ROI Showdown My 250 Angel Checks vs 80 GP Deals vs 17 LP Funds

Um, I think we had about 150 people register for this event.

Wow.

People joining from all over the world. Most everyone here is an investor, maybe an angel investor to VC. Um, and you know, the, the discussion today is really around the entire venture stack of angel investments, venture capital funds as a GP, but also investing as an LP. And so for those of you who I don't know in the audience yet, you know, my name is Ryan McLeady. I've been head of operations for Founder Institute over the last decade. I'm a general partner at the Veteran Fund. Background is in national security, military veteran-led startups and innovation. So I helped scale the organization of Founder Institute to 8,000 portfolio companies across 100 programs in 100 countries. And then on the Veteran Fund side, we actually just found out, according to PitchBook, they just released their latest data, the Veteran Fund is now a top decile VC fund in terms of our returns. So we invest in military veteran-led seed stage critical technology startups. And yeah, it's been, it's been an incredible journey over the last few years. So I would like to welcome Martin Tobias, who is a big Founder Institute and VC Lab supporter. So Martin, I mean, you've done 250 angel investments, 80 deals as a GP of a VC fund. And then 17 LP fund investments. So obviously you've got a very unique background and insight. And so I'm really excited to kind of hear what you have to say today. But would you like to do a quick intro on your side?

Sure. Yeah. So thanks for that, Ryan. And by the way, I know Mike at the Veteran Fund, like to hang out with him at events. And what you guys are doing is really great at Veteran Fund. Thanks. So yeah, I mean, I don't know if doing that many deals means that I'm good at it or I'm just a gambling addict and I, you know, can't turn it down. But what it resolves to for me is I'm like an intensely curious person and I really like to learn new things and I can really feed that itch by being an investor. I'm super excited every day to talk to new founders that They've got some crazy idea of how they want to change the world in some vertical that I don't know anything about. And it's really exciting for me to learn about markets I didn't even know existed. You know, I invested in this company a couple of months ago. They're building an AI voice agent for railroad equipment, like train heavy equipment maintenance facilities. I didn't even know that was a business. And it turns out it's a really inefficient old business that could really benefit from some new technology. And it's really exciting to see how some of these entrepreneurs are making big step function changes with technology in different industries. And so that's what's kept me excited and wanting to do investing. You know, I was at Microsoft a long time ago. Before the IPO, and that's when I started investing. And I was working in a group that was doing what was then called electronic software distribution. This is back when software was still sold in boxes and CD-ROMs, and there was no digital way to license your software. So I met a bunch of companies that were trying to move into that digitization, and I ended up investing in some of the companies and giving them a contract with Microsoft that made their valuation go up a lot. And that's what got me, 'cause the reason I started investing is I was like, I was at Microsoft and it seemed like the people in the startups were having more fun than I was at Microsoft. So I'm like, maybe I could be part of that fun. And I've always loved the sort of zero to 50, that first couple years part of the startup. When it gets bigger, it's a lot more actual work. The fun part for me is, what's the product? Who's the customer? How do we sell it? That first couple of years. So that's why, Now I'm basically a pre-seed VC, and all the work that I did as an angel got me to figure out where I had an advantage. And I think that's B2B software pre-seed. And that's why my fund is focused just on B2B software pre-seed. I don't invest in anything else, despite as an angel having invested in renewable energy and drug discovery and all this other stuff. I invested in a pharma company. That was doing psychedelic drugs. It just sold to AbbVie for $1.2 billion. That was a great outcome. But I'm not doing those investments in my fund anymore because that was, that was where I got lucky. And as a VC, you've got to figure out where you have an advantage in terms of a network or a thesis and can add value. And you can't plan on luck. And that's kind of the difference between being a VC versus an angel is an angel. You just write checks to people you think are smart. As a VC, you try to create a little bit more process and replicatable things that you think can give your companies an advantage. So, yeah, for the last 5 years, I've been investing pretty much full-time as a GP, B2B software. I did also join 3 new, 4 new VC funds in the last year. And my LP strategy right now, originally I just invested in big funds like RRE Ventures, August Ventures, Morgan Thaler Ventures, things like that. But the last 4 funds I've joined are all smaller funds, sort of, you know, $1 to $5 million angel funds that are finding companies maybe a little earlier than I would, but in the same sector. And I'm basically building a fund of fund strategy as deal flow for my pre-seed fund with these angel funds. And I've invested in 4 companies that those funds found at the angel stage and then put money into the pre-seed stage. So my strategy as an LP now is to try to be an LP in funds that are, um, you know, somehow related to the ecosystem I'm investing in as a B2B software VC.

