The Untold Truth About Becoming a VC Investor

Welcome back to the Profit or Pivot podcast. Today we have a very special guest, Wynter Mead, who is the founder of Cool Water Capital, an organization that helps emerging venture fund managers build and raise their first, second, or third venture fund. He is here today to discuss what he looks for when it comes to venture fund managers, what startups should look for when they're considering to raise money from VCs. If you're a founder, this conversation is important for you because if you understand the business of venture capital what they look for, what they think, how they think, then it may be easier for you to raise money from them. So if you're looking to raise venture capital or aspiring to be a venture capitalist, this episode is for you. Tune in. I guess the first question I have for you is there's a perception out there in startup land that VCs are basically rich, arrogant, and they hoard their pools of capital only to disperse it to their friends and family. And if only the entrepreneurs and founders, you know, can express or show the VC how great they are, they'd also release some of that capital to them. Is that true? Are VCs basically the devil, or is that a misconception?

Yeah, I think there's a couple ways to answer that question. Um, so one is very simple. No, they're not the devil. Uh, the other way to answer it is I think VCs act in circles, right? And even concentric circles. So, uh, I would, I would argue if you don't know the VC or you can't get warm connected to the VC, It's actually, yes, very difficult to get a check, right? And why is that? Because giving anyone money is based on, you know, the premise of lots and lots of trust. And if they don't know you, then you have to build up this pattern of trust. Sometimes that can take weeks or months. Sometimes that can take years. But yeah, if you just reach out cold and your expectation is someone's just going to give you all this money, I think that's a, you know, false assumption. And I think a lot of people, right, if they feel like they've been personally slighted, because they didn't, you know, get a check after having a single conversation with someone, then I think they should reframe how they think about building trust. Like, that's probably one way to think about it. I think another way to answer it is like there's, you know, insiders in Silicon Valley and I'm sure other ecosystems, right? Like these ecosystems have been built literally over decades. Some of the more nascent ones have been built over years, but most of the top venture ecosystems in the world have been built over decades, right? And what do you get over decades? You get, again, entrenched patterns. You get people who have been there for decades as well that have kind of built their reputations and their success on the back of that ecosystem. And I think that's the, that's the inside circle, right? Those people have built up a pattern of success, um, and have kind of, you know, earned their right to raise additional funds and kind of like raise venture capital funds. Um, and they're looking for, I could say, you know, repeat patterns, people that have kind of done it already, that have demonstrated success, were founders. They're looking to allocate to those folks, but they're also looking for, you know, new folks, right? The, so to speak, you know, Bill Gateses or Mark Zuckerbergs of the world where it's like their first rodeo, but they're still very talented people and you're most likely going to bet on them if you see, you know, a repeating pattern of success. So yeah, I think the net-net is it's hard to break into these circles. Um, but it's not impossible. I think the best way to do it is to go in, you know, open-minded with an understanding that, you know, your job is to, you know, demonstrate a pattern of success, build trust, kind of show the pieces of information and the data that convinces VCs to, you know, get excited about an opportunity and to write a check. Because ultimately, I think you, the founder, and venture capitalists are aligned, right? At the end of the day, like you're trying to build both, build a big business and then, you know, both of you are successful if that ends up happening.

Fair enough. You know, some, some founders are pretty bold. They actually send their wiring instructions to me in the cold email, which is, I always find to be pretty amusing.

Why not? You can ask anything, right? I think, yeah, if you read business books on sales, you're not going to get what you don't ask for. So That is, that is one, one tactic. I don't know if it, if I've ever seen it work outside of like being a very well-known founder already, but, uh, yeah, definitely ask.

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Yeah, I think the corollary here is, you know, and this is definitely a debatable point, founders are responsible for a few things, right? If you're starting a company, if you're building a company, the primary things that you're responsible for are obviously building a product that the world loves, or at least your customers love. You have to build the team, uh, right? I think there's, there's a, a meme or a conversation now where teams are gonna get smaller and smaller with AI, but effectively, like, your main priority is still to, like, build a very talented core team, right? So that's a priority for you as a founder, building the organization and building the team. And then you have to, like, make sure that the company is well capitalized, right? You can get that hopefully by selling to customers and creating a flywheel. But a lot of the time in venture capital, that means you're good at fundraising, right? Like you have to, you know, win dollars for your company so your company doesn't run out of cash. Like, you know, businesses go out of business because they run out of cash. So those are your priorities as a founder. Our thesis at CoolWater is that a lot of venture capitalists, when they start out, are founders, right? But their priorities are a little bit different, right? So where the founder of a startup— I just mentioned their priorities, right? Primarily kind of talent building and fundraising. When you're a venture capitalist and you're starting out, you're a founder, but your priorities, I would say, are less team building. Yes, that's a priority, but it's probably like a second or third priority when you're starting out, because you usually start out with a team. You're not like trying to quickly hire into this big company because you have operating leverage when you're a venture capital firm. I would say your priorities are fundraising, right? But it's, it's to the point where like you need capital to invest and then, right, you need to invest. That's your other priority. So the way I kind of frame it is venture capitalists are only as good as their next best deal. You have to find great companies always, right? Good for you. You found like great companies in the past, but if you keep on raising money, what's important is like deploying those dollars, deploying that marginal dollar into the next great opportunity. So that's, your priority. And then if you run out of money, you're what's called a zombie VC, right? So if you don't have any more money and you can't deploy, you know, founders might continue knocking on your door, right? I just saw a post yesterday from someone who I know who basically said like, I'm not raising any more funds. I'm fresh out of capital, like stop knocking on my door. I think very few VCs do that. Very few VCs will be that transparent. Most likely they'll continue to kind of posture as if they have money for, for years to come. 'Cause like it's very hard to let go of the game. So again, yeah, like we work with founders, Cool Water works with founders. We work with founders of investment firms, primarily venture capital firms. And we believe that, you know, your main priorities are finding your next best deal, investing well, and fundraising, right? So Cool Water supports venture capitalists, you know, on their, mainly on their fundraising journey. Kind of building the business around the success of, you know, raising funds and becoming successful as a next-generation asset manager and investment firm. But we also fundamentally understand that you are nothing without financial returns, right? Ultimately, like, you will go out of business. So we believe those are the two priorities and we've kind of built our whole business around that.

