Cendana's Michael Kim on VC Portfolio Construction, How Seed Funds Compete vs Multistage

At the earliest stages, it's infinite. New companies are being formed every day. So it's not so much picking the right company, it's actually picking the right founder. And so I think that's the critical thing that we want to see from our fund managers. And again it goes back to do they have the credibility to attract and work with the best founders and actually define them? So here's my thesis. If it's easier and cheaper for small companies to actually get scared scale, you know, you hear about these companies 0, 10 million in one year or.

Yeah. With like two employees or whatever.

Yeah. Then you know the critical thing is to be the first check into those companies because then it actually skips the A, it goes straight to a growth round. Because of that dynamic, the series A funds are wanting to be now the first check. And so while multi stage firms at the seed stage has always been a thing, our fund managers are telling us it's turned to 11, it's super competitive now. And so the question then becomes how do you access these founders?

Welcome to the Peel. I'm your host Turner Novak, founder of Banana Capital. Today's guest is Michael Kim, founder of Sandana Capital, making anchor investments in early stage venture capital funds.

We think of what we have as a collection of networks.

Our conversation goes inside how one of the top early stage fund investors thinks, characteristics of the best emerging managers and lessons from the top performing venture funds ever.

They return 204x DPI.

We talk about how Sandana does diligence on new managers and portfolio construction of the best venture funds.

If they have relatively high ownership and their fund is relatively small.

What's driving most returns in early stage venture today?

Historically it was IPOs and really large acquisitions. I'd say in the last five years it's actually been secondaries.

Why Sandana invests in solo gps.

If you have multiple partners then it can become political. I'll support your follow on if you support mine.

Follow on best practices.

We used to think fund managers should have at least half of their capital as follow on to preserve their ownership. And we've seen it deployed in very wrong ways.

Michael's 60x rule.

In order for you to get a 3x gross on your fund, just multiply your fund by 60.

Advice for closing your first fund.

Once you do your first close, then you have scarcity value.

How to raise a fund two or.

Three Today you kind of get a sense by triangulating like who are your co investors? If you have follow on investors, who are they?

Inside the early days of Sandana and getting Fund 1 off the ground during the height of the financial crisis.

Took me over 18 months to raise. I got 99% of the people I pitched said no. He agreed to warehouse up to 18 million of commitments.

But before we jump in, we had a small audio hiccup in the last 20 minutes that you might or might not notice. I also need to give a shout out to everyone who helped put this episode together, including but not limited to Roger Ehrenberg, Kevin Hart, Samuel Shah, Jeff Clavier, Beezer Clarkson, Jack Altman, Jeff Morris, Jr. Shulman, Nicole Wishoff, Ted Alling, and Rick Zullo. A reminder. I publish new episodes of the Peel every week, exploring the world's greatest startup stories just like this one. Tune in next week for a conversation with Sanjit Biswas at Samsara and and in two weeks with Eric Visria at Benchmark. Now a quick message from Bolt before talking to Michael. This episode is brought to you by Bolt. That's Bolt New, the easiest way to turn a text prompt into a full stack web and mobile app. Bolt is one of the fastest growing software products ever, hitting 50 million in ARR five months after launching. And regular users of the show might remember when I had Eric Simons on where we went deep into their seven year journey to overnight success, including almost shutting down a few weeks before launching Bold. They're now hosting the world's largest hackathon with over $1 million in prizes, kicking off May 30. Over 30,000 people have already signed up to build apps with AI, no coding required, 50 IRL meetups worldwide and over a million dollars in prizes. Whether you're a founder, creator, student or anyone sitting on an idea, this is the moment to try it. It's free to join and you can win real prizes like Best one shot prompt, Top build in Public Journey, and Most likely to get funded. Sign up now@hackathon.dev tap the link in the description or head to H A C K A t h o n.dev hackathon.dev now let's talk to Michael at Sendata. Michael, how's it going? Welcome to the show.

Thanks. Great to be here.

You were telling me right before we started recording that you almost died one time. What happened there?

Yeah, it's not like I lead a really risky life, to be honest, but the one time I almost died was literally true. I almost died because my friend and I had gone to see a movie. This was near Lincoln center in New York City and I was just engrossed in a conversation with him. And we were at a stop, you know, at the corner, and I kept walking and then my friend grabbed me by the back of my neck and just yanked me. And he. Luckily he's a really big guy, so he actually did yank me. And then like a second later, one of those big buses came barreling through. So I don't know if I would have died, but I would have been in serious trouble.

Geez. Well, you apparently like really deep conversations. That's what we're about to do.

I guess the thing is, you know, you got to have some situational awareness. Right. And you know, I play a lot of Call of Duty. I don't know if people know that, but I played probably an hour a day. Really? Actually, at one point, I was ranked 200,000 something out of 10 million in the world. In the world. And the one thing about Call of Duty, and it's a first person shooter.

Yep.

You don't want to just go barreling into situations. You want to sit down, look around, and then figure out what you want to do. I mean, obviously it's pretty quick. So you're not like sitting down for five minutes thinking about it. But I think, you know, a good life lesson is that, you know, you don't just rush into things. And for me, the reason why that's important is because when I first moved to San Francisco, I was a first year associate at Morgan Stanley. I was in the tech M and A. I was in the M and A group in New York City. And I was thinking, oh, okay, I'm going to just move up the ladder, becoming a managing director in 10 years and then maybe join like KKR or some private equity firm. And then there was an opening in the tech M and A group because this. Back then in the 90s, Frank Quattrone had left. So Morgan Stanley was rebuilding their team. And they're like, michael, why don't you do a three month rotation? And I'm like, okay. And I did it and it was great. We were on Sand Hill Road, and then they're like, we want you to stay permanently. And I'm like, sure. And I made a quick. I made a very quick decision. And that, I guess, was my gut feel. But it wasn't like I sat down and wrote all the pros and cons. I have a lot of friends in New York. My family's in New York. I just, I just did it. So I've been. As I get older, my birthday was this Sunday. I just start thinking, you Know, you got to be a little bit more contemplative and not rush into things.

Well, happy birthday.

Thank you.

And actually, crazy story. I was at one point. You remember the game Gears of War?

Yeah, of course.

So there's one week that I was ranked second in the world in Gears of War when I was in high school. Well, I don't know if you call that awesome. If you remember how Gears of War worked. It was. You have to play a lot to be ranked high.

Yeah. And the specific features that you could shoot around corners. Right. If I remember.

Yeah, it was like a. It was a third person shooter, like overhead. So you could. Yeah, I mean, I was. You could like, you could like snipe someone like around the corner, like one handed.

Because the gun just pulled around. Yeah, yeah.

And you could. There's a bunch of different ways. Like you could like the, the whole mechanism of like locking in against something. You could like slide in and out and you could like shoot as you slid or shoot as you were sliding out. That was a fun game, but I haven't played that one in a while.

Yeah.

And I kind of switched to more Call of Duty, Halo. I actually did a full prestige in Call of Duty once in one day in high school.

That's impressive.

Very embarrassing. Again, it's one of those things you just, you play for like 16 hours in the day.

I'm Prestige 6 right now in that new Call of Duty, which.

What's the new one?

I don't know what it's called, but it was Call of Duty.

Yeah, I haven't played in a while. I kind of. When I, it was like midway through high school or through college, I was like, all right, I gotta probably take. Take a career a little bit more seriously than video games. But I've been actually playing a little bit of Minecraft lately with my daughters. So I don't know if you played Minecraft with kids at all.

No. But I'll tell you a story. So my son, who's 14 now, when he was 8 or 9, he got really into Minecraft and so he was building his own worlds, but he would do the PvP also. And then he decided, okay, I'm gonna record these. So he started recording them and then he also set up his own server and discord channel and YouTube channel, learn how to edit his videos, add music to it, and then put it up on his. On his channel. I mean, it wasn't like thousands of people following him, but he, he actually got. I was impressed. Cause he was like, probably by then 9 or 10.

Yeah.

And the reason why he learned how to do this. Cause I don't even know how to do any of that. Is because he watched YouTube videos. So, you know, one thing that we're doing right now is we're hiring some people. And as I think about the type of people we want to hire, it really comes down to, you know, obviously, intellectual horsepower, but it's also super high agency people. People who you don't have to give a lot of direction. They'll figure things out. Right. And so, you know, I guess that's a humble brag about my son. But he figured things out, you know, setting up a server. I don't know how to do that. So, you know, that's. I. That's, I think, an important life lesson.

Yeah. And then YouTube, too. This will be on YouTube. Some people will be watching this on YouTube. So.

Cool.

Well, so you mentioned you're hiring people. What are you hiring for, specifically? Open roles. Right now?

Yeah, right now. You know, we have a team of nine. So for a long time, it was just myself. I started Sendana in 2010, and we can talk about the sort of origin story, but, you know, I was by myself for four years. And then Graham Pingree joined me in 2014. Kelly Fontaine joined me in 2018, and then we started hiring in 2020. So we're up to nine, and we're hiring a CFO, we're hiring one or two investment associates. We just hired two more data people, and we can talk about this. But data is very critical to what we do, how we collect it and how we use it and actually use it for investing. So I think within the next 12 months, we'll probably be closer to 15 people. We might bring on another partner. So it's exciting times.

Yeah. The thing that you said there that I thought was really interesting was the using data. So you said, it's a big part. It's going to be an even bigger part. How have you used it historically? How do you want to use it in the future?

Yeah. So let me talk about two critical principles that we've always had since I started this. The first is that we want to be the lead investor. And, you know, much like a VC's, a lead investor in a round or in a company, typically, that means you're the biggest check. So in 80% of our portfolio funds, we are the largest investor. But it's also not about the check size. It's how you work with the fund managers. So we're always on slack on WhatsApp we're, you know, we're texting. We want to be the people they call at 11pm if they have a question about, you know, something they're trying to wrestle through. But also structurally, we do a, a 30 minute monthly call with each one of our fund managers. There's no agenda. They talk about companies that are doing well. We're actually collecting all that data. So on every call we have a partner, an investment associate who's taking notes, although we've been experimenting with AI solutions and then a data person who, who's tagging companies and metrics like revenue growth, et cetera into our salesforce real time. So what that gives us is over a two year, three year, multi year period, we know how companies are tracking, we know which ones are the value drivers. And so one of the things that we don't talk as much about is we do have a co investment program where we invest in companies, largely Series B, generally all portfolio companies from our fund managers. And it really helps reduce adverse selection because if a fund manager came to me and said, hey, this company's raising 10 million, there's 2 million available, do you want it? And then we look at our notes and they've never mentioned it. It's kind of a yellow flag.

Yeah, or red flag even potentially.

But also because we have the data at the company level, we have over 5,000 companies, we have every transaction. So share price, number of shares, etc. You know, with that we know we can roll that up and then actually see what the vintage year quartiles are for companies and for funds. And so this is how we use the data. So imagine a fund manager came to us and pitched us and said hey, you know, our 2018 fund is marked at 1.8 TVPI. We're like, okay, that sounds good. But then when we go and look at our data and, and see what the quartiles were for that and this is just our own portfolio funds, maybe they're like second or third quartile and then we can drill down even further from there and look at the list of their companies, the year that they invested and then compare that to the quartiles in our own portfolio and we can actually filter that for like geo or sector. So like we could do quartiles of a fintech fund in the east coast, for example. So it's that level of granularity because.

You might be, you know, big into like 75% crypto, 75% cybersecurity. And one specific year was Just a bad year for cyber.

