um it's tough i mean and it starts with you know margins to a certain degree right and growth to a certain degree and then you gotta sell for distribution you gotta sell for manufacturing you gotta sell for like so many more things defensibility yeah defensibility tesla would be the one tesla

SPEAKER_154: if you consider it like it is a hardware product yeah all of those have huge software components right

SPEAKER_02: so it's yeah um maybe less a little bit gopro but but even there yeah all right man this has been

SPEAKER_13: amazing you know the one they wanted to talk to you about was just the democratization of vc you work with a lot of family offices and uh we actually did our arrays 506c and i just published the deal memo launch.co memo and um hundreds of people asked for an allocation now we have a limit on the number we can give to accredited investors and we can't accept non-accredited so we can really only accept

SPEAKER_14: qualified purchasers that scale but we did get a lot of accredited investors and accepts a lot of them

SPEAKER_28: with 50k 250k checks which was great you see a lot of demand you know in the long tail or the medium tail uh for this space and and how do you think about capturing that i love that you're doing that and as a

SPEAKER_02: personal note like it's one it's something i'm passionate about i think that certain regulatory agencies make it way harder than not to invest in top tier venture firms by basically incentivizing structural changes such that they only take qualified purchasers or even accredited investors uh and if you think about like i could go buy name your coin you know tomorrow but i can't invest in a top tier bc fund it makes literally no sense and so i hope that we see greater democrat democratization in the space i think you're leading the way and i applaud you for it um i think that there's trillions of dollars in in value right that right now has no home in in that market segment and i think to the extent that they you know educationally understand the power of venture capital and to be fair have the ability to allocate to a space that's not going to return capital for quite some time um that is something that would be fantastic to see more of so i do think it's it's i'd love to

SPEAKER_129: say it's inevitable i don't know based on uh the things that have to move in order to create more

SPEAKER_13: sec really you know they have a mandate to create an accreditation test and i really think that would be helpful and i think taking the accreditation limit off like accredited investors who pass a test should be able to invest in whatever they want if you take a five hour test or let's just say a test that takes five hours of studying the test itself could take half an hour but you know like imagine

SPEAKER_03: you had to sit through five hours of courseware on diversification on interest on private companies how long they take to go public how many fail and you just showed people the statistics for venture capital and the irr private equity real estate and then you made them take a test that proved they

SPEAKER_13: understand you know the failure rate of these and and what did the top quartile venture firms do and and the average one do and they just had a general idea of like the risk they were taking or you know a very concrete idea of the risk they were taking you know they don't do that in vegas they don't do it on you know i don't know all this fantasy sports stuff people are betting on and people can gamble the heck out of the suit the lottery take a state lottery i mean it's unbelievable

SPEAKER_00: and you look at how that disproportionately affects lower income people yeah right i mean it's like okay you're gonna let them do that i think the chance of winning the lottery and take the mpv of it do whatever you want with it and compare it to like low like bottom quartile venture and it's not

SPEAKER_01: as good that would be actually correct somebody make a chart of that i'm gonna that's a really

SPEAKER_03: good blog post i should do but like if you took scratch off tickets and you took the bottom

SPEAKER_01: quartile of venture capital better off putting in a venture capital so maybe they should have

SPEAKER_05: scratch off tickets and you scratch it off and you get a certain amount to put into a venture

SPEAKER_07: i love it yeah which one that'd be fantastic i'm in you scratch it off you got oh i got three sequoias

SPEAKER_03: i need one more sequoia to get in there all right jordan you've been a great guest i'd love to have you on again and we'll see you all next time on this week in startups and the angel podcast and whatever this is okay bye bye thanks jason