That's great. And I am very partial to your mission, obviously, because I'm a I've been in venture for over 10 years, but I'm an emerging manager by just about every definition of that term because I'm raising my first fund and deploying capital and all that stuff. It's pretty fun and intense. But what was the catalyst to start Cool Water?

It's funny, I just saw a self-deprecating remark by another VC who publicly called himself and his partner an emerging manager. He's like, 15 years later and still still like an emerging manager because they put him on a list of like top emerging managers for 2025. And he's like, yes, you know, 15 years later, still an emerging manager. So I don't know when anyone ever breaks out of that. And then it's like you're at an established fund and you end up leaving, right? And so it's like, you know, you're— everyone's always like, it's like this, you know, circle, this cycle. Like you're, you're always jumping back to become an emerging manager. There's always, always emerging managers. But yeah, I think the original catalyst, right? Like if I provided a framework for, you know, who do we support? We support founders, founders of investment firms. Why do we do that? Right? Because you need to focus on your priorities, investing well and fundraising. Right? And I think ultimately we started it because small funds, emerging managers from my, you know, ivory tower seat as an institutional LP twice over. I could see the performance of, you know, very great investors and when they, you know, had the right size fund, when they understood these concepts, these institutional best practices, these concepts of like portfolio construction and, you know, how to actually generate returns at the fund level, right? Because being a fund manager and building out a fund is different than angel investing, right? There's a, like I say, a multifold strategy to becoming a successful fund manager. We noticed that, yeah, performance was best in smaller funds. Incentives were very well aligned, right? You're actually aligned to make money based on carry instead of management fees. And so there's a lot of dynamics in the small fund, early-stage emerging manager world that I viewed as positive. Again, fundamentally it came down to emerging managers, if they're good, are putting up really good numbers, right? There's a very debatable point, right? Because like any LP you talk to, I would argue any LP you talk to, will be thinking about, do I deploy my marginal dollar into established funds, right? The Sand Hill Road firms, or do I potentially take a bet on an emerging manager? And again, ultimately it comes down to, it's not just like a bucket, right? Like an established firm. There's variations there. There's a spectrum there. There's some established firms that put up great numbers. Like there's persistence of returns. There's some established firms that might just be established in brand only versus returns. The same thing in the emerging manager world. There's small funds that put up great numbers. They're well-connected. They have the right networks, right? They're building out the right portfolios. They're connected to the right founders. They have a higher probability that they're going to generate outperformance than not. That's the bucket I'm talking about. That's the bucket that Cool Water works with. We're looking for the best performing emerging managers, the people that are going to make their LPs more money. Than if that LP were to invest into an established firm. Established firm, like the math, it's just like if you've gone to second grade, this is an algebra equation, right? It's not that complicated. The bigger the fund, the harder it is to generate great returns. The larger market capitalization you need, right? You need a $100 billion outcome to generate, right? Especially if you own like, you know, smaller percentages of companies now because they're more valuable than ever. Right? This is a very simple math equation at the end of the day. Bigger funds, it's much harder to return great multiples and outperformance. So I, you know, noticed that, you know, 10 years ago when I was deploying capital into both big funds and small funds and realized that there wasn't a platform to support the small funds. And so decided to create that because it was something that hadn't yet existed in the early-stage world and the emerging manager world.

Mm-hmm.

Fundamentally to be helpful and supportive for emerging managers.

That's great. I, I just wanna take a step back why founders should care about this because I kind of mentioned a little bit briefly, if you understand the mindset of a VC, especially one that is emerging, even established ones, you understand what they care about, what they go through, what their own struggles are, you know, you're much better positioned to raise capital from them. And it's one of the areas I feel a lot of founders really don't get coached on very well. Is getting into the mindset of a VC and it should help them craft better decks, better intro emails, better everything. And so if you're a founder listening or watching this, it's important just to reframe yourself to understand what a VC goes through and what they care about if you're going to try to raise money from them. So with that in mind.