Right.

And so you can say, oh, you're actually like top decile of cyber investors in the years. Like, that's actually good.

Exactly.

Interesting. Okay, how do you track that? Like, do you just have Excel or do you use.

We have a super duper elaborate Salesforce.

It's Salesforce. Okay. And you have like performance numbers in Salesforce too?

Yeah, we have everything.

I know you could do that.

Yeah. So, like, we've automated it so that we can actually issue capital calls through Salesforce. So we just enter the what fund it is and what the amount is, push a button and it generates the letters. So what that also means is that we have the cash flows for every portfolio fund. We know exactly when they called and for how much.

So.

So that's how we can actually track the metrics.

Also interesting. I've never heard of somebody doing like, analytical data stuff like that in Salesforce.

Yeah, what we have is pretty cutting edge. And you know, Kelly, my partner, is the one who architected it and we're actually evolving it. So the idea is that we're going to go to a data lake. We're using databricks and we're connecting all our unstructured data. So that's like the Slack and email and WhatsApp and our structured data, which is our Salesforce, and our Dropbox, which is where all the PDFs are. And then using, you know, leveraging an LLM, you can have a front end where you can do natural language query. And that way. Also, the one thing about Salesforce is that it is really good because it's super customizable. But the bad thing about it is that you have to. You have to enter stuff into it. Right. And that's where you get human error. It's just also a pain in the ass. Whereas, like, if you were able to just tag things and it just dropped into our data lake, it would then be instantly available because you could just.

There's the PDF that just gets pushed into wherever it needs to go and automatically populates what you would previously be typing in in Salesforce. Get all the right dates, get the numbers, et cetera.

Yeah, exactly.

Okay, interesting.

So easier said than done, though. We're still working on it.

Yeah, it sounds super simple, but I feel like people have been pitching this with AI for like 20 years that you'll be able to.

The other thing is that I think a lot of this stuff is Flintstones. You have the cuckoo clock or anything that Fred Flintstone was doing. Basically a human was Doing even though it looked like it was a modern thing, like the car, Right?

Yeah, like running the feet on the car.

Okay, so the reason why I say this is because we spent a lot of time looking at solutions to do just simple using AI to do data ingestion. Exactly what you were saying. You know, we get a PDF of a fund manager's financials and then using ocr you should be able to get that data. Right. And then the solution providers we're talking to, they're saying, oh yeah, we're happy to do that, but it's 5,000 per fund per year and we have 200 portfolio funds, so that's actually a million dollars. And then, so we don't do that. We actually use a BPO in Manila. We have three people there paying them on average 1500 bucks a month, so about 20,000 a year. And they're doing the exact same work.

Wow, that's like a 90% or 99% discount.

Yeah. So you have like the AI hype and then you have the reality BPO. Yeah, yeah.

Are there any, speaking of AI hype or, or realities, are there? That sounds like interesting applications that you're kind of using it. Are you seeing any other funds or any anywhere else in venture where they're using AI to run the firm or make better decisions?

Yeah, so we have a portfolio fund called Moonfire and that's based in London.

I've heard of them.

It's run by this guy, Matthias Lungman, and he was the co founder of Atomico, so very seasoned bc. But when he started, when he left Atomico to start Moonfire, his thought was, I'm going to make this a data first fund. And so they actually have more data people than investment team members. So the data is led by this guy, Mike Arpea. And you know, so I'll just give you a sense of this. So they're scraping, you know, people scrape from different sources off the web. They're basically using that to source thousands of potential companies and then they winnow that down and then they go out and meet them. But they also use GPT to generate an outbound email based on the profile and the data they scrape. So it's a very customized email to that founder and the reasons why, you know, Moonfire is interested in them and maybe highlighting one or two things that they, they think that company is doing really well. And the conversion rate for those, you know, cold emails is really high. And then on the, on the return trip where they're generally, you know, because you're passing on most of these companies, ultimately they will generate a past email articulating all the reasons why. And so, you know, I think that cuts down a lot of time. And also, you know, I think VCs need to focus a bit more on their SLAs and their MPSs. Right. You don't want to get ghosted if you get past. The founders appreciate a fast. No, they appreciate reasons why instead of just being ghosted. So I think that helps along, you know, in that regard.

How do you make sure that it's not like, shitty AI generated? Like, you know, I'm sure we've all gotten those emails where it's like, hey, Michael, like, I saw that you went to Alabama. Like, my cousin went there. Like, I would love to sell you my SaaS product or whatever.

Yeah, that's a good point. I get those two. And you're just wondering, oh, my God.

Or they'll say, like, first name. Like, hi. First name. Like company name.

Yeah, it didn't. The merge didn't work. Yeah, I mean, I get a bunch of those, especially more recently. But, you know, I think it's just getting better. Where. Where what? One of my pet peeves, actually, is that I get reached. People reach out to me about a fund. They're like, we've spent all this time researching the space, and we think we're perfect for Sandana. We're raising a $500 million oil and gas exploration fund.

Oh, yeah.

It's like, dude, obviously if you looked.

At the website, you'd qualify that, right?

I seriously get, like, a lot.

That's crazy. I mean, I get those too. Like, it'll be like, you know, we're raising this, like, well, even like $30 million round. Or we're doing like some crate, like a buyout or something, like invest in bankers. It'll email me like eight times and I'll just respond, please remove me from this mailing list. Or something like that.

Yeah.

So one of the big things I want to ask you is, historically, when you look at, like, a lot of the data, where have the returns come from in venture. What, like, specific companies or strategies? Like what. What ultimately drives most of the returns in the industry?

Yeah, you know, obviously, historically, it was IPOs and really large acquisitions. I'd say in the last five years, it's actually been secondaries.

Really?

Yeah. And I can talk a bit about that. Last year, actually was the second highest level of distributions we've received. One of a major part of that was an acquisition of a portfolio company. Called Audit Board, and they were acquired by a PE firm for 3.2 billion. Our fund manager is Mucker, and they owned almost 7% of it, so they got over 220 million, but their fund is only 45. So it was almost a 5x fund.

Returner for them just from that one deal.

Yeah, so that, that's, that's what we really like to see. Obviously, everyone wants big, outlier returns. But we also had another fund manager who had a company sold to Cisco for 300, and another company around the same time sold to Zscaler for 150, and he owned 10%. So he got 45 million back. His fund is also 45 million. So he actually returned his entire fund through two basically modest exits. And so what that would suggest is that ownership matters relative to your fund size. And we can go a lot deeper into that. But I think on the secondary part, you know, we had another fund manager who had a company that's doing extremely well, over a billion in revenue, 10% EBITDA margin. They sold, you know, a portion of that position and actually returned about 1.25x their entire fund. And yet they still own 10% of this company. If you look at a public market, it would probably be worth 5 to 6 billion. And again, our fund manager still owns 10% and their fund is only 75 million in size.

So they have like another potentially 7.8x sitting there. Yeah, that they can.

Exactly. Yeah, exactly.

So how do you decide? So it sounds like they probably decided to trim. Sounds like 20% of the position, 15%. Like, how do you. How do you size up a sale like that?

Yeah, I'm. So our advice to our fund managers always is do not sell your entire position. We've had two examples where they did and they live. You know, they totally regret doing that. One was it was in Chime, the other was in Service Titan. I won't throw the fund managers under the bus by naming them, but I think, you know, they sold for good reasons, but they sold their entire position at substantially lower. So Service Titan was sold at basically a $300 million valuation. And I think right now it's, you know, like 6 or 7 billion market cap. The other one was Chime, and our fund manager sold at a billion and a half. And that was a huge win. I mean, it was a 6x DPI fund, but, you know, I think. Well, obviously Chime last raised at 25 billion. It's been marked down to about 8 billion or so by most fund managers that have positions in it. But in the secondary markets, it's trading at 10 to 11 billion. So, you know, our fund manager missed out on an 8-10x additional turn of their fund.

Yeah, that's hard. Yeah, that's hard to look back on, but.

Yeah, so, but to get your point, the question I think fund managers should contemplate selling part of their, you know, their, their, their value drivers only when they are, number one, confident in the. How the company's doing. Because, you know, we would want them to still hold significant 60 to 80% of their position. And if not, then they should sell a lot more. Right. If they don't have confidence in the company or they're ahead of their skis on valuation by a lot, by unreasonable amounts. But, you know, I think it's also important that if you're going to do a transaction like that, that it returns a meaningful part of your fund. So generally the, the transactions that we've seen have returned anywhere from like half to more than the entire fund by just doing a 20, 30% secondary.

Okay. So the general time you should start thinking about it is if you can return half the fund by selling less than half of the position, maybe like a quarter of the position. That's when you. And then you can maybe tilt it. Like maybe we should take half it off the table to return the whole fund or however you want to tilt it.

Yeah, exactly.

Okay, interesting. And then just historically, I know you probably have a couple of these you can rattle off the top of your head, but people might be interested in what are some of the best performing venture funds ever?

Yeah, that's a good question. The one that comes to mind is Chris Sacca's first fund, lowercase one. It was a 8. 8 million fund. And I've seen the financials. So the audited financials, it returned 204x DPI.

Wow, that's insane. Yeah, that's like an individual best check on like a, in a fund for someone.

Yeah, you know, Chris had a great nose. He was, you know, Instagram, Twitter and Uber and also Stripe. Pretty good.

Yeah, that's, that's decent.

Yeah, pretty good. So amongst the mere mortals, the best fund, performing, best performing fund that we have in our portfolio is Mucker. You know, I mentioned Mucker with regard to audit board. That's not their best fund. Their best fund is their first one and it's 20x DPI. And it's because they own 7% of Honey and Honey sold to PayPal for cash, $4 billion. So they got 280 million back and their fund is 12 million. Their first fund was 12 million.

Oh wow.

And you know, just because people can do math, you know, carry on 280 is 56 million. Right.

So the, that's the fund. They returned the entire fund in carry like to themselves.

Yeah, they return almost 5x the font in the form of carry to themselves.

Yeah.

It's also life changing money for Eric and Will, but yet they are amongst the hardest working GPS that we have. You know, I think that's also an interesting dynamic is that there are people who, who make enough money or personal wealth that they start leading sort of what I call a rich guy life. And they're kind of, you know, in it for lifestyle. But you know, I also want to be relevant. There are others and I think they just have different DNA who just really work hard no matter what. And that's actually what you want to see. And you see that with founders. Right. The Collisons for example, it's Right. So you know, I, but you know, getting, getting back to that. Mucker is the best performing fund manager that we have. The second one is Manu Kumar and we're not in his first fund. Manu runs a fund called K9 and it's a pre seed fund.

I've heard of it.

Yeah, he's the guy who actually coined the phrase pre seed.

Really?

This is like 12 years ago.

Okay.

His first fund is ADX.

And isn't he invested in Uber seed round? Right, No, I remember that. Oh, Lyft. Okay.

Twilio, he's basically the co founder of Carta. So those were all in his first fund. Wow. Sadly was before my time. Same with lowercase one. It was before I started send. Those are both like 2008, 2009 funds.

And you start send down to 12 or 10.

I formed the management company in February of 2010 and our first fund, the final close was 2012.

Yeah, I know, it was a journey to get there. We'll talk about it a little bit later. Yeah, we're teasing people here. So then you mentioned one of the characteristics. But just generally speaking, what are some of the characteristics? Like when you meet a fund manager or when you just look back historically, what have been some of the characteristics that really stand out? Like this person is going to put up a 10x20x like legendary performance.

