The New Rules of Venture Capital with Loyal VC's Kamal Hassan
In this live webinar hosted by Ryan Micheletti, Kamal Hassan, managing partner of Loyal VC, walks the audience through the evolving landscape of venture and angel investing. He begins by highlighting the dramatic shift of wealth creation from public markets to private markets, noting that endowments, pension funds, and sovereign wealth funds now allocate a substantial portion of their portfolios to alternatives, especially venture capital, while individual investors remain under‑exposed. Hassan explains the power‑law nature of VC returns – roughly 65% of deals fail, 30% break even, and the top 4% generate the bulk of returns – and shows how diversification (hundreds of deals) reduces risk and yields second‑quartile performance even with modest returns per deal. He then introduces the rise of evergreen, semi‑liquid fund structures that allow individuals to invest in venture without the 8‑12‑year lock‑up of traditional closed‑end funds, comparing Loyal VC’s fee‑light model to larger fund‑of‑funds offerings. The core of Loyal VC’s strategy is a referral‑only pipeline (largely from the Founder Institute) and a staged check‑size process: an initial $10K “foot‑in‑the‑door” check, followed by $200K and $1M allocations to the top 0‑2% of portfolio companies each month. This disciplined, rule‑based approach is designed to curb cognitive biases such as over‑confidence and “falling in love” with founders. Portfolio management relies on monthly calls with over 300 active companies, a global network of 1,500 advisors, and a focus on solving the founder’s most pressing problem each month. Hassan also critiques traditional pitch‑based selection, citing a Harvard study that shows gender and appearance bias, and argues that a data‑driven, referral‑only model yields a higher proportion of women‑led founders. He discusses common reasons startups fail – founder burnout, lack of passion, team conflict, and cash‑run‑out – and stresses the importance of founder perseverance and adequate runway. The conversation moves to founder team composition, where he notes a slight statistical edge for co‑founder teams but emphasizes that solo founders who build strong teams can perform equally well. Regarding market outlook, Hassan predicts that AI will accelerate some exits and boost secondary market activity, but overall exit windows are likely to revert to historical averages. He also notes that the number of VC‑backed startups will not explode because capital supply remains limited. Finally, Hassan advises founders to focus on revenue, unit economics, and customer acquisition before seeking VC, using the classic “self‑fund → friends & family → angel → VC” path, and reminds investors that modern evergreen funds now make venture exposure less risky and more liquid, mirroring the allocations of large institutional investors.
Chapters
Welcome to the Secrets of VC and Angel Investing featuring my friend Kamal Hassan, managing partner at Loyal VC. Today we're going to discuss the latest best practices and strategies to maximize returns for early-stage startup investors. We had about 200 people, a little over 200 people register for the event today, um, people from all over the world. So please say hi in the chat, tell us where you're joining in from, um, we'd love to get to know you a little bit more. My name is Ryan Micheletti. I've spent the last decade as head of global operations for the Founder Institute, the largest pre-seed startup accelerator in the world, where I helped scale the organization to 8,000 portfolio companies across 100 countries. I'm also a venture capitalist and general partner at the Veteran Fund, which is a top-decile VC fund that invests in seed-stage critical technology startups with elite military veterans on the leadership team. So I'm excited to welcome Kamal today. Kamal, thank you for joining us. Appreciate your time. Would you like to do a quick intro on your side and then we can jump into some of the content?
Sure, absolutely. So, Kamal, I co-founded Loyal VC back in 2018. Before that, I spent 7 years with Founder Institute, actually. First, I launched the chapter in Toronto and then helped with London, ended up becoming a global director for a few years. So, And actually, I'll talk a little bit about our strategy. This is mainly about investing in the industry as a whole. But one of our, one of the two groups we source from is the Founder Institute. We are the most prolific investor in Founder Institute companies globally with, I think it's 196 companies or something that we funded in the past 8 years. So, and so has it been 8 years? Wow. Yeah. Well, 7, 7, 7. We're in our 8th year.
Great. Yeah.
Yeah.
Awesome. Well, thank you so much. Well, for those in the audience, you know, we also want to make this a discussion. So Kamal is going to run through some slides, but if you have questions about anything that comes up during the presentation, we'll be sure to put it on our list of questions. We'll dive into it afterwards. But let's go ahead and get started whenever you're ready, Kamal.