Yeah, I'm happy to double down on that. So, you know, getting into the mindset of a VC, right? Again, I mentioned what they care about. They care about raising capital and they care about generating returns. And you as a founder are part of that, are part of both actually. Um, so, you know, I think you've read about this, you've heard about this. If you're a founder of a startup, you know, you have to position your startup in the right way. It has to be relevant to the strategy of the VC, right? Like if I'm a quantum fund and you're not a quantum startup, right? It's going to be very hard to get a dollar from me, the VC, who's the Quantum Fund, because you don't fit my mandate, you don't fit my strategy. I have raised those dollars vis-à-vis my LPs, telling them that I'm going to go out and find quantum startups and invest in quantum startups. So that's one screen you can do. That's super easy, right? That's the advice you get where it's like, just, you know, ask a GPT or, you know, go online and search it or, you know, go to their website and figure out you know, what they've invested into and what their current strategy is. And like, yeah, if those things don't intersect, right, you're just wasting time. I think another way, like if there's not a lot of information, because again, some VCs are less well-known or there's a lot of VCs that are kind of tied to family offices now and they have like less information online. But, you know, create a couple of questions in the beginning of a call, right? Like, what's your strategy? What have you invested into recently? You know, what's your favorite deal? What's your mandate? What are things that you can invest into or can't invest into? Do you have any, you know, restrictive rights on what you can invest into or your investment strategy? So these are like really quick questions. In a couple of minutes, you can very quickly kind of, you know, qualify in or qualify out a potential, potential investor. But ultimately know that, you know, you the startup have to, right, if you're subscribing to the venture capital game, venture capital is very different than non-venture capital. When you take venture capital dollars, you're signing up for a hypergrowth story, right? That's the only way— I won't say the only way, that's a little too drastic, but that's the core way in which venture capitalists make money at the fund level, right? You as the startup founder build a very valuable company. They own part of that company and hopefully help you in that growth journey. And ultimately, you know, that value that you've created flows back to the venture capital fund, right? And then the venture capitalist can raise future funds and raise future dollars from the LPs that are now happy because the LPs have, you know, invested into a fund that's generated returns. So again, lots of emerging managers focus earlier, right? So it's, you know, call it smaller prices for buying a company. They usually own larger percentages, right? If you're paying at a price of, you know, $5 million or $10 million, you're, you know, writing a certain size check. This is all relative, but you're most likely going to own a higher percentage than if you're buying into that company pre-IPO or when that company is worth, you know, $10 billion or $100 billion. Right. It's just for fund sizes, right? If you're trying to generate a big return, it makes sense almost to play earlier. So a lot of the emerging managers you'll see, obviously there's, you know, differences, but a lot of the emerging managers you'll see invest very early. And so you do have the opportunity to get 100x or 1,000x or 5,000x in your initial investment if you choose correctly. So that's what venture capitalists are ultimately doing, is taking those dollars from the LPs, trying to find a company, a founder that they believe in, and a company, an idea that they believe in. And they believe that this company is going to become very, very valuable. And they're, you know, putting their dollars to work in a diversified way. And when stuff starts to potentially, you know, break out of that portfolio, most, again, VCs will look to put additional dollars in, into that opportunity. Um, so that's the name of the game. As all of you know, if you're founders, like, building a business is the hardest thing you'll ever do. Um, easily the hardest thing you'll ever do. And so VCs who are founders also acknowledge that, and they again try to invest into a pool. Some people do 10 companies in a portfolio, some people do, you know, 100 companies in a portfolio or more. But the ultimate focus is like trying to find the best founders who are building, you know, who are ambitious and trying to build big companies. And when those things start to work, you know, I think the best VCs also pour additional dollars into those opportunities.

Like, uh, but you brought up a great point about established firms that they— there's some good data out there suggesting they underperform on a MOIC basis, on an IRR basis. And some of the reasons are somewhat obvious that their incentives aren't always aligned with their LPs because if they have a you know, they're collecting 2% fees on $1 billion or $2 billion. That's a business in and of itself. They actually don't— they need to perform to raise more money, but they don't need to perform to make a lot of money. That's kind of just shifts the mindset of their— how they interact with— and I would love to believe that they're disciplined people, but, you know, who knows? Their incentives are just not the same as someone that's raising their first fund. And if they make the wrong deal, they're done. And they're not making money, not from management fees and not from carry and not from anything else. And they wasted— not wasted, but they put in years and years into this and they basically didn't even earn a salary. So I feel like it's a little bit of a different incentive.