Yeah, that's a really good question. So the metric that we, or the, you know, the vector that we look for is amazing access to phenomenal founders. Right. And so then we really get to try to assess the credibility of that fund manager to do that. And whether it's like their own networks or their operating experience or a combination thereof, the relationships that they have with downstream capital with other co investors at the seed or pre seed stage. So what we look for are magnets and I'll give you an example. So there's a guy named Dieta Van Loemen. He's a Dutch guy living here in San Francisco. We think of what we have as a collection of networks. Our ecosystem is a collection of network nodes. And we realized a few years ago that we didn't have people in the in Stripe, from Stripe in our network. So Lockheed Groom is an advisory board member now. But you know, we were looking around for someone who was coming out of that Stripe mafia and we met Dita. He was employee 26 at Stripe. He was the first head of Stripe International. So he opened 27 markets for them. So true operating experience. And then on top of it, he was the co founder and CEO of Commir, a digital health company. Last year General Callis led around at 6 billion. So he's a unicorn co founder and serious operating chops. His first fund was 15 million. We anchored it with 3 million. He is someone that founders know and want to work with. A more recent example is Imad Akund. So CEO and founder of Mercury. We invested with him. Again, Imad is like a poster child for yc, you know, with the Collisons with Brian Chesky and then Ahmad. You know, Mercury obviously just raised that 3.3 billion.

Incredible product and like business. I use it. It's great.

Yeah, I use it too. He has that magnet. He's a magnet for founders and so that's what we're looking for. I'm not saying that every one of our fund managers has that profile, but I think we look for that profile plus an extra step which is we want to see hustle. And I talked a little bit earlier about agency. We, we want high agency people because you know, where it actually comes, where the rubber hits the road. And I guess what we're saying is that we want people who aren't just sitting back waiting for emails of, of companies that are looking to raise. They're out there turning over every rock. They're out there looking at, you know, different ways to access founders. You know, we have this, we have this one gp. Her name is Casey Caruso and she runs a fund called Topology. She was a partner at Paradigm. Before that she was three years at Bessemer and also at Google. Casey will actually rent rooms in Hacker houses and stay there for a few days, get to know all the people there and then she will actually compete in the hackathons and sometimes she actually wins. So she's like, I mean she's younger, she's like 31, but she's out there and she's actually spending time with founders in a real, in an authentic way.

Yeah, that's a, that's, I've never heard that strategy before. That's really unique. Yeah, yeah.

And so, you know, nothing against old people and you know, I'm 57 now, so I can say this, but, you know, if you're sitting around coming out of an established firm, you know, and assuming that you have the networks and people are going to come to you, I don't think that's a good strategy. You have to be out there looking for founders. I actually think venture capital is a young in person game.

Yeah, I mean, I'm thinking back of like, who are some of maybe the my favorites Just thinking through like, who are maybe some of the better emerging managers that maybe are top of mind for people. I'm just like thinking through like lists and thinking people's faces, like they're all relatively youngish, like I would say probably in their 30s, maybe there's some people in their 20s.

Yeah. But yeah, I think, you know, for a long time Sandhill Road was sort of an older crowd and it was just the evolution of technology investing. Right. It all started with the guys coming out of the semiconductor world. And now I think a lot of those firms, the ones that have done very well, like a Sequoia, is always looking for younger people like Roloff Botha. He would be a perfect example of how they groomed him up. But there are other firms that are just sort of resting on their halo from like the 80s or 90s and they haven't brought younger people on. You know, Sebastian Malibi wrote this book called Power Law and it's a great book. It's, it's easy to read because basically every chapter is about a different VC firm.

Oh, really? I didn't realize, I haven't read it.

Yet, but so there's a section on Sequoia and talking about how they groom their younger people to become, you know, to have more gravitas that have, you know, more presence in investing. And then he actually uses Kleiner Perkins as the counter example of how they had taken some missteps in the 2000s, so they had brought on older people like Al Gore and Colin Powell, if you remember.

I don't really Remember this? But that's an interesting strategy.

Yeah, yeah, but they were actually older, obviously gold plated kind of guys.

Looks good on paper.

It was not the right strategy because then they had this dearth of sort of the younger VCs that they wanted to mentor and bring up. Now they have obviously corrected with that Mamoon and some others. But you know, it really is interesting and this is a whole discussion about how VC firms establish themselves and how they maintain their success. And Sequoia obviously is by far, you know, the dominant firm.

I know we're getting, we're getting pretty sidetracked here with this conversation, but is there, is there a best way to do that or maybe like mistakes that you make? Is it probably not prioritizing, I don't know, like youngness or you, you put too much emphasis on like the older. Ish. Pedigreed ish that doesn't have as much agency.

Yeah. So you know, we were known because we would back single gps, solo gps, right when most people wouldn't. And you know, we thought that was a pretty good strategy, especially if they had, if they were really good at picking companies.

Why is it a good strategy? Because a lot of people still say solo gps. Like it's not, they don't do that actually.

It's, it's the fear that. Well I guess the LP world, they would call it partnership risk and so.

It'S like literally hit by a bus and.

Well, no, no. So what is the, the. I was getting at a different point and I can talk about that as well. But you know, if you have multiple partners then it can become political decision making. You know, I'll support your follow on if you support mine. So you're not, it's not clear that it's more susceptible to like that dynamic as opposed to just, you know, flinty eyed investing. So we're okay with the solo gp. The hit by the bus thing, I don't worry about so much. It's actually because, you know, in the LP agreement, the LPA, there are provisions. So like if the fund manager is incapacitated, the LPs can take over, find a new manager and then you know, manage out the fund. So there's, you know, structural ways to deal with that. The bigger issue about a solo GP is that they fall in love with their companies and they just keep putting money in, good money after bad. That's the biggest danger. And so the mitigant to that is do they have a good group of advisors around them, sounding boards, you know, including us and that's worked. But I think with solo gps, the real question is how do you spread the offense? How are you finding these amazing founders if it's just yourself and maybe you have a community? So there's a guy named Julian Shapiro, we backed him. He runs a fund called Julian Capital. He has an amazing community. And so he also is kind of like a founder magnet.

He's got deep checks right now. Deepchecks VC is the website. If you're not a part of that, you should definitely check it out.

Yeah, so I think that was a very clever thing. And you know, so, so it really for us comes down in the question and it gets back to the first principle I mentioned, which is, does the, does this GP have the credibility to find amazing founders? And, and how are they going to do that?

How do you think about investing over time? I mean, it sounds like you've, you've kind of been building Sandana through tail end of the financial crisis. Zurp, Covid, rising rates, svb, AI hype. Like it's just like, right, there's like every new year, every year there's like a new once in a lifetime type of event. But just how do you think about managing firm fund and then like investing over time horizons?

Yeah. So I think the high level element here is that you cannot time technology innovation. And so I think about post the global financial crisis. So Lehman Brothers went bankrupt in September of 2008. The markets were way down, substantially more than they were in the past month. And it was all doom and gloom. Firms like Bear Stearns were going bankrupt, Lehman Brothers went bankrupt, banks were failing every week. Yeah, it was a terrible time. But that's when Uber, Pinterest and Airbnb started. And it's because those founders were willing to walk through walls to get it done. So those, you know, if you're just thinking, okay, in, In January, in Q1 of 2009, you know, as, as all these banks are failing, is this a great time to be deploying into a very long duration? Right. Because venture takes a long time. Should we doing, should we be deploying capital into an illiquid asset class, let alone a specific company who wants to totally change, you know, how things are done, you know, human behavior. Right. Airbnb, you had to convince people that, you know, homeowners were willing to open up their house to strangers.

Yeah, literally. It was called like, I think it was like air bed and breakfast. And it was literally like air mattresses on floors.

Yeah.

Was the first product.

Right. But the key thing here is those founders were willing to walk through walls and they got it done. So that's just amazing and that. But my main point here is you can't time technology innovation. You know, in October of 22, no one was talking about ChatGPT because then it launched in November of 22 and that actually changed the whole world. And you can see in the deployment of venture capital from both LPs and the VC firms, you know, it's an explosion of capital.

How do you think about balancing that? Like when there's something that's like blowing up like that, like AI, right. I think I saw a statistic like 70 something percent of all venture dollars were invested in AI. Like should, maybe you should have been doing this two years ago. Like are we at the top or the bottom? I don't know. But how do you think about balancing that? Whether from a fund perspective or advice to managers?

Yeah, I think our fund managers should have a thesis about what is interesting to them. Ideally they'll be able to see around corners. So one of our fund managers is Ali Partovi at Neo. They're the seed investor in Cursor, which is a company called Any Sphere. They invested in that a couple years ago. We have another fund manager, Kevin Novak, who runs a fund called no relation to you, I don't think.

No, I've heard of him before actually. You should probably meet him.

Yeah, you should.

People say like, oh, do you know this guy you related? It's like, no, I'm not. But he was like Uber Data or something.

Yeah, he was head of data at Uber. So you know, Uber is a software company basically and he was overseeing all that data. He actually invented surge pricing, so you have him to blame. But anyhow, he invested in a company, Codium, which now is called Windsurf. And you know, last week it was reported that OpenAI was in discussions to acquire them. But again he invested in that before, before ChatGPT was launched.

Yeah, you can't come rushing out and there's like a bunch of these like code editors like today if I'm like, I'm gonna like, I think it makes sense late stage. If they're good businesses, like maybe Cursor's good to invest in today, but like creating the company.

Right.

I just don't know if like, like I think it's, it's hard to balance. Like maybe at any point in time a category might be good to invest in broadly. But like should you invest it company creation or more mature, like you know.

They'Re at the Top the growth, I think Crest or, you know. So on the later stage side, you know, it's pretty clear that someone like Founders Fund is really good at identifying the four to five companies they want to back the truck into. You know, they just raised 4.6 billion for their growth fund. You know, they were targeting three and a half. The plan is for them, from what I know or what I hear, is to invest in four or five companies. And then Josh Kushner at Thrive has a pretty large opportunity fund, and his thesis, as far as I know, is to invest in the handful of. Into one specific winner per category that he finds interesting. And so it's really a concentration of a large amount of capital into a few companies, and that's great. And more power to them. That's not the sandbox I play in. Right. I focus on very early stage. And in a way, one way to think about that is that at later stages, there are only a handful of companies. And so it's more about picking the right one and getting access to it and then deploying the capital.

Yeah. Because who wouldn't want to invest in cursor today? Like, will they even take your money?

Right.

Like, everyone with a fund is trying to, you know, cold email them, invite them to events.

Right. So it's a question of picking the right company at the earliest stages. It's infinite. New companies are being formed every day. So you don't have a target list. So it's not so much picking the right company, it's actually picking the right founder. And so I think that's the critical thing that we want to see from our fund managers. And again, it goes back to do they have the credibility to attract and work with the best founders and actually define them, whether it's in a hacker house room or, you know, we have another fund manager named Josh Browder, and Josh was a Thiel fellow. He's on the selection committee. And, you know, I think. So here's my thesis. You know, if, if. If it's easier and cheaper for companies to small companies to actually get scale. You know, you hear about these companies, 0, 10 million in one year or.

Yeah. With like two employees or whatever.

Yeah. Then, you know, the critical thing is to be the first check into those companies because then it actually skips the A. It goes straight to a growth round or what looks like a growth round.

Yeah. You get less dilution. And if the company's doing well, it's like faster velocity to making money, basically.

