Cendana Partner Kelli Fontaine on Why Cendana Invested in BGV | Seed To Harvest Ep48

Welcome back to Seed to Harvest, a podcast with founders, creators, and investors about their stories, frameworks, and tactics. I'm really excited about today's episode. I'm joined by Kelly Fontaine, partner at Sandana Capital. Kelly previously served as director for Trinity Capital Investment, and Sandana Capital invests globally in very early-stage funds and now manages over $2.2 billion. They are our anchor investor for Fund 2, and I couldn't be more excited to have Kelly on the show today. So Kelly, thank you so much for joining us.

Thank you, Paige, for having me.

Of course. So I wanna kick it off with a quote from Amir Mordezavi, the CEO and co-founder of Canopy, in a Medium article written by Silicon Foundry. He said that entrepreneurs are artists, and would you mind elaborating on how this applies to seed managers and your work at Sandana?

Yeah, I think as venture firms look to work with entrepreneurs, they look to see how they can help, what value they can add, right? Cliché, but really how they can add value, um, and hopefully they can help shape the companies and help the companies along the way. We view ourselves the same way. We view ourselves as a lead investor in a fund, and we wanna do our best to help the fund, you know, with operations, Or investment decisions around pro rata portfolio construction and really shape, you know, what works for a venture fund. And so that's really how we work with our managers is taking a lead investor role, much like a venture firm leads a deal and they take a board seat. So we view ourselves not as just attending a board meeting or the LPAC meetings, but really being hands-on and trying to add value that we can to the managers.

And for a lot of the funds that you're backing, you may be one of the first institutions to back them. Is that correct?

Correct. I think about 80% of our funds are, you know, fund ones, and we're typically, we're not social proof investors, so typically the first institution to commit to the majority of our funds.

And along with your core program at Sandana, you recently initiated a nano fund program focused on investments in sub-$15 million funds. I think Fund 2, maybe $20 million is the cap. Is that correct?

That is correct. We, we did up it to $20 million. Yep.

Yeah. So what expectations and considerations are made when evaluating funds for the Nano program specifically?

So the Nano fund came about really because small funds have a higher probability of outperforming, and that's just simple math. It's much easier to get a multiple on $10 million fund than a billion-dollar fund, right? So, you know, we have always had a pilot program, or since fund 2, we started our pilot program, which is $1 million checks into groups we like, but there's a question about a sector or geography. But there's a GP that we would've backed. It's just a question on something that wasn't core for us yet. And we use that as a fund cycle to work with the manager, get comfortable around it. And then the idea is that they would graduate to a core position. What we weren't doing though is we weren't doing a lot of the really small funds. The pilots were going to funds, you know, like fintech. Our first fintech fund was done as a pilot. Our first deep tech fund was done as a pilot. Our first LA fund was done as a pilot. But again, back to the outperformance, Mucker, you know, was a $12 million fund and it's 22x for us. So these out— these small funds have a great chance of outperformance. And so we really wanted to capture that. And what we also saw happening in the Is there people that were still operating? There's a different type of fund manager happening at this point in time where seed had evolved to, and they were being invited into syndicates of great deals, but we weren't capturing that deal flow in the way our core managers, since we really look for managers who lead deals. And so what we're looking for in nano funds is honestly what we kind of look for in our core managers. Like, are you going to be able to win allocation, right? I mean, you're not leading a deal, but can you even get the allocation to the best companies? You know, what is your capability of picking the best companies? What is your network? And that's really important for us to understand your network and where the sourcing is gonna come from and what's the angle in such a noisy market. What's the angle and why are people gonna choose you?

Hmm. I really enjoyed working with you and the Sandana team as an institutional partner. I actually got to see Michael like a couple weeks ago in San Francisco and then also Graham in London a couple weeks ago. So I was wondering if you'd be willing to share a bit more about why you and the Sandana Nano team chose to partner with us at Behind Genius Ventures.

