20VC: Why Small Funds Outperform Large Funds & AUM is a Vanity Metric | Why 99% of Investments in AI Startups Will Go To Zero | Being a "Traction First" VC & Investing Lessons from Investing in Canva and Missing Figma with Nikhil Basu-Trivedi

My firm belief is that small funds outperform bigger funds. It is incredibly difficult to have a 5x net return on a billion dollar plus fund. I honestly don't know if there's great AI first opportunities for us at Footwork to invest in just the insane hype cycle around it. At the moment we over rotated once again very very quickly towards excitement here. I don't think that there's a lot of AI enabled companies that are going to be for us too expensive and there's just so much competitive noise.

This is 20 VC with me and I'm so excited for the show today because I first met this guest 7 years ago following a cold Facebook message and then we spent time together when I was job hunting as an 18 year old in San Francisco wanting to be in venture.

A lot has changed for both of.

Us since then and I'm thrilled to welcome back to the hot seat Nikhil Basutravedi, Co Founder and General Partner at Footwork Now. Previously Nikhil has invested in the early rounds of Canva Class, Dojo, Frame IO, Imperfect Foods, Lattice and the Farmer's Dog. And prior to Footwork, Nikhil was a Managing Director at Shasta Ventures and on the investment team at Insight Park Partners. But before we dive into the show today, you know all those mind numbing, tedious tasks that seemingly take up half your day? Well, Coda is here with their new AI powered work assistant that helps you and your team not just finish tasks but make progress so your product team can bring a feature to market faster by using CODA AI to tag customer feedback, draft PRDs, suggest target audiences, summarizing product discussions and more. Your sales team can engage more customers by bringing in data from sources like Salesforce and then use Coda AI to suggest action items, meeting meeting agendas or lead scores. And your marketing team can drive an impactful launch with Coda AI, summarizing user insights, creating briefs generated from notes, and writing mock press releases to visualize taglines. With Coda AI you can reimagine your to do list and how you collaborate so you're not only finishing tasks but really making progress. If you want a work assistant that lets you get back to work, you can get started with Coda AI today for free. Head over to Coda iO20VC. That's Coda IO and get started for free.

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321 0. You have now arrived at your destination.

Nikhil, I am so excited for this. We did this like seven years ago.

Remotely and so to have you in.

Person is such a treat for me. Thank you so much for joining me.

Thanks so much for having me man. Yeah, it's fun to have dug into the chats to see when we first connected it was January of 2016. I called outbound message you on Facebook messenger which we realized, which is hilarious and it's amazing to see where you've come since that.

I mean I look about 25 years older. The venture game is having its effect on me. I think I'd love to start on is I think we change how we invest so much in time and if you were able to cool yourself the night before your first day investing, what would you advise yourself on that call?

Two things. One is actually a piece of advice one of my partners at Shasta gave me pretty early on, like probably in the first couple months, which is don't look at the title on your business card which at the time was associate at Shasta Ventures. Just think about yourself as a venture capitalist and do as venture capitalists do, which is find, decide, win, help and exit. So the five components of our day to day job and venture and that advice I think was really profound. It sort of unleashed me and it's the advice I give young people in venture today, which is again, don't look at your title, don't think about exactly what the role is, Just think about yourself as a vc and I think you'll be better off for that. And then the second one that came to mind is exceptional companies deserve exceptions. And it's a mantra that I've tried to always have in my venture career, which is, yes, you have this model of how you want to invest, this dream idea of portfolio construction and the profile of company that you're looking for, but it's so often the ones that you consider an exception for, the ones that just blow you away, that feel like outliers, that end up being the ones. And so I've always tried to have that in the back of my head, which is at the end of the day, all of what we're doing in our job is searching for the outliers and the truly exceptional companies.

I do just have to unpack both. Actually. The first one you said there about kind of do your job as a venture capitalist. Don't worry about the title. Title. So often founders are told, don't speak to the associates, it's the GPS who make the decisions. And I'll be honest, I say that too. Especially at growth, we don't have time for spinning cycles on associates. Like, just go to the gps. I can introduce you to them. Do you agree with the advice on just go to the gps?

I think it's case by case dependent and there are so many folks who've grown up in the industry to become incredible investors who started off at the bottom of the ladder at a firm and so you just don't know who those people will be. And you're better off a founder judging based on the actual conversation you have, which sometimes may be a lot better, with the youngest person on the team versus the managing partner of the firm. I always give people a chance, whether it's the founders who come in through not that warm of an introduction or purely cold. I always try to review what they're saying and I'll quickly write an email back saying not interested, comma, thanks if it truly is not a fit. But I've always kept that mentality and I started at Insight Partners in New York, where I was bottom of the ladder as a summer intern and an analyst. And so I obviously have bias on this dimension, but I do think that there are people who are really young in our business who are really thoughtful, and that a conversation with them might actually lead to some learning for you as a founder. And it may even lead to an investment, as it's done for me several times in my career. On the venture side now, I often.

Find actually that they're some of the most researched and thoughtful because they've had the time to actually map out a space and they can actually provide a lot of value back to founders where they haven't had the time to do competitive analysis on pricing and everything in between. So totally that only exceptional companies deserve exceptions. Is there one company or a situation that just most stands out to you? You've invested in the canvas of the world and many other great companies. Is there one where that was very much the case?

The Canva investment for us at Shasta was an exception on so many different dimensions. And so it's obviously the one that stands out for me personally. You know, the company was based in Sydney, Australia. It was raising a convertible note at a $25 million valuation cap. It had no revenue yet. It had a bunch of early signs of product market fit, actually. Like, like several hundred thousand monthly active users of Canva who were using the product really aggressively. It was growing 30 to 40% every month, but it broke a lot of the traditional rules. And so we thankfully decided to make that investment. But there were all sorts of reasons to let it go.

Dude. I mean, just for the context, like, married couple as co founders who are fantastic.

Well, they were not married then.

Love them both. But like, a couple as co founders is a contentious one. Non technical.

Yeah.

In Sydney, Australia.

Yep.

And not a, like, stellar who's who of like, seed investors before, because it was so early.