I mean, we have a company, eleven Labs, you know, They're a rocket ship. They were doing extreme. They had that growth with very few people. And obviously cursor is kind of like that too. But what I would say is that because of that dynamic, the Series A funds are wanting to be now the first check. And so while multi stage firms at the seed stage has always been a thing, our fund managers are telling us it's, it's turned to 11, it's super competitive now. And so the question then becomes how do you access these founders? And you know, I'll tell you a story. One of my friends actually told me that a family that they know, their ninth grader signed with Stanford for baseball. And so like how early do you go? And you know, I was talking to Corey Levy who runs Z Fellows and I'm like, Corey, what's the youngest applicant you had? And he's like 13. And so the question is, okay, you have to go younger and younger and does that make sense? You know, Neo has been kind of at the forefront of this.

They're college students, right?

They're Neo Scholar. They'll go talk to the top 5Cs students at like the top 20Cs departments and try to make them Neo Scholars and kind of bring them under the tent.

Is it kind of a scout program slash? Maybe you'll start a company.

It's more like that in that, you know, they're not assuming that all the, all these kids are going to start a company out of the box. But you know, they're part of the family now, they may be working at OpenAI and then five years later start something.

Yeah, right. Okay.

So, so the key is like how do you get access to these younger and younger founders and how do you be that first check? And I think that's where we are right now in venture at the early stages is finding the founders. And of course you're going to have high mortality. Right. Not all these companies are going to be cursor. Right. So that's what's actually making right now very interesting because, well, so then question.

It brings up is a question like a lot of people wanted me to ask you, what's your current thesis in venture? If I'm investing in funds, I guess, or if I'm a manager trying to come up with a strategy, you, you kind of hit on it a little bit. But what should we do? Or what should you do?

Yeah, I guess the structural answer would be that if you're raising a fund or have a fund, you should have a portfolio construction that will optimize for modest exits and of course, everybody wants an outlier exit. You know, multi billion dollar unicorn exits, but, you know, the average exit and ventures under 500 million. So if you have a fund, you know, would a $500 million exit, what percentage of your fund would that return? And so then obviously that becomes a question of what's your ownership? Did you have any reserves to kind of preserve that ownership level? You know, what's the check size you need to write in order to get that ownership? And then how many companies do you want? And then you just aggregate that up and that should be your fund size. So Mike Maples is absolutely right, saying fund size determines strategy.

So how has, has that thesis changed at all for you over time?

No, I mean, well, there's a nuance. Yes. So that's a good point. Originally, when I started Sendana, we would say that we wanted to back fund managers who were gonna lead their deals. And, you know, for us back then, seed, a seed round was like maybe 2 million. And so we wanted to see people who had credibility to write a million dollar check. So, you know, when we were diligencing Kirsten Green's first fund, I called all of the founders she had angel invested in and said, hey, you know, if Kirsten had a $40 million fund, could you have seen her write a bigger check? And all of them said, absolutely. So that's how we were diligencing the credibility. And so, you know, what we want to see is, is that you can get the right level of ownership relative to your fund size. So we actually did an analysis with our data. We compared ownership to fund size. Okay. Across our portfolio of funds. And when you do that, when we did that, it came out to be about 10% of fund size for seed. So what I mean by that is if you have an $80 million fund, you should be getting at least 8% ownership, initial ownership.

Okay, so it's like 1% ownership for every 10 million in fund size. Roughly.

Yeah, exactly. Now, obviously it's asymptotic, right? If you have a $200 million seed fund and it's pretty hard to get 20% ownership because there's probably adverse selection, right?

Yeah. So there might be, like, you probably have some fall on reserves and like, maybe you're capping your returns a little bit because you're investing in like an A or a B, but in theory, they're really good. Like, if you have that big of a fund, you're. You're so good that you're still going to get 100x on that. Series A check potentially and still get a 10x fund if things go really well.

Yeah, exactly. And then by the way, so for pre seed funds, we also did that analysis and it comes out to about 20% of fund size. So if you're a $50 million pre seed fund, you should be getting about 10% ownership. Now it's not hard and fast, but when we get all these different pitches, we actually do look at what their fund size is and you know, what their target ownership is and that's the first screen that we take. So what that actually means is that we don't really invest in fund managers that are doing more the spray and pray, higher velocity kind of thing. I mean we have this one fund manager who is done extremely well. Their first fund is like 8x. They have 25 unicorns in it, all at the seed stage. But because they were all small checks and it was a high velocity fund and there are reasons why we wanted to work with them. You know, it's not a 50x fund or 20x fund. It's. It's 8x, which is awesome.

Yeah, that's, that's better than like 99% of people.

Yeah, it's top five percentile.

Yeah.

For their vintage.

That's awesome.

So, so they're great. But it was a different strategy.

And then when you're, so when you're meeting somebody and you're doing diligence, what's the general process look like? Like when you meet someone, you met this person with a certain strategy. Like what is your kind of go to. Like what do you look for? What are you like referencing when you're. And how do you reference someone?

Yeah, so we do a lot of off list referencing. So we'll talk to people who know them or we would look at their portfolio and see who their co investors are and more than likely we know some of them and so we'll start talking to them. Like, you know, what do you think of Turner? Has he been helpful? When we start doing more formal diligencing, we will actually start calling founders.

So that's like a little bit of a second third step. You don't go.

Right. Yeah, exactly. So we first try to get calibrated on whether this is something that we want to spend time on and do a deep dive. And that just requires talking to people. And at the heart of it, it's relationships. And fortunately for us, since we've been around since 2010, we have a number. We know a lot of people in the seed world and also the multi stage Firms and we can talk to them. We're very mindful of founder time, and so we don't start calling founders until we're relatively serious. Then we'll call all of them. There are times where we've called 30 to 40 founders, talk to each one of them. We document them on, you know, we memorialize it. And that's our investment memo.

Interesting.

That's part of our investment memo.

And so you're looking for basically, you know, this person maybe did some angel checks, they gave you 10k, 25k. Would you have taken 2,5500, a million, whatever the appropriate amount is, were they. Do they do what they're telling us? Like they're saying, oh, where we help with marketing, we help you recruit. Are they act. Did they actually help you with that?

Yeah, I mean, at a high level, my standard reference call would be, you know, tell us how you got to know them, how they were during the investment process and then. And especially how have they helped you post investment? And you know, there are a lot more questions behind all that. But at a high level, that's what we want to know because the first part actually gets to access. How did, how did that GP get access to that founder? So it's, you know, that's again, part of trying to calibrate on, on the quality of the access that they have. And also, to be honest, the hustle. And then, you know, during the round, were they, you know, just passive and just writing a small check or were they actively trying to help that founder with introductions to other investors or if they're, especially if they're the lead investor, et cetera. And then, you know, obviously post investment, do they do anything? And it gets even. Are they responsive to emails?

The bars always surprises me how low it is. Yeah, I'm just like, you just like did like they needed help with something and just like responded just like top 25% just from responding.

Yeah, exactly. I mean, a lot of founders have said that, you know, they send out their monthly or quarterly updates and most of their investors don't even say good job. You know, these don't respond. And so I think founders, I don't know if they take it personally, but, you know, said differently, GPS can, you know, can be a lot more proactive about that. It takes like one second to do.

Yeah, you send them some rocket emojis or whatever. Exactly like, and then the founder. And the interesting then is like the founder remembers, like they have 100 investors, whatever, 20 investors, and you're the one or two that respond, they'll remember that you exist and when they have a friend or raised and like, oh, I love Turner. He like, yeah, he talks to me every month.

It's the easiest thing. It's like, it's like this thing about being nice. It's the easiest thing to do. It doesn't cost you anything.

So you mentioned you think that VCs could do a better job increasing their NPS score. Yeah, I guess unpacking that a little bit. Well, how do you think someone could do that? Or why are our NPS scores so low?

I think partly it's the responsiveness and it's also sort of that delta between what you promised them and what you actually delivered. So if you're saying, hey, if I'm on your cap table, I can get you intros to all these companies and you know, customers or strategic partners, whatever, and then, then it's crickets. The founder never hears from you. Yeah.

So you can like severely underperform versus you could literally promise nothing and then introduce them to one customer and you, and then you look great because you like you.

In fact, that's the Ron Conway model. So Ron is a legend, of course, but his promise is that he'll make one. He'll do one thing for each company that he invests in. Just like the silver bullet. Yep. So you know, obviously then the founder has to think, how am I going to use that? But Ron doesn't say, hey, we'll engage with you, you know, quarterly, daily, monthly, you got one bullet with us.

Interesting.

Okay, so he's managed expectations. I guess. So that's, that's kind of what it's about, you know, you got to manage expectations with the founders.

Yeah, I've heard stories of Ron where it's like he single handedly like negotiated the deal or a sale and like saved the company kind of a thing. Multiple times.

Yeah, exactly. Yeah.

So then when you're so continuing, I guess just kind of like the general meeting and fund manager, when you meet someone and they maybe have like a unique idea or something or it's like kind of a new strategy. Like how do you discern from good, crazy and unique versus bad crazy and unique?

That's a tough question. Because crazy is good, contrarian thinking is good.

But what if somebody is like too contrary? Like is there such a thing as trying to reinvent too much?

Yeah. And I wonder about like, you know, especially around defense investing right now, you know, you just got to think all these young people trying to start next gen defense companies. Easier said than done. There's an entrenched sort of process of procurement, all that, and then you have to be able to get up to scale. It's not easy. I guess the bad crazy would be that again, you're not managing the expectations of your investors and you're saying that you're going to get into these companies. It would be totally fine if you said that almost all of them could be zeros, which is true. A venture fund can actually go to zero. And there have been examples of that.

Like literally returns $0.

The best known example is Hummer Winblad 1999 fund. Literally zero TVPI.

Wow.

It's rare, but it can happen.

Yeah. Hopefully I've exceeded that bar, I think, on both of my funds. Not close to, not by much, but I exceeded for sure.

And, you know, I think also the, you know, bad crazy would be that you don't have the highest integrity. You don't do what you say you're going to do. You. You mislead or lie about things.

Do you see that a lot?

Not often. But, you know, there was a fund manager who was saying, you know, I'm, I'm, I'm, I'm going to, I'm raising this fund. It's going to focus at seed stage. And we ultimately. But then you look in their deck and they're talking about, you know, the series A investments they want to do. And then we passed and you know, ultimately it became more of a series A fund. And so, you know, they were clearly trying to get us involved, but. And, you know, they were just basically lying to our face that they're going to be a seed fund. So that's bad crazy. The good crazy is, you know, like, I was talking about Casey Crusoe, you know, renting rooms in hacker houses and then competing in the hackathons. That's, that's awesome.

Do you think something like that is defensible? Like, I mean, no, I don't know her super well, but I'm just like, sounds like a cool idea. I should go do it. I probably won't because I'm married with kids, so maybe that's the defensibility. But like, how do you decide not just Casey, but just anyone. Like, he's like, this is actually like a defensible strategy that you can build a affirm around.

Yeah, that's right. And so part of that, I think, goes to the scalability of your time. And, you know, obviously, you know, having a large say, you know, presence on X is like, because Julian Shapiro does for Example Nicole Wishoff does, for example, that that could be helpful, but it's not, it's not the only thing. You got to be able to convert those into something real. And so, you know, again, you know, not to sound like a broken record, but it's about access to amazing founders. And so whether they know or hear about you from, from X, or your online presence or you know, podcasts or, you know, you're out there every night slumming around at all the different events in Silicon Valley or New York or LA or Boston, you know, you're finding these founders and, and that's why people talk about serendipity, right? You never know who you're going to run into. And it also takes sort of a proactive high agency person to say, oh, you know, I don't know if I can help you right now or invest in you right now, but I know this other person who could be interested. Right? And that's how you build trust and that's how you foster relationships.