Yeah, it, it's a great strategy. I mean, you're seeing a lot of family offices doing the same thing, which is they'll invest in the funds, the VC funds, to get access to the direct deal flow. But really what they care about is the direct deal flow because it could be better economic terms for them.

Exactly, exactly.

Well, appreciate sharing the, the background there. I mean, I've got a million questions, but I want to make sure that people in the audience also have the opportunity to ask some questions. So for those folks who are here, we're gonna have a discussion, but if you do have questions, happy to surface them. So please feel free to put questions in the chat. Martin, do you, I don't know if you, I know you've kind of given this talk before. I don't know if you wanna do some slide sharing or if you wanna just like talk through this from the beginning, but what format would you prefer?

I think we should just have a conversation.

Perfect. Okay. So bottom line up front, you have your pre-seed fund now. You're LPing into these other funds. Are you still doing angel investing as well?

I am not doing angel investing anymore. No.

And is— can we assume that maybe that that is the, you know, if we're comparing the 3 buckets, right? Did the angel investing part not work out as well from an ROI perspective, or are you just being more strategic with your time aligning things so that it benefits the fund?

I think both of those are true. And it was actually interesting. I have a top 1% account on Twitter and there was a big discussion and some people, other angel investors are up there saying, you know, here's all the money I put in angel and it's been the worst ROI ever. And, you know, I think it's actually really challenging as an angel to be successful because you are a small check. You don't see as many deals as a VC does, and you are not as engaged after the check as a VC is. So I think it's actually very hard to be a successful angel investor. You just, I mean, I think AngelList says you got to do 300 deals to get one unicorn as an angel. That's a lot of fucking checks. Yeah. So I'm not doing angel investing anymore, mostly just because my time is all spent now as a GP. What's different for me as an angel, I was seeing maybe 25 or 30 deals a month and I was writing like one check. As a VC, I'm seeing 300 deals a month and I'm writing the same one check. So I'm picking from 10x greater deal flow and that just takes a lot more time. But I also think it leads to better conviction, better market intelligence of who's building what. The core problem in angel investing is you see a deck, you see a team, you like them, but you probably don't know the 10 other people that are building the same fucking thing or the other VCs, what other VCs are investing in. Is this in an area that other VCs think are hot? Is it a hot? Is it a cold area? What's the potential for follow-on investing? As a VC, I see a lot more deals and understand what other VCs are talking to. I'm in all these WhatsApp groups of other managers, and I understand what they're talking about. I have like 30 calls a month with other VCs, large VCs and small VCs, comparing portfolios, seeing what they're investing in, what they want to see. And so, for example, one of the things I do as a VC, which is different from an angel. In an angel, the question is, you know, is this team smart enough? And, you know, fine, here's $25,000, you know, goodbye. Um, as a, as a, as a VC, one of my first questions is, who are the 3, uh, other VCs I'm gonna call if this company is successful to raise their next round? Like, is this a— do I know other people that I can add value to this company when they want to continue to grow? And if I don't know personally 3 VCs who, and know their, their sector, their traction metrics and everything that I can introduce this company to when they're successful, I should not be writing that check. And that's a very different approach to investing than I think many angels have. And that's the core difference, I think, between VC and angel. And that takes a lot more time. So I'm spending pretty much all my time on the VC fund.

How else are you kind of like reducing that gap from like your initial investment, right? Hoping that they can produce and drive revenue and grow the business to then getting them to that next round. Are there things that you look for, for example, like, you know, their pipeline of sales opportunities, or is there like proprietary go-to-market strategies that like really resonate with you? Like, so in addition to like the 3 investors you're going to call when to go to raise their next round. How do you like shrink that gap from, from their current round to the next one?