All right. Let's jump into this here. Give me a second while I find the presentation. There we are. So this talk is a little bit about the secrets of venture and angel investing. I'm assuming most of you, well, you can post in the chat if you are angels, venture capitalists, which topic, but I will sort of do a balance of both just so you can see if you want to invest in a VC where somebody else manages your money, or if you want to invest in startups directly as an angel, the things we're covering should be good for you. Just blow our own horn for 2 seconds here. We're a top-ranked fund, you know, the most prolific funder of FI startups, ranked 7th in PitchBook ranking back in 2024. And we've got hundreds. We're a little bit of an inside secret fund. So you'll hear a little bit about the fund. Let's just talk for a second about venture industry. Wealth creation has really transformed in the US and globally to an extent, because the US is the biggest market. In the past decade and a half. So the biggest companies in the world have all started off as VC-funded companies. And if you like, I think it's like the top 7 companies on the stock market all started off as VC-funded. But what's really interesting is if you look at them before and after sort of Dodd-Frank Wall Street reform in 2010, before that, companies would list relatively quickly after founding, and the venture capitalists were very happy to walk away with their 60x, 600x returns, whatever it was. But after the companies listed on the stock market, the public actually had access to much bigger returns than you did in the private markets. So it actually made a ton of sense in the old days to invest only in public markets. That's where the wealth was created. That's what made a lot of individual Americans, individuals around the world wealthy was investing in public stocks. What has happened since 2010 is that companies are staying private longer and longer and longer. The private markets are earning 10,000 times their money back. And when these companies do eventually go public, very little of the money is actually being earned in the public market. Its wealth is being created massively in private markets. That's where it's staying. So this is why people are thinking of getting into venture. And if you look, actually, this is another little chart here out of Bain, which shows alternatives, which includes private markets, private equity, and venture capital being the largest chunk of that. Endowments, pension plans, sovereign wealth funds, have traditionally had a significant chunk of their money into alternative investments. Talk at sort of 15, 20% as opposed to only family offices have done that as individuals. But the rest of individuals have less than 5% of their money in alternative assets. Now, endowments of course are the biggest outlier with over 50% of their assets in alternatives. And if you look, this is how, endowments actually invest their money. Most of us as individuals invest in only the 4 asset classes: stocks, bonds, real estate, and you've got your US and global stocks. And that's where all of our money goes. If you look at endowments, they're putting roughly half their money in these alternatives. And you can see there's marketable alternatives, private equity, and venture capital. With venture capital, being roughly as much as they have in real estate. Now, I'm willing to bet that there are very few people on the call who have as much of their personal money in venture capital as they do in real estate, but this is how endowments invest. And there's a real paradox here, which is we think of venture capital as being a risky asset class. So why are the largest investors in venture capital pension plans, sovereign wealth funds, endowments, people who don't like risk. So this is one of the secrets to show you is the math. Now, when we think of venture capital as being risky, we think of venture capital deals and individual startups. I mean, venture capitalists invest in startups. Aren't startups risky? Of course they are. Individually, startups are highly risky. Then for venture capital-funded deals, which are pre-selected the best of the best. Apparently VCs know what they're doing. 65% of our investments as VCs fail. And if you look at the next 31% of the deals, they actually cover off your losses very roughly. You make all of your profit from the last 4% of the deals. That's 1 in 25 deals where you're making your money. So if you invest in 10 deals, you know, you might not have a home run in there. And then what's going to happen is you're going to lose money. Now, this little bit of an eye chart here, but I just wanted to really focus in on two things. The first column here is the actual returns from Cambridge Associates of global VC funds. And it shows you here the bottom quartile, second quartile, sort of top quartile, second quartile, third quartile, bottom quartile. And what I want you to show here is we took this distribution of deals here, we did a Monte Carlo simulation to build random portfolios, and we got a distribution which looks really pretty similar to the reality. So the first thing which this tells us here is that with all humility for guys like Ryan and myself on the call here, venture capitalists, those of us who managed to raise money, seem to be roughly equally skilled. Now, I can try to brag all day long about how we're smarter than Ryan, et cetera. Ryan's performing really well now, so I'm going to brag all day long about how he's smarter. But a lot of it seems to be that there is a good venture capitalist, it's roughly similar skill, just like you see in the stock market where good fund managers have roughly similar skill. Now, what's really interesting here, that was a side issue is look what happens as you do more deals. As you move from doing only 10 deals where you can lose virtually all your money or make 40% returns over the long term, as you do 150 deals, you get a much lower risk performance. You effectively have guaranteed second quartile venture capital performance. And in fact, you're all of your funds as you diversify more outperform a second quartile 10, 10 deal fund. Now they're always also going to be lower than the top funds. So the more you diversify and reduce risk, you lose the chance of the upside, but you get rid of a lot of downside. And interestingly, you outperform public markets. So this is really why you want to think about venture capital is because it outperforms public markets, but it's also the risk of venture capital investing. Just like stock market investing depends on how many investments you make. You, as you start to make hundreds, this is a portfolio of 150, that's better if you do 500 investments. But as you start to do hundreds and hundreds of investments, you have a lower risk strategy, but still doing better than stocks. Now we walk the talk with our own fund, Loyal VC. We've got over 450 investments we've made so far, diversified by geography, diversified by sector, diversified by stage. We've been talking about risk in terms of the risk of venture capital, the risk of individual deals. There's another kind of risk as well, and