What, what seems like it'd be a good idea for a new fund or new take on venture, but usually isn't.

Okay, so it has nothing to do with seed. But right now we've been wrestling with this for like over a year. It's something that we call the messy middle. So what we mean by that are companies, let's just say SaaS, companies that are at 10 to 30 million of revenue, but they've, the revenue has slowed down to like 10 to 20%. So basically no one on Sandhill Road will look at it.

But it's a company like it's a product, people are paying for it.

And it was venture backed. And you know, hey, we have 30 million AR, but we're growing at 10% now.

Yeah.

What do you do as a founder? And I think everyone, all VC firms probably have a few of these in their portfolio. And then, so what do you do with these messy middles? So you know, do growth equity firms come in and try to buy them? Do you have general catalysts doing the roll up strategy? You have PE firms starting to take a look at this. Could you, could you create a holding company and then start acquiring some of these? So there's a lot of interesting things that could be done easier said than not. And the reason why is because that founder of that company still probably thinks they're going to become a unicorn. So if you're going to have some private equity firm or growth equity firm come in and take 50% or 49 or 51% of your company, you have to have a huge shift in mindset. Right. If you're that founder thinking you're going to be a unicorn, you're either tired or you have some self awareness that your company is not going to go anywhere and that there are alternatives to engineering a successful outcome.

And you think it's not a good idea for venture because it's just a totally different product or asset class or motion of how you do your day and how you structure your time and strategy.

Yeah, I mean, because if you're one of these firms coming in to buy, you know, let's say you bought 51% of a comp of a company that's doing 30 million of ARR growing at 15%, you're going to be putting in your playbook, you know, how to reduce costs and increase revenue. Right. And the founder may not like that and the founder may actually be pushed aside.

And that's usually not good for a venture firm when they're known for the.

Ones that kicked out of the exact.

Exactly.

So most VC firms won't do this, but you know, private equity guys, they're a little bit more sharper elbowed. Perhaps they're used to it. Right. Because they take control of companies and they control the sort of the future of the company because they own it. And so could you see where the rubber hits the road and this whole slew of sort of these messy middle $30 million AR companies, do you ultimately see them being acquired by private equity or growth equity funds? So that's actually one of the things that we've been thinking through.

True. Where are you at on it now? Are you on like a yes or no? Well, sounds like no because you haven't done it.

I'll give a shout out to my friend Hans Weldon. He's the founder of Industry Ventures and I meet with him once a quarter. You know, we're competitors in some ways, but we're, you know, we're also very good friends. And he was very smart in seeing this. And so he actually has, he has a buyout fund. His current buyout fund is 300 million. The idea is to invest in, you know, basically buy 10 companies of sort of the profile I was talking about. And I thought that that was a pretty insightful thing that he came up with, you know, like five or six years ago. I'm not saying that we're going to launch a buyout fund, but we've been actively thinking about what do you do with these messy middles. Because it's also in our Portfolio. Yeah, right. Are these going to be zeros or how do you engineer a soft landing for them?

Yeah, and I'm assuming there's a lot of cases where maybe like that company, 10 or 20 ARR, they maybe have raised 30 million bucks, 50 million bucks. So you can kind of help engineer, like, hey, we'll give you most of the money back. We can kind of buy out the investors. So if you got your $300 million fund, you're probably investing after fees, you know, 300, 220, 40 million bucks depending on that. Like first check you, you can probably give people maybe like there's an equity injection, you give people a decent chunk back and you can like make them happy. It's like, all right, we got 60% of our capital back on this thing that we didn't really want to deal with anymore.

Yeah, exactly. Because no one wants zombie companies in their portfolio.

Yeah.

It also puts pressure, removes pressure to some extent about follow on capital. Because if you're an individual GP at a multi stage firm, you really care about your track record.

Right? Yeah.

And so you may be incentivized to keep the company alive longer than it should be.

Yeah. I mean I feel like everyone has those examples of the company where it's like technically on paper it's worth 300 million, but it's probably only worth 30 or 50.

Exactly.

But it's still technically at that on the books and they haven't raised around for a couple years and they probably won't. So it's like, what do you carry? How do you discern that when you're looking at someone's performance? Like they come to you and say, oh, 2019 fund, we're 1.8x TVPI. But then you look under the hood and it's like, yeah, we look at.

Our data and we may have companies that overlap with our fund manager. So we'll actually see where they're carrying it. And then we're like, okay, or we'll just ask them outright, you know, what's your valuation policy? And if they just say, oh, you know, we just carry it the last round, but all the last rounds were in 2021, then you know that they're not, you know, being straightforward. And again, that's kind of bad crazy.

Yeah, that's bad crazy. So then how do you approach. We talked about a little bit like how do you think someone should approach portfolio construction? Or what do you like to see? I know, ownership, super important.

Right.

But just if you were, if I were to ask you first Time fund manager. I've never done this or thought about this before. I want to put my portfolio together. How should I think about it?

Yeah, assuming you have the credibility, amazing access, blah, blah, blah. Let's say you're going to go out and raise a $50 million fund. So then the question is, okay, what's that portfolio construction? You probably want to have let's say 25 shots on goal as opposed to like 10 or 15.

So why is that important? And for and versus like why don't I do 100 if I want to.

Be diversified because of the ownership? So then 50 million, if you have 25 companies, you know, going back to that 10% of fund size thing, you know, you'd want to have at least 5% ownership.

Okay.

And so let's say the post is, is 20 on average for the deals you do. So to get 5%, you'd invest $1 million. Right. So then 25 companies at a million is 25 million initial checks. And then the remaining could be for follow on. But generally another evolution of our thought is that we think fund managers, because we used to think fund managers should have at least half of their capital as follow on to preserve their ownership. And we've seen it deployed in very wrong ways and it's, you know, we probably should have been more on top of it. So, you know, sort of, some of it is my fault. But you know, you, if you're a fund manager and you have good reserves, you don't want to do pro rata in every single follow on round. So let's say you have a portfolio of companies and they, let's say almost all of them raise their series A. You should modulate how much you do in that series A as pro rata. In some cases you may just want to do a token a hundred K just to let the founder say all my investors are investing. But in other cases you should be doing super pro rata.

You should put like 5x the original check if that thing's going public.

Yeah. So to show some judgment about it as opposed to just programmatically doing it. But anyway, so the evolution of our thought is right now we think because of the dynamics we talked about where companies that really take off, they're off to a growth round after their seed round, you want that ownership up front. So let's say you'd want, going back to the example, a $50 million fund, maybe 40 million is for initial checks. And so that would suggest that your initial checks could be higher. Right. Like say one and A half million. And then you're, you know, you're getting seven and a half percent ownership.

So which then is slightly better than.

Which is better? Yeah, yeah, more. More is better to a certain point because then we're running the adverse selection.

Like, what if I say so? Like, concentration is good. Like, what if I say I'm gonna write one check and that one checks 100x and I get 100x fund? Right?

Yeah.

So, like, there's probably, there's obviously a spectrum of like, all right, would you do five, would you do 10, 20.

Yeah, I think in general, we, you know, with our fund managers, we generally see 25 to 35, maybe 40 companies, depending on the fund size. And, you know, we also have fund.

Managers who have done the 25 unicorn person.

Yeah, well, that. But we've also seen fund managers that do 10 to 15 and that when it works, it really works, but it's actually a higher risk strategy. So we, you know, we've seen their subsequent funds where they have 15 companies actually be the worst performing funds in our portfolio.

Is there a general fund size where below or above it, you, like, need to lead? So like, let's say 50. Like, if you're above 50, you have to start leading rounds. Like, is there a certain rule of thumb there?

Yeah, our sort of informal line, the sand is. Is about 100 million.

So I could tell you I'm doing 80 million dollar fund and not lead. And you think that could actually.

Yeah, because at 80 million, you'd want it, let's say 10%, for ease of math. And, and let's say the, you know, the post money average is 20, so you'd have to write $2 million checks. Right. And so, you know, with an $80 million fund, you could do probably 30 companies, right? That's 60 million initial and then have 20 million in reserves. If you're writing a $2 million check into a 3 to $5 million round, you're. You may be leading or you may actually be co leading. So it's somewhat, you know, just the taxonomy.

And sometimes you don't even have to be the largest check to lead. Like, I've had people that do like 3% leading the round. I'm like, whoa, I didn't know you could do that. Like, I remember the first time I came across that, I was like, oh, that's actually kind of interesting.

I mean, it helps to have a bigger check into the round, obviously, but it really is the relationship you have with the founder. And you know what the role that you play in getting that round to happen.

Yeah. Are there any historical assumptions about portfolio construction that you think we just as an industry should maybe revisit or adjust?

Yeah, there is, because I mentioned that ownership is somewhat asymptotic. Like if you had a $500 million fund, you're not going to own 50% of a company, right?

Yeah, yeah.

And so then it becomes a question of what is the right fund size to generate a 3x return? And you know, informally, I have this sort of rule in my mind, you.

Know, is this the 60x rule? Yeah, yeah, I remember you were. You explained that to me. I actually forget what I meant to go reread it again. Okay, so what is the 60x rule?

Yeah, well, it's just a numerical thing, but let's assume that you own 5% of a company at exit. So in order for you to get a 3x gross on your fund, just multiply your fund by three by. By. By 60. So let's say you had a hundred million dollar fund and you multiply that by 60. That's 6 billion. So you need 6 billion of exit value because you own 10%. So that's the.

Or 5%.

Sorry, 5. Yeah, right, 5%. So 5% of 6, 6 billion is the 300 million and 300 is the 3x growth gross on your $100 million fund. Right. And so that's the math. But the reality is you have to have 6 billion of exit value. Right? That's six unicorns on average, or one company that returns most of that and probably one or two other unicorns. So that rule of 60 is really keyed in on the exit ownership assumption. So we're using 5% there. Let's say you're a larger fund and let's say it's 10% at exit. So then the math would suggest that it's the rule of 30. And so the example there is if you had a billion dollar fund and you own 10% at exit, on average, you would need $30 billion of exit value. Right. Cause 30 billion times 10% ownership is 3 billion. 3 billion is 3x of the $1 billion fund. To have 30 billion of exit value, you have to. That's 3 decacorns. Yeah, or 1 decacorn and 20 unicorns. And again, if you have 25 to 35 companies, that's a hell of a hit rate.

And then at that point, people think you're God and you're probably. Your fund just gets massive because they think you're like the next hot shit. So It's a tricky thing to navigate.

There's a lot of criticism about, you know, these platform funds just aggregating all these dollars. And you know, perhaps there's some resentment against the more the smaller funds because LP dollars are being sucked up by these platform funds, but they're offering a different product basically. You know, it goes back to my comment about Founders Fund and Thrive. They're on a specific mission to find the four or five best companies and put serious wood behind that arrow. And LPs want that because they can still see a 10x from there as opposed to like a $500 million multi stage fund that's going to make 30 to 40 investments and maybe two of them are going to be good. And then you go back to that math, like $500 million fund, you know, multiply that by 30, you need 15 billion of exit value. So that's a unicorn. It's five unicorns and a Decacorn. And that probably sounds less appealing to an LP than investing in Josh Kushner or Peter Thiel. Yeah.