So, you know, that's, that's another reason why I'm focusing just on B2B software, uh, companies, because the answer to that question for a company that's doing drug discovery, for example, is very different. The traction metrics they have to get to get the next round versus a B2B software or B2C or something like that. So if you're trying to invest in more sectors, you got to understand more traction metrics to get that unlock the next round, which makes your job harder, right? So that's another reason I constrained it to B2B software, because in B2B software, basically, if you get to $500,000 ARR and that was 200% or 300% growth over the last year, you can raise a seed round. And if you get to $2 million ARR, which is now the thing, you can raise an A round. So the goalposts are fairly clear. Even though they keep moving. You know, it used to be $1 million for a Series A in B2B software 2 years ago. Now it's $2 million. I actually had a company that has $3.5 million of ARR and can't raise a Series A. So the bar keeps moving. But basically what I'm doing is I'm coming in, I consider the pre-seed to be a $1 to $2 million round after a company already has an MVP. I expect companies to have built an MVP, either vibe-coded or raised couple hundred thousand dollars from angels to get their MVP out. If you don't have an MVP, I am unlikely to do your deal. I expect companies in B2B software, if you can't vibe code something and get a couple thousand dollars of revenue, there's something fucking wrong with you. So I'm looking at a company with $5,000 to $10,000 MRR, and basically I have to say, okay, what do they have to do to get to $500,000 ARR? And so I'm underwriting it from sort of $50,000 ARR to $500,000 ARR. And I'm looking at exactly what you said. What's their pipeline look like? What's their close process look like? What's their outbound strategy? And the key thing that I look at is their distribution. Because right now with, in B2B software, it's so much easier to create MVPs with Vibe Code or whatever, like any kind of an idea that somebody's gonna have, somebody else is is going to have Vibe Code as a solution. And so the real differentiation is distribution. And so what I tend to like to look at is founders that have some wedge or some distribution trick. Like I invested in this company called Procurable, which is doing supply chain AI software. But the CEO was a VP of supply chain himself for 6 years. And was the chairman of a user group of 200 other VPs of supply chain who were all potential customers. So he personally knew 200 potential customers and had been in a professional organization with them for 6 years. And so the question is, could he call, could he get 10% of them to be customers in the next year? It was a pretty high probability because he already knew them, right? And that guy is going to have a better chance at getting to $500,000 ARR than the guy who just invented some software and doesn't already know, you know, the 200 potential first customers. You don't have to have a huge pipeline, but there was another company called Newell AI, which is a supply chain for agricultural chemicals. When I led their pre-seed, they raised $500,000 in their pre-seed. When I led their pre-seed, they actually had not signed any ARR yet, but they had an $8 million qualified pipeline prior to raising any money. That was a super strong signal. I'm like, hey, you close 10% of your pipeline and you've made your seed goal, ARR revenue goal, right? I mean, that's an incredibly powerful signal. So I'm looking for pipeline and/or, you know, a built-in network of distribution that raises the probability they can get to $500,000. Because if they get to $500,000, then the seed companies that want to write that $5 to $7 million seed check will take the call.

So let's talk a little bit about benchmarks because we, you know, we're big fans of structure and benchmarks at Founder Institute and we're constantly updating this. So in your mind, right, let's just talk about B2B SaaS. What are the benchmarks for— let's just, let's just call it like from MVP where let's assume they have an MVP, maybe they raised $100K friends and family.

What is the benchmark to go from that stage to closing a pre-seed round and then from the pre-seed round to the seed and the seed to the Series I think to close a $1 to $2 million pre-seed, if you've got $100,000 ARR, or if you've got an MVP, is you've got to have 1 or 2 customers prior to trying to raise that, even if they're POCs. And you've got to have a clear story on where you're going to get the 10 or 20 customers that are going to equal $500,000 ARR. You got to have some, some path, some reasonable go-to-market strategy to get that $500,000. So you've got to show me a plan that has a high probability of getting to $500,000 of ARR. And if you have that, I think you can raise a pre-seed. And that's a $1 to $2 million one. And then, you know, I think I already mentioned at the seed, you know, what the seed investor, what the, The pre-seed investors are underwriting is the quality of the team and a high probability that they can generate revenue. You don't have to show a lot of revenue, but you have to show probability that the team has, you know, generated revenue before and has a reasonable path to get the revenue. In the seed, what they want to see is that you have a path that gets you to $2 million of ARR because that's where they get confidence that you'll be able to raise an A. So at the seed, if you've already got $500,000 of ARR, $300,000 or $400,000 or close to that, what those seed investors want to see is a pipeline, which is something like, you know, $5 million of ARR pipeline with at a 20% close rate will get you to $1 million the next year and $2 million the year after that. They want to see a very strong pipeline and they want to— they're underwriting your probability to get from $500,000 to $2 million. And then in the A, it's the same thing because the B revenue metric for B2B software is $10 million of ARR to raise a B. So the A guy has exactly the same question just at a different stage. Okay, you're at $2 million of ARR. What's your pipeline? How long is it going to take for you to get to $10 million? So I can have confidence that you'll be able to raise a B.

