SPEAKER_00: This is a very long game and if you get your first funds right, you get to be in venture for a really long time. And if you don't, you have you won't be able to keep raising capital. And so all the pressures on in those first few funds, the fund size is typically smaller, the investments, the sourcing, the picking, the winning, the adding value is typically done by the core people who thought they were uniquely positioned to start this venture from over time, teams grow fund sizes grow, strategies may evolve.

SPEAKER_01: And some of those can be positive, but often those are not positive.

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SPEAKER_08: Hey everybody, welcome back to this week in startups. I'm Jason Calacanis. I run a venture firm in Silicon Valley called Launch. And we have a couple of programs like Founder University and we do this podcast this week in startups. You may have heard the other podcast that's gotten a bit popular all in. And what I do for a living is I record a podcast every day and I invest in a hundred companies a year. So right now I'm doing a series here on this week in startups called Angel. And this series we're having LPs, limited partners. Who are limited partners? Limited partners are the investors who put money into venture capital firms. Those limited partners can include family offices. You may have heard that term. A fund of funds where they invest in many venture capital firms in one vehicle. It could be a retirement fund. You may have heard of CalPERS or firefighters, et cetera. Having their retirement funds have exposure to venture capital. These LPs could also be endowments. Harvard's endowments. It could also be sovereign wealth funds. You may have heard of, uh, folks from the Gulf or from Japan or China, uh, Singapore wanting to put money into venture capital. They're all limited partners. What limited partners do is they back venture capitalists who are also known as GPs. So LPs and GPs are the terms of art. LPs, they manage pools of money. They want to get exposure to equities like public companies, real estate, private equity. And most of them now are enamored or very interested in somewhere between those two venture capital, venture capital. And a lot of these portfolios are five to upwards of 25% of their, uh, diversification. So we thought we'd do a series to try to get inside the mind of LPs. Why is this important? Well, many of you are looking to become LPs in venture funds. So it's great to hear what professionals who do it for a living, uh, think about it. And then some of you who listen to this pod are of course, uh, GPs running your own venture firm. We're thinking about starting your own venture firm. Obviously LPs are going to be your partners in doing so. And then finally, startups, you're going to really care about what LPs have to say, because you'll understand how the entire ecosystem works. And if you understand how LPs manage their GPs, these venture capitalists, you'll understand how you and need to manage your relationship with venture capitalists, because it's all part of, uh, this wonderful ecosystem in the United States primarily that drives massive innovation. And it's one of the reasons why if you look at the 25 publicly traded companies, the largest ones in the world, it might be 19 or 20 of them are, uh, from the United States. We have really perfected this ecosystem today. We've got Alex Edelson. He runs a fund to funds called slipstream investors, and he is going to give us a deep dive into why he chose to be a fund to fund managers and what he looks for in, uh, venture capitalists and GPs to back. Alex, welcome to the program. Thanks Jason. Thanks for having me on.

SPEAKER_21: So let's talk about it.

SPEAKER_08: What is a fund to funds and why have you chosen this as your profession?

SPEAKER_23: Yeah. So a fund to funds, um, is essentially a portfolio.

SPEAKER_25: Ours is a portfolio of early stage venture funds. They are, we invest in pre-seed and seed funds. Most are a hundred million and smaller. Um, we're relatively concentrated. So most of the capital goes into nine to 12 core funds. Um, our LPs then get diversified exposure to early stage venture funds. So it's diversified over time, geography sectors, companies, and, uh, and you know, the ceiling is a little lower than investing directly into a venture fund. Uh, in terms of the ceiling for potential returns and the floor for potential returns is a little higher than the floor for investing directly into a venture fund. And so, yeah, we, I got into this because I was a QED and sort of looking around. I started, um, as the chief of Stafford, Nigel Morris there. And I became the COO and general counsel. And I was looking around and thinking like, man, there are some great investors here and they are very compelling to founders can add value in a lot of ways. I'm not sure like why a founder would pick me over anyone on the investment team here. But what I was learning was like how to run a venture firm and what a good early stage venture firm looks like. And we spent a lot of time internally talking about that and just being exposed to it, just sort of living it, um, over, over a period of years was really helpful. And then we got a lot of founder feedback. So we'd get founder feedback every few years.

SPEAKER_00: We had a lot of founders when I was there and hearing from them, like what's a great early stage venture from, how can we be better? Um, it was pretty rich feedback we were getting. So I was getting this unique view and it's like, what's a great early stage venture firm. And then when I was seeing, when I was there was like, we're sort, we're working with these emerging managers in a variety of ways. We're sourcing deals from them. We're bringing them into deals. We're partnering with them, um, and events and just always, always other ways.

SPEAKER_25: Well, what happens? I'm seeing great funds who we all agreed were like very high quality funds. And our beliefs about their quality did not necessarily correspond to their ability to fundraise. So we may think they're great. That doesn't mean they're great at fundraising. And so there was just like a ton of opportunity to invest in these funds and to co-invest in their breakout companies because they're small funds. They're not going to continue investing forever.

SPEAKER_01: And, and as I built relationships with them, what became interesting to me was like, they viewed me as helpful. You know, they viewed me as someone who was helping build and run QED and, and maybe could help them build and run their venture firms and to help professionalize their firms.

SPEAKER_28: So why do LPs then use the fund to funds? What? Cause they're, they pay for this privilege.

David Friedberg: They pay, I think one in 10%. So they pay a 1% management fee. It means if you had a hundred million dollar funds, you'd have a million dollars. In an advance against the, the returns on you get 10% carry. So if the hundred million turns into 400 million, the team would get 10% of the $300 million gain, $30 million over 10 years. Pretty good living.

SPEAKER_31: If you can get to it could, could result in if there were a couple of partners making a million dollars a year each.

SPEAKER_28: Uh, and so why do they choose to pay those fees as opposed to just picking funds directly?

SPEAKER_32: I mean, I, I know the answer, but I'm, I'm asking you to give me your perspective and what you hear from those, uh, LPs that you, that then give you money to put into venture firms.

SPEAKER_25: Yeah, it's a great question. So, you know, there are different types of folks looking to get exposure to venture. I think the answer is different for all of them. So like a big part of our LP base is folks who don't have any exposure to venture. They're not going to spend the time trying to get it.

SPEAKER_00: Like they may have another career like that. They're focused on like they're a doctor or a lawyer or in real estate or something else. And they would love exposure to venture, but they don't know how to find or evaluate venture funds. And they may have heard of top tier brands, but those are hard to get into.

SPEAKER_25: And the minimum check sizes are very large. And so for them, a fund of funds makes a lot of sense.

SPEAKER_00: Now there are others who know, I'll speak to slipstream in particular. There, there are others who know that the small emerging managers are a big part of the best performing funds in any given vintage.

SPEAKER_32: Why, why are those early stage funds? Um, you know, overperform. I mean, we, we, the statistics show this, the seed precede funds tend to do better on a multiple of cash, but they're smaller. So what do you think is the reason for that?

SPEAKER_00: Yeah, it's a great question. And let's be clear. These are some of the best funds. They're also some of the worst funds. So like, I don't want to let's let's, I don't want to oversell this.

SPEAKER_25: Like it's hard to do well in venture, uh, by picking the right venture funds, especially by picking the right emerging managers. But if you pick the right ones, they are usually in the best in the highest. Um, and they're among the best performing funds in the asset class. Why do I think that is? I think there are a few reasons.

SPEAKER_43: Some of them are like, you know, qualitative subjective. Some of them are like based on portfolio construction fund size. So like, let's start with the ladder first, small low, like high ownership relative to small fund size. I mean, ownership relative to fund size is a general matter. Um, I think is a great predictor of the return potential of a fund.

SPEAKER_25: So if you're getting high ownership relative to your fund size.

SPEAKER_28: And high ownership, you would say is what in a startup of fat, you know, you get to 10% ownership, 8% ownership, 15% ownership, what would be high?

SPEAKER_00: Yeah, so it's relative in my view. So like if you're a $10 million fund getting 3% ownership, that's incredible. That's like a $100 million fund getting 30% ownership, which you typically don't see in the US unless there's like serious adverse, like serious risk of adverse selection. I think about in terms of fund size. So if you're a $50 million fund getting like seven to 10% ownership, I think that's great. Um, if you're a $30 million fund getting, you know, five, seven percentage, I think that's great. Um, if you're a $5 million fund getting one or 2% of honor, one or 2% of ownership, I think that's great. And even lower is totally fine and can generate excellent returns. A $10 million fund getting 1% can do really well.

SPEAKER_46: Don't I know. Yeah.

SPEAKER_00: So the math answer, the, the portfolio construction answer is that if you get a winner, when you have high ownership relative to your fund size, the returns can be. Unbelievable.

SPEAKER_25: Like well into the double digits. Right. And we have, we all know some anecdotes there and we've all seen some and maybe it'd be fortunate to be LPs in them or worked at funds.

SPEAKER_00: But, um, there's also a qualitative factor to this. Like you're, you're in your first two funds, first three funds. Like you're betting your career on this. Yes. Like you're all in often some, some of these folks have made it.

