Kelli Fontaine, Partner at Cendana Capital.

Hello everyone. We have Kelly on the podcast today. Kelly, how are you doing?

I'm doing very well, thank you for having me.

That's great. I would say maybe a first question, it would be great to hear your story from as early as you would like to tell it and maybe the steps along the way to get to where you are today.

Well, if you want me to go really early, I'm from Knoxville, Tennessee originally. So Knoxville, Tennessee to Colorado Springs. I went to school at Boulder University of Colorado upon graduating. A lot of the students at University of Colorado are from California. So, you know, I thought I'd move to San Francisco where I had a lot of friends going and get a few years of corporate experience and then choose what I do from there. So my first jobs were at Capital Group and then Credit Suisse and the people that I was friends with in San Francisco all were much more passionate about their work and really enjoyed their work more than I was at those firms. And so, you know, I really got the bug. They were really passionate that they could change the world, all the disruption they were seeing. And so for me, I really wanted to have that passion for what I was working on and where I was spending my time. So from there I started at a point of sales analytics company focused on restaurants. This was around the Times Square was launching. So back then it didn't work out. I learned a lot along the way about how hard it is made some, you know, obviously big mistakes along the way. But from there I joined a company called RPX Corporation which was venture backed and IPO'd. And that was a great experience for me really, you know, got to be a generalist and wear every hat and go deep in certain areas and so loved that experience. I known Michael Kem for 10 years and so, you know, I became a mom and was trying to figure out is operating the right thing for me with how many hours I was working. And I joined Michael. I had been to the TS events and was, you know, it brought me back to the early days of San Francisco where when I moved out here, everybody was again passionate about what they're building. Excited. I think somewhere in that timeline, since I've been in San Francisco, it flipped. It was how many dollars have you raised, who's the logos you have as investors, who versus like how cool the product is and how awesome what they're working on is it became more a different focus and a different vibe. And so what I loved about Sandana was every event I went to, I wasn't going to ask People things and I would always come out with new information, new connections, new paths and it's just very collaborative ecosystem. So Michael had built that. Graham joined him in 2014 and you know, I had the opportunity to join and I jumped on it because you know, I knew what the community they had built and I knew that you know, choosing who you're working with is so important. So again back to Tennessee. Had no clue what venture was, had no clue what startups were. And now I'm working at a fund of funds which you know, try explaining that to my parents that we invest in funds that invest in companies. And so you know Sandana Capital, we have over 2 billion under management have been around since the first vintage of fund fund one is 2012. We're investing out of fund five and we focus on pre seed and seed the earliest stages fighting the managers backing precede and seed with the correct portfolio construction. We have a thesis around portfolio construction and ownership and what we were looking for there. We have a thesis on networks and ecosystems and then this, the discernible edges about gps. And so you know, when I joined Sandana, back to my background, you know a point of sales analytics, rpx.

Great.

Created, helped create the actuarial model focused on underwriting. So really focused on our data and built out our data platform. We have two full time people in data now as well.

So yeah, yeah, that's, that's super interesting. So how do you think your operating experience has helped like when it comes to LP investing and like looking and evaluating fund managers?

I think every fund is a company in itself, right. And so if you're starting a company for it to be scalable past a certain fund one. Right. You know, scaling from angel checks to just making investments, you have to have all the right operations in place, the right structure, the right processes and procedures to be able to scale the business. Support companies still source new investments and so I think being able to have an eye into like is a manager capable? Are they better angel investor? Are they actually an operator that can operate a fund plus investor? I think you know being an investor is the number one thing that we look for. But being able to scale that into an actual business is a separate thing. I think you know, actually being on the ground and knowing what would have been helpful for us as a, as me as a founder even you know, at a later stage startup, what would have been helpful to us? What personalities would have worked well with the founders and the executive team there? I think actually having the hands on experience of the companies and understanding where people are investing is helpful to actually have had that experience. It also is a different network. Right. And I think one thing that is really important with LPs is that you're really getting a true reference when you talk to founders and people that have worked with the partner, the person you're referencing. And I think, you know, if you're fully removed from the ecosystem, you're not as likely to get a truthful reference versus hey, I actually worked with your friend at the startup, you know who I am, because I've actually worked with you. So I think it's being one step closer ingrained in the ecosystem gives you a lot more connectivity to people that you want to use as references and give you a lot more honest insight from founders and people who have worked with the partners and investors you're referencing because you have that connectivity and the trust there.