Of course. So, you know, I, I think everybody that is familiar with Sindona knows that we're very strict on portfolio construction and what we want to invest in. But I think the piece that is the nuanced piece is the networks and why we invest in someone. And I think, you know, you have a great talent for storytelling. And I think that's important to startups as they go out to raise capital to get to the next round. Are they telling the story to get customers? Can they tell their story? Do they understand how to communicate the value out of their products? So it's a very big sell, I think, to work with entrepreneurs and you do it so well that I think people will buy into that you can help them as well. So that stood out to us, but I think you have a certain gravitas about you. And I think it's really important when you're, we're investing in someone that you totally believe they're a moneymaker. And you definitely have that it factor. You know, you're young, but you definitely have that it factor and total hustle. You know, I think venture is a game where it takes a lot of work to see all of the companies, make sure you're networked in all the right places, and you have that hustle. And we have the full confidence in your hustle, your it factor, and your talents.

Thanks. I was kind of nervous to ask that question. I was like, I, I didn't know if I'd like directly ask you all, 'cause I, I know I've heard bits and pieces of it, but thank you so much. I am so honored that you all selected me as the manager to work with. And I, I've just like learned so much working with your team when it comes to institutional best practices around the, the LPAC. Like this was my first time going through the process of negotiating an LPA. Also like with capital calls, switching to an as-needed basis. I would also love to spend some time talking a little bit more about the infrastructure of what's required as you, as a fund manager, move more institutional, particularly as it pertains to capital calls and capital call lines of credit. Do you mind spending some time like describing what calling capital on an as-needed basis consists of?

Yeah, so I, I think When you understand the math of how a fund works, your IRR is something that some LPs look at. Ultimately, DPI is the most important, the distributions you provide, right? That, that's what matters. But you are going to be judged on your IRR, and if you call capital and you're sitting on cash, then that's definitely going to hurt your IRR. So the best way to do it is only call the capital that you need, so you've only taken the cash that is out the door and invested. And so we think the best way to do this is call it when you have a deal closing or line of sight to the deal closing. For most of our funds, they do have a capital call line of credit. And so what they do is they use the capital call line of credit over the course of a quarter, and then they call capital at the beginning of the next quarter and pay down the capital call line of credit. But yeah, it, it's, it, it does affect your IRR if you're calling more capital than you need.

Yeah, I thought that was really interesting because we had switched from Fund 1 to Fund 2 from a quarterly basis, which is like roughly similar, but if you use a capital call line of credit, you're kind of calling like one quarter behind where you're investing, which I thought was really interesting. So one of the things I'd love to focus on is unlike other LPs, Sandana focuses really heavily on solo GPs, and you work really closely with your managers to mitigate risks like as solo GPs. I'm curious, what operational practices have you found most successful amongst your portfolio of solo GPs since many of them have growing portfolios and LP bases? How have they continued, you know, build firms around themselves as their funds scale?

Yeah, I think, you know, our bias towards solo GP is that we see team risk as the biggest risk in venture. And so that's why we have always kind of biased towards solo GPs. I think As you said, it, it's the biggest question around solo GPs and why people don't back them as often is, you know, kind of, are they gonna keep putting good money after bad to keep their companies alive? Is there oversight of decision-making? But the other thing really is the scalability of a person's time, right? You, you can't scale yourself.

Mm-hmm.

And so it really comes into, if you put in the best organizational practices upfront for yourself on how you execute, whether it's your pipeline for how you're triaging companies and diligencing them, whether it's tracking your own portfolio to keep yourself abreast of the changes in the portfolio and where you are and being able to share information easier with LPs. There's ways that you can set the firm up, your company. It's a, you're building a business, right? And so there's ways you can set it up where you can really scale yourself. You know, Michael was a solo GP as well when he started this. I think, you know, he brought on Graham as a partner in 2014. I think when we see people bring on other members of the team, it's if they have a certain angle around community, right? They'll bring on somebody to help with the community. They can bring on a junior person as a principal or analyst to help with the diligence and the investment processes. It's whatever their focus is that's core to their business and how they're running their business, where they need to fill in the holes. And so, we do see teams built out more amongst Fund 2, 3 of a solo GP. We do have some solo GPs that have not built out a team, but it's core to how they operate with companies and, you know, it really is just their time and they have much high, highly concentrated portfolios.

