(upbeat music) - Welcome to Swimming with Alligators. I'm Ernest Sweat, and each episode Alexa Benz and I give you a VC podcast from the LP perspective. You ready? Let's dive in. - Welcome to a special episode of Swimming with Alligators. We call these our DDQ episode a little play on the due diligence questionnaire. But for Ernest and I, we end up de-discuss, DDubate and Q questioning, answering some questions from the audience. So with that, we'd love to dive in. We're doing these about every 10 episodes. And so first we're gonna discuss some of the things that we are hearing from LPs that don't make it into the final podcast, either per their requests or because they were offline. So here's some of the things that we are hearing in a more honest and frank, personal one-on-one conversations. - And so we'll start off with discuss. I wanted to start off first with an article from Theory Ventures was written talking about the Series A crunch has returned. And Tomás speaks about how in 2012, there was a ton of seed companies and then, or Series A companies. And then that caused the Series B stage to be extremely hard. And so we're seeing that again. And from our conversations with a lot of LPs and other VCs around, you're starting to notice in here how the seed stage and pre-seize stage, there's so much capital there and still so much variance in the pricing that's causing a lot of trouble in the next round Series A. And so a friend I just saw today, Robbie, a infrastructure VC and friend of the pot, she was posting that 1 million in AR is not a mark for Series A. And I think that used to be the goal standard, but now I think the industry as a whole is so honest in the fact that, hey, a Series A to one person may not be a Series A to another person when it comes to metrics. And this is an elevated problem. In fact, everyone should check out the article of the Series A Crunch by Theory Ventures, but right now I believe there's like some crazy amount of seeds to Series A's like 10 or so, I believe, 10 to one. So that's the first thing. I don't know if you have any opinions on that Alexa, but like that's just a problem right now. - The Series B Crunch, the joke used to be for gals who are founder hunters in San Francisco, go try to find somebody who's just failed to raise. 'Cause it's an ambitious person who's had their knees cut out from under them, and they're gonna make a much better life partner than the person who didn't survive the Series B Crunch. I think the one thing I've also heard is that, you expect to have like three seed rounds. And so partially this all just feels like, bizarre semantics, where by the time you're ready for Series A, you've had three official fundraises. But I guess we're all having to come to agreement that we call the hardest one at the, we call the hardest one the Series A. - Yeah, yeah, I think everybody can agree today, it is the hardest one. And I misquote it's five seeds to every Series A, but still that's a ton. And so yeah, I think that's, we'll talk about this in the next segment, but I think with that trouble, it's also an opportunity in that stage as well. - No, I think one of the metrics everybody likes to track in BC is, you know, are you, what is your graduation rate? If you're a seed investor, how many are you graduating in Series A? And so that's gonna continue to be a super powerful stat to track for your own KBI. Another thing I would love to discuss is this crazy statistic that general catalyst in Kenderson captured 44% of the USVC fundraising so far in 2024. That's 44% of all LP capitals so far committed in 2024. So we are seeing mega funds researching and I would love to discuss what that means for VCs and then maybe also what that means for LPs. - Yeah, it means for VCs that depending on if you're an established manager or at a megafond or an emerging manager, you're gonna have different experiences or different outcomes it might be. I think overall is just tougher for everyone, but you're starting to see, it kind of goes back to that old adage in business, like you can't get fired for hiring IBM. I think blue chips and established fund managers they just feel safer right now. And so we can debate and discuss if that is like the right approach for LPs, but clearly with this stat is showing that that's what's happening. Now the other thing you can think about though is like it is kind of like a denominator and effective and just numbers of kind of weighted averages. If you're raising more, you're gonna have more of it. It's gonna be more of your funds, but I would be curious to understand like were those the original targets or not? Was that number gonna be bigger? - Yeah, for Andreessen, the number I think they published was about half and so they actually raised double. Yeah, I think if you're a pre-seater seed investor, I'm like, "Corton, my buddy, is it those top tier funds?" 'Cause they're gonna be making or breaking your outcomes. Like if you can get them falling on, keep them close. Those are your best friends. 