Yeah. But I think when you dug beneath the surface on what was actually happening in people using the product, you could see what I just described, which is, wow, there's a hundred thousand people using this every month who are creating 3 to 400,000 designs on Canva every month. Those folks, it was about six months in, after the product had launched, and you could see that those folks, their cohort retention in the first six cohorts looked very strong. It looked like it was flatlining of creators who just were Canva on a very regular basis to design things. It was also fragmented usage. It wasn't just Facebook posts and infographics and social media content. It was also pitch decks, it was also posters, it was a lot of different types of media and it was growing completely organically. The SEO thing hadn't yet been figured out, but it was still just growing through word of mouth from people using Canva, posting Canvas out in the wild and other people discovering Canva as a result. And so all of those characteristics gave it some early signs of product market fit. And if you only stared at that, you could see that there was something really special here. And if you put away the noise of everything you just described, I think what you would have seen is a really interesting product that has strongly signs of product market fit.

I think we actually really underestimate the momentous weight of product market fit. Once you have that, so much else goes away. Yeah.

And don't get me wrong, you need.

To find the next stage of product market fit. But so few actually get that. We've seen this interesting reversion away in last years. It was like scaled funds. Aum.

Wow.

They've raised big funds last six months or 12 months. We've seen this constraining fund size and this kind of applauding of it. How do you think about the small fund versus big fund for early stage venture?

Nikhil, I'm very biased here because at footwork we're still investing our first fund, it's $175 million fund. And my firm belief in my bones is that small funds outperform bigger funds. It is incredibly difficult to have a 5x net return on a billion dollar plus fund. I think there's incredibly few of those funds in the history of venture.

I actually did the math with Jason Lampkin the other day which is if you have a $500 million fund and you want to do a 6. Yeah. You then need if you have 10% holding $30 billion of enterprise, that's 6x.

Gross, not net of carried interest and fees that LPs pay. And so 5x actually net is a high threshold in that it's at least one Canva in that size fund with 10%. With 10% that's high.

And it's every fund you need that on a two year cycle. Exactly.

And there's so, so few companies that get to that stage. And so when you do that math it just makes sense to me that small funds are going to outperform big funds on.

But do you think anyone disagrees with you? Because of course you're right, it's easier to make money on small funds.

Yeah. But then people have made decisions and taken actions that would suggest that they don't believe in it. Right. If the purpose of what you're trying to achieve as a venture capitalist is maximizing returns, therefore sort of maximizing carried.

Interesting misalignment between GPS and LP. So which is that actually if you have a $400 million fund and you 3x and it which I'm not saying is easy by any means, that's hard to do. But it's much better than 5xing or 6 or 7xing, a $50 million fund, 100%.

And that's part of the issue, I think, which is if there was true alignment, it would be about maximizing the multiple. And that's certainly how we think about it at footwork.

What do you think happens then? Do you think that all of these funds downsize and say, you know what, we actually are returning back to an optimization on returns.

I think a handful will, and I think there'll be a very smart handful that that will. But it's a really difficult and painful decision to do that.

Also, your team is based around the fees that you have.

Yes, although I would say most venture firms have plenty of fees to cover the team and more especially at that fund size scale. But more than that, I think there's this narrative in the industry, right, about how big your fund size is and how much aum you have. And so it's really hard to go from even a brand and reputation standpoint in the market from having a $2 billion fund to having a $400 million fund. And the handful of firms that have actually made that type of decision historically, I think some have been really better off for it.

The thing I feel quite constrained on, and I'm ambious of the larger funds for, is their ability to be less price sensitive. And what I mean by that is they're ownership focus, very much like I'm sure both of us are. But whether it's three million or one and a half, they don't really care as long as they get their 15 or 10%, whatever that is. And so founders like, listen Harry, I love you, but why would I take your offer, which is way less than their offer, which is much more. And so our ability to pay up is significantly reduced if we want the same level of diversification. I find that challenging.

It is certainly a challenge and it's something I think all of us have faced against the big multi stage firms with billion dollar plus funds. What I'll say about that and what I try to explain to founders Is I think that that's actually a misalignment between founders and these types of investors which is oftentimes in the founder's best interest is actually taking less money, being more constrained in the early days to find product market fit. As we were talking about earlier, given just how big of a inflection that is. I mean how many times have you seen a big early stage financing yield to nothing for the founders, nothing for the company. I just think there's very few of those rounds that actually have worked out historically.

I think I'm going to get in trouble for this. But my worst and the reason I think the show does better stay than ever is because I can probably open up and have more people hate me before. But like my worst performing and I've done 150 investments, the worst for me ones are always the stellar VP that comes out of the stellar company and raises 10 on 40 as the pre seed. Yeah, they are always the ones which slowly meander to either a bad act or higher or nothing. Do you find that too?

Yeah, yeah, we. And we don't do those types of rounds and we're not set up to do those types of rounds. So actually in a strange way, I really like the constraint of our fund size. I actually think it forces us to make better decisions and I think there's a laziness and a lack of great decision making that can come from having a bigger fund in the same way that it can come from having too much capital in the early days as a company.

I agree with that. When you think about the argument with founders or not the argument but the debate when they have a multi stage fund and a seed fund and they say hey, these are our options, how do you actually advise them on taking the money and they have much more money available to them from the larger funds. I guess my question is is it always better to take the smaller round, do you think?

The variables that would go into my thinking are the firm, the partner, et cetera, sort of the match of that to the type of business and the capital match to the type of business. Because there are some companies that actually do need more capital in the early days and that will benefit from that. But of course based on footwork, being a stage specialist firm at early stage, we only lead early stage rounds. We only lead and we only do early stage. I have a bias towards the stage specialist.

Do you think it's possible for stage specialists like us, the seed specialists, to operate and invest in the hot startups at seed anymore which are traditionally 5 on 25, 6 on 30, whatever that is. Do you think it's possible for us to build a business around those deals?

I think it's very hard. That's why more often than not the companies that we invest in are not the star studded team with that type of round. It's a team that looks a bit more like a Mellencliffe at Canva, but that has a product that's already out in the market, that already has some early signs that it's working, something that's resonating with customers. And so it's typically not in a really hot area like AI at the moment and it's typically not from a really hot star studded team.

