Jul 6, 2016 · 27m · 20vc
20VC: What It Takes To Raise A VC Fund & Investing in First Time Fund Managers with Michael Kim @ Cendana Capital
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In this episode of The 20 Minute VC, host Harry Stebbings interviews Michael Kim, Founder and Managing Partner of Cendana Capital, to explore the rise of micro VCs, seed-stage portfolio construction, LP allocation strategies, and fund size discipline.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Harry holds 28.2% of the talking time here. How this is scored →
Harry as informed peer 4.0 Guest teaching 4.3 Guest disagreement 1.7 Harry pushing back 3.0
speaking balance: gold is Harry, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 16:34 Rejecting Dave McClure's diversification strategy
Michael explicitly rejects Dave McClure's widely followed high-diversification portfolio construction model, arguing mathematically that small 1% ownership positions fail to return meaningful capital to seed funds.
Hardest push from Harry ▶ 11:26 Challenging the adverse selection framingHarry directly refuses Michael's premise that LP direct investing is plagued by adverse selection, arguing instead that LPs simply leverage early deal flow optionality.
Biggest teaching moment ▶ 16:34 Mathematics of ownership and exit returnsMichael breaks down the quantitative reality of venture returns, showing Harry how a 10% stake on a $100M exit returns $10M whereas a 1% stake fails to move the needle for fund performance.
Harry holds his own ▶ 15:59 Pitting Dave McClure's thesis against Cendana's modelHarry demonstrates strong domain mastery by citing specific counter-arguments from Dave McClure's fireside chat to directly challenge Michael's insistence on lead-investor ownership targets.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Harry as informed peer | Guest teaching | Guest disagreement | Harry pushing back | Why |
|---|---|---|---|---|---|---|
| Michael Kim's Journey and the Founding of Cendana Capital | 2 | 3 | 0 | 0 | Harry sets up the interview with friendly background questions about Michael's journey and the founding of Cendana Capital. Michael provides a comprehensive history of the evolution of seed rounds and micro VC funds without any friction or pushback from Harry. | |
| Proliferation of Seed Funds and Startup Ecosystem Impact | 4 | 4 | 2 | 4 | Harry challenges the positive framing of seed fund proliferation by citing a panelist's claim that seed funding is often 'dumb money' ruining the ecosystem. Michael gently counters by clarifying the taxonomy between angels, super angels, and institutional seed funds, while criticizing inefficient 'party rounds'. | |
| Direct LP Investments and Adverse Selection | 5 | 5 | 2 | 5 | Harry brings up previous guest Chris Duvos to ask about LPs investing directly in startups. When Michael warns of severe adverse selection, Harry pushes back, asking if LPs simply benefit from optionality and early access; Michael clarifies why tier-one VCs squeeze out non-lead LPs in hot rounds. | |
| Fund Manager Evaluation Criteria and Portfolio Construction | 6 | 6 | 3 | 6 | Harry pushes back against Michael's core portfolio construction strategy by citing Dave McClure's high-volume 'spray and pray' model. Michael dismantles McClure's argument with explicit math on fund returns and dilution percentages. | |
| Macro VC Dynamics, LP Budgets, and Risk Asymmetry | 4 | 4 | 1 | 2 | Harry guides the conversation toward macro dynamics, LP budget cycles, and market opportunities. Michael explains how mega-funds lock up LP capital early in the year and outlines his risk asymmetry thesis regarding low seed fund mortality rates. | |
| Quick Fire Round and Evaluating SoftTech VC | 3 | 4 | 2 | 1 | In the quick-fire round, Harry asks about LP industry flaws and Michael's favorite managers. Michael offers a candid critique of LPs acting as 'social proof' investors who play it safe and fund-of-funds acting merely as fee-extracting asset gatherers. |
Statements from this episode (16)
Kim: Startups can achieve substantial traction with just $500,000
“Contrast that to today, where it's almost an order of magnitude cheaper to start a company, you can get substantial traction with 500,000 dollars.”
Kim: Micro VC seed funds now outperform larger traditional venture funds
“Ultimately, I think our thesis proved out these smaller funds do outperform, and these smaller funds have effectively become early stage venture capital today.”
Kim: US seed rounds in 2016 typically range from $1M to $2M
“The composition of a seed round, which today is about one to two million in the U S sometimes larger as large as three million.”
Kim: Party rounds are the absolute worst early-stage financing structure
“Now, the absolute worst scenario, and Mark Suster actually talks about it in his recent post on both sides of the table, are these party rounds. I don't think these party rounds are happening as often, but these party rounds are where 20 plus individuals, you …”
Kim: Early-stage LP direct investing suffers from severe adverse selection
“At the high level, I do think that there are substantial issues with LPs investing directly. First and foremost is adverse selection. If an opportunity is available to the LP, why are they being shown this? Is something wrong with the company? Does the fund ma…”
Cendana operates a direct fund targeting Series B and C portfolio companies
“Specifically to Sandana, we do have a direct investment fund. So we have a standalone fund that invests directly into the portfolio companies of our fund managers. The idea here is that we would invest at the early growth stage, so series B or C. These compani…”
Kim: Top VCs maximize ownership and squeeze LPs out of Series A
“If there is, at the earliest stages, a company that is High quality with high quality investors coming in. LPs are probably the last in line in terms of getting access to that. So imagine a seed funded company by one of our fund managers, a high quality firm l…”
Kim predicts only 1-2 of Cendana's 18 funds will reach Sequoia status
“I would say that to be realistic, maybe one or two out of You know, the 18 plus funds that we work with may ultimately emerge in that category”
Kim: 1% seed stakes do not move the needle in typical exits
“The typical venture exit is between 50 to a hundred million. If you own 10% of that company, that's ten million dollars back at a hundred million dollar exit. Ten million back to a seed fund is very meaningful. If you own one percent, you get the same kind of …”
Kim: Institutional LPs have already exhausted their 2016 annual capital budgets
“A lot of them did, and so now institutional LPs are largely out of capital for the year. A number of LPs I know have already spent their budget or have already allocated their budget to these re-ups, and it's also not just in the U.S. There are a lot of re-ups…”
Kim: Cendana Capital's seed portfolio mortality rate is currently under 10%
“I will tell you that through our portfolio, Of 700 companies or more, our mortality rate right now is less than 10%. What I mean by that is companies that have shut down, companies that have been written as zero.”
Kim predicts long-term seed startup mortality rate will be 25% to 30%
“And, you know, I do think that the longer term sort of steady state mortality rate is probably 25% to 30%, but I don't think it's 80%, but we'll see.”
Kim: Most LPs invest via social proof and preserve failing VC funds
“I think most LPs are social proof investors. I think that there's a substantial dynamic of you don't get fired for buying IBM. And venture funds are hard to kill. A lot of them should have been killed, but they're 10 to 12 year vehicles.”
Kim predicts SoftTech VC will build a multi-generational platform like Greylock
“And if you look at the absolute top tier VC funds, they've done a phenomenal job of generational shift, and, you know, the older generation handing off to the younger generation, certainly firms like Greylock, have transformed themselves, and I think that is t…”