'Cause I don't see founders turning down these brand name, I mean, there's gonna be one in a million that's like, oh, I prefer this other series they lead 'cause they're willing to pay me less but they have more of an experience and they'll give me more time. I think for the LPs, it's fascinating really because the game has generally been like, stay out of EC unless you can participate in the top funds but they were so exclusive, you couldn't get in. So 20, 20, 20, 24 is kind of crazy time to be an LP because anecdotally I was chatting with a SoCal kind of RIA multi-family office and they haven't had a venture strategy in the past but they were able to go get allocation in Andreessen among a few others and they said, okay, we'll go ahead and sprinkle that into our strategy 'cause now we can get access. And similarly allocate, for those of you who don't know they've have a platform, you can build a portfolio with pretty reasonable minimums and I know Andreessen was one of the 20-some funds that you could get into. So it's, this whole universe of exclusivity is kind of like, seems like it's kind of out the door. So on the one hand it's incredible that you're able to get access but I also wonder what's your intention to get access to a mega fund? 'Cause now you're playing that the kind of like bag of the envelope math is really hard. So do you continue to believe the top two firms are the only option and that they're gonna be able to three X, seven billion dollars? - Yeah, I think that's a tall task and a hard task. I think some a very small percentage may be able to but I think the question is really asking LPs and new allocators kind of what's the purpose of what are you trying to get out of your venture portfolio? Is it really sizable returns? Is it just at some exposure? That's, I think that's the kind of question that they should be asking themselves and then making the appropriate decision based on that. - One last super interesting thing from Bishop Buck that I think would be, I don't quite understand it. So I think it'd be cool to chat through it. It seems different this time, the concentration in mega funds. They have this graph that shows the share of LP capital that's concentrated in the five largest USBC funds from like 2020 to today. And every other year it never went above 20% but we seem to be on track to have the top five being far more than that. I mean, we already have, we're halfway through 2024 and 44% is between two funds. So in that initial era of like the katos and soft banks, things were less concentrated than they look like they're on track to be for 2024. - Yeah, that's fascinating. I think we're taking the power law to new heights and new areas when it comes to like concentration of allocation. But it's something that we definitely should keep our eyes out on. And despite numbers like that, every day I'm hearing about new spin outs of friends doing, teaming up with people or being a solo capitalist or a solo GP themselves. And so a lot of things are gonna stay the same yet change at the same time. - Yeah, the resurgence of the mega funds, they're back people. - They are. But I think that that doesn't mean there won't be more cottage industry funds and it brings me to the next thing I wanted to discuss was I saw an interesting post on X the other week. And it was the 33 questions that led to partnership and it was this expansive number of questions, 33 from Pace Capital. And with those two gentlemen asked each other before starting the partnership. And so from stuff like work style to what do you think the team should look like, economics, what should time be? Time priorities on different activities, what are your weaknesses, strengths, motivations. And I thought it was so intentional and I think it's the intentionality that's really demanded from this job. If you're going to be a successful fund manager. - Yeah. - And so I was curious what questions, what kind of caught your eye Alexa, but or what questions would you wanna ask someone or feel like people should ask their potential partners? - Yeah, no, this kind of reminds me of like if you are interested in working in tech, consider your job selecting where you go to work like a venture capitalist. And similarly, it's like, okay, if you're sitting down, interviewing your potential partner, you should be thinking about it like an LP. Like what am I gonna see when I see you two? And I think 100%, it's gotta be, it's gotta be, are we capable of top decimal returns? What is it about us? Cause I think it's a job that a lot of people wanna do. It's like getting into work in Hollywood. Like you're willing to start at the bottom of the mail room because it's an exciting, cool gig. But do you actually think you're gonna be one of the exceptional ones and why? And I think that's what you should be looking for in your partner is something where you're like, "That mother ever is a smartest freaking person or has access to something nobody else in this world has." That's what I would be looking for in a GP partner. Yeah. - Yeah, it reminds me of one of my first Kaufman sessions. And I'm not sure where I can share this, but like one of my, the speaker who won't be named, but she said, when she was asked what was the best investment she ever made, it was like, she said in deciding to work with who she ended up partnering with, it's fine. As she was like, it was the best investment I ever made. And I think that has to be the case for things that our partnerships are special because every LP we talk about is like, when you have a partnership, they're looking at each of your individual track records and then in diligence in each of you, but then there are also diligence in your partnership. And that's gonna be the most fragile thing. And so, just like when we talk to founders and you can tell people kind of like founder dated, but never went through kind of like the counseling needed before they got married. And so, yeah, I would push everybody to look at these, there's some great questions on here. And thinking about how you