Yeah, makes perfect sense. And what kind of valuations are you seeing at like the pre-seed and then the seed level?

So in B2B SaaS, the— I have in Fund 1, I have 26 investments. The average valuation is $8.1 million for a pre-seed round. And the range there is, I mean, I did one at 2 and I did one at 12. But the average is 8. So something under 10 for a pre-seed. Seed valuations, you can look at Carta numbers and stuff like that. It's more like 20 is the average seed valuation, 20, 22, something like that, raising 5 to 7. Series A's are something like 50 or 60, raising 10 to 20.

Yeah, yeah, that's exactly what we're seeing too. Let's talk about the Series A crunch really quick, and then I want to revert back to sort of like the strategy with B2B SaaS. So, you know, you mentioned you have one company that already has $3.5 million in revenue, like clearly above the $2 million kind of threshold that you've set. I've kind of seen like $3 million. I've heard some, you know, other funds say they want closer to $5 million now, and like seems like the goalposts are always moving and it's different between investors. How do you like the big— like, I think it's easy to raise pre-seed, and if you do a good job, then it's like relatively easy to raise seed. But then there is that gap, right? The Series A crunch where like, you know, how do you advise your companies to get past that? Is it as simple as like, okay, just go out and grow and get more revenue and be in the top 10% of those, those companies that the firms are looking at? Or Is there another strategy that you've seen to overcome that Series A crunch?

Well, I think Peter Walker from Carter published something recently that, you know, I think the average time to the A now is like 3 years after the seed or something like that. So it's a lot longer than people, you know, thought in the past. So the time is stretching out, which means you got to raise That's why you're seeing some bigger seeds, frankly. But so I guess I forgot to mention, it's not just the ARR number, it's your growth rate. And so the company that I have that's $3.5 million of ARR and has not been able to raise a seed, the problem is that they only grew 50% last year. And the Series A guys, so in the in the seed, if you get to $500,000 ARR, those seed investors want to see that you got there, you know, on like a 300% growth over last year. They want to see like 100-500 type of an ARR number. If you got to 500 but it took you 5 years and you were only growing at 50%, because you don't have the growth rate they would say, you know, we don't, we don't like that. So you, you've got to look at the, what the, the companies that ended up getting, end up getting funded. Unfortunately, one of the things that's kind of impacted B2B software and, and other, uh, venture, um, deals right now is the stupid growth rates you're seeing in some of these B2C things, things like Cursor and Lovable and Bolt.new and those those fuckers getting the $10 million ARR in like 3 months. Like it's sort of warped people's expectations, right? And they're expecting higher growth rates. And those high growth rates are very hard to get in B2B where you've got a longer sales cycle and stuff like that. But the minimum that a Series A guy wants to see You know, the minimum a seed guy wants to see is like 300% growth over last year. The minimum an A guy wants to see is 100%. So if you got to $2 million and you did $1 million last year, they're like, okay, your growth rate's good. If you got to $2 million and, you know, you grew 50%, they're going to be like, you're not growing fast enough because they have to believe that, you know, you can— it used to be triple, triple, double, double, double. But now people are saying they want, you know, even faster growth. So I think you got to look at the growth rate too in the A and the seed. And yeah, higher the better. I mean, if you get to an A with $2 million of ARR and that was 300% growth, you're going to get a lot of calls because you're going to be an outlier.

Yeah. No, that's a really, really good insight there. Let's talk a little bit about AI. And B2B SaaS, you know, the famous quote, Marc Andreessen, software is eating the world. Right now it looks like AI is eating software. How do you navigate in this world where it's like, you know, there's just so like, especially like you mentioned vibe coding, right? I mean, there's like almost like so much more noise now, especially in software. How do you, how do you find the signal in the noise? And then are like, so are there industries or like types of applications in B2B SaaS that you're more interested in? And then as you think about the next 5 years with like the growth rate of AI and how, you know, ChatGPT is now getting to agents and they're starting to like kind of go up the food chain a little bit or go down the food chain. How do you think about defensibility in the B2B SaaS space?