SPEAKER_25: So maybe you would argue they haven't bet their entire career. Maybe they're a successful operator with an exit. And if this doesn't work out as a venture capitalist, like they they'll be okay. But as a general matter, like this is, this is a very long game.

SPEAKER_00: And if you get your first funds, right, you get to be in venture for a really long time. And if you don't, you have, you won't be able to keep raising capital. And so all the pressure's on in those first few funds, the fund size is typically smaller. The investments, the sourcing, the picking, the winning, the adding value is typically done by the core people who thought they were uniquely positioned to start this venture from over time. So over time teams grow, fund sizes grow, strategies may evolve.

SPEAKER_01: Um, and, and some of those can be positive, but often, uh, those are not positive for fund level returns.

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SPEAKER_32: On a qualitative basis, you've got people who are hungry, putting their reputations on the line, they have pride, they're proven winners.

SPEAKER_61: So when you when you pick an emerging fund manager, yeah, those exist in the world who are emerging means are on their first three funds or so after their fourth or fifth fund, maybe they're more established and most funds never get to their third or fourth fund.

David Friedberg: Yeah. Yeah, that's right.

SPEAKER_65: And, and, and yeah, it's interesting, right? I mean, there's obviously a survivorship question there due to performance, um, on both directions.

SPEAKER_00: So like, let's say a fund doesn't do well. It's not looking promising, harder to raise capital. Let's say a fund does really well. Those people might say, Hey, I don't know that I need to keep doing this. Venture's hard. Like we've done well for ourselves. This is too much work.

SPEAKER_01: I'll retire. Yeah. Or we see people saying like, let's just use our own money. Um, yeah, that happened with homebrew, right?

David Friedberg: Homebrew was like, we're going to just use our own money and we'll be super selective. We've made some money. We'll just, we'll take a hundred percent carry because it's our money. Um, and so your point here is those people are hungry as time goes on. Maybe they're less hungry. So that's one of their qualitative reasons why seed might, uh, overperform, but it is a lot of work. And so I, that has been my experience.

SPEAKER_32: And so, uh, and the anecdote you're referring to a lot of the people who are the Uber first investors. Uh, when I was a scout that fund, I put 650 to work and I think it, the DPI was 120 million or something, depending on when you sell your Uber shares. Um, yeah. And, uh, Chris Saka was in that as well.

SPEAKER_74: The first round of Uber and his fund was famous for being, you know, also a hundred X fund or something crazy like that. Right. 200 X fund.

SPEAKER_32: Um, so, and I think, uh, Ron Conway had, I think a little tiny piece of Google in that first, one of his first 10 or $20 million funds. And that one did extraordinarily well too. And I was in, uh, one of the funds that was in WhatsApp and that was a 20 X fund. So it's very rare to get 20 times your money back cash on cash.

David Friedberg: After 10 years, the average is, I mean, maybe you could explain to people what the averages are for seed funds, you know, cash on cash versus say the stock market or IRR or, or both.

SPEAKER_13: However, you want to sort of phrase it. Yeah.

SPEAKER_65: Well, one thing you said though, reminds me of a point that I should have made before, which is talking about the emphasis on small funds.

SPEAKER_25: And, and I didn't completely answer your question about why folks invest in fund funds. So I can circle back to that too. Yeah.

SPEAKER_43: But one thing that's really compelling about the emerging managers and the small funds, you're naming iconic winners, companies that have reached valuations that are astounding.

SPEAKER_00: Yeah. No one you probably assumed was possible at the time. Once in a career. Yeah. So like you can get low ownership in those relative to your fund size and still have a great fund. I mean, those, those exits are so unbelievable. Yeah. But one reason why small funds and high ownership relative to fund size is really compelling is that if you get more modest outcomes, which is much more likely than getting the next Google, you can still generate great fund level returns. If you have high ownership relative to your fund size and we can sort of go through an exercise. It's like, Hey, you had 10% ownership, not diluted much. You're a $50 million fund. Like what's a fund returning outcome. Right? And it's, it's much more modest than like some of the outcomes you're talking about.

SPEAKER_87: 10% of a $5 billion company.

SPEAKER_18: If a company became worth 5 billion and you owned 10% of it, that'd be a $500 million return on a $50 million fund. You'd be a 10 Xer. Uh, and you just have to go look how many times does a company become worth $5 billion and you can maintain your own income.

SPEAKER_90: Or even if it was half that 250 million on a $50 million fund would be a five X. So the math kind of pencils out.

SPEAKER_92: Yeah.

SPEAKER_25: And so what I think about when I'm investing is not like what's going to happen to this fund if they get a $5 billion exit, because if they get a $5 billion exit, they're good. Yeah. How good? Well, sure. That's what the math is for, but like, I want much more modest outcomes to generate meaningful fund level returns.

SPEAKER_00: Yeah. And so, yeah, if we're getting like 250 to $500 million outcomes, which is, which are much more likely than a $5 billion outcome. I want that to be meaningful to the fund that actually raises in my view, the floor on the fund level on the likely fund level performance.

SPEAKER_25: And so there's a lot of the, it's risky in many ways to invest in small funds with limited track records. On the other hand, the math is like very much in your favor if you happen to be right. And so, and, and circling back to the question about why folks invest in fund funds. Um, the one answer is certainly true for, for slipstream in particular, where it's folks who just don't have exposure to the venture asset class. And they feel like this is a great way to get it. They wouldn't get it if it weren't through a vehicle like a fund funds. But the second answer is folks who know these are the best performing funds. They, they may know these are also not the best. These are also some of the worst performing funds, but, um, there's so many, they are very hard for some folks to evaluate. And for some of them there, it may be difficult for them to get an allocation. Like some of these are oversubscribed. Some of them are oversubscribed quickly.

SPEAKER_99: Um, it's a lot of work to get in.

David Friedberg: Just like it's a lot of work as a seed fund manager to manage 50, 100, 200, 300. I have 400 portfolio companies now. Uh, now some of the in total over just over a decade. Now, some of those are, uh, you know, gone right now, or, you know, Uber's Uber.

SPEAKER_32: And I, I maintain a relationship with Dara, but I'm not involved. Like I was as a seed investor, obviously. Uh, but your job is very hard. You have, you're going to put nine to 12 fund managers into your fund of funds.

SPEAKER_102: I understand your fund of funds is 50, a hundred million, 200 million ballpark.

SPEAKER_103: Well, yeah, I'd rather not talk about my funds. I'd rather not talk about my fund size on here, but my fund size, my current funds is like a little under 15.

SPEAKER_23: So it's pretty small. Um, and I want to stay very small. Like my next fund's not going to be that much bigger because. Got it. For a variety of reasons.

SPEAKER_73: To put in, but you, you might be 10% of a fund that you're going into five or 10% of a 10 million or $20 million fund. Yeah.

SPEAKER_43: You know, it's funny. I actually don't worry about the percentage of a fund that I am. I think for funds where I'm a small percentage, I actually find that I'm as close or closer to the GPs, just because I think I'm working with them in ways other LPs aren't because of my experience at QED.

SPEAKER_00: And I think I probably behave a little more like a GP. And then I am very open and I'm constructively challenging folks and I'm responding to everything they send out. And, and so I ended up being close. I think close as close as maybe a much larger investor. And I also have, yeah, no concerns about being a very large investor. Like if there were someone who I was really high conviction on, I'd be their only LP.

SPEAKER_43: Um, I don't really worry about the percentage of a fund that I take.

SPEAKER_32: And by the nature of investing in a dozen venture firms, you hope to, you're, you're going to hit some sort of an average because like a mutual fund, you know, you want to pick the best, uh, vehicles, but you're, you could have some underperformers. You could have some overperformers. So therefore you're giving your LPs who are in your fund to funds, you know, uh, a, a bit of an average, hopefully a higher end average. So maybe you could explain your strategy there and what their expectations are. Is there expectation? Hey, if you just hit the average average is pretty darn good for seed. Uh, you know, I'm sure.

SPEAKER_114: Yeah. Here's, here's how I think about it. When I'm investing in a seed fund, I want to see a path that seems plausible to like a four to six.

SPEAKER_43: X net of their fees. That is very high performance based on historical benchmarks, but, um, and they won't all get there and hopefully some will outperform it.

SPEAKER_00: That is where I hope they get, um, for pre-seed funds. I'm hoping that, yeah, it's more like, I want to under, I want to understand and believe in a plausible path to a seven to 10 X net fund.

SPEAKER_25: Is, is it a failure if it's not a four X seed fund or a seven at seven X pre-seed fund? No, no, it is not. Because at bottom my thinking on, you know, what success in ventures, like if you're over a three X net.

SPEAKER_00: Yeah. I don't think anyone should be complaining about that. No.

David Friedberg: I mean, if you were to, I mean, they typically say it takes, you know, whatever, 10 years to double your money in the public markets historically. So if you are three X in the same period of time, you beat the market, uh, with which has liquidity, of course, by 50%. If you hit four X, you know, you're probably doubling it. And so just back of the envelope, people who are allocating capital.