all work together. And it's really challenging me to think about, you know, what are things those motivations for me? What are my superpowers? How important is brand? What are the key values that I wanna have in any firm and wanna be able to represent day one, day 365, day 10,000? So, everybody should read this. Next D is debate. And so this is where we don't provide any real kind of prep for the other co-hosts and bring up a subject and have a lively debate on it. So, I kind of hinted at, I'll start, I kind of hinted at this with the kind of Series A crunch and all the doom and gloom of one million AR isn't enough. What is a Series A? And all the bad things associated with that. But I believe that the biggest opportunity right now in the entire ecosystem is a new Series A fund or a new Series A funds. - Yeah, go where the crunch is. - Yeah, go where the crunch is. And I say that because if you look at the entire industry, we have a ton of great pre-seed and seed investors, solo capitalists and individuals who are really kind of driving the cottage industry at the early, early, earliest stages. And then we have multi-stage funds that can do cradle to grave for you. But when kind of the rubber meets the road and you're trying to get that graduation from seed to Series A, there aren't that many funds, or I shouldn't say there needs to be more funds that are focused just on A and A prime. Because it's such a critical stage. And so I believe there's a lot of opportunity there. - How big a fund does that need to be in order to have lee checks and enough? - Yeah, I think so, I would say maybe-- - Minimum 150. - Yeah, yeah, so I would say more than that, I would say probably 175 minimum, 200, 200 million. Just given that there's a fluctuation in where the Series A can be, 'cause we had at the height of 21, they were getting to 25, 30 million kind of rounds that we saw in Series B historically. And so depending on what you're investing in, whether it's an AI company, gen AI company, or something around enterprise artificial intelligence, that's gonna be the high end, and then everything else will grow. You can see rounds of 8 million, 9 million, 10 million again. And so I think being around somewhere between that 200 to 300 million dollar fund size would be ideal. - It's hard for me to debate this without kind of tapping a little bit into what I wanted to bring up next, but I think they all play into each other. Because one thing I would say is maybe you wanna be looking at some companies where the fair market value has been reset and you're not coming off of these blown up C valuations. - Yeah, yeah. - Like if you're just picking where in the life cycle you're investing, the crunch sounds good. Crunch sounds like it needs some money. - It does. - That you're gonna have some options. But those founders are all, I don't know, have they been knocked down in the way that you might be hoping to found her date back in the day? (laughing) You want the people who have really just lost their unicorn status, maybe that's the portfolio I want right now. - Maybe, that feels like more of the crunches that Series B, Series C and other growth. - Yeah, you call that like an IPO crunch. - Yeah, IPO crunch. But I don't know about this early stage people feel like already having a unicorn status and being cut down. That's a hell of a turnaround story. Which I was talking to somebody about this. I don't know if you've ever had this, I don't think I've had one company where I've invested in my 10 years in a down round where that actually turned around. - Oof, this is a tough reality, right? Yeah, once the growth slows. I mean, I think that's why everybody's struggling right now with like, do we just need to be in the plane? Or is there still a chance that this thing has escaped velocity? Because everybody's turned off growth. - Yeah. - And they just aren't used to seeing anybody recover from that. - Yeah, yeah. - But I guess we're gonna have to have a few. There'll be a few survivors. - Yeah, yeah, I think there'll be survivors, but I think they've always, you can have companies that have kind of teeter, teeter, teeter, slow growth, slow growth, then kind of like taken off. But to just like do a 180 and then back, I don't know, it's just such a hard thing to do. - Yeah. - But anyway, I think I won the first one. - All right, next question of two debate. I wanna play a new, an updated version of Startbench Cut. If you heard our last DDQ, we pitted some sort of stereotypical theoretical, emerging managers against each other in the game of who would you start, who would you bench, and who would you cut? But I don't think this gives the full picture of what is available to the family office by net worth individual LP set these days. If you're a little myopic, if you're thinking of your competition as just other managers who are fundraising right now, 'cause there's so many cool new products out there where we can get access to venture as an asset class. And I'm not alone, things other than venture, there's plenty to invest in. So I wanna do a Startbench Cut of three kind of products that would be considered a competitor to putting together your own suite of managers. - If you say private credit, I'm cutting that shit. - No, it's all venture, all venture. - Okay, cool, all right. - Okay, my first athlete is, let's call it like a secondary fund, some kind of index like solution, similar to what our sponsor and friend Dave Thorton at Vested offers, where you've got a basket of all late stage mature companies, their