That's super interesting. So as you think about how fund managers evolve and scale their teams, I'm curious if you could share a bit more about how your role has evolved as Sandana has grown.

Yeah, so I mean, when I joined Michael, I'd known Michael personally for over a decade when I joined Sindona. My background had been in operations and traditional finance roles and operating companies and startups. And so when I joined Michael, one of the biggest things I saw was that we had access to amazing data. And so I took a big initiative on the data, and we've used that data to really hone our investment focus and our own portfolio construction and where we see the market moving to. And, you know, so it's great to see that evolve and how we have been able to utilize the data. You know, also I would say our LP base has changed as we've grown and evolved.

Mm-hmm.

You know, we're raising Fund 5, and I think that with that, we've been more strategic with our LP choice.

Mm-hmm.

And that means how can our LPs benefit from us and the ecosystem that's been built with SendOnAno? And how can the 2,900 underlying companies from our managers benefit from each other? And how can the managers benefit from the scale that we provide? And so that looks like, you know, partnerships with more corporations, downstream capital partnerships with multi-stage funds so that we can highlight the top companies in the portfolio. So really trying to change our, grow our organization with our managers adding value to them.

Yeah, it was interesting. I was talking to Anne Duane from Village actually, like right before this, and she was talking a lot about how as Village has scaled, some of the most significant shifts have come from just continuing to scale the external network. So although you're like the team that's internal to the fund might be smaller than like a traditional organization, your network is like massively expanding. And I want to go deeper on something that you mentioned, which is the evolution of the LP base. So As a fund of funds, you sit one abstraction above venture fund managers, and I think a common misconception is that LPs are also using their own capital, but as a fund of funds, you also partner with other institutions to invest in your fund. So can you share how your process has evolved from the most recent fund that you all closed?

So I would say that we definitely have a GP commitment, so we are aligned financially with our, with our, so much like you all. But yes, I, I would say obvi the, It is LP capital. You know, I, I would like to say that we have mainly foundation and endowment capital, so it's great that whatever money we make goes back to students or charitable causes is the majority of our capital. You know, the fundraising process, is that really the question for us or?

Yeah. How it's evolved over time.

I think, you know, it's, it's relationship building is a long-term game, right? And so Michael, Relationships that he's had for years now are available or interested in the relationship. And you just have to be patient and keep updates. And I think that's consistent across. I think, you know, once you're on fund 5, like we are, there's a difference of a track record and different value add that we can add to an LP where that we couldn't have added at fund 1 or 2. Mm-hmm. So I, I just think it's very different on what we, how we can interact with LPs and what we can provide. And so that, changes the process and who we're targeting as LPs and who we want to partner with. Again, as you said, their extended network, right? A lot of our LPs invest directly into our funds, so we want LPs that want to help fill out the cap table and build out their own direct portfolios. So it really is a strategic decision, but again, it's still— what doesn't change is that it's a relationship game, and they're very long-term relationships that you have to nurture and figure out if it's the right people to work with.

And I'm curious, you mentioned updates, which I would love to dive deeper into. So among the managers that you back, which firms' LP updates do you really enjoy reading and why?

So I would say that our managers pretty much across the board do a great job with the updates. We love to learn more about the companies. We do monthly calls with all of our managers, so we really have a good insight and pulse on what's going on with their organization, what's going on with certain companies. But I think the written updates, it's great to hear or see sometimes the, you know, how good did you meet the entrepreneur? How were you introduced? Where did this come from? I think it gives a real sense to the LP of where your network is, why you're choosing these founders very from the very early days. And so I think it's a great, and what your thesis is around the business model. And so I think hearing the story and the narrative around the investment rather than just the data is, is a great way to present it to your LPs. Although I would say we do love data that makes it super easy for us. So consistent format. of being able to say, these are the companies and here's all the data that goes about the round, the valuations, the ownership. The easier it is for an LP, the better.

And in addition to updates, what common qualities or practices have you observed amongst the managers that you partner with? And I'm, I'm curious if there's anything specifically that stands out to you in initial meetings with managers.

You know, common qualities is a difficult one. I think everybody has a different— when you look at their best performing managers, there's not really a certain thing across them. It's kind of unique.

