S6E7: David Yuan, Founder and General Partner of Tidemark Capital, Discusses the Business of Launching a Venture Fund [LIVE at the EVCA Summit]

Welcome to The Room Podcast. I'm Claudia Laurie, co-CEO and founder of Pryve.

And I'm Madison McIlwain, partner of seed stage investments at Defy VC. Claudia and I are friends first and and business partners second. Living in the heart of Silicon Valley, we know what it's like to be on the inside of innovation, having worked at flagship companies like Gap Inc. and Uber. Now in our roles as a founder and a funder, we're changing the face of technology through our mission to bring more people into the room where it happens.

With past guests such as Shikshir Mehrotra of Coda, Michelle Zatlin of Cloudflare, and Grammy Award-winning Ciara, our past guests' companies are currently valued at over $73 billion. If you're a first-time founder or emerging funder who wants tactical insights into starting a company, venture capital funding, hiring, and more, this is the podcast for you.

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What's next?

What if?

Now what?

Silicon Valley Bank understands these questions can keep founders up at night like Claudia. For over 35 years, Silicon Valley Bank has helped high-growth companies through scalable financial solutions, plus insights and expertise that many other banks just can't, which could be why 50% of US-based venture-backed tech and life science companies bank with SVB. Learn more at svb.com/next. Silicon Valley Bank, built for what's next.

Cooley is a global law firm built around startups and venture capital. Since forming the first institutional venture fund in Silicon Valley, Cooley has formed more venture capital funds than any other law firm in the world. The firm has 60+ years working with VCs, helping form managed funds, make investments, and to handle the myriad of issues that arise through a fund's lifetime. Learn more about the firm at cooley.com and also cooleygo.com, Cooley's award-winning free legal resource for startups. Mads, so great to chat.

Thank you so much. How are you, Claude?

Good. It's been a hectic time as a founder. I think the markets are crazy, but I'm sure that is not just me as a founder feeling that, but also in venture. So it's definitely a point of time for the ages.

Yes, I totally agree. It is a crazy time and I'm really looking forward to reflecting on it more with you as we wrap up this season. This is our second to last conversation that we're having here on the podcast, and most of the audio that we're sharing today, we actually recorded back in April, which was starting to be a tumultuous time, but I don't think that it was anywhere near what it is today. And I'm looking forward to reflecting more from our many seasoned guests over the past few seasons on some of the wisdom that they've shared and really chronicled over people who've experienced past downturns, or perhaps maybe are experiencing their first. What are some lessons that we can all take away? So definitely people should be looking out for some more content on how to be thinking about either starting a company in a downturn or how they're thinking about working alongside their investors to navigate these tricky times.

Certainly. And I think one piece of advice that resonated with me and has been my mantra during these times is that when you are driving a Formula 1 race, if you're not the top driver, then your best opportunity to overtake is when it's raining. Sending that sentiment out to all of our fellow founders listening to this pod today.

That's an excellent insight into how to have an awesome mindset right now. I love that.

Thank you. Thank you. Can't say I came up with it on my own, but Mads, you were recently at a conference just a few weeks back and it was really focused on venture capitalists, fund formation, just everything in the world of venture. So would love to learn a little bit more about that conference that you were in. Absolutely.

This is a unique episode, so I'm really delighted to bring an inside view into a conference that I got the chance to both go to and speak at, as Claudia alluded to, a few months ago. Emerging Venture Capitalists Association, EVCA, is a community, a club that I'm a part of. I joined actually when I was an associate myself. A friend had referred me and I instantly loved the community that was being cultivated, particularly around other young people who were either wanting to break into venture or had just broken in and needed some wisdom and guidance and some sounding boards also in the industry. And so that community has grown a lot. I think the Slack channel has totally popped off and they hosted their first event actually since starting since COVID but it was much larger scale, hundreds of people, and it was really fun to be in a room with other like-minded young individuals in the venture space. But what I'm excited about for today is to share some of the inside scoop from that conference for all of our aspiring VCs who listen in, who maybe didn't get the chance to go to that event.