that is market risk. And this becomes really interesting when you look at today's market. We are in a period where you've got record highs in the stock market. And I know at least some people on this call are probably thinking, everyone's telling me stocks are overvalued. Everyone's telling me that I don't, some very, very smart investors, in fact, a really smart investor I know who spent his living, invest in the stock market. I was talking to him yesterday and he said, look, everybody knows the stock market is massively overvalued right now. The question is not, is it going to go down? It will go down. The question is only when. Will it take a couple of years and stay at these heights for a couple of years? Is a crash around the corner 2 months from now? Who knows? But his thought and the smart people I know are taking at least some of their money out of the public markets and putting into other things. And this is where venture capital becomes interesting because early-stage venture capital. I really want to stress the early-stage part here. Early-stage venture capital is uncorrelated with the stock market. It's got a negative correlation actually. So +1 would mean every time the stock market moves up, it moves up. -1 would mean every time the stock market moves up, it moves down. 0 means there's no correlation. It just, it moves, it's uncorrelated. And this is a second way venture capital reduces risk. And this is why the endowments like it, is having venture capital in your portfolio early stage makes it less risky. And you can see this is data for 25 years. In the recent past, just looking at our own fund versus the NASDAQ, look, we've moved with the NASDAQ 3 years in the past 6, and we've moved against the NASDAQ 3 years in the past 6. Now, we all know what's going on with the stock market. What's going on with the venture capital market right now? And actually venture capital, which was the world's top performing asset class from 2014 to 2021, has actually, it's at record lows now. It has been one of the worst performing asset classes. And the reason why it's per— well, we'll go into the reasons of why it's performing so badly, but you can see it's been moving pretty well against the stock market, which is up at record highs right now. Now, the other thing which is happening in this market is money is concentrated, concentrated in the biggest funds. You've got out of the period here in 2024 where you had about under $60 billion raised, you had $49 billion of that going to the top 34 firms. So you had 70% of the money in the top 30 firms, which almost by definition If you're investing $1 billion, you are a late-stage firm. You throw tens of millions and sometimes hundreds of millions at a deal. And you've really got this portfolio where you've got a handful of mega deals which are being pushed to grow really fast. You've got lots of competition for money at the growth stage, and there's very little capital at the seed stage. And entrepreneurs who are on the call will probably empathize with this very much because it's just been really a desert. In fact, to show you what the desert looks like, the amount of money entering VC is at record lows. We are down, we haven't been, we haven't had this little money entering the industry since 2014, over a decade since we've seen this. And you can see it's down off 90%, the money going into venture in this most recent quarter, was only 10% of what went in in the top quarters back in 2022. So it's actually pretty amazing that venture capital, the asset class, hasn't dropped in value more considering how little capital is going in, 'cause supply-demand, prices go up and down with the capital flooding in. So this is the environment we're in. If you're an entrepreneur fundraising, my sympathy, this is what's going on. A number of us expect things to change.
Just really quickly, I have a question for you and then we can keep going. When we're talking about the amount of money that's entering VC, do you have any data on the large institutions versus individual LPs or family offices? What is that stratification?
Great question, Ryan, and you're setting up the next slide. Which is this has been primarily from institutions. This is what's happening with institutional money. And as we showed earlier, look, Loyal's not the only person who looks at this chart and says, hmm, institutional money is dropping. Why is institutional money dropping? By the way, I don't have a chart on this, but it's dropping because it's been taking longer and longer for companies to exit. But in any case, the institutional money is dropping because the institutional money is dropping. A number of people started to look at the private wealth market And sorry, yeah, this is the chart. The private companies, the reason why the money going in has dropped is because institutions recycle money back into venture capital. Venture deals have been taking, the best deals have been taking longer and longer to exit. Venture capital funds, when they're set up, are officially supposed to shut down in 8 to 12 years. 40% of funds today are taking over 16 years to fully shut down. Now, this matches my personal experience. I made, as an angel, I made the angel investment, the best deal I did, made 30 times, I made 30 times my money back, but it took me 14 years to fully exit that investment. So this is what's going on because of this sort of long-term to exit from your assets. Venture capital funds are traditionally illiquid funds because the assets are illiquid and you buy assets, you hold them to maturity in a fund which is illiquid, and then you shut the fund down. And this is what has historically gone on. Now people are saying, "Great, I want to target the individual market." The problem is if a pension plan to have a 16-year horizon to get their money back, doesn't scare them. For an individual, 16 years is really scary. So what you are seeing happen right now, and this is overall in the private assets market, is the growth of evergreen semi-liquid funds. Now you can see on the left-hand side here, this is net assets and institutional funds of $16 trillion. Only $0.4 trillion so far in semi-liquid evergreen funds. So it's only about sort of 2, 2.5% or so. But you can see it's got a long way to go. The other thing is, if you look at the mix of asset classes here, a lot of people when they're talking to their wealth advisors are hearing about private credit and private real estate funds, which make up 23% of institutional funds. But make up 82% of what individuals are being offered right now. However, the private equity, which is 43% here, is growing as 15% of the evergreen semi-liquid funds. Venture capital is the big outlier. Lots of institutional venture, sort of closed-end, hence institutional venture capital funds out there, hardly anything in the semi-liquid evergreen fund space. Now the question is, why is that? Look, the reason evergreen venture capital funds are hard to find, and we're basically talking about looking for something for individuals, is you don't want to have a sort of evergreen, an evergreen really focused fund because to really diversify risk