Yeah. And speaking about maybe investment process or the structure of how your team invests, can you walk us through how it works from sourcing or discovering fund managers and then how do you sort of conduct your due diligence and then finally make the decision?

Yeah, so sourcing, you know, I started once the Flywheel was spinning. So sourcing has never been an issue because we only focus on pre seed and seed, I think everybody knows us, we get referrals from other endowments, our own LPs, our own GPS founders, you know, so we really, I would say the, the bulk of the time is spent with people that are warm introductions. We have a 20 person advisory board. So you know, we make sure that the ecosystem of Flywheel is fully spinning. Again, we do skipping ahead the way we due diligence is a lot of time referencing. And so, you know, we've talked to say 40 founders per fund. Right. And so all of these people then know what we do, who we are and hopefully if they are talking to somebody who they really believe in, they would suggest talking to us. And so, you know, I think the top of the funnel is really spinning. And so again, our LPs are great source of deal flow for this as well. We're very collaborative with our LPs and the way it works is that, you know, we get introductions, we'll do an intro call or we'll look at the deck. If it's not a structural fit for us, then it's, you know, it's a pass because it we have a thesis around portfolio construction. We're not looking for something a fund that investment, initial investment dollars are going to the series A or beyond. Right. We're looking for preced seed. That's where the dollars are deployed. So it's we screen the ones that are in our past structurally for us and then you know, we'll do an intro call. If it's something that we find anything differentiated about or that is unique, then we'll dig in. And so that means other team members will start talking to them. We start back channel referencing, Talking to our GPs that have worked with them, talking to our LPs, figuring out, you know, who we know that knows them and what their sense is and get a real, you know, is this worth spending time on initial screen and then you know, it moves through the process. The majority of our time is looking the specific sector. We make sure we've talked to all the other funds in this sector that they're focused on. If it's a geo, we make sure that we know all the other funds in the geo. So we have a good benchmark, we have our database which has, we can benchmark them against our own portfolio, their own investments. And we start digging into their model, you know, and understanding the thesis of the companies and how they were thinking about investments. It's really understanding how the person thinks if they have a differentiated view, if there's something different about the way they're sourcing about the way they're investing, like what is it that makes them special. And we dig into that and really understand their thinking around investing to understand if they're a good investor, how are they thinking about things. And so again referencing and understanding their thinking and spending time with them specifically are, you know, the bulk of our time and diligence.

Yeah. And that entire process or on average how long is it maybe from the first cold email or from the first K kick off all the way to investment. Curious from a LP perspective, it, it really ranges.

Our last core investment, our most recent core investment, that's new to the portfolio, you know, it was a year but the pre marketing for the fund started, you know, a year before we had the introduction from one of our gps made the introduction, that's Alt Capital. And so we started spending time with Jack, you know, over the course of the year that he was thinking about his next fund so we really got to know him. Another fund that we just verbally committed to, you know, we talked to two for fun one back in 2020. It wasn't a fit then we stayed in touch, we got the updates over time. So it really is a relationship game for LPs. We're not investing in a company and you have a product to show and it's a buy in. It's. You're investing in a person and you have to trust their judgment and understand their thought process. And so it does take time. It's, it's never, I don't think it's ever a quick like three months we'll make an investment. It typically is a longer relationship build process maybe.

Now talking about portfolio construction, I think you talked about this earlier but what are some best practices when it comes to like portfolio construction? How do you mitigate risk when you're investing in all sorts of managers across pre seed and seed our portfolio construction or their portfolio construction to mitigate like your portfolio construction. Like how do you mitigate risk within your own fund?