That makes a lot of sense. And you were leading a fireside chat with renowned investor Dave Yuan, where he speaks a little bit about his career, his investing philosophy, creating a fund, being a founder of a fund. And we have quite a few of those on the pod. So I'm curious to see what your insights were from him compared to some of the other conversations we've had on the pod.

It was a real pleasure to get to chat with Dave. As you alluded to, he is now founding partner of Tidemark Capital, and Tidemark is a growth equity firm that's raised over $500 million to invest in growth stage startups. He actually had spent a number of years at Technology Crossover Ventures, TCV, which is a super well-known late stage investor. And that's really where he established his foundation as an investor and has now gone on to be an entrepreneur in his own right. As someone who founded a fund, but as you said, Clauds, this is a topic we've talked a lot about. We sat down with Jesse Draper, founder of Halogen, uh, Rachel Goddard, who is a fund formation lawyer at Cooley. And I think Dave's advice was relatively consistent with what we've heard from others, which was around having a unique perspective on the market and how you're going to really sell yourself both to limited partners, your investors, as well as your key stakeholders who are your entrepreneurs. And I was really impressed with his perspective on, first of all, what's Tidemark's differentiation, and then also advice for any aspiring fund founders on how to think about positioning yourself.

It's super interesting from the founder's perspective because what I've been noticing, a lot of former founders end up actually becoming either investors or founders of their own fund. And I think a lot of people are like, oh, you know, is it just because founders are looking for their next gig in the same space? But I realize that there's just so many transferable skills and the core of being a good fund founder is often very similar to being a good founder from the perspective of pitching and storytelling and having a thesis and executing against it. Very different implementation and very different tactical differentiation around the two careers, but I think the The farther I progress in my founder journey and the more that I meet other investors, the stronger the tie is. Going through fundraising, the best thing that you can figure out as a founder is how do you effectively tell a story in your own voice that is authentic, and how do you clearly communicate the thesis that you have around the market you're disrupting? And what I'm starting to hear from you, Mads, is that's exactly the same thing if you are an investor pitching to LPs.

The three-sided marketplace of being a founder is really similar to being someone who has started a fund. And what I mean by that is you have constituents, Claudia, as a CEO, which are your investors, also DeFi, other investors, and then you have your customers, right? And you're always having to navigate this founder, this team, this, oh my gosh, internal private things happening to the external investors and the external customers. That dynamic is actually really similar to what we experience on the GP side, which is we have our stakeholders who are basically our customers, which are our investments, you. We don't have a ton of visibility into what's going on in their company on a day-to-day basis, but at the end of the day, we're hopefully helpful and responsible for their success. Then, as you said, on the other side, there's our LPs, our investors. Of course, everyone has bosses. And so this dynamic of having to really be in the middle of a couple different stakeholders, really a three-sided marketplace, is incredibly similar, but is really unique, right? If you're an individual contributor at Google or at Meta, you don't have stakeholders on either side. You have a boss, and that's great. And that boss is hopefully responsible for your wellbeing, but it's a unique dynamic. So to your point, it's oftentimes that founders turn into investors.

I'm really excited to hear more of Dave's insights and the conversation that you had. So I'm ready to hop into it.

I am too. Let's get listening. Hi everyone. My name is Madison McIlwain. I'm a partner at Defy VC as well as the host of The Room podcast. Thanks SVB and EVCA for having both me and Dave here today. Dave really needs no introduction, but I'm going to go ahead and give you one anyway. Dave has been investing for over 20 years. Most notably, he was at Technology Crossover Ventures for 15 years, investing in 25+ companies. Heard that there was 12 IPOs you supported on there and over 8 acquisitions. So truly a titan of industry and venture. Most recently started TideMark Capital, where he is investing out of his first fund. He's been on the Forbes MIDA list twice. And I heard a rumor that you're more comfortable at the ocean than the country club. Can you back that up?

That is right. Yes, I, I'm an introvert. I like to be in cold water.

Thanks for coming out of your comfort zone today with us. Yes. And sitting down to talk about the journey of starting a fund after 15 years at TCV. I know we could spend the whole time talking about what you've done previously, but we're gonna focus on Tidemark, a $575 million growth equity fund in which you're both the founder and general partner. Can you just share a bit more about the origin story?