That's a really good question. You know, I've been investing for a long time. I invested in the early days of the cloud and mobile and all this stuff. And I think that helps me understand where we are in the AI adoption cycle. We are very early. We're like, you know, inning 1 or whatever in AI adoption. We're basically in the infrastructure build-out phase. And if you look at, if you roll back to say 2000 at the beginning of the cloud, In the beginning of the cloud, who was making all the money? Cisco and Dell and the infrastructure, the people selling to data centers. And for the first 3 or 4 years, that was the people that made all the money. And then people started to build applications on top of the cloud infrastructure, which became the SaaS business. And if you look today, AI infrastructure or cloud infrastructure is about $100 billion a year revenue business. SaaS is a $300 billion a year revenue business. So the SaaS, the applications built on top of that cloud infrastructure ended up being 3 times bigger than the infrastructure. And many of the original leaders in infrastructure like Cisco, people are like, where the fuck are they? Like, who are they? Like, they don't fucking remember who they are, right? Even though they were the super fucking hot company in the beginning of the cloud. And if you look at what's happening in AI, I don't know what the numbers are for this year, but in 2024, something like 80 cents of every dollar went to NVIDIA of all AI spend. And that's because we're in the build-out infrastructure phase of AI. And, you know, a bunch went to the model guys and the cloud guys. And then there's these data center guys. And the numbers are even way bigger than the cloud, the amount of money being poured into AI infrastructure. And my bet is that the application layer built on top of that AI infrastructure will be similar to SaaS, a 3 or 4 times larger revenue number. But the application revenue as a percent of AI spend today is like 1%. But my bet is 3 to 5 years, that's like 3 to 5x, right? I hope that's where I'm putting my capital. I could be wrong, but that's—

I'll check in with you 5 years from now.

Check in with me. But, and so then the question is, What are the applications that are going to be valuable enough on top of the infrastructure? You know, like, and you'll have tons of different applications. I mean, who would have thought that you could build Snowflake on top of AWS, which is just really another level of infrastructure, right? But they were able to build a very big business on top of the infrastructure. The applications that I'm looking for are ones that are as far away from what's going to get sucked into the model companies as possible, which tends to be vertical market software and industry-specific software and specific workflows that the general things are not going to be very good at. One of the things that I look at For validation on that, I don't know if you saw the MIT research study that came out like a month ago that said 95% of enterprise AI projects are failing. Yeah. And why is that? It's because you have a general set of tools from OpenAI and these platforms, and the developers at these enterprises get it, and it's just too hard for them to cobble together general tools into a specific workflow that works. And so the MIT researchers also said, okay, if 95% are failing, what's unique about the 5% that are successful? Well, what's unique is that they really understand a specific business workflow and have built specific AI integrations that make that workflow work. They're not using the general things. And so that is, you know, things like Harvey, you know, in legal, things that understand a specific industry. So what I'm looking for is AI companies, and I don't really call them AI companies. I just call them B2B software companies. I mean, AI allows you to solve some problems that were previously intractable. For example, I invested in this company called WithSavvy. They're building a local government purchasing database. Local governments, think cities, counties, school districts, spend $1.2 trillion a year. There's 180,000 different websites, no standardized RFP format, no standardized database. If you want to sell into that kind of a market, you got to hire the ex, you know, school press principal in every school district and try to, you know, golf tea your way to contracts. Anyway, these guys are using AI to read, to have AI listen to public records meetings on Zoom, read PDF files, and they're able to build a purchasing database of who's spending what and who are the vendors, and they can build a structured database out of this unstructured information source at a cost that no one could ever build before AI tools. And that's turned out to be very, very valuable and they're monetizing it and they're growing like fucking crazy. But this is, you know, a lot of people talk about AI is going to eat SaaS. I don't think so. I think that AI is going to open up new software applications like with Civic that were never possible to build before. And what it's going to eat more necessarily than SaaS, I think, is the labor component. And I tweeted something about this the other day. So SaaS is a $300 billion business. The labor that uses SaaS software is a $4.5 trillion spend. And the real eating that's happening is not so much, you know, rewriting Salesforce in AI, which is going to be much harder than anybody fucking thinks. It is automating that labor that was using Salesforce.