Within our own fund, you know we're, we look for managers who get correct ownership for their fund size. And so what that means is there's a ratio of fund size to ownership that we're looking for. So you know, if you are $50 million seed fund, the minimum ownership at entry you should be getting is 5%. And so it just really is so that a company, if you do ventures of power law game so hopefully you catch an outlier and that company can be meaningful. We bias towards small funds so that they're not even huge outliers can return a meaningful portion of the capital. And so we think that really mitigates risk. If you have the right portfolio construction on a small fund, you don't need an absolute outlier to return meaningful capital to your fund. And then the way we look at it at our own fund level is that we need to be a large percentage of the fund. Right? So if we're a large percentage, have a concentrated portfolio of managers, the look through ownership of a company, a company can move the needle on our fund of funds. But you know, we're concentrated, high conviction investors. We view ourselves as the lead lp, we're an anchor check. And by the way that's a separate conversation but we do take that very seriously where again we, we do monthly calls with our managers, we have a slack channel with all of them. We are on a texting basis. We want to be their first call. We view ourselves as a lead vc, we view theirselves as a lead investor and we want to be helpful. But how that plays out in the portfolio again is that if we have high conviction, the ownership look through of the companies works well. But you're diversified over time. We're investing over two and a half to three years. We're capturing, you know, three to four vintage years of funds and then the underlying companies, there's six to seven vintage years of companies in the funds. And so just by nature then, you know, we mitigate risk because we're diversified by time, we're diversified by geo, we're diversified by sector. And so, you know, we try to not be prescriptive about sectors. Like, we're not like, oh, we need fintech, we're looking for best gp, we're looking for the best investors. And so we're not trying to construct a portfolio by sector geo, we're looking for the best gp. But we do look at if, hey, if we already have a manager or concentration, we want something accretive to the portfolio. So, so we do look at the portfolio that way holistically and make sure that what we're adding is going to be accretive to the exposure that the portfolio has.

And I think you're also mentioning, like, beyond the financial investment, you also hop on calls with fund managers you invest in. So what is really the value add since you're the anchor lp, how do you help with your network or what your team offers?

I mean, from day one, once we make a commitment, it's work helpful in the fundraising process for them, it's introducing them to RLPs. Many of RLPs use us as a platform investment where they make an investment in us and then they're interested in directly investing in our underlying funds. We share our references and investment work with them. We hop on reference calls and talk to any potential LP that is looking at the fund. So from day one, we try to really help with the fundraising process. We give feedback of who we know has been a great partner to our managers, as, you know, co lps and funds. So it's really helping just from day one that we start, you know, outside of that, it's if they're thinking about adding people to the team, we know other managers who have, we can make sure that they're talking to the right managers. We can give advice on what we've seen gone right and what we've seen gone wrong. And, you know, I think as you get into this again, you'll see and have things happen that you have not experienced. Before a company is sold early, how much do you recycle of that capital and how much you distribute? How do you think about those things? A company has term sheets and you're thinking about, you know, what pro rata to do, how you should think about it, how much should you put in an SPV if you get super pro rata how much should the fund get? So it's really all these dynamics where the thought partner on questions they've had that they've never had to address before. Where we've had the experience obviously working with you know, all of our managers typically we've seen everything now so helping them think through these things and being a thought partner to them on you know, building the firm market intel and data. So yeah, know how. And then we also have strategic LPs. This is the newest fund that we brought in Strategic lp. So we have Carney, the management consulting firm we have at the latest stages General Atlantic. Then we have Tiger and Sequoia as investors we have Allianz. And so through our strategic LPs and our own LP base there's a potential for us to be able to help the underlying companies through introductions. And so you know we try to help however we can. You know this next Friday will be our monthly noon zoom with all of our gps. Maritech, who we think is the gold standard of data will be presenting on how they think about data for the underlying companies and how they capture the data and know what our manager should be thinking about for their own data consumption from of the, from the company. So we, you know, we really try to take it as how we can help the managers for sure.

Does your team invest in first time fund managers and if so does it differ from investing in maybe an experienced fund manager? How many like first time fund managers do you potentially think of investing in?