First of all, really excited to be here today. I started investing 20 years ago and when dinosaurs roamed the earth and At that time, there weren't organizations like this, so we kind of had to figure it out ourselves. So I'm really excited to try and be helpful and share what I've learned. I've raised one fund, but it was a pretty intense experience. We did learn a lot. So at TCV, I was a GP for 15, 16 years, and it was a great experience. I learned a lot. I really loved a lot of the people. Just at the end of the day, at a certain point in time, you realize it's not yours, it's not your life's work. And at 44, I decided to try something different. What I came to realize is I really love the job of investing, working with partners, working with really smart people, the chase, the negotiation, help building the companies. But I wanted to do it in a different format. I wanted to do it in a group where it's a small group of highly engaged entrepreneurial investors, small rather than big. I wanted to do it in a way that we showed up with more than capital, and there's a real personal element to it. I wanted to work with people that I like, trusted, and respected and admired. When you've done this for a while, you'll realize that the money's the money. You'll be successful. I wanted to build something that was aligned to how I thought we should win and then do it in a way and with people that I really enjoyed.

Absolutely. People are the cornerstone of all of our businesses, whether it be entrepreneurs, partners around the table, or limited partners who, when starting a fund, can become one of the most important initial yeses you're going to hear. Having this be your first fund, how did you get started? On those LP relationships for saying, hey, I'm gonna, I'm gonna start this?

I was at TCV for 15 years, but I really wasn't part of the fundraising processes. We had a great head of IR, so I had to start from ground zero. The net of it is it's a sales process like any fundraising process, whether you're a CEO or whether you're a GP, whatever it is, it's a fundraising process and sales process. And so what does that mean? It means volume, it means speed, it means process, it means a really tight story. I was doing 5 meetings a day for 4 months to raise the fund. I knew exactly how to qualify each LP in the first 20 minutes. There's a cadence to how I wanted to take the conversation. And I was talking to Adam about this earlier. There is something about the speed and the messaging that you're trying to create scarcity where scarcity doesn't exist. When I was raising the fund, it was like me and a PowerPoint and some ideas. But that's the high level. I think the second piece is you're looking for some early adopters, just like a CEO with an early-stage company is looking for some seed funders. And you'll be surprised at who leans in and who doesn't. I was blown away by some of my old colleagues at TCV. Our old CFO taught me how to get our books together. Our old head of IR introduced us to tons of people, sat on 3 terrible pitch meetings with me. You're trying to get the seed group of initial momentum, and then you just got to go hard. You got to back it up. And any moment you have to really just just doubled down to the point where momentum's building momentum. And I think the first $30K raise was super fast because it was all friends. And then the next, call it $50K, was really tough. The last $100K was like in 2 days. It's just like being an early-stage entrepreneur.

I was going to say, it gives us a lot more empathy for the entrepreneurs.

Oh, for sure. For sure.

One thing that you definitely had going for you when going out for your fundraise was an incredible track record. For many of us in the room, if we ever had aspirations of starting a fund, that is something that we should be thinking about today. How do you think about track record as it relates to getting to sell yourself essentially as the founder of Tidemark?

Your track record is your product, your fundraising deck. You should start with your track record. That's what they're there for. They want to make money. And there's maybe two things I'd highlight from a structural standpoint and then two other super tricky things that you just have to negotiate. The first is when LPs look at your track record, they're really looking for two sets of things. The first is real attribution because success has a lot of fathers or mothers, right?

Yeah.

So what they're really looking for is who sourced the deal, who won the deal, who made the investment decision, who sat on the board, and who added value. When you start thinking about presenting your body of work, those are the questions you need to answer. And the more explicit you are, the better, right? And there's some considerations here which I'll get into. Second. The second is up until this year, for the last 2 or 3 years, everybody's been a genius, right? The world has gone up into the right, multiples have 2 to 3x, and LP— the smart LPs know that. And so what they're trying to understand is what's beta and what's alpha. And so you really need to establish these LPs pretty early on that, hey, this isn't just capital compounding on other capital as this massive rush comes in. These are great companies that we've backed. We had proprietary access. People are really focused on that. We added value and ultimately these companies grew really fast and we made strong risk-adjusted returns.