SPEAKER_32: And I do myself, I'm in 24 venture from my four and 20 other ones. I look at it like, you know, I got money in the stock market too. If, if this beats my stock portfolio and the money's locked up for 10 years, 12 years, I'm kind of, kind of like that as a feature. I know it sounds crazy, but it's kind of nice to put, you know, I'll typically put 25 K to 250 K as an LP individual P in these emerging fund managers. And some, I mean, the highest, I think I've gone is 500 K with more established folks. Um, so it's probably on average, a hundred K, uh, in each of these, I have a couple of million in venture just as a small, you know, uh, investment for myself, but also it helps me build my network. And it helps me support other managers and, you know, um, you know, I'm looking for a return, but if I triple quadruple on average, great.

SPEAKER_133: Once in a while, you'll hit a 20 X or man, that lifts everybody's average. Cause I'm in 20 funds.

SPEAKER_32: Now every fund has become got one more turn, right? One more X on top of it. So if my average was three X across nine funds and somebody hits 20, well, there you go. Now everybody's a four X fund.

SPEAKER_90: So yeah, the math does pencil out for me with my access, I think the funds.

SPEAKER_00: Yeah. And I think that's right. And so, so, you know, some people would say, Hey, why not invest in like 30 funds, right? Why not invest in 50 funds?

SPEAKER_114: More likelihood of hitting, um, some of the sort of generational companies of any given vintage. Why not just be, um, lower concentration?

SPEAKER_00: Why not? And the, and the answer in my view is like, it's much harder to outperform. Ah, and yes, I don't know why I exist. If I'm not aiming to outperform. And so I want each investment to be a big enough part of our portfolio so that if we're right, if we're investing in top decile funds, top quartile funds, like this should be a great performer. And, um, and that, yeah, that's how I think about concentration, but we will have, hopefully fingers crossed some that outperform my underwriting and some that underperform our under, that's just likely to happen. So I, I have to be very careful with returns. And with how hard it is to generate DPI, because a lot of this stuff just looks like unrealized gains for a long time. And, and you know, what actually comes back if it comes back is like a net DPI, a DPI

SPEAKER_146: of like three X, um, plus, like, I think any LP in a venture fund should be happy with that.

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SPEAKER_32: How much of your strategy is based off of watching the portfolios emerge? So let's say you're in 10 funds and they have 30 names in each on average. You got 300 names that might be some duplication there. So let's cut it back another 20%. So call it 250 names. Maybe is that what you expect to see across those 10 funds or so?

SPEAKER_102: 200 names, 250 names.

SPEAKER_00: I actually expect to be a little higher than that because there are a handful of funds that are lower concentration. And I also, um, so maybe 400 names, 500 names. Yeah, I think it's more like four to 600 funds. Um, and I think we're tracking towards that in the current fund. So let's say 500 is the number.

SPEAKER_32: You'll, you're able to determine what the winners are by year three, four, five of those. You know, how do you do that? How do you mechanically do that?

SPEAKER_00: Well, I would turn the tables on you. You mean which winners there are of the, of the 500 companies? Yeah. I mean, you can turn it.

SPEAKER_168: Feel free. You can, I know you had some questions for me.

SPEAKER_00: It's a great question. I think part of it is a definition is a definition question. It's like, how do you define a winner when you're getting really high ownership relative to your fund size?

SPEAKER_146: A $500 million outcome could be a winner, even though in many funds, that's not a big enough outcome because they don't have enough ownership or because they don't have enough.

SPEAKER_44: They need, they need, they need bigger wins relative because of their ownership relative to the funds. So let's just say winners in general.

David Friedberg: These are companies that are going to break are breaking out. I'll just say use the term breaking out. They're starting to break out because you want to co-invest in some of these companies. So you're reserving some amount of the fund for co-investments. And then the, uh, you pop up SPV special purpose vehicle. So if I, if I was one of your 10 funds and I hit an Uber, but I'm not doing the series B at three or $400 million valuation.

SPEAKER_32: And you might want to go to your 10 family offices or 20 LPs, whatever number of LPs you have in your fund to funds and say, Hey, we can get an allocation in this, you know, taxi company, or, you know, this stock trading app Robin hood. Uh, or we should try to get an allocation in this because we see, we have inside information. It's breaking out. How, how much, uh, do you expect of your returns to come from co-investments?

SPEAKER_173: You know, based upon those, um, well, yeah, I mean, your original question, which was the right question, which was a really interesting question.

SPEAKER_43: I love having this conversation. I don't want it to ask you that I want to turn this on you. Like how long does it take you to know whether you have a winner?

SPEAKER_00: And I think I have a decent sense from talking to a lot of fund managers and sort of living through this at QED for how long it takes many people. Yeah. To decide to realize they have a real company, but a company that generates DPI.

SPEAKER_177: I mean, that it could be, I think, you know, you get it, but what's your experience? Yeah.

SPEAKER_32: Uh, four to seven years. They, they emerge in that number of times. You knew Uber was a winner in year two or three, just based on, I knew it based on the addiction level that I saw amongst users.

SPEAKER_18: And the rapid interest from top tier fire firms in getting intros to that founder to get an allocation. So you, we saw two things there. One was user adoption and just how maniacal users were about the products. You know, when it came to LA, you know, people were like, I'll never work in LA. And then, you know, you talk to 10 executives who use it. They're like, there's a game changer. So, you know, and the press never understood the company. So you just ignore the press and embrace the users. And then when I've got people emailing me saying, Hey, can you introduce me to Vlad from Robinhood? Or, Hey, I'm my wife, uh, my daughter, my cousin, my son is using calm, uh, and they love it. Can you introduce me to Alex and Michael from calm? You know, like you, you start getting those kinds of inbounds from really top tier investors, or they want to talk to you about it. I just want to talk to you about it. I know why you want to talk to me about it.

SPEAKER_90: You want to place a bet.

SPEAKER_18: So, you know, those usually happen in the first couple of years, year three, four or five. Um, and then, you know, the revenue ramp and the quality of the revenue, I think are the things that determine a DPI and the, and the real breakout.

SPEAKER_32: So there have been major questions about the quality of the revenue at Uber quality of the revenue at Robinhood. And so we had to really look at that and say, this is actually a high margin business or not. And then I just did a back of the envelope at some point where I was like, well, they did a hundred million rides and they're losing a dollar a ride. So, you know, or whatever they were losing 50 cents a ride, losing $50 million this month. Whoa, it's crazy. Um, but then I was like, wait a second, the average ride is, you know, whatever $19. Would anybody not take an Uber if it was 21? And I was like, no, maybe you lose the bottom 5%. If you lost the bottom 5%, you're making a dollar ride. Now this thing's throwing up 500 million a year. That's easy to do. So, I mean, in the press of course was going crazy. This could never be profitable. They're burning money. I was like, mm, you could just flip the switch though. It was kind of like Amazon story, right? So I think that's where I come to is you have the user love, you have, you know, inbound interests from other investors or acquirers. You know, at one point I had a very high profile, you know, one of the top three technology companies in the world reach out to me to talk about one of the portfolio companies. And they were like, Hey, can I talk to you confidentially about this company? And I was like, sure. I talked to them and said, oh, they want to buy this company. They want to know, you know, what the founders like they, you know? Oh, okay. I get it. Uh, you know, this is like a Google Amazon level company having interest in one of your profile. Cause that's another signal that this could work out. So I have now come to, I've been working on this a lot because we have a doubling down strategy. And I guess this speaks to concentration of portfolios.

SPEAKER_74: Um, and when we can talk about that in a second, but what, what do you think are the early signs of when, you know, you have a winner and how, how, how, how, how do mine match up to yours?

SPEAKER_43: No, I mean, I think like, I listened to yours. I'm I, my job is to sort of listen to the GPs and listen to their experience.

SPEAKER_00: So I want to hear from like thousands of venture investors about, you know, what have you heard from other GPs? Yeah. Yeah. I mean, well, in terms of time, it's funny. I almost never hear experienced investors say that they know in less than two years. They almost never hear, but I often hear emerging managers say, Oh, I'm just going to follow on into my best few companies.

SPEAKER_25: We're going to get an enormous percentage of the fund into those best few. And, and my question is like, well, how, how early are you going to get those dollars in? Because often companies are raising their next round. Certainly the market is slower right now in terms of pricey, you know, price day round after a price C round. But, um, that's taking longer now than, than it has been recently.

SPEAKER_191: Yeah. But it used to be like a year later, six months later, they're raising the next round.

SPEAKER_01: And so it's like in a year, yeah, not much. Well, well, like maybe you have seen growth.

SPEAKER_00: Maybe you have seen a lot of things and you are very high conviction on this company. But you might not have even made all of the initial investments that you're going to make out of that fund. It's like, it's hard to know at that point, like at the time a company is raising its next round, which are the best few in your fund. So I certainly see funds where like they got the follow ons all right. And, and it's amazing. And like major kudos to those investors.

SPEAKER_25: And some people have done it over many years or many vintages. And like they actually do seem to know earlier than most folks, but most folks, it seems like it's at least two years. Um, and so, yeah, like I'm thinking about that and I'm looking for signal from the GPs that we've invested with. I'm looking for signal from other investors coming into those companies. Like I'm typically not in the next round after the initial investment from a fund that we've made, we've invested in. Maybe it would be like the B round and we were in the preceders. We have exposure to the preceder seed round. And now we've seen them raise, you know, an A round from a great investor at the A round. And then we've seen maybe someone come in to lead a B and we're all pretty high conviction at this point. Yeah.