Do you think a load of multi stage funds are burning a ton of money on AI seed companies right now?

Yeah, I think so. We don't think the foundational model investments, for example, that are raising hundreds of millions of dollars in a seed make any sense. They don't make sense for sure for our firm, but we don't think they actually make much sense for the big funds either. I mean the money is going to fund capex to Nvidia H1 hundreds. It's going straight out the door in many cases. I don't get it. And so I'd love for you to have a bunch of those folks on your show.

I think they declined.

Do you understand it?

So I think that funding rounds are very misreported. And what I mean by that is there's definitely been some in Europe where $100 million rounds are reported on $250 million valuations. If you actually know, you know that moronic investors did it on uncapped notes, but actually only 20 was priced at that, that. And so quite often there's like structure to rounds which journalists just don't get. And actually the founders are not stupid. They're not selling half the company in that round. Investors are stupid for doing it in an uncapped note. And well done to the founders. But one thing that I really want to ask about is there's a lot of portfolios today where the founders have done riffs and they did preemptive A's in the good times. And so they actually have eight to 10 years of Runway, but they don't have product market fit. What happens to these companies with very long runways but no product market fit?

Those companies have to find some product market fit somewhere to deserve to exist for a longer period of time. And I think there's a lot of companies that are just having really honest, hard conversations around this right now, or at least there should be, because the Runway doesn't matter unless it leads to a takeoff or landing. And of course, ideally a takeoff in startup land. The other thing is momentum and winning for companies, as I'm sure you've seen is everything thing like, if you do not have that, it is really hard to have a great culture at a company. It's really hard to hire the best people. It's hard to do your best work yourself as a founder. And so you just have to have that at some level.

Have you ever had this discussion with founders about returning money?

Yeah, a couple times.

How does that go and how would you advise me? You know, I've had it too. It doesn't always go great.

Yeah, it's kind of the conversation that we are just having, which is, do you want to feel like you're winning? Do you want to feel like you have momentum? Because that's what we want you to feel. And invariably the answer is like, yes, we want to feel that way too. And so the question is like, are we banging our head against the wall at the same thing for too long? Should we move on? If so, we can move on and keep the capital. But at some level, I think you have to have that type of conversation.

Generally they will have spent half the money, say, as an average. Is it not worth just letting them keep going? They're a team you backed in the first place. They're probably going to meet a certain level of quality. Actually, the Stuart Butterfield and Slack example always rings true for me. Yeah, just keep going.

I think it can be if you're having the right types of honest, transparent conversations around it. And if you're seeing that the team is iterating and experimenting around something and moving quickly around something, it's okay to throw eight different ideas at the wall. In an experimentive phase when you realize the thing you have that you thought was going to work is not working, I think it's not okay to not be operating with a sense of urgency and to not be able to have transparent conversations around it. Those are the two things that I would try to suss out and judge.

When you think about kind of those early days and actually making the investment decision, I this one which we about canva but I wanted to kind of let the conversation run. You have people, you have market, you have traction. How do you rank them in terms of importance?

I've always been traction. Early signs of product, market fit. First investor, then people and then market. And so that's really interesting.

That's not what people as often the opposite. Like you're like an Eli Gill.

Yeah.

Will be like market first and then I think people and attraction.

Yeah. Like, I remember having a chat with Keith Raboy about this where he was just like, look. I just look for sort of founder plus keynote. That's my stage. Founder plus presentation plus idea. And I was like, keith, that I could never do that. I've made very few, if any, investments like that because I like to see the early sparks of something working. And I'm willing to take more risk on the market than I think other investors. And so I'm happy to unpack that if that's.

Yeah, I'd. I'd love to understand that and like how that most commonly shows itself. Is it word of mouth? Is it revenue? Like, talk to me about.

Yeah, so it's certainly not necessarily revenue. Right. As I mentioned with canva, there was no monetization. It is those early signals that you've built something that people love using. And so that can come in the form of, you know, high frequency of usage or high repeat usage or high retention. Even on a really small base of users, it can come from word of mouth growth. Even on a small base, it can come from just anecdotes like, I could not possibly live without this. Now that I've tried it from customers.

I find so much in the comments on YouTube videos, on app Store reviews. Yeah. I find that a real gold mine of untapped.

Absolutely. Product reviews in general.

Also, like, are people doing tutorials around products? That's a really good one. Yeah.

I mean, you can literally Google and learn a ton about what's happening to a product in the wild without ever speaking to the company. And we always try to do that. And so the hard thing is they do.

I agree with you totally on all this. But at the stage we invest, I find they're well past that by that point. Do you know what I mean? That's the A round. By the time they've got. Yeah.

Now I should be clear about this, which is at footwork, we only lead rounds. We only do early stage, we lead seeds and as. So we've made 11 investments so far. We've done five series as and six seeds. I think our average initial check's about four and a half million and the range has been two to nine million. We've done later seeds and earlier A's precisely because we love this stage that I'm talking about where there is a little something that's Working where the founders can articulate why and have a bunch of unique insights and where the why now is strong and where they have a big vision for what it can become. But there may be some level of market risk. You know, it may not be clear how big it can become. I wrote recently this is the question that keeps me up the most. Like how big can this company be? Can it be one of the ones.

You wrote this in your billion dollar. Yeah, yeah, that's right. I remember reading in the research for this and then I thought instantly to we, you know, do a show called the Memo where we review the investment decision of multi billion dollar companies. We've had Jeremy on Snap, Alfred on Instacart, Byron Dieter on Twilio, the best of the best on the best companies. Every single one said we massively underestimated how big the market would be.

And so I kind of lead back.

From that thinking it's just a way to come to a wrong decision. Trying to do market scenario but planning well.

So a couple things. One, this is precisely why I underweight market. Does that make sense like I weight market third on the three that you asked me about because I just think it's the hardest one to assess and predict for myself. And I think when you look at the investments you just described and some of the very great ones, that was true for those investors as well, you can imagine and dream the dream that the product market fit that this company has, the team that's building it, can expand the market beyond your wildest dreams, can actually create a whole new market. Those are oftentimes the most special companies. My thinking around this, it comes back to well, this is exactly why I underweight market. In the analysis I always think you've.