You've had some focus themes that you've been spending time on in your career. You recently published a paper on vertical and SMB SaaS. It's a really great guide. I'd recommend everyone read it and send it to your founders for sure. And it's clearly a sweet spot for you having invested in Toast Host, LegalZoom, and a host of other companies that fit this market. How would you think about, as an emerging manager, crafting that mandate and then ultimately differentiation when pitching your investment thesis to your LPs?

I think differentiation is not that dissimilar to how you all are trying to differentiate to CEOs. We were talking about this earlier, right? You're a people person. You like to interview people. I'm an introvert. I dig small business, I dig vertical SaaS, and I like to write. So that was my way of getting my ideas out there. It's a passion project of mine. And I think what you'll see from Tidemark is we'll lead with content and then community. That's the stack we'll build in multiple different end markets. But as it relates to building out differentiation with LPs, at the end of the day, like after track record, after, hey, this person can make money, how can we project forward and know that they'll win? And they'll win hearts and minds with CEOs. When you break it down a little bit, again, it's exactly the same in terms of a position with a CEO at the highest levels, it all sounds the same. Like, I'm a smart person, people like me, I know a lot about your industry, I can add a lot of value. And so the key thing with LPs and obviously CEOs is to show, not tell. And we've chosen a certain formula for that. Even if you don't raise a fund, I think as investors, as younger investors, you should think about who are you as a product. It's not only the social proof in the community that you're part of, it's not only the content, the value add, but even just your passions and who you are as an individual. Like, the thing about More Comfortable in Oceans Than in a Country Club is really me expressing myself and giving surface area about who I am as a person so that entrepreneurs can engage with me in a different way. I spent a lot of time with founders like all of you guys, a lot of founders are friends, and it's some extent investors come across all the same. Like, to pick a stereotype, some dude in a blue blazer is like, hey, I love your business, what's your gross margin? And so what you're trying to do both as a firm and as an individual is put yourself out there in a super authentic way. And that— yeah, that just leads to goodness over time.

I totally agree. Authenticity is often key, especially where there's a lot of overinflation. In that vein of authenticity and really people who were there, limited partners are just one leg of the stool, so to speak, in starting any fund. From day one, you have to have people around you on the team who are supportive. I know when We went to start Defy. Our first call was to our CFO, who was fund controller at General Catalyst at the time, and we knew we wanted her on day one. How about for you when you were starting Tidemark? Who was that first person you called?

The first person is our interim COO, my wife.

You don't have to call her, you just yell downstairs.

We actually sit in the same room.

Perfect. Even better.

Let me give you her background and then this will be a little bit more logical. She was a consultant at Bain for 10 years, then was a senior executive into a corp dev and corp strat. And then she was a COO of a couple startups. I remember it was one of these things like I talked about momentum and speed and of course I totally overcommitted. I had 5 meetings the next morning, we're sitting in the same room and our slides sucked. And at that point, that's all we had. So it was pretty important. And I was like, I just can't do this. And she's like, let me do that. I love to do this. And she just banged out. And today she's running marketing. She's hired our VP of finance. She figured out how to become a RIA, which is no trivial task. Without Grace, there would be no Tidemark. I'd say more generally, as employees, what you don't realize is you have this amazing group of operators around you that make your job easier, that help you win. And even more than that, if you excel from an operations and execution standpoint as a firm, you will be that much faster, and you will move that much more quickly and that much more effectively. We're super lucky to have 4 full-time folks on the operating staff. They're all really committed, really bright. They work harder than I do, and it's awesome. That's one thing that you miss as an employee in a bigger firm.

Absolutely. You closed Tidemark in 2021 with your first fund. Again, congratulations.

Thank you.

Very exciting. It was an interesting year, 2021. Cooley helped 491 funds close across $61 billion in Coulee's billables alone. So just taking that into perspective about how many other law firms there are and how much other capital is being raised, it was a busy year.

Yeah.

Going into that, you couldn't have known it was going to be one of probably the most committed years of capital ever in the history of venture capital. What is one thing you wish you had known going into that process?