It's definitely a different incentive. Yeah, I mean, big funds are playing a different game, right? It's apples and oranges here. They're a completely different game. So what I'm saying from the Coolwater seat is if you're an LP, then you can choose both, right? Because you can choose an established fund that's trying to generate a more consistent 2x return, maybe 3x if you're lucky. But you're playing more like a persistence of returns, like I'm not going to lose money. And you're diversifying into a different part of the economy, right? Versus private equity or versus public equity. So you're going to be buying like a different basket of companies. You know, that effectively is more, you know, people would argue with this term, but more like growth capital, right? Because it's almost like you're investing when you have to put most of your dollars to work when there's more consensus around an opportunity, right? That's public equities investing, right? I've underwritten this, you know, asset. There's lots of information here. There's lots of data, like how it's going to grow, how it's grown, right? Like that's public equities investing. That's fundamental equities investing. Venture capital is a little bit different, right? It's kind of disconnected from reality in certain parts, right? Especially early stage. Like, you're betting on a team, you're betting on an idea, you're betting on a market, right? You have very little data in the beginning, and you're kind of tracking that data very closely, which is why you tranche out the capital. But that's where most emerging managers play, is that early stage, right? They're kind of helping you get to strong product and product strategy. They're helping you with early sales, right, to get that traction, to raise those additional dollars so your company is de-risked. They're helping you track down follow-on financing and capital, right? So these are the roles that an early-stage, you know, good VC will play. They're also playing in the right circles, like we mentioned earlier, where you're working with founders who understand their role and responsibility of building a big company very quickly. Right? So as an LP, you can bet on the, I guess, the, you know, 2x persistence of returns of like, that's how you're thinking about it, right? Or you can bet on emerging managers, which are, if one of their companies actually breaks out, right? You have to believe that they're playing in the right circles. But if one of those founding teams and those companies actually breaks out, now you have a 5x or 10x, you know, a 25x fund. So again, a lot of this comes down to, you know, portfolio construction and, you know, right-size ownership and Playing in the right circles with the right founders. But if you're betting on those funds, which is what Cool Water does, like finds those people, finds those teams, works with those teams, bets on those teams, like that's who we want to work with. As an LP, I think you can have both in your portfolio and you should think about investing into emerging managers as a bucket of outperformance and even as diversification within venture capital. Um, so I think that's, uh, that's one, one way to think about it. On the founder side, because like the audience here seems like it's more founders of, of companies, right? Like you would choose an emerging manager because their whole wellbeing is aligned with your wellbeing, right? Like you need to be successful for them to be successful. If you take a small check from a big fund, you're inconsequential to the ultimate return of that fund. So yeah, you can think about it as, well, this fund has deep pockets. That's one way to think about a bit taking a check from a big fund. But the other way to think about it is it might be negative signaling if if they write a check early and then they don't follow on, right? Or maybe they're always going to be there. Like the big funds always have to be there later on at the later stages because they can't miss a, you know, company of consequence. They can't miss a generational company. That's very important. Like they have to because their ultimate 2x, 3x fund returns on their $10, $20 billion fund relies on them capturing those generational companies. So they'll take option bets all day long in the early stage, but they're not aligned with you as a founder, right? They obviously want you to be very successful. They obviously want you to be a $100 billion company, but they're not fundamentally aligned with you in the early days. Emerging managers, because of their smaller funds, because of you needing to be a, you know, consequential company for them to generate great returns, like emerging managers, I believe, are more aligned with founders in the early days than bigger funds. Bigger funds will always be there because they have deep, deep pockets and they have huge amounts of capital. But again, like they're there, right? Kind of hovering, waiting to cherry-pick stuff as it breaks out. Where emerging managers are in the trenches with you, again, helping shape product, helping shape team, helping shape go-to-market, all these things that are fundamental to your existence as a company. The best emerging managers are there helping you with that, right? So if you're picking again, as like if I'm coming from the founder perspective, just know who's aligned with you in the early days and then know who will be there kind of trying to like help scale you up to like make you a public company. You can take both of those sources of capital. And again, like as a founder, just as an LP, like you're picking quality in the emerging manager world, like work with people that are going to be very helpful. And you're also picking quality in the established manager world, working with people that again can raise subsequent funds that are going to kind of well capitalize you before you, you know, IPO or build a really big company.

So I guess one of your primary roles is to determine who will be kind of an exceptional VC fund manager before it's obvious to anybody else. Right. So what are some of those things you look— what are some of the criteria you're looking for before deciding to back an early, like an emerging manager? I imagine it's much more sophisticated than they have a decent track record at a more tier 1 fund and they're spinning out. You can walk us through that.