SPEAKER_153: And what percentage of your reserves are you, do you think will be for co-invest like that? Or are they all just SPVs and you'll just put them as icing on the cake?

SPEAKER_146: Yeah. Yeah. So I can, in the current vehicle, uh, we can use up to 20% of the cap on the funds.

SPEAKER_25: Perfect. That seems smart. Well, you know, we'll be recycling and over committing. And so, so we have room for that even after, after we're sort of fully allocated is the plan.

SPEAKER_73: Yeah. I, I, I, it's so interesting. We're having this conversation right now because I have a large team.

SPEAKER_32: Um, because we have massive amounts of inbound. So our deal flow because of the two podcasts. I mean, my deal flow was absurd before all in, and then it went absurd again.

SPEAKER_74: So it's like absurd on top of absurd. Uh, now we have 20,000 people applying for funding. If you're one of those founders launch.co slash apply launch.co slash apply. You can just fill out that form and meet with our team, uh, as long as it's like an actual adventure style business, not like a pizzeria or a movie or a CD, or you're doing your next album. We don't invest in those kinds of things.

SPEAKER_32: Um, but we, uh, in training folks, I literally have to, I force myself to write these things down.

SPEAKER_18: And I've written down now two instances because in our current fund structure, five, half the fund is going into the primary investments. That first bet through our programs, et cetera. Founding universal, et cetera, the second half of the fund is going on to follow on. So I'm pursuing like a Brian singerman who I had on the podcast, uh, recently. Hey, we're going to put the half the fund into the top five names. Let's say 10 names, 15 names. We'll see, you know, what the, what the market tells us, right? If we hit a unicorn every 25 and we have 200 names in this fund, well, we've got to divide that second half of the fund by eight. If we have three unicorns, we're going to divide it by three, but we also have to be able to pick them right to your point. And so we've come up with likely winners, definitive winners.

SPEAKER_32: And so I now have a criteria of what's a likely winner and have a criteria of a definitive winner. Now that doesn't mean it's definitively DPI. It doesn't mean that the money has come in and it's gone public. It just means that that early stage, we can then say, okay, it's a likely winner. We should put an X amount. We should put another a hundred K and we should get another one, 2% ownership. This is a definitive winner. Okay. We want to get more like three to 5% of additional ownership and get us past the 10% hurdle of ownership. So yeah. Yeah.

SPEAKER_25: I think, you know, yeah, I love it. And one thing I think about is, um, the information that folks should track over time that might be actionable down the road. And so like one thing I encourage people to do, um, who are investing is, Hey, like track your level of conviction. Yeah. Um, you know, could this be a fund returner? Uh, not likely to be a fund returner. Like, no, this is a zero, um, track that on a quarterly or every six month basis or more often if you'd like and track like how these companies are trending. Like, are they trending positively? Are they trending? Neutrally? Are they trending negatively? Like if you have time and interest, like maybe force rank these. And then like, we can talk in two or three years and we can say like, Hey, how likely is it? Or, or maybe further down the road.

SPEAKER_00: Does it ever happen that you get to a point where a company is trending negative and it ends up being a fund returner? Or how often is it? Very rare. Very rare. Yeah.

SPEAKER_218: Like a save. You're talking about like a crazy save.

SPEAKER_01: Yeah. Right.

SPEAKER_00: How long did a company go without in your mind having the potential to be a fund returner? And then it actually could still become a fund returner. Like use that information. So now it's like, you have this information. You can look back historically and see like, well, historically, nothing has ever emerged from a, you know, a likely zero X or likely three to six X return. Yeah. To being a fund return. It's never happened in our history or it's happened three times out of a hundred.

SPEAKER_164: If only I had that.

SPEAKER_222: If only I had that from 10 years ago when I was doing this all in my mind.

David Friedberg: Uh, this is why I'm writing deal memos. And so what I do is I capture all of this. Now we have two investment team meetings a week. I now record them. So I had to tell the team like, Hey, never talk, you know, in a spicy way on the investment team call, but we're recording every call. We're transcribing it. We have it. And then we can go search it. So, you know, in three years, we can go back to the original decision for making the investment in Uber, a calm grin, you know, uh, Robinhood or whatever. And we could actually look at that.

SPEAKER_32: And then we can look at, oh, we had an opportunity to buy more shares in the company. Oh, we didn't have them as a likely winner. We didn't have them as a definitive winner. And that's where like forcing your team to, to define things, you know, in a very specific way is super powerful.

SPEAKER_18: So I can say to the team when they're having this discussion, there's 14 people on a phone call. Okay. Uh, is it a likely winner or a definitive winner? And then make your case. Uh, you, you want to put more money into this. Is it a likely winner? Here's the criteria for a likely winner, or is it a definitive winner? Here's the criteria for that. Make your best case and write it down. And that's why I try to like, we, we do what's called the mini deal memo. Um, so if people want to fight for an investment, I should put a mini deal memo in slack and give us the criteria of why we should invest, why we shouldn't invest.

SPEAKER_32: And then I ask other people who maybe have domain expertise or who I think value the opinion. Okay. Do you agree or not? What would you do? Some people might say Stan Pat Stan Pat is one of our internal terms. Like we're not going to add to our position. It's a poker term means like check. Basically Stan Pat, Stan Pat. We're not adding to our position, but we're not selling our position. And let's have a thoughtful discussion about that.

SPEAKER_74: And man, has that changed everything in our firm over the last couple of years that people are using a framework for debate? Yeah.

SPEAKER_146: I mean, I think it's really thoughtful. And it also like dovetails with another thing that's on my mind when I'm thinking about managers.

SPEAKER_25: Like, are you thinking about every round that a company raises as like a buy or sell opportunity? And if it's a sell, like, what are you doing about it? Doesn't mean you need to sell. It's not always possible. And if it's buy, it doesn't mean you're in a position to buy, but I think it's helpful to think about it.

SPEAKER_23: It sounds like, you know, your analysis is, is, is similar to that.

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SPEAKER_237: The sell side is super important.

SPEAKER_32: Do you talk to fund managers about when, about their strategy for clearing positions and returning capital to LPs? Do you do that when you're selecting them?

SPEAKER_74: And then what do you like to hear? Yeah.

SPEAKER_238: I mean, it's really important to me. So like, I think about, um, and we can, we can talk about sort of what I look for when I invest.

SPEAKER_25: But at a high level, I think about like venture, like a, you know, there's like a five tool baseball players, like a six tool venture capitalist. And in my view, like everyone talks about like sourcing, picking, winning. Some people talk about adding value. I would add two more to that, that are really important when like we're making an investment at slipstream. And that is like getting your portfolio construction, right. And getting liquidity from these investments. And yeah, what I want to hear from folks is that they are thinking about it. They are thinking about it. Every time a company raises capital about whether they're buyers or sellers, they are not necessarily act acting on it. I want to get a sense for whether they're sort of in the ride or die camp, like no, we'll never sell early. We're just right until the end. Um, which I think can be great, but has some drawbacks. Um, there's risks associated with that. And I, and I'd say like, if there's one regret when it comes to getting liquidity that I hear the most and that, um, I've seen most. Yeah. It's it's well, yeah. It's I waited too long.

SPEAKER_43: Like, um, I regret taking the kill. Oh, it was, it was a unicorn.

SPEAKER_00: I could have sold a little into that round. Um, I didn't now the company didn't work out or it went public, but it was locked up.

SPEAKER_65: And after the lockup, by the time, you know, the lockup ended, I, I wasn't comfortable.

SPEAKER_153: See, it's very different for, it's very different for seed stage investors versus series A and series B investors. When you sell, because if you're a series B investor, you're almost always overpaying.

SPEAKER_32: And if you're investing 25 million for 5% at 500 million. Okay. Like you're not gonna sell that position at a billion or 2 billion and very few companies get to a billion or 2 billion.

SPEAKER_253: So you have to wait till it hits 5, 10 X, right? If you've got some basic portfolio construction, if you're invested at 5 million, we invested at calm as an example at 5 million. We had the opportunity to sell 10% of our position at 250. It was like a 40 some odd X, you know, 50 X. I took that opportunity to sell 10% of our position.

SPEAKER_32: We had an opportunity to sell another 10% of our position. Another, I think we sold $11 million of our position, uh, $12 million in our position when it hit a billion change. And I took that opportunity.

SPEAKER_18: So we sold 24% of our position going up that had nothing to do with our belief in the business of the founders. It just had to do with the fact that, well, 50 X, how often do you get a 50 X and you have the ability to sell some of it and lock in a 50 X and then do it again at, you know, man, 200 X. The, the great irony of that is it was that we had some money in SPV. When we told the LPs that we had sold, um, person was like, oh my God, you got me a 50 X. This never happened to me in an SPV. And I was like, yeah, we still have 90% of our position. They were like, you have 90%. What do you, I don't know what you mean? I'm like, we only sold 10% of our position. They're like, okay, so we sold our position. We own 10%. And so we got a 50 X. I was like, no, we owned 6% of the company. We now own 5.2% of the company. We sold about 10% of our position. We were diluted. You still have 90%. The person could not understand that we had not sold our entire position. Oh my God, Jake, how I love you.