Got to be directionally correct. And what I mean by that is like Canva rode a brilliant wave of content creation, of solopreneurship of marketers within companies and every company being a brand needing content, there are multiple threads at one in time intersection which come together and that's when you have something really special. On the people side, we all make mistakes. When you review people assessment, what have you made a mistake on that you have changed or should have seen?

The first thing that comes to mind though Harry, is there's this difference between the ability to fundraise and the ability to build a business. Yeah, I have been sucked in and seduced by founders that can tell a great story, that are great in a handful of one hour sessions and in person for the first time who feel like they're magnets for talent who know their business insights now it seems and who are great at fundraising and so attract multiple term sheets. And what I've seen happen a handful of times is that they are not good at the fundamentals of building the product and building the team actually finding product market fit or growing the product market fit that we thought that they had and that there's that huge difference between fundraising and business building. And I think that's showing up all over the place right now. Right. Like there were so many companies that were able to fundraise in 2021 that now don't have P&Ls and fundamental titles to show for the vision that they told.

I get you.

And I agree that I've definitely fallen victim to that myself. But I'm not sure. And the reason I'm not sure is because you think about founders ability to sell to investors, to sell to customers and sell to hires. If you can do those three things, you should have a great founder.

Yeah, it's not like that is a necessary precondition to failure by any means, but I think it's been a failure moat for me.

Do you sense check yourself on it now? Like sometimes I go, oh, it feels too slick.

Yeah, for sure. Like just how much substance is there really beneath the surface? How much does this founder actually care? How much they really understand? There's a bunch of questions that I try to ask to suss these things out.

What sort of questions do you ask?

Yeah, so oftentimes if I'm really digging in and really excited about something, I'll say something like hey, let's just pretend that this is our first board meeting right now that we just invested in the company. What's the main challenge topic or discussion topic that you want to have in our first board meeting right now? The spirit of that question is just assessing. Like are they clear eyed in their thinking right now about what's happening in the business and can they articulate that? You know, usually you want what they say to be the most important thing that's also on your mind to prioritize and figure out in this phase. And you want some level of transparency and vulnerability around the answer. But I find that that question and the answer you get tells you quite a bit.

Do you know what I find in commonality of the best founders often I find needed the not so great ones. Ones actually will kind of shield themselves but the really great founders will say, oh Nikhil, there are so many challenges. Where do we start? Yes, we've got 1, 2 3, 4. And you're like, oh yes, it's very.

Consistent with what I've seen as well. Again, that ability to be confident in what is actually working, but also confident in what's not working yet and clear eyed and self aware about it is I think a characteristic of many of the great ones.

I spoke to actually a mutual friend of ours before the show speaking of confidence and vulnerability. And they said the challenge that I have with Nikhil is he is one of the great ones. He just doesn't believe it yet and he kind of feels like he should be someone maybe that he has to be sometimes. Do you think that's fair?

I think there's certainly some truth to it. I think there's an insecurity that comes from not yet having delivered in distributions many, many multiples of what I've invested and an insecurity that comes from having started a firm that has so much to prove, everything to prove, an anxiousness that I'll have until. Until we've many times over returned our first fund. But I also think that who I am more than I've ever known, I'm able to authentically be myself. I think I've been able to find my voice as a writer over the last three, four years of trying to do the newsletter. And so my hope is that Footwork is an embodiment of who my partner, Mike and I are and that we express ourselves fully, authentically through the investments we make and how we conduct ourselves as a firm.

I was going to ask kind of who you think you are, but it's actually a shit question because no one can actually answer that. But it's like what actually makes you happy. And it could be anything but like one of my closest friends asked me this the other day what just like genuinely feeds yourself.

So there's two that come to mind. The first is I've just always loved those first meetings with founders. I live for the couple every year that just blow me away and that suck me in. I've had a bunch of those now in my career. But I just love, love that as a venture investor you have to love that thrill. At least I, I believe in my. Do you find with those great ones.

It'S immediately obvious that it's great.

Oh, I've gone back and forth so much on this. Right. Because it's. This is sometimes that's. Yeah. This is what decision making and judgment's all about. I do think consistent thing for me is. And I've gone back to try to study this. Like if I'm thinking about it that evening. If I'm reaching out to people to sort of suss it out better, and I'm just researching on my own about it, you know, hours after the first meeting, there's something there that I should pay attention to. And conversely, if I haven't done anything about it two days later, that's probably not a fit. Maybe it goes on to be really special, but I actually haven't had that many of those where I didn't really think anything of it. I didn't follow up on any interest in it after a couple days and it turned out to be a massive company. And so I certainly reflect a lot on. On that.

Do you and Mike have to agree to get a deal done?

We don't. One of us has to absolutely love the company. The other can like it, not love it or dislike it. The other can't hate it. If you think about the 1 through 4 voting scale, where 1 is strongly unsupportive and 4 is strongly supportive, 3 is supportive and 2 is unsupportive, one of us has to be a 4. One of us has to be strongly supportive to make an investment.

Sure.

The other cannot be a one. Strongly unsupportive.

I don't know about this, and the reason I don't is because I think in any situation, I just generally, and I'm speaking as I have a friend who is bluntly an associate at a different firm and they kind of have a similar scale. I said, always do a two, Just always do two or a three. Either one. You're like, well, I didn't say no, unsupportive isn't really. And so it should just be four on one.

Four on one.

Yeah, fair enough.

I mean, I think.

But am I wrong?

I believe that there can be a place in the middle. So, for example, I've rarely been a one on anything in my venture career, but where I have been, I felt like there's actually actual downside risk to the firm potentially with making this investment, or there's just something really off about it and therefore I feel very strongly we shouldn't do it. But I've disliked a lot of companies. I've been at two on a lot of stuff, where others have been fours, where I'm really glad that we did it. And conversely, I've been very glad for myself that I've been a four and strongly supportive and other folks have been a two because they didn't think it made sense, but they didn't hate it. So Much they wanted to block it or say we there's no way we should do it. So that's the way I think about it. I think you have to be intellectually honest obviously about in the ones the.