Yeah, my, my role is like a seed stage VC, right? A seed stage VC can identify, at least a good one, can identify like talent, right? You, and you make, you know, 20 or 30 or 40 or 50 bets in a fund. So I view that as my role, right? We also have an incubator accelerator for funds and like multiple programs that can help you as a GP, you know, launch and, and build the right infrastructure at your at your business level. And so fundamentally, right, like, what are your priorities? You have to invest well as a GP, you have to invest well, and you have to fundraise. There's a third bucket that I haven't really mentioned that's very important that you need to manage as a GP, but you shouldn't be spending a lot of time there. That is your kind of financial operational bucket. Like, that is the actual business that's built. Right? If you build a business, you're building a machine, right? Like, if you think about the established VCs, the established firms, they run their firms like businesses, and they should. Because ultimately, like, if you're, you know, without naming names, like, if you're a big tier 1, like, some of those firms are as big as, you know, 400 or 800 people, right? If you're not running that firm like a business, it's going to be chaotic. In the early days, you're less of a business You're a business, but you're less of a business. You're not 800 people, you're a couple people, right? Most emerging managers are just a couple people. So you have to find deals. That's your priority. Like if you have to have a marginal minute and it's going to be like, do I spend a minute trying to find a great deal or do I spend a minute on my operations? Most of the best VCs, right? Obviously you're going to say, oh, but you can spend time on both. But most of the best VCs will actually spend time finding their next best deal. Right, or just fundraising because they're paranoid that they're going to run out of money. Right. And they've already kind of entrenched themselves enough in a certain network where they're going to get enough flow. Right. And then they're just like good at picking. But fundamentally, I think they're going to try to spend that marginal minute on finding the next best deal because that's going to create the compounding effect, the flywheel that's ultimately going to make you a better fundraiser. But there is a third bucket, right? So where does Cool Water play? We aim fundamentally to work with the best investors who are emerging managers, right? Because at the end of the day, You're not going to continue to exist long-term if you don't generate performance and put up good numbers. So ultimately, like, right, even if you have the best business in the world, the processes are the best, you've built a machine. If there's no investment performance on top of that machine, right, the machine is fundamentally just, it's great, but the machine isn't what actually raises you dollars and the machine isn't what, uh, it can help you, but it isn't ultimately what like generates investment performance. You picking deals. Having the right process to source and pick deals and you fundraising, that's what's going to keep your business in business. But those are the three kind of pillars. So Cool Water looks for the best investors, right? We help package all of that. Like we've gotten, you know, we're early enough where people basically have, you know, angel investments and different advisory shares and investments all over the place, right? Like we're bringing it into like one spot, helping you build out your track record. Helping you kind of build out your, your story and your strategy and the framing and everything that goes into that. Very, very important. I love doing that work. That's a big piece to kind of like package the investment track record. But that's really big. Like if you don't have an investment track record or an operational track record to start that can demonstrate, again, access to future great founders, it's going to be very, very hard for you to raise a fund. I think that's just a fundamental part of being an early fund manager. Like you have to start somewhere. You've got to get points on the board by being a successful operator. You've gotta get points on the board by being an early angel, a successful angel. You've gotta get points on the board of, you know, doing the apprenticeship model, like working for some other place and kind of showing that you know how venture works and you've made a lot of good bets already and you kind of know how the game works and you can play the game, right? Those backgrounds are pretty tried and true. So we're just looking for the best people, you know, from those different backgrounds. And then we can help them with everything, kind of go-to-market, launch, right? Like I said, it's like the thesis, the strategy, the packaging of it all, the financial, the operational pieces. Like, we can literally do everything from scratch, right? If you want to build a Michelin-rated restaurant from a blank grassy field, right? Like, and that's your venture capital firm, we can do that. We just, like, we need you and we need the grassy field, right? And then we can build everything else on top of that. But fundamentally it's a people business, right? I'm a seed stage manager that's betting on talent. Like, you need to be the rock star and then like we can build the whole, you know, brand and kind of arena around you. But you, if you can't sing and you don't have charisma and you know, you don't know how to write songs and you can't play an instrument, like it's going to be much harder for you to be a rock star and probably still do it because of AI, but it's just going to be much, much harder. And most likely we're going to fail than like help you succeed. So again, we're looking for rock stars in the early stage. Testing capacity and skill set and track record is very, very important. We can help build everything around you. And then on the fundraising side, right, if you're getting the right pieces, fundraising can be easier. If you're talking about the right things, if you're building the right materials, if you're communicating correctly, if you're installing the right best practices, if you're building the right business, all of that goes into— that's actually helpful for fundraising. This is a key point that, again, most people miss. I know I'm not talking to a bunch of VCs here, talking to a bunch of founders, but, you know, maybe these founders, you know, out in the audience someday become VCs. Like, I think that's a big disconnect where just think about building a startup, right? If you're not collecting the data the right way, if you're not, you know, packaging the data the right way, if you're not building your team the right way, um, if you're not thinking about signaling, If you're not, you know, building processes and running processes well, especially on the fundraising side, if you're not running a strong fundraising process, if you're not talking to the right people in the fundraising process, what's going to happen to your startup, right? Maybe, right, there's again, maybe there's enough there and you get lucky. But our bet is if you build a machine, you're more likely to actually go farther, right? Like if you build a car, if you build a machine to go somewhere, you're probably going to get there faster than if you walk. You can still get there if you walk. It's just going to take longer, right? So ultimately, like, do you want to get there faster? Do you want to get there more conveniently? You know, it may be right. Like some places you just can't walk, right? You need an airplane or you need like— so there's these things of like, why would you build a machine, right? You build a machine to access, to go faster, to be better, right? To do things like, you know, more efficiently, right? To build something bigger, right? Like If I can go to Japan and back in a day, right, I can't do that walking, right? So it's like you're compounding success if you think about like building the machine. And that's what Cool Water does ultimately. Like it helps you think through initially all the things you need to do to build a machine. And then it isn't just about teaching, it's about doing as well.