there, you need to invest in 20, 30 funds. That's what institutions do. Institutions don't want evergreen. They want a closed-end fund. If you are targeting individuals and you want the diversification, the options become a fund of funds with fees on fees or investing in a diversified fund, which is very complex to build and run. And if you aren't able to do this sort of offering and you aren't willing to sort of raise money $1,000 at a time for a specialized fund, then it's really hard for individuals to invest. So individuals are focused over here. Now I mentioned the fund of funds, fees on fees. By the way, there's a good fund out in the US launched in 2022, has over $2 billion now in assets raised. It is the big one on the block, though having said that, Hamilton Lane launched Evergreen Semi-Liquid Diversified Venture Capital Fund of Funds in 2024. So this is getting up there. But if you just compare side by side, our fund against this other one, you can see that our fees are virtually half. In fact, if you take their sales load into account, less than half of the competing fund. And our carry, which is a percentage of profit we take, is equivalently less than half. So it is really, this is a great fund, a great place to look, very North American focused. Now you may be looking at all this and saying, well, hold on, fees. I don't want to pay someone fees to pay due venture capital. I don't even want to— I, I don't want to pay someone fees to pick venture capital funds. I don't even want to pay fees to a venture capitalist to manage my money. Why don't I just do my own deals? And you are absolutely— um, that is a good strategy to pick your own deals. Now remember the numbers I put up there where 1 in 25 deals is where you'll make all your money. And I will admit, I mean, I learned a lot of humility entering this business because I started off, when I started investing, I was a successful entrepreneur. I'd made money in my first, in my one and only venture. So I thought, gee, I'm a successful entrepreneur. I'm bright because of that. I was a Bain and Company consultant before that. Even before that, I was top of my class at INSEAD MBA, the global MBA. So you sort of walked in investing thinking, oh my God, I know the stats for everyone else, but I'm different. And in my 10 angel investments, I had exactly the industry stats. I learned a lot of humility. And look, it's not just me. Bessemer Ventures, who many of you will know is one of the top VCs in the world, they have on their website, their anti-portfolio, a list of companies they rejected and why. And I encourage you to look on there. They said no to Google, to Apple, to Zoom, to Tesla, to Coinbase, to Facebook, to PayPal, to Airbnb, you name it, pretty well they rejected them. And if you look at why, it was for very good reasons. To Facebook, they said, "Hey kid, haven't you heard of Friendster? Move on, it's over." To PayPal, they said, "Come on, rookie team, regulatory nightmare in the payment space, forget it." Very good analysis. And I do want to encourage all people thinking of investing directly on the call, Have that humility when you're listening to a pitch, looking at an entrepreneur, because sometimes the best investments are those crazy ones which just don't make sense because they're competing against a Silicon Valley giant out of this little campus in Boston because they are trying to do something with regulations stopping them. And, you know, Sometimes those can succeed. And it really is, to me, I think this is a business where you want to learn humility. And there's actually, it really comes down to how you think about investing. There's two philosophies. One is to say, I'm not going to take any risks and I want to avoid losing money. The other way to think about it is, if you don't take risks, are you going to avoid missing out? And this is a quote from Abe Altman of AngelList, did some research on all the AngelList companies. And he said they found that seed stage investors should put money into every credible deal. Now, he said assessing whether a deal's credible or not is still challenging. That's why VCs, good VCs, are pretty good at assessing whether a deal is credible or not. He also said that over a 10-year investment window, indexing, in other words, funding every credible deal, beats 90 to 95% of investors picking deals. So if you index, if you invest in, you could invest in every deal on AngelList, and certainly we're investing in hundreds of deals, we're probably going to, 90 to 95% chance, we're going to outperform how we did if we picked fewer deals. It goes on to say, even if you have some alpha here. So why is this diversification a good thing? Why do you want to make a lot of investments? Well, remember, if you're funding everything credible, you're reducing the time you miss out on the 1 in 25 deals, or even look at these rare mega winners. That's 1 in every 250 deals or so, which is a 50x. You want to be— if you want to be sure to get that, then you want to have the more checks you have out there, the less likely you are to lose out on those mega winners, as long as you're finding credible deals and not throwing your money away on things which are almost certain to fail. Now, the other thing I'm going to just throw out there, because we are a little bit against our industry here, is we think that pitches suck as a way to pick deals. And a good evidence of why this is a sucky way to pick deals is this is a study out of Harvard where they got an identical pitch to be voiced by male and female actors. And then they showed a picture of who they said the entrepreneur was. It was the same person's voice, so they showed pictures and they randomized this. This was a whole bunch of investors and they basically found that this very same pitch word for word had a very significant difference in whether people funded it or not based on the looks and the gender of the person who pitched. So as far as we're concerned, pitches suck as a way to pick deals, What happens if you don't use pitches as a way to pick companies? Well, there's a funny little side effect, and here's a couple of examples where one of them, we've got 30% of our portfolio of women CEOs, and I'll show you how we pick in a second. But there's Clearbank here, Clearcode they call themselves now, Social Capital, who used to fund 30-40% women CEOs. And if you don't use pitches as a way to pick companies, you have a less biased pool of people you're picking from. And I don't care if you're a gender warrior or not. All I'm saying is if you're willing to give a much higher score to a company just because it's being pitched by a good-looking man, then you're probably not getting the best companies. You want to get the best companies, fund by the numbers. That's what people like these are doing. If you fund purely by the numbers with no pitch, you're going to get Probably outperformance. This is how we invest. So we invest by referral only. We don't listen to pitches. And your standard VC, you review thousands of pitches, you do due diligence, you start with a big check, and you're very supportive with your follow-on. And we do a