System you put as twos that turned out that you were really pleased to have done. What did you not see?

Yeah, I think because of my bias towards companies that have some signs that they're working, some early signs of product market fit, the ones that most stand out there are ones that didn't have that where at Shasta for example, we made a decision to invest in something that was pre product but that actually turned out to work probably. The other ones sort of that I can think of off the top of my head is ones where we stretch on price to do it. I liked it, didn't love it, but then I didn't like the price and so I was net. Netted out as a 2.

Do you find it hard that like, okay, so you vote 2. You're unsupportive, but you're not. Like there's nothing super, super unsupportive. But then given the size of our teams, you will probably have to work on it quite extensively if you do end up. Yeah. Ten years working on a deal, a lot of freaking time on a company you were unsupportive on. Yeah.

For Mike and me it is very easy for us to disagree, but very seriously commit every investment that we make at foot. So obviously a footwork investment. We actually don't even do attribution at the firm. We've never talked about which are Mike's investments versus my investments. We've done some kind of crazy and wacky things.

I mean this in the nicest way. Is that not a bit BS in the way that one person sits on the board and so everyone's like, well, that's Nikhil's. Well, that's my.

Well, look, we actually, for the first year after we invest, both go to all the board meetings together. We both do the work we have.

Not a bit weird. Sorry.

That's what I was about to say. It is weird and wow, wacky and non traditional and of course it doesn't scale. But it's been really important for us in the first couple years of building the firm to operate in this way because we think that's the purest form of teamwork. Like every venture firm talks about, we work as a team, but very few, I think actually show up as a team. And we've tried to do that from the earliest days. Both of us being on the text threads with all of our founders and both of us showing up to those board meetings in year one is reflective of that commitment to actually work together because we think we have complementary skills, skills that founders can benefit from that. And we really don't want to think about any of the decisions we make as individual decisions.

What are the most dysfunctional breakdowns of investment decision making processes within partnerships? You see the venture landscape in a unique way, especially given the fact you're not in one of the large firms now. What are the ways that they break down in terms of decision making?

Look, there are partnerships where decisions are made based on the ability of individuals to sell internally. There's some folks that are just naturally more gifted to sell the deal to their partners. And there's political points back and forth on the voting system. That's a terrible way to make decisions. I think there's a lot of stuff that can bleed out from that selling process. I think also in general, it's sort of intellectual dishonesty that unfortunately a lot of partnerships have. Those are the things that I would cite that lead to the dysfunction.

Speaking of kind of the ability to sell internally, it makes me think of Jason Lamkin who said to me the other day, there's often advice like, don't do a deal for a year when you join someone new or you join venture. Like total bullshit. Like, if you have a hot hand, say you come out of a great company and your alumni network is super strong, whatever that is. Do deals. How do you feel about the don't do a deal for a year advice that often people get?

I come back to the mantra, which is exceptional companies deserve exceptions. So our entire job is to find the companies that are outliers and to invest in those companies. If you really believe in your bones that something's an outlier, you should be trying to make that investment. I think it's as simple as that.

Can I see? We've spoken about kind of dysfunctions within venture partnerships, kind of extrapolating that. There's also the LP relationship before we talk about kind of dysfunctions there. I know many of your LPs, I'm sure we probably share some. How did you select the LPs that you work with for footwork?

Three things that we thought about when we raised our first fund, and we actually ranked LPs based on these three dimensions, and they were one. What's just the quality of the relationship with the. The people we really tried to prioritize, people who we built relationships with. Who we really liked as humans. Second, we thought a lot about are these people who have seen what world class looks like and will they push us to be world class? And third, we thought about the mission values of the institutions themselves and whether they were institutions that we are really excited to make money for and be partners with. And so Those were the three dimensions that we prioritized. We assigned like a 1 through 5 rank on each of those. And then at a macro level, we were really lucky. In our first five fund we had about 450 million of commitments for $150 million fund and we ended up raising 175 million. But what we thought about as we were constructing the full LP base was just having a little bit of diversity across both check size and type of LP. And so we wanted a nice mix of LPs where there were a few at the 20 to $30 million level out of 175, a bunch at sort of the 10 to $20 million level, a bunch at the 5 to $10 million level.

So that was diversification, concentration in a $175 fund. How do you think about concentration limits that you were comfortable with?

We don't have a single LP who's more than 20% of our fund. We don't want 1, 2, 3 LPs having the majority of our fund and having therefore outsized control in our thinking or our decision making in some way.

And so we have that. And in terms of like types of LPs we have obviously there's corporates, there's pension funds, there's funder funds, there's high net worth family offices, all the different types. How did you think about that? And do you agree with the common wisdom of endowment funds that they're so stable?

Yeah. So we wanted some diversity. And I think we have about 15 institutional LPs, we have six university endowments, three other foundations. So we're a little bit weighted towards endowments and foundations. But we have a bunch of fund of funds and we have a couple family offices as well. And so we like that mix because while the endowments are great names and they are long term oriented, there's still some level of risk of having an entire endowment based LP base because they may all have the same denominator effect issues at the same time. They also perhaps tend to be more aligned in what they care about. And so we in general like the diversity and that's what we prioritized.

To what extent are LP sheep? And what I mean by that, I mean like you have Some blue chip, Blue chip endowment names that I'm sure we both know and people generally follow when they do it.

Yeah, look, I think that there's, especially in a first fund, there's a handful of LPs around the world, at least that I know of and have met, who are truly independent thinking, who will truly raise their hand and say, we're willing to do a first time fund and we're willing to be the first commitment or the first big commitment. That group of LPs is very small. It's probably 10 LPs, 15. Our biggest LPs are not LPs in my prior firm, they took a chance without having known Mike and me for a very long period of time. We have a bunch that are LPs from my private firm, but not, interestingly, the very largest ones.

A lot of people get the advice of get your anchor first and really solidify the base around that. Do you agree with that?