Mm-hmm.

I do think, you know, what they've invested in is kind of an not obvious right time, right place in the market. So again, a lot of it's timing, but the things that stand out about them, there's some that are just extremely hard workers. That stands out, right? You can tell when somebody's hustling. You can tell when somebody comes prepared to meetings with questions. You always have questions for us prepared rather to make the best use of your time. And I think that definitely stands out. And I think, you know, in initial meetings, it's difficult. I think there's, at this point, you know, I think there's 2,000 seed funds in the US and to stand out when we're talking to somebody, it really has to be a passionate reason why this is what you're choosing to do, why you want your own fund, why you're not joining another fund.

Mm-hmm.

And what's so differentiated about your thesis that a startup's gonna take your money over every lifecycle fund, every other seed fund? And so it, it really just has to be differentiated. There has, it's something about, you know, you look at founder market fit on a company, it's the same thing with a GP, right? Is their GP market fit? So it could be something of an expertise in a sector, it can be an expertise in a geography, it can be an expertise of some type, or like you with storytelling. I, I just think there has to be something there.

Mm-hmm.

That is more than just a PowerPoint hook, but a really, a hook that will actually add value across companies.

That's interesting. I, I liked it. It's cool. I mean, I've, I always think about how everyone does venture uniquely, but it's really interesting to hear that across the top performers from a data perspective, that there's not really a common thread there. I think that's really Cool. I, yeah, I guess I've just like never seen the data, so that's really interesting.

Yeah. I mean, there's definitely, there's like a, you know, there's former operators, there's, you know, yeah, it, it just, there's not a certain school background, you know, there, there's nothing that you would like that you can check the box for. Again, I think it comes back to like, yeah, the personality of grit, determination, the hunger, the work ethic, or those intangibles, right, that are hard to put into words. But again, it's like the it factor that you have. I, I think that's what you're having to go with. Mm-hmm. Mm.

That's cool. So I wanna switch gears and talk a bit more about annual meetings because you're in the midst of annual meeting season. So I'm curious what, among the annual meetings that you've attended, what stands out about a firm's annual meetings? And then are there any particularly memorable stories that you'd like to share about? Maybe like a favorite annual meeting that you've been to.

I think for annual meetings, presentations, it does not need to be long. I think people really want to capitalize on the fact that they have everybody there and they made the effort, and so they need to make it very long. And I don't think that's the truth. I think people have short attention spans. So I think, you know, a general overview with great materials that are unique is very impactful to the LPs to get the update and your thinking on the market and where you're going with your business, the fund, and And then I think what stands out also is the portfolio founders, right? I think the LPs like to hear from the portfolio founders and get a sense of what the, who you're investing in. And so I think that's always an important part of the meeting is highlighting and seeing a few portfolio funds present. And again, it's the real life rather than reading the update or thinking you have an understanding of it, but hearing the story from them, you really get a sense of who you are investing in. And so I think that's an important part. You know, memorable stories. I, I think what can be beneficial is more intimate one-on-one time with LPs at dinner so that people can all talk about and collaborate. I, I really think that people utilize this time when you're in person, you have the opportunity versus virtually to network and to talk to people about what they're seeing in the market and what they're investing in. And so I think it's an important part of the schedule to facilitate or create an environment for that connection.

And speaking of this market, I'm curious what advice you would have for fund managers currently raising in this bear market.

It comes back to having that grit and determination. It's going to be obviously a lot more difficult. You know, I feel like this is kind of what was said in 2020, but it didn't bear fruit. And I think it's really here now and it It has to be your chosen career path and it's gonna be difficult. It's gonna be more difficult. You're gonna have to be okay with smaller fund sizes. You know, I think having to cut back what your previous target was will have to happen sometimes. Again, it's just a relationship building exercise. Certain people are a certain place in their current allocations, right? So LPs have asset allocations to venture, private equity, publics, et cetera. And so the markets are down.

Mm-hmm.