slightly different process. It's referrals only to get in, but then we start with a very small check, only $10,000, and we do due diligence after we're inside the company through monthly calls and to earn the entrepreneur's loyalty. That's what it's about. Because then in our case, it's very competitive to get a follow-on investment. And that's what we reserve 95% of the capital. Now, where do we get our referrals? One of our two primary referral sources is the Founder Institute. So that's why we partnered with the Founder Institute. If a guy like Ryan has run a program with entrepreneurs, he's been running a sort of a 15-week program with 50 entrepreneurs, he should know those 50 entrepreneurs far better than I could ever know them from a pitch. So talk to Ryan and say, hey, what have you found out in these 15 weeks? Who should we be interested in looking at ourselves? Just to give you a little bit about the process we use in investing, also just to show you what happens after that $10,000 investment. And this is data from back in March. We still need to update this, but from the $10,000 investment, Every month we take the top 0 to 2%, we offer them $200,000, and the top 0 to 2% of those get offered $1 million. And we intend, as we raise more money, to continue this process. It's just continually build a relationship, earn the right to be at the table for follow-on funding, and then pick the best companies to get that follow-on funding. Now you will notice we have fixed rules there. Fixed amounts, fixed percentages which go on. We use these fixed rules to compensate for human cognitive biases. It's interesting, by the way, you would think that in, as a VC, you could earn more money on your follow-on investing because you know the company better. And you do. But you also have a series of emotional problems. You want, you fall in love with the deal. You want to save your investment. It's sort of, you really know and want to see this entrepreneur succeed. So we do large upward steps in the investing amount from $10,000 to $200,000 to $1 million because we don't want to be tempted to put in money to save and invest. You don't put in $1 million to save a $200,000 investment. We also, to avoid falling in love with people, we actually make sure that we only pick the top up to 2% in any month because You want to avoid the falling in love. Now, over time, 1 in 3 should go on, but in any 1 month, we have to— it forces discipline on us. And then there's a couple of other things we're trying to avoid. Overconfidence. Therefore, we have fixed investment sizes. We don't want to say, oh my God, this is the next Uber, throw all our money into it. We want to— it's if you go to the next stage, fixed check size, you're done. Et cetera. I'll just wrap this up with the last slide too, which is really useful if you're thinking about winning deals. The way we invest, small amount, earn the right to invest in the next round, earn loyalty. The best founders are flooded with money. They have their pick of who they want to take money from. And it's really interesting that what VCs think founders want and what many investors generally think founders want. This is a survey of sort of 100+ VCs and 100+ founders. And on the left-hand side, you can see what VCs thought the founders want was a good relationship, which was right. They thought they cared about the brand of the VC. They don't. Deal terms, yes, absolutely. And then the things which they thought didn't matter, like investor speed, actually really matter to the founders. That's one of the reasons why we do our diligence early after this $10,000, so that when we decide to invest in the company, we can move extremely quickly. So that is, that is really, if you are running an angel group, think about how quickly you can make decisions. Really understand that if you want to win deals, you need to be sure that you deliver these 4 things here. By the way, sector focus doesn't matter. Operational support, gee, it's nice that you can add value. These sorts of things which we as VCs think really matter, founders don't really care about. So look, I've covered a bunch of things. I've tried to cover different areas of both what's happening in the market today and ways of thinking about investing, which may be a little bit different for people and not the norm. We've got a lot of smart people on this call here. Be delighted to stop here and open things up for Q&A, for discussion, etc.
Thank you, Kemal. Let's go ahead and start with one question from Milian. You mentioned the low success rate in duration with VC firms, 1 out of 25, similar to the 9 out of 10 startups will fail. What do you consider a true win and what might be the one in terms of startup investing in?
Yeah, well, so first of all, I mean, all VCs know this. We all know it's a power law. We all know when we're writing a check that we are dreaming that this investment will return 10 times our investment or more. 1 out of 25 deals will actually return 10 times or more. But our belief, most VCs, and I'm sure, Ryan, when you're writing checks, every time you write a check, it's because you think this company is a 10-bagger or more, correct?
Yep. 100x or more.
Yeah. So this is what we're thinking is we think every time it's got to be 10 times your money or more. By the way, if you're a startup here, use this as a clue for how you're pitching to VCs, how you're doing your financial models. If you aren't showing us 10 times our money back, we're not interested because that's where we make our money. So what do we consider a true one? What do we like? We want— look, we're a rather different VC. So for most VCs, they need that home run to return 10 times as much because two-thirds of their deals will fail. The way we work is, by the way, we're starting to see data on this, which I haven't shared yet. But we actually know that of our first checks, it takes companies an average of about 6 years to fail. It might be 12, 15 years to exit, but 6 years to fail. And we've been running for, 7.5 years now. So we know how long our companies are taking to fail. And I can tell you right now that our $10,000 checks, we have a 65% failure rate. We're right on track. I mean, it's about 30%, 35% have failed so far, but it's right on track to be a 60%, 65% failure rate. That's for our $10,000 checks. If you look at our follow-on checks, our $200,000 checks above, We only have a 30% failure rate. So the way we run things, if for a normal VC, you return 3 times your money, all you've done is you've covered 2 companies that lost. You haven't made the fund any money. In our case, if you return 3 times the money, that's fine because we only have 1 failure for every 2 winners for the follow-ons. So therefore, you've doubled our money and already we are feeling very happy about you. So For us, a win is something that gets returns for the portfolio. For most VCs, a win is if it's not 10 times your money back or more, it's not interesting.
Kimberly just asked, what is the biggest reason you've seen these failures?
What is the biggest reason I've seen companies fail?
Yeah, like in the— so I think she was tying it to the 30%.