Well, what we tried to do was we had a bunch of our friends who proactively said to us, we want to commit to invest in the firm. And we went out to a broad group of LPs at the beginning in a first wave, a sort of set of friendly conversations to get feedback on our story, to practice. And we had one institution that we've known for a long time who said we'd love to do it. They didn't actually say what the check size would be. And it ended up being a small check. But it's really impactful to have one institution that's known you for a while, that's a well known institution, say yes. And then we did try to prioritize the larger institutions, the sort of group of 10 to 15 that I referenced that would do a larger check in a first time fund because that's a small n. That's the right group to see if we can get anyone to do it out of.

Yeah, I always think that I find some. They're so focused on getting the anchor and it's like I always say, like, get the GPS who they most respect as your LPs and hopefully they're your friends already. So get them in as friendlies and then leverage them for the intro. And then you can also leverage that check. And so it's like not only did Nikhil make the intro, he's also investing. It's like, oh wow.

We had two slides in our fun one fundraising deck, which actually we barely got to present. We only had it properly designed in February of 2021. And by then we Already had the whole fund committ. But in that deck, the last two slides, one board members that we've served alongside, both Mike and me, people who we've literally been in the boardroom with. That was a subtle way to say, like here's all the people you can call as references and you probably know a bunch of these people. And then the next slide after that was here are all the people who've inbound said that they want to invest in the fund. And that was a bunch of founders that we worked with, a bunch of gps that we worked with at other firms. Honestly, we never asked any of those folks or any individuals if they wanted to invest in in footwork. We just let them say that they wanted to invest and when they did, we put them on that, on that slide again as a way to just have a very easy way to reference us for LPs. I actually haven't asked our LPs who ended up seeing that deck if those two pages resonated, but I suspect that they did.

What do you think, LPs? You know, we obviously sit in the venture landscape, see a lot more the transparency, VC to VC is very clear, like founder to founder. What do you think we see that LPs do not see in the venture landscape about how VCs operate?

There's a difference in hunger and energy and drive that some managers have that others don't. It's sort of what we look for in the companies that we invest in. You know, of course, if it's a manager like you, for example, that really has a unique spin, a unique story and is an N of one on different dimensions, it's sort of easy to see that because you can put it on a page, you can touch it as well. Yeah, exactly. It's like, oh, it's sector focused in this area and I believe in that area.

Great.

It's like super easy to check the boxes on some, some funds like that. And don't get me wrong, there's incredible funds that are like that. Right. But I think a lot of this business is the human side. I don't think that that's going to change. Assessing a person, individual GP's, real commitment to doing this, their level of drive and hunger, their ability of course to improve themselves and learn, their ability to source and make investment decisions and to win and help companies. It's actually hard to get to the bottom of that, just as it is hard to get to the bottom of Founder is for us in our jobs as VCs.

And so you think LPs don't do that well.

I don't think that they spend enough cycles on it, but I actually think some of the great ones do. And of course I'm biased here. You know, we had LPs who did 30, 40 references that we heard about on us each. You know, we were heavily scrutinized on us as people because so much of our strategy is really just about Mike and me and our ability to make decisions in the partnership that we have. That's where we found LP GP fit with RLP's is the folks who really dug in on us as people and how we make decisions.

You mentioned seeing picking, winning, helping and exiting. If you were to say your best and your worst, what would you say?

My worst right now that I feel is on the sourcing side. You know, I think when you're a duo investing at CNA as a generalist firm, it's impossible to see everything you want to see. And I think it's hard too when you have started a firm and you have other responsibilities, abilities to be able to purely focus on sourcing companies. We do calendar audits and Catherine and Rachel, who are our operations folks at Footwork, actually send both Mike and me every week. What does our calendar audit look like for this week that's just passed and what does it look like for the upcoming week? And the single metric that we're focused on there is are we spending more than 50% of our time on meeting new companies and sourcing new investments? I firmly believe you have to spend the majority of your time on those those things to be able to find the next great one. And the beauty of our business is the next one can be the one, right? The next one can be the one that changes everything and the trajectory of the firm.

Do you buy the platform value add services generation that we saw?

Look, I think there's a handful of firms that have done it well, but every firm getting ahead of talent. And if we just break down the.

Head of talent more like that's a great example. But like if you're hiring a head of developer relations and a company requires comes to your head of talent, that is a fundamentally different hire to a cmo. What you need to be able to discern between they are not going to be the same, they're not going to be the same network. So at the end of the day they're riding a JD and working the process with a firm.

No.

And it's a muscle that the great companies build themselves. Again, I do think there are a Handful of firms that have platform offerings that have moved the needle. But most of those platform offerings are about scaling the firm themselves versus about actually scaling companies and really helping companies get to the next level.

Can I ask you one before you do a quick fire, you learn a lot from your biggest hits and your biggest misses. When you think about that, what would you say is your biggest hit other than Canva, which is your biggest hit? And how did that change your mindset on what good investing is?

I actually think my biggest hit, at least as I can best predict it, is not Canva on a dollar gains perspective and on an IRR basis as well. It's company called the Farmer's Dog, which is in the pet food space, a subscription service for fresh pet food. It's doing fabulously well. Two things. First, that some of the best businesses are incredibly simple. They're simple to understand, they're actually simple to build, but they're based on unique insights. I think that that's going to be the story of the Farmer's dog once the story fully gets out. And the second is the pet category is a fabulous category. There are some markets where the tailwinds are just so strong in multiple different ways that there's a lot of opportunity for incredible enterprise value. And I think that that's the case.

For the Farmer's dog that's the winner. What about a miss? And what did you learn from that?

The first one that comes to mind that I reflect on a few times over the last year is Figma. You know, I spent time with Dylan Field in the very early days. I was actually one of the early interviewers for the Thiel Fellowship program which he was in. And I remember going on walks with him in Palo Alto and a little bit like you actually he was, was mature for his age. Now I'm trying to think back to our first meetings in San Francisco and London. Dylan was really mature in a bunch of different ways. Like the way he was thinking about the need for perfecting the product before getting it out there, the opportunity to go after Sketch and others that were in that market already. But also just on life related stuff, like I remember asking him asking me about my relationship with my then girlfriend, now wife, and just how we make decisions together and how we communicate and what's good about our communities, communication, what's poor in our communication, all sorts of stuff like that. Where I think he was about 20 years old at the time, maybe even younger than that. I don't think I've still seen anyone at that age. Be able to think about those things in sort of work and personal life at the level that he was thinking about. I've reflected on that a bunch of times because I wish I could have been in both Canva and Figma.