I think it goes down to my naivete about being a first-time So first of all, recognize the market, right? In some ways it was hard because all these GPs were coming back and LPs were fully deployed and they didn't have time to meet with some new dude with just a PowerPoint, but people were flush and they were excited about technology. So we were very lucky in terms of timing. The thing that would confuse me is when I talked to LPs, they all have very strong views. They all have very strong views of how to do it, how to invest and all this other stuff. And one LP would say, oh, you gotta go left. The other LP would say, you gotta go right. I was like really confused by this. And the CIO of one of our LPs at TCV that I got to know a little bit, she just pulled me aside and she's like, "Look, Dave, we want you to be a CEO. We want you to go out there, tell us how you view the market, tell us how you're gonna go win in that market, and tell us the team and everything around it to go win." And so I think the thing that, maybe two observations on that, just like investors are looking for great CEOs and management teams, you question them, you think through strategy, but at the end of the day, they are the driver and you advocate for them. Support them with your capital and your time and your network and whatever. The good LPs are looking— particularly experienced LPs are looking for you to step up and say, this is this crazy world of technology. This is a crazy world of growth. Here's the segment that makes the most sense. Here's the thing. This is how I'm going to win. This is what I'm building to go win. And I'm going to go do it. That's what LPs are actually looking for. The other thing that was really interesting is I tried to really get to know the LPs on a personal level, and what I found was a really amazing group of people. One of our LPs helped me recruit a data science executive. One of the LPs obviously pulled me aside and like, hey dude, you're totally missing this. This is how you do it. Thank you. Thank you, Nicole. Another one jumped in really early. I got to know a family. We were talking about my kids and whether they'd want to get into the venture business. This is a guy who founded one of the largest private equity firms in the world. He's got two amazing children who are in the business who are killer investors themselves. And I just got to see like this guy had built the life that I aspire to, which is he loves what he's doing. He's built this firm that's great. And he's got this amazing family that all gets to share this thing. And I don't know if Andrew and Caroline will want to invest, who knows, but it was just really neat to get to know that family. And they've been incredible LPs. The other piece to it is just like a CEO should really understand his or her investing partners, get to know your, LPs, they're going to step up for you in ways that you may be surprised and can be a great asset to the firm.

They're true partners in that, and it's great to hear how you've gotten to know some of them on a personal level, and hopefully they're in Tidemark for the long haul for years to come. As we look out on this awesome group of people who are young emerging venture capitalists, I'm guessing there's a few more who are interested in starting a fund someday. And we're in an interesting era, right, where there's rolling funds, solo GPs, and like we just said, incredible amounts of capital going into the market. But traditional LP dollars are still pretty limited to a select few of individuals who have the opportunity to start even a fund like yours. How do you think this landscape is going to change in the next 5 years?

I think it will change a lot for really 2 reasons. But let's first start at the job to be done here, right? LPs These are making a blind pool commitment. And if you think about what that is, it's a big step of faith. These are institutions that support amazing causes. They support financial aid, they support cancer research, and they're giving you discretion on how to invest their money for 10 years plus.

Yeah.

With really very few checks and balances. So it is natural that trust is going to be driven by highly referenced, highly affinity-based based models. And so there's a big element of judgment associated with that. The flip side of judgment, the really dangerous aspect is judgment and bias are two sides of the same coin. I feel fortunate that I'm not like hobnobbing with a bunch of LPs and such. And that's not my community. But I was fortunate to work with some great CEOs and some other great GPs that could advocate for me. I feel very fortunate in that way. To be clear, there are some LPs that are being super progressive about stepping beyond the easy and really trying to invest in other emerging managers. I think this is going to change a lot. And you see like how industry patterns work, right? In technology, it's usually the gaming companies that come up with something crazy on the customer acquisition side, then consumer companies follow, then SMB software companies tend to follow, and then 10 years later enterprise gets it going. And Brian, your partner at Defy, is very good at understanding that mechanism. Likewise, if you think about data and automation, companies are obviously all over this, and we know that GPs increasingly so are using software and data and automation, and increasingly so, I think over the next 5 years, LPs will as well. They'll use data, automation, and signals. When we talk about track record, if you look hard enough, it's pretty damn easy to know who did what. If you look at press releases, there's usually one person joining the board after an investment. There's usually some sort of sense of what the valuation is and what the valuation exit is, and that's That's pretty easy. And so, as an LP, you're going to do your work in terms of primary work, but there's a lot of external signals. If you think about right to win and social proof and community, there's some great solo GPs that are building up effective media businesses and community that show that they're really impactful. And the smart LPs are going to take those social signals. That's the real equalizer is more and more of the stuff is going to become digitized, and as a result, more transparent. Transparent. There's some really smart OPs out there, and they're starting to take these signals and make the use of it. So there's always going to be a trust element, and there should always be a trust element, but it's going to open up quite a bit.