Oh yeah, for the companies who failed. Oh yeah, sure. Absolutely. Couple of, look, generally the failure happens. It's a trite, it's a truism, but it's sort of, it's a joke, but it's actually very true. A startup doesn't fail until the founder gives up. That is, the startups all fail because the founders give up. Because I've seen lots of startups not fail because the founder didn't give up. And some of those resurrect, some of those are still zombies, but some of those resurrect. Why do founders give up? They give up a couple of different reasons. They give up because they weren't, they did the wrong business. They did something they didn't care enough about. I'll give you an example. We had a company in our portfolio which was doing a menopause business. It was a young man who did a menopause business because his mother struggled with menopause. He saw there was nothing out there. He said, gee, I'm going to do this. Bain Company consultant, worked on this business, had like top people from around the country working in it. He discovered that he couldn't figure it out how to get women to sign up. He was— he had to spend $1,000 marketing to get a woman to sign up for a free menopause consultant session with one of the top doctors in the country in the space. And he just couldn't find a way to economically get women in there. He gave up because he was this bank consultant who expected the growth to be like this, and it wasn't. But I was talking with another entrepreneur last night. We agreed, we all agreed, he gave up too early. If he'd stuck with it, he probably could have figured it out. So they give up because they don't care enough, because they're in it for the money. They're not really in it for making a difference. I've similarly seen entrepreneurs who are motivated by changing the world who keep going even when it's hard. A second reason they stop working on is fights in the team. It's when you're fighting with your coworker and the two of you are mad at each other. You don't want to work to help the other person out. So that's the second reason people give up. Look, a third reason people give up is because they run out of money. And that's another tip for the entrepreneurs on here. Some entrepreneurs make the mistake of going too long before they take outside money. They spend all their own personal money getting the business up and going. You should absolutely put some of your personal money in it, but don't put all your personal money into the business. You will need money set aside for when things— when rainy days come later on in the progress of the company. You might have 3 or 4 years in to go without salary for a few months to help the company through a dry patch. So make sure you get outside money in so you've got personal reserves you can make it through that period. Those are, yeah, those are a couple of them.
Cool. Just one follow-on question. I'm going to expand on this, Kimberly. So she just had a comment that said, you give them money, do you give them adequate support? And so the question here is like, there's actually two philosophies in venture. I mean, there's many more, but like two kind of opposite ends of the spectrum. So there's like the founders fund model, which is, look, We're just going to invest in the best founder and get out of their way. We're not going to do introductions. We're not going to provide value. We're not going to have operational support. It's just you're either the best founder in the world and we're going to give you the money and get out of your way, or you're not and we're not going to invest in you. The opposite end of the spectrum is more of like an Andreessen Horowitz where they have talent networks, they have lots of operational support, they've got a lot of staff supporting those companies in a variety of ways. And so Kamal, what's your opinion of that spectrum of how involved should the VC be versus not?
So I think the VC should absolutely be incredibly helpful, but not directive. So you lead your horse to water, you help them around all the way around, but you're not going to force them to drink if they don't want to. And we can afford to do that because our strategy is you put small amounts of money and you only put more money at the ones which are doing the best. And If they ignore our advice and they're doing the best, wonderful. We'll give them more money. The way we sort of get through this, though, is we follow the Founder Institute model. We have a network of 1,500 advisors around the world. And unlike the Founder Institute, it isn't just you have access only to the advisors in your local city and only during the program, generally only during the program. We have access to those people for the, for the rest of the time you run your company from anywhere around the world, you can reach out. So when you want to reach out and say, hey, I want to, um, we're talking to someone who's in the shipping business right now. It's that we actually just added a new, a new advisor to our network a couple of days ago who's in the shipping business. And it's like we have 2 companies in our portfolio in the shipping business, but for those 2 companies, she loves to find out about what they're doing. and they love the introduction to her or will love as she joins our portfolio. So the way we do it is, yeah, we've got, we're incredibly helpful by having a massive network of massive resources to support you. Because remember, we're loyal VC, we want to earn the right to be in the next round. So for us personally, we can only earn that right by adding value to the entrepreneur because we want when the next time comes for you to say, and I'm sure it's the same with you, Ryan, we want the entrepreneur to say, hey, Ryan's a good guy, Kamal's a good guy, let's give them some more, some more allocation, as opposed to— because the next round, venture capitalists will almost certainly say, ah, let's clean up your cap table. What are you doing with Ryan? Don't give them their pro-rata rights, don't take any money, we want to fill up the whole round if you're doing extremely well. Um, and that's the point when you want the entrepreneurs sticking up for you.
Yeah, makes sense. Um, There's some—
but I will also say, by the way, for Kimberly, more generally, how do I feel on that? I feel that you absolutely need good advice as an entrepreneur. You absolutely need money. You can get those two things together, but you don't have to buy them together because cash will buy you advice and support. So you can equally just raise cash from a VC, a good, non-interfering VC who gives you money and then gets out of the way and you use that money and you use your shares to find amazing advisors, great. Do it that way.
There's some other questions here in the chat that I'll get to in a moment. Kamal, when you think about portfolio success, right? Because you're talking about adding value to these companies. For the investors on the call here, have you learned anything on the best way to optimize managing such a large portfolio. Do you have any, like, are you checking in with the companies? Are you just reviewing their, like, monthly or quarterly updates? And then, like, when you find ways to support them, is it usually introductions to customers and other investors, or what, what kind of themes have popped up for you on, like, here's how we manage our portfolio of almost 200 companies?