I want to ask you, how do you distinguish between luck and skill? Let's say you have, you know, because one significant outcome will get a VC some great performance metrics and could say we have 5x MOIC or a huge IRR, but they may have happened to fall into the right business at the right time. So how would you kind of for an emerging manager, really any VC distinguish between luck and skill?

I would distinguish between luck and skill by distinguishing between luck and skill. Skill is something you actually have, like I'm shooting 3-pointers in a basketball game. I can be better at that, right? Like that's a skill. If I practice, I'm gonna get better at shooting 3-pointers. So I go from making no 3-pointers to practicing and practicing and practicing and practicing and practicing. And all of a sudden, years later, I'm hitting most of my 3-pointers. That's skill, right? And so again, where does Cool Water sit? Like we help you become more skillful in things. Um, if you think you can make 3-pointers, but you never shot a 3-pointer, are you going to make that 3-pointer? Probably not, right? Because you're not skilled. You could get lucky and make the 3-pointer, but are you going to consistently make the 3-pointer? That's skill. So the difference between luck and skill in venture is the difference between randomness and repeatability. That's how I distinguish between luck and skill. So Cool Water tries to help you become skillful. Ultimately, venture will be dependent on some luck. You know what to look for, right? The way other VCs frame it is right process, wrong outcome. You have the right process, you have built the right process, you built the right machine, but maybe the outcome wasn't what you expected. Why? Because there are many more variables than just hope that lead to a great outcome.

Mm-hmm.

So that's the difference for me. It's like you wanna practice to become a great 3-point shooter. But ultimately, like, when the game is on the line and there's 3 seconds left and it's Game 7 of the Finals, and like you're— you have the ball and like you're left to shoot it, like, most likely if you've practiced, you're more likely to make that basket. If you've never practiced and you're in that situation, you're most likely going to fail. That's the difference between luck and skill.

Interesting. I like the basketball analogy. Usually when, when I talk to folks about this, because I find it to be an interesting philosophical question. I think it's more, you know, do you consider it more like poker or blackjack? If you think neither, that's fine. But if I were to pose that to you, what do you think successful VC is more akin to?

Is it— I don't think it's— I don't think it's that. See, like, this is— I joined one of my firms, like, when I joined them, they talked a lot about bets and, like, venture is betting on something, but it's betting on something based on probabilities. Maybe you could say poker is based on probabilities, but I think it's different than probabilities because you're actually like, here's the— so if you're building a bridge, right, there's— again, you've never built a bridge and now you're required to build a bridge. Who's going to build a better bridge? Someone that's built a bridge before, 1,000 times, 300 times, or someone that's never built a bridge before? If those two people built bridges, the probability of Which bridge is going to be more successful? Which bridge is going to be stronger, more durable? Right? Obviously, the person who's built the skill to build a bridge, right? So there's a difference again between like luck and skill. It's the difference between building a company. There are tried and true ways to build processes, right? And sell things and build things that people want, right? It's different than just relying on luck. Like that's not the right way to think about it. Like you can— you actually have control of things when you're building a company. When you're flipping over cards, you can calculate it, but you don't have control over the next card unless you've cheated, right? But if you're building a company, you have control over the team you build, the team you recruit, how you structure your sales process, right? Like how you market the brand, you're building your culture. You have control over a lot more things than in a card game. So there's still a probability of like whether or not the outcome is going to be positive. But it's very different than cards. Like, I can— I completely disagree with that analogy because, like, again, it's calculating stuff. Like, I think a lot of VCs like to think of themselves as, like, calculating risk, right? But— and, like, you know, you do expected value and all that, but that's fine. That's a— that's a perspective. But when you're building something like a bridge, right, that's like building operations, building something that's been built before, there's a lot more skill that goes into it, right? There's a lot more pattern recognition that goes into it. Like if you've played poker before and you're thinking of pattern recognition of like, oh yeah, that card, like when the 3 of hearts was drawn earlier, like in my last game, the next card was the 4 of spades. So it must be the next, like the next card must be the 4 of spades, right? Because the pattern recognition is from the last game that the next card is gonna be the 4 of spades. Is that true? Does that happen? No. But if you're like, if I built, if I laid this train track, and I laid, you know, one of these posts down, right? And the prior time I laid the train track, like 30 seconds earlier, I laid another post down. Is the next post going to be another post? Is that going to make my train track better? Yeah, it's going to make it longer. It's going to make it stronger, just as strong as the prior post. It's totally different, right? Like you have as a founder a lot of control. You as a VC, as a founder, have a lot of control, right? There's still an element of luck. Like ultimately, are all those variables going to work out? Like, are you going to build the whole bridge, right? Design and build a bridge. I'm going to lay the whole train track, right? There's still a lot of risks there. There's a lot of things you have to do, right? Not just think about and hope for and want. Like, you have to do stuff. Thank you, Nike. But ultimately, like, I think there's a lot more skill than people are giving credit for in venture capital. And I think there's a lot— if there isn't that framework, if there isn't that belief, I think there's a lot of people that just like So you're like, oh well, if it doesn't work out, then, you know, it's just luck, right? Like, it's just like, I'm unlucky. But it's not. It's like, you're lucky because you do more things, right? The luckiest people, right? The saying like, where the more I do, the luckier I get. Because you're doing more stuff, right? So it's not like you're luckier, you're just getting more outcomes, right? People associate luck with great outcomes. You're getting great outcomes because you're putting in the work. Like, that's why you're luckier, so to speak.