SPEAKER_206: But wait, there's more money. We still have 90% of our shares. Yes. We still have 90% of our shares.

SPEAKER_18: Now we've been diluted a little bit, but that's par for the course. Um, and you know, I did the same with Uber, uh, you know, and I, I, I haven't talked too much publicly about it, but I was able to sell some back to the company, you know, in like 30 some odd dollars a share years before it went public. Um, now that seems like a stupid trade when the stock's at 70 now, but you gotta remember that was eight years ago. I put that money to work. That money has done more than Uber has in that time. So, you know, there there's two sides to this coin.

SPEAKER_32: I think Peter Thiel was, you know, very famous saying that he missed the best investment of his life, which was the round. I think Jerry Milner did the year before Facebook went public because in nine months people doubled their money. So like a hundred percent IRR on an IRR basis. That was extraordinary. But in terms of like other opportunities, Peter Thiel has to put money to work or founders fund does maybe selling and not having that opportunity, but putting that money into their next fund would have been a better return. Right? Yeah.

SPEAKER_00: I mean, look, I think it sounds like you've done a really thoughtful job of getting liquidity and there are no rules. Like my conclusion about getting liquidity is like, there are no rules. The rules are if, if you ask me, like, if there are rules, they are as follows. Think about every round as a buyer. So like, like hopefully you have enough information to, to make an informed decision, track your decision, even if you don't take any action in buying or selling. Um, because it will be interesting to see. And we might have learnings from that. And if you have an opportunity to like return your fund or better by taking off 20 or 30% at most. Do it. I would hope folks are like seriously thinking about doing that, but it's case by case. And, and, and, and the last thing is I hope people are just being reasonable about, you know, what a company could be worth at a later exit. If they're not going to take it now. Like I've heard people say, Oh no, no, no. Like this $2 billion company is growing so fast. This could be a hundred billion dollar company. And I want to say like so few companies are a hundred billion dollars. Like $2 billion is an objectively successful, uh, outcome for you. If you're just like putting the whole thing right now, your fund gets multiples. Like is it top decile performer?

SPEAKER_270: Let's be careful about like talking about a hundred billion dollar exits here. I'm not saying this won't happen, but.

SPEAKER_32: Well, but you know, when you, when you bring up the Uber example, there was a famous, um, accelerator, Uber didn't go to an accelerator, but they had invested a little bit. And I think they sold their entire position at 4 billion, uh, which returned a multiple of their fund, like you're saying. And I think Travis had told them don't, don't sell, don't sell, don't sell. And the, the, the secret was the angel investors, the, the people in the four and a half million dollar round for Uber. I saw soccer, a couple of other people first round. They didn't have the restrictions on selling their shares, the series a people and further had restrictions. They couldn't sell. Um, and we had to jump through a bunch of hoops. The company had the ability to buy the shares back, all that kind of stuff. Um, and then the 9 billion, I think eight or $9 billion round was announced within months of that person clearing their entire $4 billion position. So LPs were like, what, what you didn't know. And then Travis told you not to sell. And then we would have gotten two X and whatever number of months. So I I've come to the conclusion that pairing 10% two or three times for seed funds is the right strategy on the way up.

SPEAKER_18: Because if I was, if you were an LP, uh, Alex and I said to you, listen, I, I know we were in Facebook. I sold 10% of 5 billion. I sold 10% of 10 billion. Yeah. I know the company's worth 50 billion in IPO, but we locked those in and hopefully you appreciate us locking in those returns and hitting, returning the fund with that first 10%, making it a three X fund with the second or two X fund with the second 10%. And yeah, we still have 80%. Would you be mad at that? Would you be furious? Would, or would you think thoughtful person?

SPEAKER_25: No, I would think thoughtful person. And I think liquidity, I think DPI is really hard to get in venture.

SPEAKER_00: Yes. And getting meaningful DPI, getting multiples of your fund means so much to your LP base. It means so much for your ability to raise future funds, both from them and from others who are looking, especially these days for fund managers who know how to generate liquidity. Hmm.

SPEAKER_180: So, uh, tell me a little bit about, uh, how you pick managers.

SPEAKER_32: Um, we've talked before, you know, you, you, you, if you're going into this emerging sector, these are typically unique individuals in the world who want to start their own fund as opposed to go work at one or start companies, be an associate somewhere, be a partner somewhere and kind of go up through the ranks. So, so how do you pick emerging fund managers? They tend to be iconoclastic. Yeah.

SPEAKER_33: Yeah. So it's a great question. Like I, I kind of have like a handful of threshold issues, but then there's a bunch more.

SPEAKER_25: So I guess like, we'll see how, but, but yeah, like my threshold issues are like portfolio construction that can generate fund level returns.

SPEAKER_00: So like high enough ownership relative to fund size. So that if we get even modest winners, that's a good fund. And if we get some of the big winners that, you know, we've sort of talked about throughout this conversation. That's an amazing fun.

David Friedberg: Um, so fun construction. It's like having, yeah, so high ownership relative to fund size.

SPEAKER_289: I have a $10 million first fund. I'm getting 1% ownership. I'm putting a hundred K checks a hundred times into a hundred names on average. I get 1% ownership that gets me down to 50 bips after dilution at the exit. 50 bips, you know, in a, uh, 1% of a $10 billion companies, a hundred million, half a percentage points, 50 million.

SPEAKER_90: My 10 X fund with a $10 million becomes a five X fund. Congratulations.

SPEAKER_00: I mean, I even think about like a little higher ownership, but like when the fund is that small, even a little change in ownership actually makes a big difference. So if you're a $10 million fund getting 2% ownership, like that's amazing. That's equivalent to a hundred million dollar fund getting 20% ownership. But you have a much broader opportunity set. Cause if you want to try to get 15 to 20% ownership, you know, those are very competitive. You're might, you risk adverse selection. There are only so many opportunities, but if you're writing small checks, trying to get 2% of a company, there are a lot more rounds that you'll be able to invest in. And so, yeah, if you're getting like two to 3% ownership on a $10 million fund, I think that's excellent. If you're getting 1% ownership on a $10 million fund, I think that's solid. I don't, I wouldn't be looking for much less than that.

SPEAKER_25: I'm $10 million fund, but like, it starts feeling a little ridiculous because, Oh, what if they get 0.75% of the next great company? Like, are you going to wish they hadn't done that? Like, no, you're going to wish they did that. And so of course you, it's, you kind of just, you have to have sort of a sense.

SPEAKER_110: This is where accelerators come in. You know, it's one of the reasons I was attracted to putting in so much work to our accelerator and pre-accelerator.

SPEAKER_32: We can do a hundred or 200 names at 125 K for 7%. You get water down to three and a half percent, but you know, to run an accelerator is the hardest work I've ever done. You know, 14, I think we do 14 weeks with the companies and man, they squeeze every ounce of value out of our team as they should. Every introduction, every lunch, every phone call, every strategy session, man. They, there's, there's two reasons why more people don't do accelerators. One is the amount of work it is. And two, you need to have, if you're just doing, we do seven people per cohort. You need to have 700 people apply. You can't run an accelerator with a hundred applications and accept 7% and expecting a good outcome. You gotta get, you gotta be accepting 1%, which I think, yeah, they accept one and a half now or something.

SPEAKER_90: We accept like 0.5 to one and a half, depending on the class. Yeah. Yeah.

SPEAKER_43: You know, you have to get in very low, you're getting a very low entry valuations. You get, so you get great ownership with small checks and I that's, that's great.

SPEAKER_00: Um, the second thing I'm looking for is like some competitive advantage unique to the team that is sustainable. So like, it's something, uh, it's some reason you think they will win across multiple funds. It's typically like not gonna change. Like in QED.

SPEAKER_303: Give us an example.

SPEAKER_00: Give an example. Yeah, like QED. And it usually relates to like sourcing, picking, winning.

SPEAKER_304: QED usually talking about the, the fintech venture firm. Yes.

SPEAKER_00: That's where I worked prior to starting Slipstream. And, and I think about, I mean, I'll put this in context of QED, but, but I'll start by giving a little more context. So usually this would relate to like sourcing, picking, winning, adding value. Ideally all of those things. It could be some domain expertise, like deep domain expertise. It could be operating experience at a successful venture backed company. Um, it could be some track record of working with founders and showing that you can win competitive rounds with certain types of founders because of certain reasons that they're picking you. And so, um, or something unique about your picking and, and your sourcing. Well, like QED is an example because QED was founded in 2008. In 2008. I mean, fintech wasn't really a, it wasn't a word. It wasn't a category. People thought the category is not like financial services is not big enough to support a sector focused fund. And so there were no fintech investors. There are many today. So just being in fintech is not a sustainable competitive advantage, but no one else had started a company like capital one. And that was really relevant to fintech founders were at the time, like founders starting companies in financial services. And if you were one of those founders, how could you not want to talk to the folks who founded capital one?

SPEAKER_99: They're one of one valuable and it impacts their ability to source. Of course, all these founders want to meet them. It impacts their ability to pick that very unique perspective. They know all the industry players.

SPEAKER_00: They know what it takes to build these companies. They know what it sells to what, what it takes to sell to customers and financial services. They know operationally what it takes to build a high growth company to go through an IPO.