Yeah, and actually, so portfolio, the total portfolio size is, um, it's over 470 investments we've made, of which We've got well over 300 active ones. So we have around 300 monthly calls with entrepreneurs. We feel that if you are not in touch with the entrepreneur every month, you don't have the relationship to know what's going on. And the whole point is to build a relationship to know what's going on. We find monthly is a good cadence or frequency to do that. The look, when you're talking to the company every month, You know what's going on. And what the question we ask every call is, what's the biggest way we can help you this month? What's the single problem you have that you're struggling the most to solve? And then our goal is, and they may say, hey, I'm putting in this government proposal to run this, to run my software at the local municipality. And I'm being asked about my IT security. And we say, okay, great. Well, here's this guy Phil you can go talk to from our advisor network who's been doing identity and internet security for a big Silicon Valley company I won't name for the past 15 years. Talk to him. Or I'm trying to get into Estée Lauder right now to get them to see if I can get them to buy my company because I've got this makeup business. And it's like, okay, well, here are the 3 advisors who've used to work for Estée Lauder in senior positions who have now left. Why don't you talk to one of them and they can use their networks to get you introduced to the right person in the acquisition team. So it is, it's absolutely about staying in touch. Those are the types of things we generally don't, because we have hundreds of companies and because we are cross-sector, we don't do as good a job as we could of referring people on to the next investors. We've talked about, gee, be really nice to build a database, but we need to have a database of literally thousands of follow-on investors because we are in 70 countries and across sectors. I think if you are a focused VC, um, it's really easy to build up who are the top 20 follow-on investors I need a relationship with, uh, in, in, in my sector, in my geography. But for us, I mean, that would be a list of here are literally the top thousand follow-on investors we'd need, and those top thousand follow-on investors, it feels overwhelming to build as relationships. So Our advisors have individual relationships, but on a firm level, we haven't systematized that.
Yeah, that's good to know. Lucas has an interesting question here, which is, do you expect the failure rate and exit window to change over the next decade with respect to the AI?
So I absolutely— we're already seeing signs of the exit window starting to come down a bit. That's a really good question, Lucas. I'm— I haven't thought about what— you could hypothesize exit windows would come down, but that's a hypothesis and I don't know what it'll look like in reality because you can also hypothesize— the thing about exit windows is there's two factors. I often like to say that many people like to say that good companies are bought, not sold. But there's a two sides. You need an acquirer who's interested in what you have. And there will absolutely be some AI companies which are quick growth, quick flip with a fast exit. There will be some of those. But there will equally be a number who grow and that first offer comes along and it's not a good offer and you think you can make more by sticking with the business on your own. So, and then it's going to depend on the entrepreneur themselves. And look, some entrepreneurs want to run their business, they control their business. And in many ways, I think sort of an 8-year, 10-year exit window is a little bit of the entrepreneur starts to have had enough by 8 or 10 years. And they're more willing to sell by that timeframe. So I don't see human nature changing. So you could argue human nature won't change, the exit windows won't come down a lot. Or you can argue that there will certainly be some early exits. I don't know if it'll change overall.
Let me take the bull case here on why the exit windows might come down a little bit. So, you know, you're already seeing a little bit with the secondaries market expanding, and a lot more deals are getting done on the secondary level. You're also looking at AI is going to increase the speed of growth for a lot of these companies. And why does a company want to acquire another company? Well, it's because it's strategic, where it's helping them grow in a certain segment, or it's helping the company with its overall strategic vision, or it's financial where maybe the company's making a lot of money. And so when you're seeing AI kind of replace some of the workflows within big companies, right, what should happen is expenses are reduced. So therefore, there's maybe more of a profit margin where maybe the next segment of growth is actually by acquiring other companies at scale. So that's one bull case. I mean, there's probably a bearish case as that. So it's hard to determine which will happen. I also think that there's, because of one of your first slides, Kemal, the disparity of like public returns versus private, at least in the US, there's a big push now to start to unlock that private market a little bit more. So maybe with more cash inflows into the private markets that will allow for, you know, maybe a larger secondary market or more capital going to VC. The bearish case in looking at like, you know, what will happen over the next decade with AI in terms of failure rates is I think there's going to be a creation of more companies because it's easier to create companies. But that might just create more noise than anything else. So I'd be curious to get your thoughts on that piece. It's like I could see like thousands of more companies being created, but does that mean there's like the economic value grows with it, or is it just there's going to be more failures and you just have to find the right winners in that area?
So I don't think the number of VC-funded companies will expand dramatically. I agree with you. The number of startups is likely to expand because it is so much easier right now, but I don't think the number of VC-funded ones will go up just because there isn't the supply side on the VC capital for that many more to be funded. And that, of course, is that the nice thing about AI is can also mean you aren't as restrained by needing that early capital. By the way, circling back to where this market is going, I agree 100% that I think the, I think that there will be a pulling back. I think this has been too long a period here, and I think the exit window will shrink back down to historical averages for sure. I'm just not sure if it'll get much lower. And I will say about secondary markets, I think secondary markets have been growing recently because exit windows have been closed and because sellers were desperate. And when the sellers are desperate, they're willing to take a big discount. But if you notice when the secondary sellers, like I've got a friend who's a VC, been a VC for, I don't know, 15 years or so in France. And he's made his reputation off this top deal from his first fund, which is still not exited 14 years later. And it's not that there isn't a buyer for it. There isn't a buyer for it at the price he wants to sell. Therefore, he's just holding onto it. And I think that's what some VCs got desperate, sold in secondaries. But I think that as the market exit markets shrink in, the secondaries markets are going through some turbulence because you make money as a secondary buyer. You don't know the asset. When you lack the inside knowledge about the asset, you have to demand a discount because you're taking a risk by buying an unknown. Product. Now, if AI made knowledge shared and took private knowledge and made it public, that people had better access to it, maybe that would drive down the margin required by secondary, and then it would all work. I'm just not sure how much information will stay secret and how much is going to become public.
That's a great point. When you transition from being on the founder side of the table to the VC side, What was something that surprised you about being a VC or about working with companies in a different way? Were there any revelations that happened, good or bad, or did you have any unique insights or aha moments?