But the venture marks have not come down to probably where they will come down to, right? And so that's gonna be a gradual decrease. And as that decreases, then there's more capability for maybe some venture names. I, I think much like GPs took the time to look at their own portfolio, triage their own portfolio, put more capital into their winners and figure out how to survive this bear market, LPs have done the same. And so I think it's really a game of timing and just being consistent and, you know, realizing where the capital markets really are and people's budgets and, you know, liquidity really are at this point in time.

And looking to the future, how do you envision seed stage venture firms evolving in the next 10 years? What do you think might be different with whether that's business model, demographic, investment thesis? I'm curious to hear your thoughts on the evolution.

I, I think early stage is very different than everything else. The 0 to 1 is extremely different. It's the hardest time for a founder. Like, I, I shouldn't say that. There's hard times all along the, the process at a, at a startup, but the 0 to 1 is extremely messy and hard. And, you know, I, I think that it takes a specific skillset.

Mm-hmm.

And when you look at when Michael started this in 2010, what had changed was that you, all the prior rounds, the first rounds were $5 million because that's how much you needed to buy servers for your startup, right? You had to buy the servers and software and it was capital intensive to start a company. You know, when back then it was $500K to start a company, right? Like you could buy AWS, right? And you can host your business on. So it just, it changed the dynamics that you could start a company with a lot less capital. We're back to now where seed rounds can be up to $5 million. And so that, you know, is a shift over the last decade. Now we're back to where we started. But I would say there's more traction when people get the $5 million seed rounds. Typically there's a product and market, there's some revenue. So I, I just think that pre-seed has kind of become what seed was. We've shifted the nomenclature maybe. But I, do see that there still needs to always be early-stage specialists, right? Like the concentrated portfolios where you get a lot of the VC's time and they're experienced zero-to-one builders and can really come in and help build out the first 6 hires with you and can really help get the first believers and customers in before there's any other customers to call, right?

Mm-hmm.

I think that part always needs people that are passionate about the earliest stages. And, you know, I think it's very noisy right now in the market. As I said, the number of funds that have been formed and how many seeds, you have to stand out. So over the next 10 years, what does it look like? I do think specializations, networks, things like that become increasingly important. Does it always have to be a former operator? I don't know, right? Like that, that could be something that somewhat changes, you know, specific experts in their fields coming into venture and investing in that field. So I, I think, you know, early stage stays early. You don't need a ton of capital to start a company. You need to figure it out and you need the specialists who are empathetic. It's a personality trait that's needed to survive the zero to one. So I, I think those things have to stay the same. And so that can't really change over the next 10 years. So. As much as things will change at the early stage, I think it's the later stage that changes more and the exit market that changes more than the early stage.

Yeah, that's interesting. I guess like looking back over the past 10 years at the data, like I'm curious how you've seen the evolution of the seed stage fund market. So you said there's around 2,000 in the US today. Do you know what the numbers were going back like 5 or 10 years or like how that How, I guess like your market has evolved?

I, I don't have the exact data because we really track painstakingly our own portfolio data. Yeah. But I do know that when Michael started Sedona, I think there was probably like 20 seed funds. So 10 years ago there was probably 20.

Whoa.

Yeah.

That's pretty crazy growth.

Yeah.

Well, awesome. That's all the questions that I had for you today, Kelly. I so appreciate you taking the time. And if you're listening and you'd like to connect with Kelly, I'll drop her socials in the show notes below. But I so appreciate your time. And it was so wonderful to have this conversation with you.

Thank you, Paige. Really appreciate it.

Of course. Special thank you to producer Riley Jennings and podcast editor Tate Doherty for your help on this episode. If you're listening and you'd like to connect with me, follow me on Twitter or LinkedIn, Paige Finn with 3 N's. Thanks again for listening. I really appreciate it. You can look out for new episodes every Monday at 5:00 PM PST. And if you'd like to learn more about the strategies and tactics of seasoned institutional investors and rising venture stars, check out our YouTube channel at Seed to Harvest. Also my TikTok channel is Seed to Harvest where I post a lot of behind the scenes. And if you like this episode, please rate and review this podcast wherever you get your podcasts, if that's on Apple or Spotify. Anyways, thank you so much for listening. I hope you have an awesome rest of your day.