SPEAKER_43: They're, they're very unique.

SPEAKER_309: So it's some amount of pedigree expertise and, and a sustainable one is critical.

SPEAKER_43: Yeah, it impacts their winning. It impacts their ability to add value and the advantage that QED hadn't fund one is still true today.

SPEAKER_00: And fund eight, there's still no one doing fintech early stage fintech investing who started something like capital. And now there have been sort of digital entrants and other folks, but, but QED is really uniquely positioned and they will, they will always be, I think.

SPEAKER_107: Fantastic.

SPEAKER_316: Okay. So we got portfolio. Backup. Construction.

SPEAKER_107: Yeah.

SPEAKER_316: Sustainable brand advantage of some type.

SPEAKER_00: Sustainable competitive advantage unique to the team. Got it. It typically does is the reason why they can build a flywheel in a founder community. Cause founders love them.

SPEAKER_43: They all want to work with, you know, this venture fund. Um, and, and I hope to deal flow.

David Friedberg: Right. That speaks to the proprietary deal is another way. I think that's what you mean by flywheel. Hey, they have that definitive sustainable advantage. Founders recognize it. And that drives the flywheel, the flywheel being more founders apply for funding. Correct.

SPEAKER_63: If QED is great to fintech founders, then the next generation of fintech founders will hear from that.

SPEAKER_00: The folks who have worked with QED. Hey, QED is amazing. You really should talk to QED. They're the best in fintech. And then QED has this flywheel of making great founders. Love QED helping great founders, getting great exits. And then the next crop of fintech founders want to meet QED. And then they keep seeing great deal flow, investing in great deals, generating great returns. And so the last part of that point, though, the competitive advantage that's unique to the team and sustainable is that you want the strategy built around that, that whatever thing makes them so special. It's got to be tailored to them. And so, um, so like QED shouldn't go and do deep tech investing. That doesn't make any sense. And like QED should be relatively confident. They should be able to work with founders closely. They shouldn't be so low concentration that they don't have time to work with their founders. Cause their founders really value their involvement after investment. That's a big part of what makes QED special. So they have to have a portfolio construction that allows them to do that. Um, okay. So that's the second thing. The third thing would be like founders love these folks. Um, I think it is common to say and believe that venture capitalists don't add much value. And I think that's probably true in many cases, but I think the best funds, they, they often do add value and at least their founders love working with them.

SPEAKER_25: Send their best founder friends their way. And that's a really important part of what I'm looking for.

SPEAKER_00: The next thing would be like the best investors at the next stage from this venture fund. Trust this VC, track their deals and invest in them. It was like, nothing feels better to me as an LP than seeing that like the companies that we have exposure to are now being marked up by the best investors at the next stage.

SPEAKER_01: And then the last thing would be just like scrappy entrepreneurial driven, hungry folks. I think that is often more likely associated with folks on their first few funds, but it's not always.

SPEAKER_25: And some folks who have, they don't, you know, more money would not impact their life and they are as hungry as anyone who's just getting started. And so, so, um, but that's an important part of what I'm looking for.

SPEAKER_328: And yeah, we can go deeper into any of these things, but like at a high level, like those are my five filters.

Chamath Palihapitiya: Yeah, I, I, there's the ability to compete for deals, um, that I hear come up a lot.

SPEAKER_32: The thing that I don't understand at the seed stage of why people are obsessed with this is when I look at a cap table of a siege stage company, most often there's between 20 and 30 names on it. And so I look at that seed stage, uh, funds and I'm like, if you can't be one of the 20 names on the cap table before series a or 30, what's going on here? Like they must hate you. Like they're passing the hat.

SPEAKER_18: I, I, and I literally think it's 98 out of a hundred startups pre series a when they do around is passing the hat, especially in today's market. Like you, you're not fighting for an allocation. Now you might want a larger allocation in a great company. You want to put in two 50 and they are saying you can put in one 50, 150 K or something. But yeah, generally speaking, uh, so do you think about fighting for an allocation at seed stage? Or do you think it's irrelevant? Yeah.

SPEAKER_307: I mean, let's, let's, I guess are, are we distinguishing precede from seed here? Sure.

SPEAKER_18: Why not? Why don't we do that? Why don't we do precede versus seed? What do you think the difference is between those two? How do you do it? Some people would say product free product launch post product launch and people might do valuation? How do you define precede versus seed in 2024?

SPEAKER_238: Yeah. I mean, the way I think about it is in terms of entry valuation, but, um, and. Okay.

SPEAKER_276: The entry valuation for precede and seed.

SPEAKER_238: Yeah.

SPEAKER_276: What's that?

SPEAKER_43: I have two numbers in mind. I'm thinking of like precede entry valuations as like sub 10 or $12 million post.

SPEAKER_99: Um, and then I'm thinking of like seed stage venture or a seed stage entry valuations as more like, you know, 15 to 30 post, um, I had six and 12.

SPEAKER_340: Yeah. I had six and 12. Uh, yeah.

SPEAKER_32: And the reason I was saying six and 12 is because I'm including accelerators in there. So yeah, that's, you know, accelerators getting at a 1.7 to $2.5 million valuation. And then there could be, you know, six to $10 million valuations at precede and seed. Yeah. Yeah.

SPEAKER_102: You know, could be eight to 15. Yeah.

SPEAKER_146: Yeah.

SPEAKER_102: And then series a obviously is 30. Yeah.

SPEAKER_146: Yeah. And so what's interesting is like, I think there's a lot of activity at seed.

SPEAKER_00: There are a lot of funds playing at seed. There are a lot of tier ones who are later stage investors primarily. And I know there's just like multi-stage investors who are playing at the seed. Now they, those companies might be inception stage. They might have revenue and be a little more, um, further in their evolution.

SPEAKER_25: Pre-seed is typically pretty early in their evolution and the entry valuation. Yeah. It's very low. And I think there's less competition there, but the same company might be getting offers from a pre-seed fund and, you know, or like pre-seed valuation offers. And, and they might also be getting offers at what we have here today defined as seed valuations, right? Like Sequoia might come in and say, Hey, we want to value this at 30 posts. And someone else may say like, Hey, we want to value this at eight posts. Right. So like in that sense, these categories are, there's a, it's hard to distinguish them, but

SPEAKER_00: I do think there is a lot of opportunity at pre-seed. I don't think there are that many folks in relative terms investing at the earliest stage, like company inception or before the company is created. We're just bouncing ideas around.

SPEAKER_25: Oh, you decided to start that company. I'm going to invest right now. We're sub 10 million dollar entry valuation. That to me is very compelling.

SPEAKER_00: That is where I am. I'm more focused there than seed. Although I'm, I'm doing reinvest in both types of funds. And, um, yeah, I think winning is important in every stage. Um, but I think at seed it's, it's really important to be able to compete at seed because there are so many players playing at seed. There are so many venture funds playing at seed. And so what I think about is like, what is the reason? Like, do I have a reason to believe, or is there some good reason to believe that this investor or this team will find these companies early, great founders early and that great founders will pick them. And, um, you have to win unless you're the only investor at the table. And that is so rare. And even if you are the only investor at the table, you still need to win. Like you still need to convince this founder that they should want to work with you.

SPEAKER_25: And so, um, it's really important to any investment that we make is understanding like sourcing, picking winning.

SPEAKER_73: Yeah.

SPEAKER_74: I, now my criteria is doubling down. How do you decide on what to double down on? That to me is my obsession right now at the moment. Cause I have deal flow, right?

SPEAKER_304: Like a deal flow, too much deal flow. Decision making. I figured that out. Got a really good system for that.

SPEAKER_74: We know what to look for in that early stage, multiple co-founders, builder, co-founders, product velocity, consumer, uh, love, you know, early adopters really loving the product. Two to three X growth rate. We've got a whole criteria there, but really doubling down is the hardest decision. I think people have to make my producers told me you have questions for me.

SPEAKER_354: Now you want it to turn the tables on me here.

SPEAKER_133: Now I, uh, usually I don't allow this kind of, uh, Meshuggah, but I'm going to allow it for a couple of questions here. Go ahead. You, you, you want to hit me hard with some hard hitting questions. I'm good. I don't know what questions you want to ask. I know they put them in the notes.

SPEAKER_18: I told them, don't show them to me. I want to give my lightning round here in the last 10 minutes. One thing I just, before we get to, uh, the questions you have for me, optimal fund size. Um, why is this important? You know, most people in seed, I think they say maybe 50 million or less is the right size, 25 million, 75 million. What's a, what's a number if you had to pick the optimal size or the range? Uh, and then, uh, why is this important?

SPEAKER_65: Yeah. Uh, those are such great questions.

SPEAKER_25: And so I'll, I'll talk about it first in terms of like the factors that I think about. And then I'll sort of like give rough answers. They're like more direct. The, the factors that I think about are like in the first instance, someone has a venture fund because there's something very unique about them and typically relates to sourcing, picking, winning, adding value. They should be building this around them. And so, um, that's the first question. There's no one answer. Like every pre-seed fund should be $64 million and every seed fund should be like under 108 million. Like I don't have that answer. And I don't think that answer exists because this is such a personal industry. And, and it, and the success of a venture fund has to do with the people who are sourcing, picking, winning, the founders they are working with the sectors they're in. Like it's so you be specific to every person on a venture team and every venture fund and every fact. So I don't know.