And then the other thing too is like time to exit. So if your founder's fund and you're investing later, and we might get an IPO on this in three years and it might only be a 2x fund, but you get like a 40% IRR.

This is the issue. So venture is illiquid. Obviously it's a long duration asset. That's how LPs think about it. And you're like, okay, I'm going to be in this thing for at least 12 years. You know, this is the other thing about ventures that traditionally it's a 10 year fund plus two one year extensions. It's not even more like a 20 year fund. Yeah, but no one wants to sign up for that. Even if you have like a 4x, you know, your net IRR after 20 years is going to be sub 10%.

Yeah, I was going to say that's like literally like 10%. Something like that.

Yeah. So I think fund managers really have to think about institutional LPs who have their asset allocation. And if ultimately a venture capital fund is going to deliver a 2x and a 10% net IRR, small buyout, middle market buyout can generate a 2x with a lot less risk. And in five years as opposed to 20 years. Right, yeah.

Or just put it in the public markets and it's liquid, press a button and get it back.

Put in the S&P 500. Right. Historically, that's the 12% net IRR.

So is the 3.3X fund assumption. Even like that's like, doesn't sound that good. Like shouldn't you try to be shooting for at least five, maybe ten.

I mean absolutely. That three X that I'm talking about is gross. And then so if you apply the carry. Yeah. Then it's actually closer to two and a half. 2.6.

Yeah.

And so 2.6 again, if you're an institutional LP, why are you gunning for 2.2.6x on a very long duration asset as opposed to investing in small buyout or in the public markets?

So you really should be trying, if you're a venture manager, you should be shooting for more of like the 5 to 10x.

Yes. I mean we tell our LPs that we will, we're targeting 3 to 5x net returns to them and fortunately we've been able to deliver that in our older funds because they're more mature. But when we're underwriting a new name, you know, a new relationship, you know, we, we run a bunch of scenarios on how they can get to a 3x at minimum. But you know, if you, if you had. And we, we don't use a bunch of unicorn exit assumptions. This is all sub one $1 billion kind of exit assumptions. But if you start putting in one or two unicorns, you can see how a fund could easily get to like a 5 to 10x. And the, the, the fundamental thing is if they have relatively high ownership and their fund is relatively small.

So I want to ask you about starting Sandana, but I have one other non related question. So like can seed funds compete with these multi stage funds? We were just talking a little bit about that because like it's like I think there's, there's two arguments to this and I'm sure we've all heard both of them. What's your take on it?

Yeah, so if you're a founder and you know, you're talking to all the other founders that you know and some of them have gotten these bigger rounds, bigger seed rounds from the multi stage. And then founder fund offers you 8 on 32. And then all the seed funds we're offering 4 on 16. You probably take the founder's fund and by the way that's the same dilution. Right.

20% dilution but you twice as much money to work with.

Which is kind of a conundrum because everyone's talking about how you know, with a copilot you can actually accomplish more with smaller teams. Yeah, but so this is how our fund managers fight that dynamic they will tell the founders that hey, you're not a call option with us because the big multi stage firms, they're making a bunch of these investments and you're a call option. If it works out, they'll pile in. If it doesn't, they don't even know your name. Yeah.

I mean we just said Founders fund had a four. You said four and a half billion dollar fund, like 40.

That's like a growth fund but their main fund is smaller. But you know, so our, our fund managers generally fight this dynamic by saying we are going to roll up our sleeves and work with you. And by the way, if Founders fund and I'm not picking on them but, or like Andreessen or whomever, if they're interested now because of the capital that they have, they can easily lead your next round. So it's better to keep them interested because the biggest negative signal is if one of these multi stage firms invests in the seed round and they don't lead your next round, all the other series A funds are like, hey, you.

Know, is there something wrong here? Like they should have what do I.

What do they know that I don't? Yeah. And we've actually seen this happen where the founders had a hard time raising because the multi stage firm that was in their seed was not leading their a.

So like how do they, so I was going to ask like how do they get there without there being any negative selection? Because if it is actually like a really good founder or product team, like Founders Fund will just like, we'll give you 10 million, we'll give you 20 million.

Yeah.

Instead of the in the side of the eight.

Yeah. We have this discussion almost every day because our fund managers for the most part show great discipline. They are thinking about ownership and their fund fund size and then they're like, oh, but there's this amazing founder. I've known him for 10 years.

Yeah.

And they're going to raise 10 on 40 again, 20% dilution. Right. But do we do that? And I'm like, well you know, your fund is too small that you're not going to hit your target ownership. Generally our advice is to actually participate, especially in the cases where they have super high conviction about don't lead but small check. Yeah. So you know, there's, there are different playbooks around that. But like let's say there is a $10 million round at 40 pre amazing founder that you've known for a long time and you're convinced that this company is going to do really well. But it's not you can't write your get your ownership, but to write a check size, you know, like let's say your standard check size is 500k. You would write 500k into that and then maybe you could get your ownership level higher doing uncapped safes or discounted safes along the way.

So it's like three months later you're like, hey, like this is going really well. I love you. Like I want to give another 500 grand.

Yeah. Or they might come to you and say, hey, you know, we're planning to hire two new people and we need a little bit of cushion. Do you, what do you think? And then you could say, hey, I'll help fund that. I'll just put in an uncapped safe here or a Safe with a 10% discount and help you along so you can actually build your position. You know, Roger Ehrenberg was really good at this. So he's the founder of IA Ventures. One of their biggest wins is a company called Trade Desk. And Trade Desk, at the time of IPO he owned 17% of this. And it's because actually the company went sideways for a little bit. So he bridged them. But he had the foresight to see it was a bridge, not a pier. Right. So whenever people are talking about bridges, we're like, hey, is it a bridge or a pier? What are you actually bridging to?

Okay.

And you know, Roger could articulate all the reasons why he thought with just this little bit of extra capital that the company could get to this next level. And he was right. You know, Founders Founder collective was also in it. They own 13% at exit and it's because they also worked with Roger to, to do that bridge. So to answer your question directly, you know, it is a major issue with our fund managers, do they participate and how do they participate in these rounds that pedigreed founders are being, you know, the rounds are being led by the.

Multi stage firms, like can you do these like pre launch 100 million post rounds? Like is there a cutoff of like, you know, that amount is just too high to even participate?

Well, I think it comes down to what do you think you can do in terms of exit? So is it 100x from here? You know, is it going to be a $10 billion company? You know, because what it is is said differently. It's opportunity cost. So if you're going to participate in something that's high, high valuation and you're getting a tiny piece of it, you know, would that Capital be better used on five new investments that you could have made at the precede stage.

That's, I mean, extremely hard question to answer.

It's extremely hard to be honest. We generally err in saying it's a. The gp that they should go ahead and do it if they have high conviction. Yeah.

Is there like a marketing component component to it where someone says like, oh shit, you were like an early investor in that specific company, like I want to work with you for this, like have you seen that become a part of it or is it, is it really like you're owning part of the company that's going to be extremely valuable and you still get the returns?

Yeah, that's a really good question because you know, obviously the cynical way of viewing that is that you're collecting logos, right? Yeah. And so.

And some people have that strategy and it's worked for them to a certain extent.

Right. But I think it ultimately comes down to relationships and you know, if you're a founder, you probably would want to. So like you're a founder and then your friend is a founder. They're invested in by, you know, tier one VCs. You'd want to know if they actually have been helpful to you, et cetera. And whether it was just that that one particular fund that wants to invest in you was just doing it for logo collecting. Yeah. So you know, it's all. It's about diligence.

Yeah, that's fair. Like that could be kind of insulting. Like this person saw me as a logo to collect. Right? Yeah. Huh. Okay, so the. I think I want to talk also about like about starting Sandana.

Oh yeah.

So I don't know if we talk about when you first got exposed to being an LP or if we start this when you actually.

Yeah, so I mentioned that I came out here with Morgan Stanley. Right. In the tech M and a group. And then in 2000 there was a family office that wanted to start an alternative investment program and that was called Rustic Canyon and it was $500 million. I was a lowly second year associate at Morgan Stanley, but they're like, hey Michael, you should join this. We'll give you the partner title, et cetera. There were six of us, two of us here and then four down in Los Angeles. And so that was my first exposure to actually investing in private companies.

Because you were doing banking like M.

And A. Yeah, we were working with venture backed companies and VCs, but I had never really made a direct investment in a company. And so I did that for nine Years. It was sort of across the board or across the spectrum in investing. We did a small buyout, we did pipe steals, we did growth equity, we did some early stage venture. But in 2003, Gavin Newsom ran for mayor in San Francisco.

I didn't even know that.

Yeah, he ran for mayor.

Oh, he was the mayor for a while, wasn't he?

Yeah. Starting in 2004 for eight years. Okay. And I, I, I was the co chair of his finance committee because I knew him, I knew his sister really well. I knew his dad, his dad actually married my wife and me. So he was the. But Gavin's like, hey, now that I've won, you're a finance guy. There's this board I want you to join. It was the San Francisco Employee Retirement System, and that's the public pension fund for the city of employees of San Francisco. And so I joined it and that was the first time I was on the LP side of the table. So, you know, it was a $12 billion pension plan. Today it's probably closer to 40 billion.

Probably because of you, because of your decisions right back in the day.

No, they've done a really good job. They were very early to venture compared to other public pension funds.

But I mean, they had a cheat code. They were right here. Everyone's around them.

Yeah, exactly. They started investing in venture in the 90s.

Nice. Okay.

Which is pretty.

Hopefully they got some of the good funds in the 90s.

Yeah, I think so. And you know, they were also in a lot of the great buyout funds like Hellman and Friedman. They were in their first fund, but that was the first time I was on the LP side table thinking about asset allocation, how to evaluate managers, you know, because obviously no one grows up thinking, I want to raise a fund of funds.

Yeah.

That's not how. So I was thinking, okay, this is actually really cool. And you know, the other thing that was going on was Venture was changing. So this is going to sound quaint, but in the 90s, you know, the first round a company would raise would be for 5 million. And you know, because they needed to buy sun microsystem servers, they had to pay for software licenses. So, you know, 5 million sounds like it's like the seed round now.

Yeah. And they would sell like 30, 40, 50% of the company.

50%. So they would sell, you know, the typical round was two multi stage firms would come in, split that. So they'd each take two and a half and they'd own, you know, basically 25% of the company. Each that, that totally changed because of, of the cloud. So Amazon Web Services and open source software, you could start a company for an order of magnitude less. You could start a company for 500k. And so that's why in the early 2000s you see firms like Union Square Ventures, True and Foundry. And then in the mid 2000s, first round capital. And so what I saw was, and you know, I'm not the only one who saw it, but you know, there are basically people who are called super angels in the late 90s, in the late 2000s, guys like Mike Maples or Jeff Clavier, and they started institutionalizing by taking outside capital and having funds.

But it's still like angel ish, angel like type of chat.

This is the genesis of seed funds. And so I'm like, okay, my thesis is that small funds outperform and two, that seed funds would de facto become early stage venture because at the same time the multi stage firms were getting bigger and bigger. So now there was an opportunity cost for a partner at a multi stage firm to spend time with a dinky $1 million check, right? And so that created this greenfield opportunity for seed funds to create, to launch. And so I'm like, okay, I'm going to start a fund to invest in these seed funds.