I'm very partial to your argument. I guess where I will disagree a little bit here is that let's say, let's take the basketball analogy, right? In theory, because it's all physics, you can, you can create a machine that gets the ball, you know, measure the wind, measure the exact environment, the distance, everything, and you can get 100% balls in net. And a human being could train themselves to get close to that as well, right? And but just my own experience as an entrepreneur and as an investor, right, I'd love to believe that I have as much control as, as suggested. And I think there is a lot of control and skill skill and pattern recognition insofar as figuring out who are great founders and all that. But I'll just give you a couple of examples. Like, you can make all the right decisions, you said the outcome is not going to always turn out good, right? And some of that is completely out of control of the investor and the founders. For example, you know, you could have had an event-related business during the COVID— government-related COVID restrictions. Nobody could have predicted that in 2019, right? You can't account for it. And that I would put in the category of bad luck. Meaning, let's say you can create a scenario where everybody made all the right decisions from other— you know, they just made all the right decisions, but it would not have affected the outcome because it was completely out of their control, right? Or for example, in a more extreme case, let's say a founder dies, God forbid, right? Like, things like that happen in life, right? You just can't control it. So, you know, it's— that's why more— I would, I would say there's an element of— I wouldn't call it random.

There's absolutely an element of luck. I'm not arguing that there's not an element of luck. But what I'm saying is like, if you think, right, that again, like there's certain things you can control, like for example, maybe you need to do more releases of your, your code, right? If you're doing once a week, right, to compete with your competitors, are you going to win if you keep on doing once a week and they're doing 3 times a week? Or, right, are you more likely going to win if you start maybe doing 3 times or 5 times? Like, right, like there's things you can control. They're hard to do, right? It's very stressful to do them. But my argument is like, there are certain— and if you can control— ultimately you still might lose, right, to your competitors because maybe you're— even though you're faster at coding, like, it's just not as good, right? Or for whatever reason, like, customers like, you know, some feature that your competitor has. So there's luck involved in choices and there's the human element. There's things that are unpredictable. There is luck involved there. But I'm saying like what you can control, I think about it as the VC who's fundraising, right? Are you going to fundraise faster if you talk to 10 people? Maybe if you've done the absolutely best qualification and these are the absolute right 10 people to talk to and you've known them for 30 years and they're your best friends and you grew up together and now they're in charge of billions of dollars and like you talk to them, they give you all the money in the world that you need. So there's that like fringe case that might like, right, that you could kind of. But ultimately, like most, for most people out there, if you talk to 10 people and you expect to raise like millions of dollars, you're most likely going to fail because, right, like that's not the skill, that's not the process, that's not the machine, that's not how it works. So there's luck. Like if you talk to 10 people, you might get lucky and one or a couple of them might give you the money you need, but you're actually going to get luckier. I bet my argument would be— my argument would be you're going to get luckier if you talk to 100 people or if you talk to 1,000 people, right? Because then again, like luck is basically the equivalent of probability of success. and you're going to have, if you're talking to the right people, right, there's some assumptions that have to go in here. But if you're talking to the right people, the probability of success is going to go up if you talk to more of the right people than fewer of the right people.

Right. Yeah, I definitely agree with that. Um, what would you say is kind of the most ideal VC value add? Like if a startup is looking to raise capital from VCs and also from your perspective as an LP, running Cool Water. Okay.

Yes.

Fair enough.

You run out, you die because you run out of cash.

Right.

Again, there's an argument that could say like, well, if you have less cash, it makes you smarter and leaner and more creative. I think there's— that argument is definitely true. But, you know, your job as a VC is to make sure your companies don't run out of cash. Everything else is gravy train.

That's actually very— I vibe with that, you know, for lack of a better way to say it, because I'm I'm not necessarily— I'm a bit more cynical when it comes to VC value. I'm not— because I don't believe VCs can add more value than cash, but I think that if founders look for anything other than cash, they'll get disappointed. Because really, the best companies don't need the VC to do anything other than good governance, provide the capital, help them with introductions, advice here and there. But like, they're not going to get involved in operations, and you shouldn't want them to, right? Like, once a VC starts talking that way, it's a bit of a red flag.