David Friedberg: But it sounds like 25 to a hundred million seems like we're 25 to 75 might be typical. Yeah. We're not saying you have to pick a number, but it's typical. Yeah.

SPEAKER_82: What gets me most excited from a fun math perspective is pre-seed funds are 50 million and smaller.

SPEAKER_01: So like if you're a $50 million fund getting seven to seven to 10% ownership, sub 10 to $12 million entry valuations. Like that's great fun math.

SPEAKER_366: You can generate great returns without needing enormous winners. And if you get enormous winners, then you have an amazing fund.

SPEAKER_74: You need only hit a $500 million outcome to a billion dollar outcome to return the fund with one investment. Yeah.

SPEAKER_164: I mean, it's all, and then it's relative to dilution, all those things, but yeah, like rough math.

SPEAKER_00: And so, and so I'm looking for, yeah, like high enough ownership relative to the fund size on a pre-seed fund $50 million.

SPEAKER_01: Getting that level of ownership often gets you like 20, 25 companies at least could get you a little more depending on how you deal with reserves and how early you're getting into these companies. And I think that's a good number for folks to have. I think I see funds that are more concentrated.

SPEAKER_146: It does make me a little nervous, but if they, people have a history of investing and you can get comfortable with that level of concentrate. Like I can get comfortable with that level of concentration.

SPEAKER_371: You got a minimum number, minimum number to hit the power law.

SPEAKER_146: You think of companies, you know, it's so interesting. Like, or as we say, less than logos in the logos.

SPEAKER_372: Yeah.

SPEAKER_01: Like less than 20, less than 20 logos, um, makes me uncomfortable, but more is more's more comfortable. As long as I believe the team has the capacity to source pick and, and win and, and work with those companies post-investment.

SPEAKER_00: I'm typically drawn to funds that are working pretty closely, um, with the companies. And so there's a limit on how many companies they can invest in, but then you see any given fund and you're like, wow, look at that.

SPEAKER_01: That's a 20 X fund. And you're like, how'd that happen? Okay. It was actually one big winner and like a couple other solid fund returners. And that's like, that got us to 20 X. And you're like, man, if they just did 32, instead of 33 investments, would they have missed the big, you never know.

SPEAKER_00: It's like this game of just a small number of winners making all the difference. And so I don't think there's a magic number here, but yeah, like less than 20, I'm uncomfortable. More than 40.

SPEAKER_01: I'm typically not doing because it's hard to work closely with those companies, although it is possible. And I'm typically drawn to folks who are working closely with companies. So I'd say it's somewhere in the 20 to 40. For me, it's usually more like 20 to 30 companies, um, on a pre-seed fund. And yeah, like ideally around 50 million or smaller getting, yeah, 7 to 10% ownership on a seed fund. Yeah. Like I'm comfortable with funds that are getting up to like a hundred million dollars at this, um, investing the seeds that they're investing in bigger rounds.

SPEAKER_00: I, hopefully the companies are a little further along and, um, maybe a little less de-risk, a little de-risked. Although I think the data would not necessarily support that. I think actually it's a great risk reward and pre-seed. Like you don't see a lot of death from like pre, like a high mortality rates between like pre-seed and seed. And so that is a part of the reason why I am focusing increasingly on pre-seed funds because of that mortality rate and because like smaller fund size, higher ownership relative to fund size. Like there are a lot of, and there are fewer funds playing at that.

SPEAKER_99: So there are a lot of seed funds. There are a lot fewer folks investing at what I'm thinking of.

SPEAKER_61: Seed funds are generally trying to buy, you know, 10% of the company for two or 3 million bucks. Yeah. Uh, something in that range. Seed funds leading rounds.

SPEAKER_192: Yeah. Seed funds leading rounds or co-leading. Yeah. Like there are folks who say, Hey, we're going to be a $30 million fund.

SPEAKER_01: We're going to get 4% ownership. Um, in seed rounds, you know, we're going to be investing in 15 to 30 million posts or whatever. We're calling a seed round and, um, that strategy can work too. Totally. Uh, but like if you were to say, Hey, Alex, are you interested in a $30 million seed fund targeting 4% ownership or a $50 million pre-seed fund targeting 10% ownership?

SPEAKER_307: I would be drawn just from a fun math perspective to the $50 million pre-seed. Yeah.

SPEAKER_237: And, and I think your point is really well taken.

SPEAKER_32: The difference between a pre-seed and a seed stage company is typically like very little. And sometimes it's like the charisma of the founder able to raise a bigger fund going bolder. Some, you know, uh, founders are like, you know, I'm heads down. I only want to raise 250 K right now. I don't want to raise two or 3 million. I got two developer co-founders. I'm a design UX designer. We don't need that much money. We don't want to take the dilution. And so that's the, that's one of the trends I think is under reported right now is founders being very judicious in how much dilution they allow in their companies. I think this could be one of the big trends of the cycle is founders like not wanting to liquidate, you know, or dilute 30 or 40% in, you know, you know, at their, by their series a and they own 50% of the company and seed investors, pre-seed investors in the series. They own 50%. You're seeing less and less of that. People want to skip rounds.

SPEAKER_74: I, I call them, uh, I, I, I, I see that too.

SPEAKER_107: And I should be careful here because when we're distinguishing between pre-seed and seed, like many funds are just kind of both.

SPEAKER_00: Yeah. Oh, if we could invest in an $8 million post, like we would, it's not that we're only doing that. Like if we see a great company at a $20 million post and we can get the ownership that we think we need to generate fund level returns, like we're going to take that one too. And so I don't mean to be so, um, rigid in how I think about these funds.

SPEAKER_25: Cause I think the reality on the ground is that many funds are a mix of, I guess, precedency, what we're calling precedency. Yeah.

SPEAKER_237: All right. You had a couple of questions for me. We got to wrap this up here, man.

SPEAKER_64: We went long. Yeah. Yeah. Great discussion. Great guests.

SPEAKER_00: Oh no, it's been fun. So one, a few questions for you. One is like, what's the ideal LP for you? Like, how do you pick LPs to the extent that, you know, you're oversubscribed, you're trying to choose, or you meet people and you're like, Hey, this is the ideal LP for you. You meet people and you're like, Hey, this person's not a fit or Hey, that person is a fit. Um, what are you looking for?

SPEAKER_32: I like, there, there seems to be two groups of people who enjoy working with us and that we enjoy working with. There are some who are set it and forget it.

SPEAKER_289: Hey, we, we understand venture. We want to place a bet. We, you know, we understand, you know, you're going to have some funds, you know, fund one and two might overperform. Fund three might underperform. Fund four might be average fund five might break out. We understand the dynamics, uh, and the randomness of what you do. So we're going to be in it for the long haul.

SPEAKER_32: And, uh, yeah, you know, we want like this level of communication, which is typically yearly audits. You know, and then we have another group, which I really enjoy working with, uh, which is the new retail investors who, Hey, you know, I, I've made some seed investments.

SPEAKER_289: I is my first venture fund or my second venture fund. I'm looking to, you know, put 250 K to $5 million into venture funds. And, you know, I, uh, I want to learn.

SPEAKER_18: And yeah, I like looking at the Google sheet that you share with your major LPs, you know, over a million dollar LPs that have all the, you know, companies in it in real time. And I, I kind of like the rush. I like the sweat as we would say in gambling of like seeing the companies you're investing in and being part of the community. Right. So people who really, you know, they seem to fall into those two buckets. Um, the ones we don't like working with are maybe ones who are a little skittish. Maybe they're, you know, overextending themselves. They don't understand the asset category. You know, I've, I've had people in our syndicate who will get really upset at a founder failing and they'll write like an email. I didn't get updates and, you know, uh, why didn't I get updates and now you're failing and you didn't work hard. And I'm like, Hey, reputation wise, like you came into this knowing that 80, 90% of seed stage companies go to zero and, you know, you invested in five and three or four of them went to zero. Isn't that what's supposed to happen here? So, you know, let, let's be gracious and, uh, magnanimous in defeat and victory, right? You gotta be humble in victory. Hey, you know, people ask me about my investments. I'm like, yeah, you know, I got lucky a couple of times. Uh, there's a lot of hard work involved. And I also, you know, some of this luck, you know, and be in the right place at the right time, sliding doors, whatever. Um, and you know, the more you focus on your process and the better you get at your craft, the more I think you quote unquote increase your luck.

SPEAKER_138: Um, yeah.

SPEAKER_32: And so I, yeah, that it's, it's, some people are skittish, you know, and I, I'm, I always encourage them to not go into venture. They should put their money into a mutual fund. They should put them into Vanguard funds and, um, you know, not be in this asset class.

SPEAKER_73: Yeah.

SPEAKER_32: If you want liquidity, if you can't take losses, if you can't take, you know, founders who are, like I said earlier, iconoclastic effervescent would be like a kind way.

SPEAKER_74: Some of them are hard to get along with and the hard to get along with one. Sometimes are the ones who are the most successful and you should not be in this asset class.