pre-IPO, their venture backed, and they've been reprised. So it's all 2024 for a market value, low fees, and you don't have to be so patient. So like what, five years? So that's player number one, secondary fund. Player number two would be like the portfolio of blue chip brand name venture, but this like say your RIA can now put together for you or you can get through allocate, where you get access to the light speeds in the colesus, all with reasonable minimums. So it's all top tier franchise funds. And then player number three, plenty of people are saying, let's just be direct. We'll go direct ourselves. You talk to these family offices who they can find an ex-associator analyst from one of these top tier funds, they bring them in house. And so they got people, they've got time, they're gonna make some concentrated bets, just stick to the industries they know, and you pick your own startups, you don't need GPs. - Huh. I love, I love how you asked me to do this because next time I'm coming up with the start, and chin cut, so I can put you and be like, hey, which of our sponsors do you think will work? I was like, "Alexa, it's 'cause next season's gonna be "Alexa and somebody else." All right, so we have the secondaries, we have the new creative ways to get access to Blue Chip funds, and then we have direct through family offices. So I would say, I would start the probably secondaries because if I'm a family office, I'm thinking about when am I actually gonna get some DPI, and maybe in this fake scenario in 2020 and 2021, I put a lot of money in different funds and I just haven't seen anything yet. - Yeah. - Two, so bench, I would do something like allocate where I get access and kind of index, create my own little index fund of tier one funds and multi-stage funds. And then I would cut the direct investing, and I'm making an assumption that they are new to investing in an early stage, and kind of in the scenario you mentioned, it's like somebody more junior who might have some access, but that's a really, really, really big bet, and they might not have that much access to put in legitimate check sizes, so. - Totally. - That's what I would do. - I think it's an interesting pattern we're seeing that some people are saying we'd rather not have managers, we're gonna try to do this ourselves. And for sure, a big pitch I think for our early GPs is we're gonna give you co-investment opportunities. So the number of LPs who think that that is a start, it's an interesting challenge for anybody who's fundraising to say you do need my help, but you do need my access. Yeah, I think what we hear often is everybody asks for co-investments and then when it comes around, they don't have time to move quick enough to do it or what have you. Well, interesting. As they, I think it's just helpful to sort of zoom out a little bit and be like, okay, your only option is not right now to just pick which manager that there's a lot of new products coming out. - It's a great time to have a podcast for alligators to think about all the options too. So for debate number three, something that's been coming up a lot with all of our conversations, recent interviews that we've released in some we haven't released yet, has been the emergence of the solo GP. And I've actually been very surprised despite the numbers that we've heard from fundraising and capital going to a lot more of the established brands, more and more very talented, millennial investors are spinning out and creating their own funds. And a lot of them as a solo GP. And many of them don't want to be a solo GP forever, but didn't want to rush their rush in each type of partnerships. And so I'm really intrigued with like, what's going to happen to them? - So my, I guess, stance, is I think we're going to see a lot of mergers over the next five years of these people building out their brands, continuing their track records and merging and finding those different partners and either kind of keeping one of the names or starting anew with some fun ones. - I do think there's at least one pretty good example. I started out my VC career at Mieven Ventures where the solo GP Jim over time gave more and more responsibility to his first junior hire Sarah, who's now taken over as the main GP on this latest fund. Kudos to Jim that he like figured out what that looked like. And now Sarah's in the leader, to make the mains of thought, yeah. - Yeah, so the way I see it is that because there's going to be more of these solo GP, some of them might raise enough funds to lead some seed in maybe even some Series A rounds. But as they get to more of that Series A and Mango seed, they're going to have to have more party rounds. So I think it'll give people exposure to working with others, being on the boards with others. And so something might flourish through those experiences. - Well, okay, last topic to debate is 2024 going to be a breakout vintage. So we've got some helpful stats on how important the vintage year turns out to be in this game we're playing called "Venture". - Okay. - Stepson published some numbers. Over the course of 23 vintage years, 80% of the returns came from five, six separate vintage years. So hitting the vintage year right is not a, we wouldn't recommend trying to time the market, but it turns out to matter, that you do happen to hit the right years. So what's your take on 2024? Is this going to be one of the stars? - I think it's definitely going to be better than 2020 and 2021. But I think sometime we'll tell on, I think you still