So why was that a good idea? Because for someone who maybe might not know this, they'll just say, oh, like this endowment, just give a million bucks to Jeff Clavier, like do the, do it for him. Like why were you in the middle there?

Yeah, well, number one, I think a lot of the institutional LPs at the time did not recognize seed as a legitimate thing. So when I was pitching my first fund, you know, it took me over 18 months to raise. I got 99% of the people I pitched said no. I've actually had people tell me it was a stupid idea. Other people more generally would say, is this a fad? You know, so why, why did I.

Start it or why, why was it a fad or why was it a stupid idea? Like what was there?

You know, it's not scalable. All these people, there's just like rich guys who want to take a little bit of outside money and then kind of and co rich guy lifestyle, which totally was not the case. You know, Mike Maples and Jeff Clavier, they hustle anyway, you know, and it was also really bad timing because coming out of the global financial crisis of 2008, you know, people were very focused on liquid strategies. The fund of funds is double layer of fees and then I was also a solo GP myself with this new.

Asset class that was emerging.

Four strikes against me.

Yeah.

And that's why it was really hard. But I was very, very fortunate that the University of Texas believed in the strategy. It was Lindell Eekman at the time. He's now at Foundry Next. And he called me one day and said, hey, Michael, we're committing 60 million to this. And then I had cobbled another 28.

Oh, wow. So they were like, what is that, like 80 or 70% of the fund?

Yeah. So they're actually in a separate vehicle called Sendana Longhorns. It's a managed account. So they were the sole LP in that vehicle. And then I raised 28 in Sandana 1. And that was, you know, very difficult.

But I think you, you convinced like a family office. The first one that come, that came in, you sort of like warehoused a couple deals. Right. On a fund to fund. I've never actually heard of that on a fund to fund.

This is totally crazy. But the family office I never met in person until after the transaction was pretty much done. And so I, I pitched, I pitched this. It was a guy named Steven Chang. He was running a family office for a well known real estate investor. And they were out in the main line in Philadelphia. And Stephen was a credit guy. So it's not even his world. Right. Venture. But I'm like, Stephen. So I did like four or five calls with him. I convinced him or at least somewhat persuaded him that this was a good idea. And again, he's not from that world. He's from the credit world, the real estate world.

He's looking at downside and like getting his money back.

Yeah. So basically he's, he agreed to warehouse up to 18 million of commitments. And because of that warehouse and I had to kind of, you know, give him carry also, you know, they were fronting the capital cost, so I was paying pretty high interest, which is what he was interested in to some extent.

Okay, that makes sense.

But yeah, with that 18 million, you know, our first commitment was to IA Ventures Fund 1, which is a 10x DPI fund.

Did it look good though, at the time?

Yeah, Roger's a beast. And, you know, I just knew he was a special person.

Okay.

You know, we invested in Jeff Clavier's fund, we invested in Kirsten Green's fund. And so, you know, that warehouse actually enabled me to get make those investments. And one thing that's really helpful for GPS is again, LPs will want a due diligence so by making those commitments to those fund managers, other LPs who are looking at Sandana could call them, could call Roger or Kirsten and say, hey, what do you think of Michael Kim? What do you think of the Sandana idea? So what you want to actually do is give proof points or touch points where LPs can actually. Or people can do diligence on you. So the other thing, the other way I kind of phrase this is that I went from being a PowerPoint to actually something real nice. And that's an important dynamic. Founders, VCs, it's important for everybody because of one fundamental psychological dynamic, which is fear versus greed. So fear is like, if I make a commitment to Michael's fund, am I looking smart or am I looking stupid? And then if you do a first close or have investments that you can show, then it becomes more like greed because there's scarcity value. Oh, like I only have six months to decide on whether I'm going to invest it or not. Right. And that's the same with founders. Like, you know, the typical story is, you know, a founder goes out and pitches 20 VC firms and it's crickets. Right. But then they hear, oh, Sequoia is leading the deal and all other 19 firms are trying to pile in. Right. It's the fear to greed. And to be able to control that dynamic in any way and help shape that is critical in any kind of fundraising situation.

So what's the right way to approach a first close? And. And flipping from fear to greed.

Yeah. So, you know, warehousing investments is one thing, because that's touch points.

What does that mean? Actually, for somebody who's never heard that before, what does warehousing and investment mean?

So let's say that there's. So Turner, you're raising your first fund, you have some pool of capital because they're interested in investing in you. Maybe they can warehouse your first two or three investments.

So this might be like an LP that's going to invest in the fund and they volunteer to say, hey, we know you're raising 20 million, we'll give you 5. And you can use it like a line of credit almost to, like, draw it up. And then when you close the fund or close more capital, we'll like. It'll buy it away. You'll, like, buy it back from us and you'll maybe put some interest on it or something.

Yeah, exactly. That's exactly it.

Is that hard to set up? Like, do most people know how that.

Works or most people don't know about doing that, I'd say, but it's very helpful. I mean, it was super helpful to us. The risk that pool of capital is taking on the LP is taking on you is that you don't raise your fund. So they're now stuck with it. So they have to have some conviction in your ability to pick amazing companies. But the question of first close, it gets to the point about fear to greed, because once you do your first close, then you have scarcity value. Then you've converted yourself from a PowerPoint into a real fund. And so then you can key off of that and say, hey, I did this first close. We've made investments, you now have touch points for diligence. And then we're going to spend the next three, six months, two to three quarters finishing this fundraise. So now you have scarcity value, you have a deadline and people either act on it or they're like, okay, congrats, let's stay in touch. We'd love to see your next fund. At least it's a forcing function.

Yeah. What advice do you have on getting to those quick answers and quick closes? Because just emerging other emerging manager friends, you know, like, oh, this LP dragged us along, never made an answer like, what have you seen works best of just getting someone to make a decision and move on, at least from your portfolio funds or in your own experience.

You know, I think really just in an earnest, high integrity, honest way to ask the person, are you interested? And if so, what do you need? What do, how can I help you get to a decision point? And you know, I think, you know, structurally we're talking about first close and a final close and scarcity value. But it's actually, you know, we've, I, I, I've had so many people, so many prospective LPs ghost me. It's really annoying, but it happens. I understand, but it's if you, you know, reach out to them and say, this is real, we would love to have you on board. What are the next steps? It's really just pushing for next steps and there are different tactics. Like Mark Suser talked about this once in a blog post. You know, if you meet with one of the LPs, then maybe they have another team member and you can suggest, let me, I'd love to meet your other team members. You know, actually showing up in person is a real thing. You know, there, there are very smart institutional LPs who are not necessarily in San Francisco, New York, LA and Boston. So by visiting them, you're actually showing you know, number one, hustle, but number two, you know, you're trying to build that personal relationship and again, it's a long game. There are many LPs who have told us no and then they go to a different firm and then they say yes because they believed in their strategy but the overall first firm didn't believe in it.

So should you be asking like what is your guys investment process look like? Who makes decisions? You, what's your like capacity this year? How many more funds are you doing this year?

All that. It's just really getting a sense of who your customer is. Right?

Yeah. So yeah, it's like enterprise sales. It's like someone's buying a product from you. At the end of the day it's like what need do you fulfill for them?

Yeah, exactly.

Thinking through sort of the, the current, current environment, what percent of emerging managers do you think are going to survive? You know, I think a lot of people talk about like extinction events. What are your latest thoughts on that?

I'll give you two stories or two angles. One, it's hard to kill a venture firm, right? Because again it's 10 year plus two one year thing. So it's going to be around for 12 years. The question then becomes, does that GP actually want to continue on if they're having trouble raising their second or third fund? Maybe it doesn't make sense. And then the question also becomes, is opportunity cost? Could I be actually doing something else? So we have this one fund manager. I won't throw him, it's not throwing him under the bus but I won't put the spotlight on him. But they're at a very successful seed fund and you know, they're thinking about what does the next fund look like? You know, could we generate meaningful carry off that fund? How long will that take? And if you were to say okay, I can make you know, 5 million of carry over the next 10 years from that fund, well you divide that by 10, that's 500k. Right. And they're not paying themselves that much. So let's say they're paying 150k salary, so 650k all in. Then suddenly, you know, working at OpenAI and getting paid a lot more is actually pretty reasonable. Right. And so you got, you know, I think gps are coming to that conclusion. Same with actually the junior partners or the mid level investors at the multi stage firms. So like if you're at a, using no names, if you're just at a $5 billion VC fund and you're thinking okay, how how's this fund going to generate carry and in what timeframe? And then, oh, by the way, what's my percentage of that carry? Then suddenly you're thinking, okay, I'm actually doing all the work, but I'm ultimately going to get paid maybe 2 million bucks over the next 10 years from this fund, you know, 200k right on top of my salary. Then again, suddenly it looks a little bit more attractive to either start your own fund or join a tech company, or start your own company, go work.

At Google and make a million bucks a year. Even some venture funds, the larger ones, or maybe not venture fund, but investment management, asset management firms.

Right.

Make like high six figures, maybe seven figures a year.

Yeah, exactly.

You don't have to. The risk of fundraising and all that stuff.

That's right. So I think, I think LPs really need to dig into this, like how incentivized are actually the people doing the work.

So how do you tell, like when you meet someone and you tell like, maybe they're good in all these things and check the box, but you're just like, I don't think this person actually wants to do it.

Like, how do you tell the.

And then, and you, and you say like, if there's an 18 month period where it gets really hard, that they're not going to give up.

Yeah, that, that is a very good question.

Question.

You know, we have some fund managers whose funds aren't performing as well as they hoped it would be. You know, these are fun ones. Their TVPIs are below one, partly because it's still J Curve and they haven't had a bunch of markups. But some of those companies, let's say a good amount of them are not going to make it. They're going to be zeros, then you know, fundraising is going to be hard because they don't have any superstars. They don't have anything that they can really point to because it's just too early. And so then the question is, do they decide, number one, when are they going to raise the next fund? Do they try to slow roll it so that they can actually show progress or, and delay fundraising? Imagine, let's say they were thinking about every two, two and a half years, maybe it's now three to four years just to see how their portfolio plays out and they're making salary from their management fees. But so they can do it. But you know, if they kind of deep down know that most other companies aren't going to make it and that portfolio is not going to look like a pretty stellar one. And that fundraising is going to be hard. They might throw in the towel and you know, I think we're going to start seeing more of that partly because in 2021, kind of in the bubble, there are a lot of new funds being formed. It's like, you know, tourist fund managers. Everyone talks about tourist founders, right? Oh, my friend raised a round, started a company, I'm going to do that too. We also saw that in the fun world, you know, tourist fund managers like oh, my friend raised $15 million, I'm going to go out and raise $15 million. And you know, back then it was relatively easier to do that.

My conversion rate on my fund 1 in 2 Q1 of 2021 is way higher than it should have been. You have a call with someone, they give you 100 grand, 150 grand.

Right.

Surprisingly easy. Especially when you contrast 2020 and 2021 to 2025.

Yeah, massive difference, massive difference. And it's also because, you know, the smaller funds, their LP based were largely high net worths and you know, people in the tech world and maybe they're portfolios are doing as well now so that the.

Yeah.

Plus liquidity to commit to these smaller funds. So I do think that we're going to see, you know, quiet resignations of groups who are not going to raise their next funds and, and they'll position in a way that like hey, I'm joining Andreessen or you know, a multi stage firm and that might be the right home for them and they might still be amazing investors. It's just the dynamics in the fundraising market and also the last five years in venture make it very hard. Unless you have a few amazing companies in your portfolio, it might be harder to raise and you might ultimately conclude from an economic perspective that it may not be worth raising the next fund, but rather going to work for an established multi stage firm or starting a company or something else.