We think first time fund managers are, you know, it's driven the alpha in our portfolio to be honest and we think that is the best place to be investing. Obviously it's the hardest because you either have an angel track record that's light and they're scaling check size or they're spinning out of a fund and hey, how much did that business card, how much did that firm brand matter and can you still have the access and deal flow and win rate that you did? So I think first time funds are the hardest but when you do it again, if you do it, if you could do it well it, it is the source of alpha because we have several thoughts on this. You know I will say the majority of our capital, the majority of our relationships have start. Sorry, the majority of our relationships have started with fun ones. I think it's over 60% and I think maybe higher than that because close to 90% have, have been fun one or two that we've started the relationship with. And so you know, fun ones they're not spending their time. Well, number one, it's the smallest fund they'll have. Right. And so going back fund size, a small fund, it's much easier to have a higher multiple, to multiply capital. And so that's number one. But there's a lot of other reasons. You know, there's, hey, you don't have an entire portfolio of founders that you're supporting. You can spend the majority of your time sourcing. You have a flexible check size where VCs or whole, you know, VCs across the spectrum will bring you into deals because your check size is flexible, that sourcing mechanism will go away once you scale and have ownership targets. So your bandwidth, your capability of which deals you're getting in the fund size, you know, the lowest hanging fruit in your network. So if you're starting a fund, typically, you know, there's a reason, there's an inflection point in your career and it's all of those relationships that you built along the way and you activate them right by fund two, three, you have to find, you have to build something else to keep the flywheel spinning for sourcing. So it'll be different deal flow you have. And so I do think there's a lot of advantages to fund 1, 2 and 3. You know, you're waiting for the proof points. You have proof points. And I do think there's persistence of returns and venture. Obviously the return output changes when the fund size scales, but I do think the alpha truly lies with the funds.

One and twos, I'd say maybe. Last question, looking ahead, how do you see first LP venture investing for 2024 and beyond? Maybe as a general question and then more specific, how do you see Sandana Capital as, as a platform evolving?

Yeah, LP investing in 2024, you know, you, I think the largest allocators to venture have an issue of there's no distributions coming back and the way they model their own portfolio or the model their own endowments, foundations, et cetera, they need those commitment, the money coming back to fund, the commitments they're making, that's how their models are set up. And that's not happening. So just in general, you know, there's a slowdown. But I do think, you know, there's two things happening. Either, hey, we're going to the platform funds because they've shown persistence of returns. We want the logos, we want the safe bets. But I do think, you know, I've been with Sandana for over six years. Michael started this in 2010. Their first vintage is 2012, he was evangelizing seed like nobody wanted to invest in seed. It was this risky space. It took a long time to evangelize the space. And why, you know, seed and pre seed are so attractive, I think people have gotten the memo. I think people know that emerging managers and pre seed and seed is truly where alpha is. And so we're seeing a lot of LPs develop their own way or a lot of other funded funds trying to start and do this as well of how to access this other part of the market. And so I think there's more attention focused than ever before. We'll see what the dollars that means for dollar count at the end of the day in 2024, again because of the environment. But I do know, I mean the amount of attention, content, blogs, focus, funds being stood up to focus on this. And even internally, I think the next generation of foundations and endowments, they want a track record and the way you can do it is finding the next, you know, big brand. And so they, they, you know, they're more inclined to invest in funds, ones, twos, threes and focus on the earlier stages. The other question was about Sandana. You know, I think we've remained disciplined. We look at pre seed and seed and that's our specialty and that's what we're going to focus on. You know what that looks like is what we now have data look back what's worked really well in the portfolio and it has been the funds one through three. So that's a bigger focus for us. Pre seed has done well for us. I know that the nomenclature has somewhat shifted where we just kind of change the names of rounds. Pre seed rounds look like seed rounds did when Sandana started. So you know, calling seeds look like series A's did when Sandana started. So our focus is more probably towards pre seeds because that is again, the nomenclature shifted but our focus has not. And so, you know, I think we'll remain dedicated to the earliest stages and you know, that's, that's the focus. We have spent more time on data. We hire, we have two data, full time data. So a director of data and a data analyst now. So that's been a change internally and so I think we'll continue to have a focus on, you know, how we build and stay ahead to be the leader of focusing on the space.

That's, that's really interesting, Kelly. I'm sure listeners have benefited greatly from this 20 minute podcast. Thank you again for being on the show.

Thank you, Justin.