Well, so I worked as an angel for, I was an angel for 15 years before I became a VC. And there was the transition from entrepreneur to angel was what there were a lot of aha moments because there was the The biggest one is as an entrepreneur, you see something you want to get done, you jump in and you do it and you have to hold yourself back and go, well, clearly this is going wrong. This is what the company should do. Let me make them do it. Let me do it for them myself. Let's make this thing happen to fix their problem. And you have to divorce in your brain the no, no, no, it's not your company anymore. It's their company and they have a different vision. They're seeing things differently than you would do it. So I think that that is probably the biggest thing is to get that disattachment from, as the operator, you just want to do it. You know the answer, you want to get it done and you have to step back from that and go, okay, maybe I don't know the answer. Maybe I shouldn't be the person to get this done. Let me step back and support them and nudge them and advise them.
But yeah, yeah, um, I know we're, we're almost out of time here, so in the last 5 minutes, um, Lucas asked a question here: could the risk of a solo entrepreneur be less than the risk of a co-founder, um, during the first 6 years? The question is a little confusing, I think.
No, but no, it's a really good question. I mean, makes a ton of sense. And actually, um, that is a really good question to be asking. Sophisticated VCs, the number one question when they hear you have a co-founder is how long have you worked together before now? And if the answer is we just met in this accelerator program, that's not a very encouraging answer. So because we know that's the number one risk. So I think the stats actually show that there is a slight outperformance for teams over solo founders, but it's only a slight outperformance. And guess what? You're a solo founder who— when a company is developed a couple of years in, if you're a solo founder and you hire good team members, or if those team members were co-founders, it doesn't really matter. Your business is equally successful. You're equally doing the same things. So I personally, I mean, we don't care if someone's a solo founder or not, but I know there's some VCs who that's just on their checklist.
Yeah, I think the point about the solo founder with a team versus like co-founders is pretty interesting because a lot of the time, you know, you'll also see where, you know, I'm sure you've seen this on the cap table where it's like there's a team of like 2 or 3 co-founders, but like one has like 70% and the others have like 5 or 10%. So is that really a co-founder? Is that an early team member? And I think, you know, it's all nomenclature. Let's do one last question here. Let me pick one. So, okay, kind of going along the same line of this solo founder thing. So Kimberly is saying she's a solo founder with an MVP with a 5-year plan for exit. Is that attractive to investors? And when does a company know they need an angel and want an investor?
So the thing to understand about most VCs is most VCs have a closed-end fund, which they want to shut down 6 or 7 years after the time when they're talking to you. And if you know you have to sell the company in 6 or 7 years after the time you're talking to them, you end up being slotted into a very particular formula, which is, um, I want to help already successful companies accelerate and sell, and that's what I want to do. So what are they looking at? They're not looking at your plan, your MVP, anything else. They're saying, how much are your revenues? How fast are they growing? What's your cost to acquire a customer? Boom, you hit my numbers, I'm throwing money in there. And that is what the vast majority of venture capital does. Because when you've got a whole bunch of money and there's way more founders than there are venture capital checks written, there's way more founders. You get your choice and you're going to pick the ones who already have revenue. My advice is if you've only got an MVP, follow exactly the model of a little entrepreneur you may have heard of called Jeff Bezos, who, what did he do? He self-funded his MVP, then he raised money from friends and family. His parents put $250,000, $220,000, $240,000 into his business, and he told them at the time, 70% chance you'll never see this money back. And I've just told you 65% of VC deals fail. Smart man. And then he raised angel money and then he raised VC money. And you do it in that order. That's how he did it. And getting to reasons why, but that is really the way to think about it. So if you have an MVP and you're talking to venture capitalists, there's a mismatch. Most venture capitalists are wrong for you.
I think there's that Shark Tank effect in the industry, which is a lot of founders get distracted with the, you know, trying to go out and raise capital too early, thinking that that's their pathway to success, when really the pathway to success is to build a great company, get customers, drive revenue. And so I'll just share a resource for founders here in the chat. We put together a list of benchmarks at Founder Institute on the different stages, the traction needed for funding. It's really powerful when you can just kind of look at going from idea stage to pre-seed to seed to Series A, and what those inflection points look like in terms of the size of the company, the traction needed, the maturity level of the product. And when you can think of your next steps as a founder and break it into more of these structured steps, it gives you clarity and it gives you the ability to focus. So maybe instead of going out and trying to raise investment capital, maybe instead you go out and you build your team and build a product and get your first customers. So hopefully that's helpful. I know we're out of time here. Kamil, any last words of wisdom for the investors or the founders on the call today?
Look, I think the last word of wisdom, we've been talking to the founders recently, so I'll wrap up with the last word of wisdom for the investors, which is this market has changed. There are evergreen quarterly semi-liquid funds out there. You don't have to lock your money away for 15 years in a fund. You can buy and sell venture capital like you do any other asset. You can come to a fund like ours directly. You can go to a fund of funds. But the market has changed. People have it out there for you. And the related message is venture capital doesn't have to be risky. Do it like the pension plans do. Do it like the endowments do. If you're buying a specialized fund like buy-ins, buy 20 of them. You're buying a single fund, buy diversified fund or buy a fund of funds. But there are, the product is there now. You don't have to be stuck only in the public markets. Diversify into private markets.
Awesome. Kamal, thank you for your time. Thank you for the audience. We'll be sending out this recording in the next 48 hours or so, and I look forward to seeing everyone at the next event. Take care.