So what do you think in 2025 right now, raising a fund two or a fund three? What do you think someone needs to have or you would have proven proof points to get either you or just like generally the LP community excited about a fund.

Right. Well, first and foremost, did you do what you said you were going to do? So, you know, let's say you raised a $25 million fund and you said you're going to invest in 25 companies, 500k each or you know, did you actually do that? Yeah. And then we would look at like, okay, let's look at the companies and we can see, see how, how they're performing. Even though it's still early. You kind of get a sense by triangulating like who are your co investors? If you have follow on investors, who are they? You know, you can probably look too.

It's like it looks like there might be three companies in here that could return the funds.

Like yeah, we would do the math, right. And then say, okay, this is a plausible path for these guys to actually generate 3x. So that's the kind of analysis we would do. And then obviously, as I mentioned before, we would talk to all the founders and say, hey, you know what, what was that fund manager actually helpful to you? You know, why did you let them on the cap table? Could they have actually, you know, let's say you had a $25 million first fund and now you're talking about raising $50 million, which is probably the next natural step, 40 to 50. But we've actually had fund managers who had $20 million funds and say I'm going to raise a hundred million. And we're like, dude, you know that means you're going to have to write 1 1/2 million dollar checks, not your 500k checks. So then we would talk to the founders and say, you know, if this guy or gal had $100 million fund, would you have let them have 2 million of your round?

And hopefully they come back A guess. Hopefully. But not always the case.

It's not. We've had founders say no, no way.

So then just thinking about like broader, just lp what's going on in LP world right now? I mean some of the listeners have probably been aware of this, but there's some of these endowments, like classic venture investors like Yale, Harvard. I mean I think there's a lot of endowments out there. The like venture.

Yep.

What is sort of happening right now in their world?

Right now? The endowments, I think are under siege. You know, there's been a proposed tax on the endowments. If you're, if your endowment on a per student basis is above 500k, you might be subjected to. And this is the proposal, 21% tax each year. What go each year? Yeah, it'd be an income tax. So basically I think what that would mean is that endowments would have to think through what their asset allocation is because if they're actually paying tax now, they actually have to have more liquid.

You feel like 20% liquid, at least at a minimum to pay that tax. Yeah.

And so I think that's something that every endowment that's under that spotlight are going through right now thinking about it. And universities also have started issuing, been more active issuing bonds just to have more liquidity. Now. I don't think that endowment tax will happen, actually. Oh, if I did. If you, if you just say, you know, if I had a bet, bet you it doesn't happen. Why not? Not at 21%. A few years ago in the first Trump administration, there was a tax put in, but I think if I remember it was like 1.3%. So now there is a tax. And the question is, because with any tax it always just gets bigger. You know, what level does it end up? You know, 20% versus 10% or 5% is a material difference. So I do think it'd be, you know, maybe it will go up, but it won't. I don't think it'll end up being 20, 21%. So I think endowments are really thinking through how are we going to change our asset allocation in order to have more liquidity. Well, that generally means you're going to have probably more fixed income and less longer duration assets like venture funds. So I think, you know, the other part of it is that I think both the PE firms and the, the venture capital firms are going to be lobbying very, very hard against this tax because the, the, the pool of available capital from institutional LPs for private funds is going to be less in that case. Yeah.

I mean, you're going to have to find new sources of capital like high net worth or go overseas, which I know some people kind of are done that. Luckily though, we have a bunch of, like, we have a lot of friends in VC in the administration. Hopefully they can.

Yeah.

You know, finally do so they can do something for us.

Right, I agree.

So what is, what do you think? Maybe like one of the last questions. What do you think the ideal GPLP relationship looks like? You have a lot of them. What seems to be the best just way to structure that?

Right. Well, I mean, no one likes to be micromanaged, so we're very mindful of that. And you know, as I mentioned, we're the largest LP in 80% of our portfolio funds. But we don't unnecessarily ping them where, you know, we, like I said, we, we do monthly calls with them and every so often we're like texting or on what we use WhatsApp specifically to text with our fund managers. And, and, and we just want to be helpful. So, you know, our fund manager might ping us and say, hey, you know, one of my companies is going to go out for series A. It's in let's say this particular space. Are there downstream capital investors that you think are the right fit for them? So then we would start engaging but we're not like pinging them, you know, how was your day? You know, what'd you do today?

Any hot deals coming out that we can get into?

Yeah, it's not like that. So I think it's, it just comes down to the normal things about any relationship. Is there a trust? Are you, are you responsive and you know, do you ultimately provide good advice and you know, it's that kind of thing. We try to lubricate all of our ecosystems by having events. For example, we'll have a dinner with like a multi stage firm and invite a few of our GPS to it. You know we, we, we're really trying to foster our ecosystem and if we have a new fund manager and they don't know some of our other fund managers, we'll connect them so that they can go up and meet them on their own. So again we're just trying to foster and lubricate the ecosystem. So I think that's appreciated.

Is there anything you think fund of funds get wrong or usually mistakes on?

Yeah, absolutely. The number one thing would be just continuing to re up. And so the traditional VC fund of funds, you know the knock against them is that they kept re upping to these multi stage firms, you know, through the 2000s and 2010s and those firms were over the hill. They're past their prime and they weren't open enough or didn't have their own portfolio construction where they could add new names and because the number one the reason is historically venture funded funds would basically be selling access right to a big state pension fund who wanted to check the box off that they had venture. So they worked with a big fund of funds and the big fund of funds would have these traditional sand hill road names and, and you know the trustees of that state pension fund could say look, that's our venture.

Yeah that, I mean that's an incredible pitch to the right lp.

Yeah. And there are very large fund of funds in venture and that's I think kind of the core premise of what they're doing. The smarter ones like a horsely bridge, which I view as like the bluest chip in venture fund of funds. They're different beasts than us, right? Cause their funds are a billion plus. They're in multi stage firms. They do some seed investing but, but you know, they're smart they add new names and again it goes, they, they write big checks to their existing portfolios. They're not constantly re upping with every name. So each name is a complete new underwriting. But historically venture funded funds would just continue to re up with the Sandhill Road crowd and, and so that they can say to the their institutional piece, look, this is what our portfolio is. These are hard names to get when in reality those weren't the funds that you wanted to be in.

So it wasn't even like a performance or underwriting. It was just like we have access and like that was the pitch. And it's a good pitch for the time I guess.

Right.

But maybe not.

The other thing that we're very different about than traditional venture funded funds, aside from that, you know, our space, you know that we focus on seed and precede is that from the beginning we really wanted our LPs to meet our fund managers. So most venture funded funds don't allow their LPs to meet with their fund managers because you know, it's the Achilles heel of a funded fund. The LP will ultimately invest directly. Yeah, that'd be terrible. But that's intrinsic. And so because we, we decided it's intrinsic and because seed was still sort of early in its stages, no pun intended, we actually wanted institutional LPs and RLP's to see what these fund managers were doing. And we actually encouraged our RLP's to invest directly into these funds. With the value prop being, hey, Sandana is going to continue to find new managers. And so we're a good sourcing engine. And so we're okay with them investing in some of our portfolio funds, but they still want to work with us because we're finding new ones with us.

Yeah, they almost see you like a, like a seed investor in like companies, but in finance.

Exactly.

You're constantly finding ones, bringing them in and like they'll graduate. Like these guys, they have a billion dollar fund, it's not in the Saddam model anymore, but like they have a great forex net return pitch to an endowment and they down the LPs. They probably, they probably like see you as a way to like deploy more capital downstream.

Right.

And help you vet the manager.

Yeah, exactly. And because we're known as very active in the early stage, we also see a bunch of series A spin out firms, you know, like Sarago at Conviction, Tomas Tungun's at Theory, the Chemistry guys, we've seen a lot of those and a lot more. And while it's not a fit for Us, you know, the ones that we like and we always take the meeting because you know, obviously it's an ecosystem and our fund managers need to know these new groups because they might be leading their Series A's. We'll also introduce the higher quality ones to our LPs and say hey, this is an interesting group. You guys ought to talk to them directly.

What's like the most interesting thing happening in venture right now that you're paying attention to on like an ecosystem level?

Well, there's a couple of things. One, you know, I think there's an arms race to get earlier and earlier and so I don't know if VC firms are gonna be funding 13 year olds but finding these younger founders in their natural habitat I think is important. Then you also have this whole, you know, very large scale investing in, in the late stage companies and they're you know, making billion dollar investments into companies and those companies may not survive. So you might have a complete catastrophe. For some firms that bet on the wrong horse. I'm largely thinking of that foundational model companies. So it'll be interesting to see how that if you fast forward that movie 10, 15 years from now, whether it was a disaster or they turned out to be genius pickers. The other thing I would say is that really is that messy middle that we were talking about. There is this whole slew of companies that are just kind of stuck there and what do you do with that? And I think there's an opportunity in there. So like I was saying earlier, you know, we've been thinking through that. I'm not sure raising a buyout fund is the right answer for us. But you know, you actually see certain VC firms, you know, starting holding companies or you know, obviously the general catalyst, roll up strategy, et cetera, I think that's very smart. And it's partly because you know, if you have a, a portfolio of companies that you've acquired, you can roll out a tech stack and make it a lot more efficient, you know, AI tech stack, et cetera.

So I think in theory like the companies are acquiring, I guess depending on the how tech native they are, some of them might be non very, not very technologically or the meme is like acquiring accounting for.

Exactly.

So like yeah, maybe you like supercharge a tech stack and actually on that.

Point, you know, it would be interesting to see how service centric companies can get software margins. And I'll give you an example. So like you know, if we get an lpa, a limited partner agreement and we send it to Our law firm, they have an associate read it for five hours and write out all the issues and they charge by the hour. Now you would think that with AI you could do that in one minute. Yeah. And you know, so I think that's some service centric firms like law firms should start charging by, you know, by project fee. You know, so like our, our law firm would just say, hey Michael, it's $10,000 flat fee and then it's up to them to get a 90% gross margin on that.

Yeah.

And then.

Yeah, it'll be interesting to see how that.

Yeah, yeah, for sure. So, you know, again, you can never time technology innovation. It's always a great time to be in venture, but it is a long haul, long duration asset and I think there have been ways where people are generating liquidity and I think that hopefully will be sufficient, but it's not. But ultimately venture is a power law game. You want big exits and the fund managers who are going to do best are the ones who own a relatively high amount compared to their fund size.

In the best companies.

In the best companies. Yeah.

Yeah, I think that's a good way to end. I feel like you just succinctly like tied everything together at the end. So this is a lot of fun. Thanks for doing it.

Yeah, absolutely.

And thank you for listening. Sorry again for the audio quality in the last 20 minutes. Did my best to make it bearable. Don't forget the world's largest hackathon kicks off on May 30, hosted by Bolt. Over a million dollars in prizes. 30,000 people are already signed up and it takes just one idea to get started. Join@hackathon.dev if you missed it, make sure to check out last week's episode with Mike Vic at Pursuit on how AI is changing business models selling to the government. And tune in next week for Sanjay at Biswas at Samsara and Eric Bisha at Benchmark. Subscribe to my newsletter the split to get both of these episodes plus a transcript emailed directly to your inbox. Thanks again for listening. See you next time. Sat.