Yeah.

And then that makes the market for what we put in the software budget much bigger because now you can eat that $4.5 trillion labor market with a software expense. So my bet is that companies that are able to eat that labor market and develop new software applications that were not in the current SaaS market, is where the really interesting ideas for B2B software are, and that's where I'm investing. Now, that's my bet. We'll see.

Yeah, no, I, I, it sounds very solid, and I appreciate you kind of sharing that with me. Going back to kind of the more general topic at hand of like angel versus LP versus GP, how do you think about diversification differently at each stage? Or maybe like now that you're mainly focused on the fund, maybe before for that hyperfocus, how did you think about the diversification between like the, like, okay, I'm gonna do 10 angel deals versus, you know, how many in the fund versus how many LP deals?

I didn't really, and, and I appreciate, you know, sessions like this and things like the Founder Institute or the VC Lab also has like an LP Institute and telling people how to think about creating a portfolio allocation if you're an LP. And I didn't really think about that as an angel. As an angel, I was like, oh, here's a smart guy. You know, I have $25,000. I don't need any more. Here you go. Like, I did not have any strategy whatsoever as an angel. And I think that's how most angels are. They're like, how much can I afford to donk off on angel investing this year? Let me divide it by 10, and that's my check size. And frankly, I think that's why most angels are not that successful in the portfolio, is that they don't have a well-defined thesis or anything like that. But I mean, now how I think about diversification, I mean, one of the great things about being a venture fund and why it's great to be an LP in a venture fund versus an angel. Like, if I'm an angel, let's say I write 10 checks. First of all, I've got lower deal flow and I'm probably seeing poor quality deals and the probability that those 10 checks are going to work is low. But if I invest in a fund like the Veterans Fund, they have a professional manager, they're seeing more deals. I'm still getting a portfolio of 30 companies, but likely from higher quality sourcing and higher quality picking. So I'm actually getting a diversified portfolio being an LP that would be harder for me to build as an angel investor. So I actually think the preferred angel strategy is to be an LP in angel or pre-seed funds and then reserve your direct investments for pro rata in the seed or the A where you have a lot more data and the probability of those things being successful is better. I think it's a better angel strategy to invest more alongside an A, you know, Andreessen Horowitz leading an A, than it is trying to pick 10 more, you know, angel stage guys that potentially could raise money in the future.

So yeah, that's a really good point. And we actually see that with a lot of our LPs as well. Like they again use the fund as a filter for deal flow to then get access to directs. How at your fund, how do you think about your pro rata and follow-on? Like, are you, are you doing follow-on? Like, what's your kind of first check to follow-on?

Yeah, I am a first-check-only fund. So my current fund is $11 million. I'm writing $250,000 checks into the pre-seed and I get pro rata rights. And what I do with those pro rata rights is I give them to my LPs in a 0 and 10 SPV. Yeah, I've had 4 or 5 of those and they've all been oversubscribed. That's why a lot of my LPs are LPs, is to get those pro rata rights. And a $10 million, $11 million fund is going to generate $40 or $50 million of pro rata opportunities. And I give those to my LPs at a lower fee structure because frankly, it's less work for me to manage that. And so far, all the LPs have taken that. I do have a bigger network of other of my syndicate investors still on AngelList where if I ever have any extra pro rata, there's also now a fairly robust set of funds that will take that pro rata if you have very big ones. There's like the Proof Fund and there's a couple other funds. Correlation and those guys. And I actually had an opportunity where like I put $500,000 into a pre-seed. When they raised their B, my pro rata was $5 million, and it was too much for my LPs. So, I went to some of those bigger funds. I mean, I think I had a decision to make when I raised my fund. Do I raise a $50 million fund, write those pre-seed checks, and write the seed checks myself? Or do I just write the pre-seed checks and then hand off that pro rata to the LPs? Personally, as an LP in funds, I would rather have that second thing because I pay less total fees than if I was paying 2 and 20 on a $50 million fund. So that's why I decided to do that. On a multiple basis, you're going to make a higher multiple on that first pre-seed check than you will on the seed check. So that's why I set up the fund the way I did. It acts for LPs like a $50 million fund, but they have the optionality on the pro rata.