Thank you so much for sharing that perspective. I'm excited for a future where there's a trust component to the multi-millions or billions of capital that are being deployed, but at the same time, equal opportunity for people who might have the chance to say, hey, look at my track record, look at numbers, you can see I will I'm going to return this capital 3 to 10x for your incredible organization, and you should back me because of it. One final question to wrap up our time today. Thank you so much, Dave. And this is a question I love to ask on my podcast to every guest we have, which is an important question, I believe. Who is a woman in your life that has had a profound impact on you and your career?

For a whole bunch of reasons, I'm going to actually name two. I talked about Grace. Without her, there would be no TideMark, and more importantly, without her, there'd be no family, which is the true life's work. And she pushes me to be a better person, which I struggle with at times. And then this is going to sound very traditional, but my mom came over here on a scholarship, classic immigrant story, became a biochemist, actually was at the School of Public Health for Harvard. I think more importantly, anytime there was a need, she was there. Even when I was an adult, I broke my neck when I was 26 playing rugby, of all things, and she flew out to San Francisco for 4 months and drove me to my private equity job and picked me up.

Wow.

And then the thing that's crazy is in a different world, she would be probably one of the most successful hedge fund investors. Her association muscle is insane. I'll go over and she lives now in the Bay Area now, and I'll say hello and she'll ask me about my latest deal and she'll be on it. She'll know that Toast kind of is similar to SiteMinder, which is kind of similar to CCC. And it's insane. So she's been an awesome role model and she is It's amazing when someone's just in your corner all the time.

We'll have to have her upstage next year with us.

She's a better speaker than I am.

Well, thank you so much, Dave, for joining us here today. Thank you guys all. And thank you SVB and EBCA for having us.

Awesome. Thank you.

Thank you so much for joining us today on The Room Podcast. If you want more from The Room every week, subscribe to our newsletter at theroompodcast.com/newsletter. We'll be back next week with an all-new episode, inspirational guest, and our season 6 finale. Tuesday, July 5th, 10:00 AM Eastern, 7:00 AM Pacific. See you in the room. Thank you so much for joining us today on The Room Podcast. If you want more from The Room every week, subscribe to our newsletter at theroompodcast.com/newsletter. We'll be back next week with an all-new episode, inspirational guest, and our Season 6 finale. Tuesday, July 5th, 10:00 AM Eastern, 7:00 AM Pacific. See you in the room. Support for The Room comes from Silicon Valley Bank. Silicon Valley Bank understands these questions can keep founders up at night like Claudia. For over 35 years, Silicon Valley Bank has helped high-growth companies through scalable financial solutions, plus insights and expertise that many other banks just can't, which could be why 50% of US-based venture-backed tech and life science companies bank with SVB. Learn more at svb.com/next. Silicon Valley Bank, built for what's next.

Cooley is a global law firm built around startups and venture capital. The firm has been devoted to entrepreneurs and investors, partnering with both to transform breakthrough through ideas into successful companies. Cooley works with thousands of entrepreneurs and newly formed companies to ensure that they are structured for growth and long-term success. Since 2005, Cooley has been ranked the number one most active law firm representing VC-backed companies going public. Learn more at cooley.com and cooleygo.com, Cooley's award-winning free legal resource for startups.

All opinions expressed by Claudia Madison McIlwain and podcast guests are solely their own opinions. And do not reflect the opinion of the Five EC. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.