Why did you not?

This comes back to my bias around wanting to see some early signs of product market fit before investing. And Figma did not have a launched product product before its first couple venture rounds. So I give the folks that did those rounds. I think John Lilly at Greylock and Danny Reimer at Index, if I'm not mistaken, I give them a ton of credit. They saw the specialness, I think in Dylan and in that market opportunity and.

Were willing to wait because there were a couple of years where it was like, when's he going to release something?

They were willing to do it and then be patient. And I think there are multiple rounds. I think I talked to John Lilly at Greylock about this multiple rounds that, that John was involved in before the product even launched, which is incredible. Hats off to Dylan, hats off to.

Those early backers you said about your wonderful partner. I do have to touch on fatherhood. It's such a special but also significant change to life. There's so many ways I can take it. I think the biggest one that I'd love to understand is if you could advise yourself one thing and call yourself up the night before your wife gave birth, what would you tell yourself?

Well, first I would say you think you have a bunch of control over your life and you kind of do have a bunch of control over your life right, right now, but tomorrow you suddenly are not going to have a bunch of control over your life. All these things are going to be out of your control. As a parent, you can't control exactly who your kid is. You can't control how they're going to behave in certain places and dimensions of life. You think you have the perfect childcare set up, but stuff's going to go wrong. You're going to have to keep adjusting your schedule. And so you have to embrace the lack of control and the surprise that is to going to come from all of this experience. The joy of parenthood is in the randomness and surprises of it. And so it's still something that I'm comprehending. But was that challenging to you?

You're a very structured person. It's challenging to embrace randomness and spontaneity and change your plans.

Absolutely. And yet it's an incredible gift too. You know, we all get to live this life once. And so having that has been one of the great joys of having a kid.

How does it change your relationship with your wife?

Yeah, it certainly makes things harder on a bunch of times dimensions that the cliche thing that people say which is you, you just have less time for each other is absolutely true. But I also think it gives us purpose. Like we have this unified person who we're thinking about and co parenting and co working on. It's also strengthened our partnership in a lot of different ways. It's given clarity to kind of what matters.

Do you think it changes the type of investor you are, companies you like to invest in, where you like to operate in as an investor?

It does in the sense that my time obviously matters more than ever and that's only going to continue being the case in my life. And so I have to believe in my bones when we make an investment decision, this is something I really want to spend time on. It perhaps used to be much more just about the capital and the economics and now it's about that and time because time is such a precious commodity.

I have a lot of conversations with people about this and they say, I actually wish I'd had short children sooner. They say that post. Do you wish it had children sooner?

I don't think so. It was 32 when we had our daughter Shreya. And I got a lot done in my 20s.

You know, can you work as hard as a parent? This is what I worry about. I worry that you're able to, you know me now pretty well. I just pounded at my desk a lot. Yeah, you can't do that when you're a parent.

No. And I believe the answer is no. It has not been the case for me. I want to preserve that window, for example, from 5:30 to 7:30pm Every day, every day that I can. Because that's a really special window to do. Dinner time, bath, bedtime. I also spend time with her in the mornings because my wife works starting pretty early, east coast hours. I'm typically the one who takes our daughter to Montessori in the mornings. It just means that I have to spend my 7:30-10pm window working every day. That's the only way I found to be able to make up for some of those lost hours on work. Now the flip side is I think I have to be present in those windows but with her. So I hope that it does something better for my brain when I'm actually focusing on work, that I can be slightly more efficient. But I was also pretty efficient before. So I think overall I am less productive.

Good. I'm glad. It's not just my worries. I want to do that. I want to do a quick firearm, my friend. So I say a short statement, you give me your immediate thoughts. That sound okay.

Okay.

So what have you changed your mind on in the last 12 months?

AI is being a very, very interesting category to I honestly don't know if there's great AI first opportunities for us at footwork to in and that's because of just the insane hype cycle around it at the moment. We over rotated once again very, very quickly towards excitement here. But as I've thought through the venture investments here, I don't think that there's a lot of AI first AI enabled companies that are going to be for us in this phase. And yet I do believe because they're too expensive. Too expensive and there's just so much competitive noise and there's also so much that for example, in the large language model world, the LLMs themselves will serve as a use case versus an application layer on top of those LLMs. You know, I've heard there are several companies now that have grown rapidly in ARR and have now started declining in ARR as retention actually starts to affect these businesses. Because there's churn from folks who just try out products built on top of these LLMs because they're interested in the novelty of them, but then churn away. And there's also just the reality that as ChatGPT itself gets better in leveraging GPT4 and other models as an example, it serves those use cases that some of the application layers on top of ChatGPT and GPT4 have tried to serve.

I think people are forgetting novelty enterprise buying which is like there's a lot of AI companies. You have Walmart, McDonald's, Porsche, and it's like two people in their design team testing it out with the 10K.

Yes.

And that is not the same as enterprise wide rollouts.

Totally.

What would you most like to change about the world of venture?

People talking about AUM as a fact, Matter of metric. I think AUM is the stupidest thing to talk about as a venture firm because back to what we were talking about earlier, small funds outperform larger funds. You really shouldn't be talking about how much capital you've raised. I'm okay with people talking about how much capital they've returned and how much enterprise value they've created. I just think talking about the aggregate size of all the funds that you've raised is a complete vanity metric.

I Think the enterprise value of portfolio companies is total though too because I could invest in the figma in the series E. Fair enough. And then it's like we've created $35 billion and you're like, come on, you put in 500k and the. I've seen some. Do you know what I mean? Yeah, I totally agree with you.

I think dollars returned, that's the thing that matters the most.

What was your biggest investing mistake between 2020 and 22 in the hype cycle?