SPEAKER_396: It's just going to be way too. Yeah.

SPEAKER_399: No, that all. Yeah. Yeah. That all resonates.

SPEAKER_25: And I'm curious, like many GPs I talk to say that they don't know where they stand with their LPs. They don't get much feedback from them.

SPEAKER_402: No, that's been hard for me. Yeah.

SPEAKER_25: Yeah. I'm curious.

SPEAKER_146: Like if you could ask your LPs questions, like, what would you ask? What do you want to know that you don't know?

SPEAKER_222: Oh, I mean, you know, one thing is like, just tell me why you're passing on the fund in all honesty.

SPEAKER_32: And I think a lot of LPs are like, like VCs. We're passing on the majority of what we see in order to, you know, and, but there's no upside to being honest on why you passed. And so, you know, if you pass because you thought, oh, you know, your fee structure or your carry structure is, you know, uh, I think a little too rich. I would love to hear that piece of feedback. Uh, you know, there was a fund of funds who was like, I just can't, you know, uh, do 25% carry or 30% hurdle because I'm charging 10%. That's 35 and 40. It's just way too much. I can't get it past me. I would love to know that.

SPEAKER_18: And I would love for that person to say, you know, I would put 10 million and I put 5 million in if the fee structure was this, but, you know, Jake, I can't do your fee structure or whatever. Okay, fine. Let's have that discussion. You know, maybe at least like to know. Right. And so there's no feedback loop. I'm trying to give people permission to tell me candidly.

SPEAKER_90: I don't know if they will, but, um, yeah, it's hard to get them to.

SPEAKER_43: I mean, it's funny. It's an, it's an emphasis of mine, like to be clear.

SPEAKER_25: Um, and I really do try to be real with people and tell them like, Hey, like, here's what I love. Like, here's why I'm not going to get there.

SPEAKER_00: And like, if you're open to it, like this is a fund that I'd love to, like, I'd love to see the next fund. Like, I'd love to stay close. I'd love to try to help.

SPEAKER_25: And sometimes if, if I don't think a future fund would be a failure, I don't say that, but it often does result in like staying close to folks because they feel like I was honest.

SPEAKER_18: I mean, I was honest, I had one, yeah, I had one LP because I insisted that she tell me and she was like, we just haven't seen somebody have 200 portfolio companies in a fund and then also be concentrated. I'm like, great. Let me explain to you how we're doing it. I explained it all to her and she was like, great. Still a no from us. But I said, I just want to make sure you're not out there. You know, when you're talking to other LPs or whatever, saying that this is a bad strategy because I am convinced it's a great strategy. Here's why I think you're wrong. I told her why I think she was wrong. You know, you might be right with most folks, but here's why you're wrong in terms of our fund. And here's what I'll show you in the coming years. And she's like, great. If you do show us that, then we would love to be LPs because, you know, just because we haven't seen it before. And we have an investment committee that requires us to, you know, hit these notes doesn't mean it's not going to work. And so I just insisted on getting on the phone and just making sure. Hey, if you disagree with our portfolio and, you know, listen, I, I've have a different, I have a unique idea. And my idea is different than what a lot of people have seen. I believe you can put two or 300 logos into a fund and then reserve 50% of the dollars for the top five names.

SPEAKER_253: And the only reason I know I could do that is because I've, my portfolio before had a, you know, a first fund had 109 names and in four unicorns. Right.

SPEAKER_18: And then we looked at it and I asked myself, did I know Robinhood, calm, uh, superhuman, uh, and density will become unicorns. And I knew three of them definitively would have been unicorns, you know, with enough time to put the investments in.

SPEAKER_32: And if we had, instead of that being a five X fund, which is where it is on paper right now, um, it would have been a 15 or 25 X fund if we had just made those second bets. And so I'm like, you know what, that was my mistake. That was my mistake, not making the second bet on Robinhood, the second bet on calm density and superhuman.

SPEAKER_395: And we had the opportunity to, in every single case, but we didn't reserve the dry powder. And that to this day makes me insane. Like this makes me mental to only have that be a five X fund.

SPEAKER_417: Cause I knew it could have been 15 would have been easy to put another 250 K into those four names.

SPEAKER_73: And if you had put an extra two 50 or 500 K into those names, boom, you know, legendary fund. Yeah.

SPEAKER_419: Yeah. My last question for you is, you know, VC is a really long duration asset class. Mm-hmm

SPEAKER_43: And I think there are plausible arguments to believe that liquidity could come sooner, um, for vintages now than maybe vintages 10 years ago.

SPEAKER_25: Um, and maybe like, it, it won't be such a long wait for LPs and funds these days as it was for LPs. Oh yeah.

SPEAKER_424: Because of the secondary markets and how vibrant the secondary is.

SPEAKER_25: Yeah. Companies, companies grow faster for cheaper. They, they may raise fewer rounds. Yep. Um, secondary opportunities. Um, curious. Yeah. Curious. What you think? Like, do you think 10 years from now?

SPEAKER_43: We'll say like, actually, like it used to be a much longer duration asset class than it is today.

Chamath Palihapitiya: I think secondary. Yeah.

SPEAKER_32: I think if the GPs choose to build a secondary discipline inside their organizations, you could be right. And I have decided to do that. So after we fit, we're going to wrap up our fund. May 1st, uh, has been the date. And so when we wrap up our fund, my plan has always been, uh, to. When we get, you know, whatever to a certain number of investments in fund for to start that process of building the secondary. Group, you know, like deputizing a person. Your job is to look at, at all of the, just talk to the secondary markets every day. And there's so many of them now and just make friends with them, get their phone numbers and say, Hey, you, you know, our names, you know, here's the price. When this hits $10 a share, you know, we, we, we might be inclined to sell a hundred thousand shares and take a million off the table. If you find somebody and they might say, Oh, can we go find somebody for you? I'm like, well, you know, the highest you've gotten is $7 a share. So I'm probably not. But when you consummate a $9, uh, yeah, that's when we would probably want to engage.

SPEAKER_90: So I was reactive to people selling, calling us because, you know, people would get your, get the cap tables of these companies and start calling the seed investors, pre-seed investors. And so now I want to think about actively doing that, or in this case, this is a little controversial, you know, just talking to the other funds that do the series B or C and saying, Hey, you did the series B, you know, the rounds close. We're both on the board of this company. We are looking to pair our investment. If at any point, you know, we don't want to sell our holding, but, you know, we want to get our LP's liquidity. You want it to buy 20% of our position for 200. We have a million shares. You want 200,000 shares. You know, we're, we're kind of at our, uh, target now. And we wouldn't mind paring back our ownership and just see what they say. Um, now that a lot of VCs have not wanted to do that because founders might interpret it as a vote of no confidence, but I think the market's maturing and there's a way to do it, you know, without, uh, having it reflect badly on the company.

SPEAKER_436: Like I'll talk about secondary sales now, you know, way in the review mirror, but I wouldn't talk about them in real time. Right. Yeah.

SPEAKER_43: I mean, two, two things that come to mind there.

SPEAKER_25: One is, you know, I think increasingly like coming out of what happened in 2020, 2021, and partially 2022. Like I think the pressure's on, I think people feel pressure to get liquidity, but I also wonder like whether we're overstating the potential relationship issues with founders. When we talk about pre-seed and seed stage investors selling, it's like selling secondaries and growth stage companies. I actually think those issues can be managed.

SPEAKER_439: And if the investors are close to the founders, it's a process.

SPEAKER_32: I mean, I've had founders explicitly telling me like, we want you to wave your party pursue. Like we want you to not sell in secondary. So we as founders can sell more. Now that's when you've got a real situation where I've had to say to founders, you know, um, I understand, I understand and appreciate that you're asking. I want you to understand and appreciate that. We've told our LP is that we would pair 20% of our position. And in a case where I had to do that, actually, I had to do that in one case. They're like, totally understand.

SPEAKER_442: Um, I was like, I also hear of stories. Oh, go ahead.

SPEAKER_32: No. And I said, Oh, okay. How did that go with the other investors? Oh, four out of five other investors said they would wave and they wouldn't sell. You're the only one who's selling. And I'm like, yeah, it's interesting.

SPEAKER_25: And I've heard others, I've heard of founders who say, uh, who try to block their, in their early investors from selling on the secondary market because they just think their company's worth more than that investor has agreed to sell for. I'm hearing that coming out of the last few years of very high valuations. And that is, uh, I'm wonderful. See more of that.

David Friedberg: I mean, if you were an investor in Figma and you could have gotten out at 10 or 15 billion and they had that sell for 20 billion.

SPEAKER_90: If you had sold at 15 on the way up, you know, in the Adobe figma deal, then at 20 billion cracks. And now who knows when you're going to get liquidity at 10 or half that amount. Yeah.

SPEAKER_102: You probably would have felt great about selling at 16 or 14 or 15, some percentage of your ownership. Right.

SPEAKER_43: Uh, I mean, yeah, the hope is that founders let investors do this, but we'll see. It'll be.

SPEAKER_450: All right, Alex. Well, uh, since you're interviewing me, you get to sign off.

SPEAKER_64: All right. Thanks to everyone for tuning into, uh, this week in startups. I'll see you next time.