Here's another way to think about it. Like if you're, if you're a founder, right? Like the way to think about it when you're managing your startup is what are you the best at? Right? Delegate out stuff you're not the best at, do what you're the best at. Same thing as like a founder of a VC firm, right? When it comes to value add, like, again, your job, invest well, fundraise, right? Let Cool Water handle everything else. But, but seriously, I think the, on the value add piece, What are you the best at? And I think what happens is a lot of emerging managers say like, oh, well, this 1,000-person firm over here is doing all these different things. So I'm, you know, for me to compete, like, I need to do all those different things. The LP, the person that gives you money to invest, like, is this going to be like, you're doing too much, you're strung too thin. I don't believe, like, you're competing against a firm that has 1,000 people. What you need to do is pick well, invest well. And fundraise. When you tell that story, maybe there's a value-add component. What are you the best at? And just focus on that. I think that's the way. And like, that should be more true to your brand than you kind of saying like, oh, because this 1,000-person firm over here does, you know, all these things, like, I'm going to do all those things. And therefore, like, look at me, I'm competing head-to-head with this 1,000-person firm. Like, that's not— that's not believable. But what could be believable is if you're the best at something, right? Like, if you're like, I'm the only person that builds suspension bridges in Indonesia and no one else does that. And you're like, well, I'm going to advise people on how to build other suspension bridges in Indonesia. Like, that's believable because like, well, you're the only person that does it, right? So I think there's that exercise, you know, before you go to bed tonight, like when your head hits the pillow, stay awake for a couple of minutes and be like, what am I the best at, right? What am I— what can I do that no one else can do? That should be your value add. 'Cause like if you try to compete against something that you're not really good at, right? Like, oh, I'm gonna compete against Steph Curry on 3-point, like shots. It's like, really? You really wanna do that? Like, that's how you're gonna like show LPs that you're the best? 'Cause you're probably gonna get smoked, right? And so I think the way to think about it is like, find out what you're actually good at and integrate that into your narrative and into like how you talk with your founders and how you talk with LPs.

I, I do want to get into a bit of the, the general VC landscape. Kind of what you're seeing on the fundraising side, both from an LP perspective and maybe even from the VC to startup perspective. But before that, maybe just tell us a little bit of the stats of Cool Water, you know, how many managers have gone through it and maybe anything else you'd like to share about it so that people can— any VC listening, they can calibrate, you know, their own expectations and maybe apply if it's a good fit for them.

Cool Water has had about 350 funds come through its programs. So this is a mix of domestic and international programs we've run. The expectation for this specific program is you are either a first-time fund manager that's launching their fund, right? Like you need to understand the fundamentals of fund management. You need to put everything together. You need to launch. Again, you need to fundraise. Very important. You need to go from zero to one, so to speak, in startup language. That's what CoolWater can help you do. So we're very relevant for first-time fund managers that are launching their funds. Again, we can take you from— you need to have operating background. Ideally, you have some angel investments or an investment track record that we can help shape and kind of package, but we can help you go from zero to one there. The other group that it's very relevant for are people going from fund one to fund two, fund two to fund three. These fund managers that, again, like, this is your life. You want to be the best. You want to institutionalize, meaning like, again, build the machine, build the best practices. We offer a curriculum, like we offer a training program that helps you understand all the pieces of fund management that others have kind of done in venture for the last 50 years. Like who's generated the best performance, who's built the best businesses, who's built machines previously. Do you know what that looks like? Do you know how that looks like? Um, do you want to spend the next 5 years building that, or do you want to spend the next 3 to 6 months building that? So the, the concept behind like the program is making you a better version of yourself, helping you build a better business, helping you understand what to prioritize and not to prioritize, help you to understand what you need to be more successful at fundraising, and ultimately like make you a better fund manager, focus on the right thing so you generate spend more time prioritizing the generation of great performance versus like trying to figure out all this other stuff, right? Like if you're spending time figuring out the rules of basketball, recruiting for the team, building out the team, you know, figuring out how to dribble, filling, figuring out how to shoot, like, are you going to win the 3-point contest? Or if you just got to like practice shooting 3-pointers, are ultimately you going to win the 3-point contest? That's kind of the, right? Like just keeping the, I'd like to keep my analogies consistent throughout my podcast, but effectively like that's right. Like you could try to figure it all out and people for decades decades before we even came around, like, figured it out. But do you want to figure it out faster? And do you want it packaged? And are you willing to kind of believe that you could be more successful faster? Because again, if you're successful already, like, time is your most precious asset. And that's, you know, what we're trying to help you with is like, get better faster so that you can be more contributing to the early-stage ecosystem, to the innovation ecosystem faster. Again, just for the best people. Like, if you, don't want to be the best, we're not the right fit for you. But if you want to be the best, again, we are setting the culture to come in and we're giving you the platform to do that. Like, that's who we want to work with. That's why I want to work with, right? That's who should self kind of elect into our ecosystem.

That's great. That's a very compelling pitch to the people that you're looking for. Thank you so much. It's been pretty illuminating for me, especially someone that's, you know, an emerging VC fund manager. I'm gonna leave more information about you and Cool Water down below in case people wanna reach out or apply for your program.

Thank you. This was great. Thank you so much.

Awesome. Thanks, Winter.