Doing our pro rata in companies that quickly raised another round at a huge step up from where we first invested because fundamentally there was very little de risked. And we saw this happen where company had raised a series A from us and two months later they did a series. This is a real example. Two months later they series B at a 7x6 to 7x mockup and we did our full pro rata and that becomes a very big position for you without that much being de risked from the initial round and that then do reserves now? We do, yeah.

Why?

A couple of things. One is obviously there's going to be some cases where an entrepreneur is going to need a little bit of extra support to get to the next round. You know, of course some of those may not be the right decision to make, but some of those I do think will be. The other thing is that I think.

In a world have you had bridges that lead anywhere?

I've had a couple in my career, yeah. But I think the other reason is especially as a newer firm, you want to be able to say that we can support the company in that next round. I do think there's validity to that in especially today's market where capital isn't is free, where folks are leading the next round. Maybe looking at whether the insiders are going to do their pro rato or not as a signal. And so we like to do our pro rata on the next round following ours and then we pair back. If you think about our total fund, our total fund size, about 175 million.

Right.

We think we'll make about 20 investments out of that fund. Average check of 4 to 5 million. So call it sort of 80 to $100 million on initial investments and the rest is for follow ons.

So it's still 30 to 40 for follow on.

That's right. So it's still. And hopefully we have recycling as well. But it's still weighted towards initial checks. But we do think there's value in having a bit of little bit reserved.

I just feel that reserves actually fundamentally challenging dollars to deploy because you'll most often do it according to traction.

Yeah.

And I look at mine and like some of the fastest spikes.

Yes.

And not the sustainable value creation companies. Do you see what I mean? But logically you would concentrate capital towards those. They are absolute bangers in the moment. Yeah.

Look, it's where we started our particular conversation which is the decisions that I regret in that 2020-22 era were those pro rata decisions.

And.

And I think we've got to be a lot more disciplined on those moving forward.

Which less well known firm do you most respect?

I'll name two. USV doesn't get the credit that it deserves. It should be in that pantheonic greatness that sort of Sequoia and Benchmark are typically put in.

Yeah. It's just being on the east coast.

I think so. And I think it's because I'll never forget, for example, when Coinbase went public, every investor was on CNBC or wrote a blog post about it, whether they were on the board or you know, just a tiny investor in the company or whatever relationship they had.

Or a user.

Exactly. And yet you heard absolutely nothing from Fred Wilson on that day. Absolutely nothing from USV on that day.

From the guy who writes a daily blog. It's great.

From the guy who writes a daily blog, from the person in the firm that led the series a round, you heard absolutely nothing. And I was just floored by that and I just loved it. And so I just respect the hell out of those guys. And I do think they are one of the most collaborative and team based firms, if not the most out there, which is, as you know, North Star for Mike and me. And at Footwork, I'll say another that I think is less well known which is IA Ventures.

I was going to say ia.

Yeah. Jesse Beiruti, who's one of the two gps now with Brad at ia, was a fellow intern with me at Insight. And so we've known each other since we were 20 years old. And he's just incredibly thoughtful. And the thing I love about them is very few people know about them. They do very little on the external brand front, but they have crushed it and I think they know what they are good at.

They know what is their type of deal as well.

Yes, they know the way that I think, you know. Yeah. They know their taste and they have great taste and they've kept disciplined on everything. And as you know, they have done fabulously well from a return standpoint.

Roger is now retired.

Exactly Exactly. And you can see the data, I.

Think, from, you know, when everyone's done well, when the manager then returns with, I'm managing my own money. Well done. Yeah. Best ball member you sat on a board with and why then?

Oh, interesting. I'll put one that I miss right now working with, which is Vasana Darajan at Excel. Vas and I were also at Insight together in the summer of 2010. He left soon thereafter to join Excel. So he's been there, I think for about 12, 13 years now. He led the seed round in frame IO. We did the Series A with them at Shasta. And so I got to work with Vaas and founder Emery and the team there. You know, I pick Vos because I think he's not that well known, but he's got a great portfolio. Frame IO was acquired by Adobe for 1.3 billion doll dollars a couple years ago. A segment was another one that he did. But as a board member, he just asks really thoughtful questions. He sticks to just what's most important to prioritize as a company and in my peer group and sort of our generation, although you're younger than me and I'm younger than Vaas, I still think of us as sort of the same generation. I think he's one of the best and probably hasn't gotten the credit he yet deserves for that.

You can have dinner with anyone, dead or alive. Who do you choose?

Two of my heroes wrote a book together and so they have a ton of chemistry. And, and that's Sir Alex Ferguson, the longtime manager of Manchester United, and Sir Michael Moritz, the longtime partner at Sequoia. And I think what would be special about dinner with both of them? I've actually had dinner with Sir Michael, but sadly I've never met Sir Alex. I think what would be special about dinner with both of them is the chemistry they would have in that dinner. The fact that they are my two heroes and two of my favorite subjects would make that so much fun.

Final one, footwork in five years time or 10 years time.

You can choose.

But you said Aum's not the metric we should be measuring. Most firms always scale. What does footwork look like in the 10 year frame?

We perhaps add one or two equal general partners to our group who are re founders and co owners of the firm with Mike and me. But most importantly, we've been able to already work with a handful of really special founders and companies where we've been their lead Series A or C partner. And again, that probably in five to 10 years is not going to show up with distributions and dpi, but hopefully it shows up in in just the fundamental nature of a couple of the companies that we work with and their scale and revenue, their business fundamentals, the impact that they're having on markets and on hopefully creating categories. You know, Mike got to work with a woman named Katrina Lake, the founder at stitch fix, from five people to 10,000 people and from zero revenue to a couple billion in revenue. And we hope that we get to work with a handful of Katrinas of Melanie Perkins from Canvas, of Jonathan Regas from the founders Dogs. We have hope to work with a handful of those folks over the next 10 years.

Nikhil, I've loved this. It's so much nicer to do it in person. I've so enjoyed this chat, so thank you so much for joining me.

This is awesome man. Thanks for having me.

I absolutely love that show with Nikhil. It really is special when you have like a seven year relationship like that and then still being friends. So appreciate all that he's done for.

Me and the support he's shown for me over the years.

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