need to be disciplined. Obviously, if you're going to be investing in some hype, industries, you need to pick the right winners in those industries. And ownership, it always comes down to ownership as well, right? You can pick the right winners in logo shop, but you won't really end up with any kind of stronger terms. So I think 2024 is going to be there, but I think, it actually makes me want to think of like, so when did you start, I started my career in 2016. So, which of those years, 2016 to now, which is, how would you rate the years? I think that kind of is like, okay, of the years I've been in now, would I rank 2024, you know? - Yeah. Well, if so little capital continues to be committed, in 2024, it's going to mean anybody who does raise is going to have a lot of opportunity and choice. I think that drives down valuations. So I think that helps out ownership, it just gives everybody, well, how's everybody? We'll pick here. Should you be raising in 2024? I think this should give you like a little beat, a drum to beat that this is worth doing right now. And if you're an LP who's investing right now, I think things are going to look pretty good in retrospect, looking back at 2024. Should you want to rep the 2024 vintage? We now offer a t-shirt, limited edition, that says, in fact, 2024 vintage on swimmingwithallocators.com/shop. And I'm going to go ahead and say, this is going to be a breakout year, this is worth doing. - Yeah, you should have, I didn't see where you were going until it was too late. Yeah, 2024 is going to be the best vintage and you should buy a shirt. - Our final segment questions, we have a few questions that we've received from our audience. Thank you so much. If you have any more questions, just send them over and we'll run down these quickly. One first time fund managers said, what can I possibly include in an LP update that actually gets them over the line? Like we all have these drip campaigns, what should they say? - Well, I think from hearing and from a lot of LPs, they want to hear consistency. They want to hear that there's a conviction in your strategy and you're executing on it. I was talking to a emerging manager today and he was telling me about his pipeline and kind of co-collaborating over a year with LPs and keeping in touch with them. And a number of them, initial feedback was you were too broad and you were saying trying to be all things to everybody and they didn't know where to put you and how you fit. And so that makes them want to, if you get that initial, not now, but maybe later, they want to see what you put pen to paper is actually what you end up doing. So I think being able to clearly say that and clearly execute on what you said you were going to do is really important. And then the second piece I would say is, when I think about some of the best LP updates, they're genuinely that person. So I'm thinking of when emerging manager and he's just a great writer, he can tell that it's not trying to be too formal or too casual, but he's just himself. And you can feel that he put time into it. And so being really kind of drafting something that's truly you is important to. - Yeah, though, that's a great point. Like, is the point when you're messaging them really expecting that they are going to come in on this final close, or is this a longer sell in which you expect to maybe work together in two, three, four years? Yeah, I really like that point that you just like, it doesn't have to be like everything is news, everything is breaking news. It's much more just like consistently executing on your strategy. I do think the one thing that actually gets people to make a decision, if they are still considering coming in is a deadline. - You can meet with any other emerging manager and still sit on my decision about you. - Oh, I thought you were going to say it's, we're oversubscribed. You have to wait until next time. - I mean, that one works too. There you go, we got two. What are two things you included in your LP update? I'm oversubscribed, or yeah. Okay, second question from the audience. This is an aspiring ally. What is something I can do to be a better ally and he's speaking specifically about for minorities and women in finance? - Well, I think this was going around a lot in 2020 and 2021, but instead of more mentorship, writing a check. And so I know a number of executive coaches, former GPs of other firms, just starting a small LP book. And so they were writing small checks within emerging managers that were from underrepresented backgrounds, just to serve that support. So yes, it's great to, it's kind of the old adage of what you get. When you ask for advice, you get money. And when you ask for money, you get advice. - Or if you're black or female, you just always just get advice. Is that how the adage goes? It doesn't matter where you ask for. You just get advice. (laughing) - When you're black or a woman, you just get advice. Yeah, maybe that's true. Is that our next, and we have a T-shirt for that now. (laughing) That's okay. - I'm here asking, yeah, I'm here for advice. I also feel like another one for me is the next time you have a frickin' rad opportunity, make the first person you send it to, somebody from one of these less included groups. So it's like, there's four partners at the Series A Fund, send it to the black partner. Send it to the female partner. - Yeah. - If you are day trading and you have a hot stock tip, send it to your niece. Send it to your sister. Because I think there's these communities where people