Yeah, that was actually one of the big things that we had learned as well going from our $20 million fund one to now raising our $50 million fund two, is that you're never going to get better terms and better valuation than that first check. And a lot of the institutional investors know that and they want to see, you know, that we thought the traditional wisdom was a 50/50 fund, reserve half your fund for follow-on because you want to double down on your winners. I think that was like conventional. But I actually think when you look at the returns, you actually want to have more of a first-check-only type structure and then leverage the pro rata either with partners or your LPs and still participate and secure the pro rata. But yeah, it's true.

I mean, a lot of people say they like to double down on their winners, but, you know, looking in hindsight, you know, it's actually hard to know whether it's the winner, right? Because let's say you've got— I've got 25 companies. Let's say I've got 10 pro rata opportunities. Which ones do I take and why? You know, in hindsight, 5 years from now, I might look back and say, well, I wish I'd have put more in that one of the 10 that ended up working out. But how are you going to decide? Yeah, at that time, are you going to pick that one or are you going to pick all of them? I mean, I just think it's hard. I'm an LP in a $60 million fund that has a $7 million pre-seed allocation and then does the seed. And I actually looked at those two cohorts of investments. They were making, they were basically about 8x TVPI on the pre-seed checks and they were about 2x TVPI on the seed checks. And the fund as a whole was averaging to like a 2.5, which is fine, but those second checks actually averaged down their TVPI.

Yeah.

And I didn't want that.

Right. You want the 8x. I mean, you know, I want the 8x. 2.5 is still pretty good. I mean, it's still pretty good.

It looks good, you know, in the cohort of other things. But the bottom line is you're averaging down your TVPI by writing that second check.

Yeah. And then you could kind of look at, well, did did the second check lock in the 8x return from the pre-seed? You know, so there's lots of different angles, but like, I'm a pretty firm believer in like that big first check, like get the ownership up front, get the ownership.

And so like, that's what I'm doing. I'm raising a second fund, um, next year, uh, as well, like in, in, uh, Q1. But the— this current fund that my $250,000 at 8% is basically like a 3% or 4% ownership stake in pre-seed. In the new fund, I'm keeping the same number of deals, 30, but I'm doubling my check so I can have more like 8%. And that's what I want to do is I want to have more like 7%, 8% in the pre-seed because of all the dilution and everything. It's going to work out better. So rather than changing the number of deals in the fund, I increase the ownership early to, you know, improve numbers that way.

What is your portfolio construction in terms of number of deals?

30.

30. Yeah.

30 in a fund.

Yeah.

And, you know, prior to this fund, I had done 66 investments as an angel in a syndicate, and I had 6 unicorns. So that's an 8% unicorn rate. I don't know if I'll be able to replicate that, but if I have 8% unicorn rate in a 30 fund, a 30 investment portfolio, that's a 5, 6x fund easy.

Yeah, yeah. No, that's fantastic. In the last 10 minutes here, we haven't gotten a lot of questions from the audience, but I do see one from Brian. If a B2B software startup doesn't need funding to support a 500% growth, should it raise anyway? Trying to get the smart money investment in?

No, you should bootstrap and then you should— I talked to a company this morning, B2B software bootstrapped to $1.5 million of ARR and profitable. And now they're talking to investors. Those conversations are going much better and many more VCs are interested because they bootstrap to a meaningful revenue number and are profitable. And then now the question is, instead of can you build something that people will pay for, the question is, how do you make this $1.5 million thing into a $10 million thing in 2 years? Like, how does money accelerate what you've already built? If you believe you can bootstrap something to the seed number, I would skip fundraising and do that because you will be you will get more attention from investors with more traction.

Yeah. Let's talk a little bit about private credit, which is coming up more and more in conversations. There's a lot of LPs like family offices and institutionals that are looking at the private credit opportunity. They want to provide debt to these startups. What are your— just in general, like, what are your thoughts on that? And then, you know, is Is there an opportunity where if you can get in early to like, let's say, a pre-seed or seed round, and then instead of having them go and raise, you know, a $10 million Series A, if they're growing, you know, especially with like the growth rate that Brian shared here, if they've got strong revenue, strong metrics, and they can raise debt instead of going out and raising investment capital, do you see that as a trend that might continue to grow? What would you advise your portfolio companies to do?