just share the best stuff. And the way for us to be top decile investors is to be included in these share circles. So that's what I would suggest. It's like next time you have something rad to share, share it first with somebody you wouldn't necessarily have thought of. - Another point advice I just heard today from a emerging manager that allies can participate in is if you're not able to write a check, is be an advocate and essentially a disciple on behalf of that emerging manager. And the idea that this person shared with me is they had kind of this advisory council where they had friends who were other emerging managers, executives, founders, review their deck, not just a review and give feedback, but he wanted them to know his story as good and narrative, as good as him. So then they could spread the gospel because that then helps LPs are like venture capitalists. Who you get a lead from and who validates kind of like you're thinking on if someone's good or not, really impacts your decision if it's a go or no go. And so that's another thing, be a Paul Revere for one of these people you want to be an ally for. - And last question, someone considering raising their own fund, what swimming with allocators episode, would you recommend? - That's really hard. What I've learned from the audience is they're vastly different opinions on what is the perfect episode for what manager. And so I think if obviously if you're not able if you're running kind of like a incubation group or something like that, you're going to listen to Sarah's episode from vault, right? If you're looking for GPs or individuals, you're going to listen to Boris episode, right? So or J cows episode. So like there are different flavors for everybody. I think this is really putting the work on you of like, who do you think you're, as much as we push our founders to understand who's their ideal customer profile? Who's your ideal LP profile? Like that's what you should be thinking about and testing. - One final segment. - Yeah, one final segment. So we did this last time and I didn't hear anybody say absolutely no again. So we're going to continue to do it. And next time Alexa has to do one. But it's additional information. So we know DDQs are the diligence questions. Questionnaires are really long. And then they ask at the end, do you have anything additional? It's like, no, I've signed off my child and you know everything from my social security to who my kindergarten teacher was. But we wanted to do some additional information where it's just a parting thought for you all. So we'll take suggestions, feedback and we'll make sure Alexa does it next time. I finished listening to Power Law about two weeks ago and I was enthralled and hooked. As I got a glimpse of the history of venture capital in the United States and globally, I noticed a few things. Venture capital is a young person's game unless you can stay hungry and nimble like some type of VC LeBron, which it felt like in the book was Mike and Doug as Sequoia. I also noticed that the industry is constantly evolving. The author pointed out every new successful fund from the 70s on had two things in common. One, they had a recognizable investor or a group of investors that has some type of cloud or community that saw value in their previous experience. And two, every new firm that entered the market had a truly novel approach to the venture capital model. This book left me with a lingering thought. I couldn't shake the lingering thought was what is going to be that next novel approach that provides a new firm with a lead, which then causes the entire market or a good portion of it to join in and becomes table stakes. It happened with generalist approach in the 70s. Then it went on to prepared mind from the Excel being a telecom fund and it's kind of led to the whole wave of verticalized firms. Then there were services and platforms that Andreessen and other large firms brought into the market. And then we had early data firms, right? And now it's growing into the next thing will be these truly AI automated firms. But what will be next? I'm seriously thinking about what will be next. So I'll take a wild guess right now. Maybe it's not just about AI platforms, but how we use them. Imagine a venture firm that leverages AI not just for the analytics and automation, but for fostering deeper human connection between investor and founder and founder and customer. A platform where AI curates personalized experiences for the founders and investors, making network feel like serendipity. Or what if the next big thing is the democratization of venture capital? Where blockchain, that you didn't think you were gonna hear that word today, creates a more transparent and decentralized fund that allows anyone to invest small amounts and startups disrupting the traditional LPGP model and ending our podcast. Or is it something even crazier like venture firms becoming mini nations and with their own digital currencies, governance models, social contracts with their portfolio companies? Who the heck knows? The point is the next big thing is probably something we can't even fully imagine yet. And what makes this industry so damn exciting is that fact? So what's next in venture capital? Your guess is as good as mine. Or maybe it's not because I have a really weird guess that I think someone should build. But whatever it is, it has to be bold to actually shape the future of this critical industry. See you later, alligator. After portfolio tile, investing with a smile. (upbeat music)