It, there's a couple of issues or problems there. Most debt providers that are going to want to come in like that are going to want some security. And what are they securing against? And there's basically two things you can secure against: hardware purchases, you know, fixed infrastructure, or SaaS contracts. There's a couple of funds that are like SaaS venture capital and all that stuff. And if you've got $3 million of ARR, they'll loan you $2 million against those contracts, right? So the question is, what are you borrowing the money for? And do you have the CAC to LTV things to make that a good investment and what is the security. Not every company has enough contracts to provide the security for that or enough hardware. And I think one of the worst things you can do is get venture debt. I think Silicon Valley Bank screwed up a lot of companies because they were doing venture debt for warrants without a lot of security into companies that couldn't deploy the capital really correctly. If you understand your CAC to LTV ratio, your pipeline, your close ratio, and, you know, you have, for example, to fund setup of your software before somebody will sign a 1-year contract, and you know you're going to pay back your setup within 3 months or something like that, that can be a good use of debt. To fund the onboarding of your customers to get a longer-term contract. But my recommendation is always, what are you going to spend the money on? And do you understand that you're getting a better than you're paying interest on return? Like, if you're paying 18% interest, can you generate 50% return on spending that money. If you can't generate more than you're paying your debt provider, you shouldn't borrow the money.

Yeah, and I guess that's being a CEO 101.

It kind of is, but a lot of people don't really think about that. They're just like, oh, it's non-dilutive financing, like, why wouldn't I take it? Well, what are you spending it on and are you getting a good return? If you're spending it on covering burn rate and your core CAC to LTV metrics are still not fucking working or your margins are upside down, you're just fucking wasting your time.

Yeah, I think that's really interesting because, you know, with the announcement JPMorgan put in $1.5 trillion into critical technologies, you know, only $10 billion of that is for venture. And I think that's both direct investments but also LP investments. So the rest of that $1.5 trillion is really going to be debt. And so they're seeing— but like critical technologies, to your point, it's hardware, right?

It's— yeah, I mean, it's really hard to spend that much money on software companies. What they're doing is they're underwriting like chip fabs.

Yeah.

And data centers which have tons of assets, right? You know, they've got buildings, they've got servers, they've got Nvidia GPUs. You know, they've got securable assets and very few companies that I am involved in have that level of securable assets. Right. They've got contracts for revenue maybe, but they don't have huge fixed assets. And so the large private credit thing really doesn't come into play with many B2B software companies because they just don't have those kind of assets.

Yeah, there's one, we'll do one more audience question here and then I think we can wrap. What is the future of ROI given that industry-specific agentic AI is on the rise?

I think that you have to have a much faster ROI and much clearer ROI for your software today than at any time in the past. And when you're talking about these AI replacements for labor, The best kind of thing is, let's say you're a voice agent and you're replacing a receptionist in a medical office. You go, that receptionist costs you $4,000 a month. My software costs you $1,000 a month and works 24 hours a day. So, your ROI is you're going to save 75% on your headcount cost and you're going to get a more productive employee in month 1 of buying my software. Your ROI case today has to be very compelling, you know, 75% cost reduction and a productivity thing. And the best companies deliver that ROI in the first fucking month.

Yeah. Let's do one final question for you, Martin. How can we— it's like the Founder Institute, FI Venture Network— how can we be helpful to some of the things you're working on.

Yeah, just keep inviting me to the demo days and stuff like that. And I'd love to fund some of the companies that come through your program. I've been to a couple of events. I've met some interesting companies. I just want to keep seeing those.

Okay, well, I've got a few in mind that I can send your way, but yeah, we'll be in touch. And I think, yeah, no other audience questions. So I'm going to give everyone 3 minutes of their day back Martin, thank you so much for joining us. For people who want to see the recording, we'll send that out in the next 24 hours. And if there's investors in the audience who want to see deal flow from the Founder Institute and VC Lab Networks, you can join the FI Venture Network, which we'll include a link in, in a follow-up email. So, Martin, great to see you again. We'll be in touch.

Great to see you, Ryan. Sorry I was late. Technology, it always gets screwed up. But have a good day.

Rest of your day. Thanks everyone.

Bye.