Oct 23, 2017 · 28m · 20vc
20VC: Semil Shah on How To Raise An Institutional Venture Fund, Why LPs Mostly Have Reserve Allocation Theory Wrong & Why IPOs and Acquisitions Are Severely Constrained
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In this episode of The 20 Minute VC, host Harry Stebbings interviews Semil Shah, founder of Haystack, who shares essential insights on raising institutional capital, pre-marketing fund strategy, seed portfolio construction, reserve allocation theories, and navigating macro liquidity constraints.
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 33% of the talking time here. How this is scored →
Harry as informed peer 3.9 Guest teaching 5.9 Guest disagreement 2.6 Harry pushing back 1.9
speaking balance: gold is Harry, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 16:20 Challenging LP Reserve Orthodoxy
Semil directly challenges the industry norm, arguing that most institutional LPs take traditional VC reserve strategies and incorrectly bolt them onto seed funds.
Hardest push from Harry ▶ 7:07 Probing EarlyLP Relationship BuildingHarry pushes back on Semil's warning against approaching top endowments by asking if pre-marketing early is still valuable for future fund cycles.
Biggest teaching moment ▶ 19:54 Demystifying Market Liquidity and SecondariesSemil educates the host and audience on macro shifts, pointing out that public listings and acquisitions are severely constrained, forcing VCs to learn secondaries.
Harry holds his own ▶ 17:32 Referencing Industry Benchmarks on Fund SizingHarry demonstrates deep industry knowledge by bringing up Mike Maples' specific fundraising timeline rules to challenge Semil on fund execution discipline.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Harry as informed peer | Guest teaching | Guest disagreement | Harry pushing back | Why |
|---|---|---|---|---|---|---|
| Semil Shah's Journey into Venture Capital | 3 | 4 | 0 | 1 | Harry sets the interview structure and pushes back gently on Semil attributing his early success to luck rather than skill. Semil explains his transition from blogging and startup work into early-stage venture capital. | |
| Approaching Institutional LPs and Timing Strategy | 4 | 6 | 2 | 3 | Semil breaks down why early-stage managers make mistakes targeting elite university endowments too soon. Harry challenges this by asking whether early relationship-building with top LPs for future funds is still worthwhile. | |
| What Institutional LPs Look For in Seed Funds | 5 | 6 | 3 | 3 | Harry asks detailed questions about pitch deck materials and DocSend usage. Semil re-frames the conversation around practical communication, explaining his preference for conversational iPad slide sharing and PDF attachments over tracking links. | |
| Rethinking Reserve Strategies for Seed Funds | 4 | 7 | 4 | 1 | Semil presents a contrarian view on seed fund reserve policies, arguing LPs wrongly copy multi-stage VC reserve models onto seed investing. Harry listens and concurs with Semil's focus on upfront ownership. | |
| Disciplined Fund Sizing and Market Shifts | 4 | 6 | 3 | 2 | Harry cites advice from Mike Maples regarding fundraising timeframes and fund caps. Semil explains his firm stance against raising above a forty million dollar hard cap to maintain disciplined ownership targets. | |
| Liquidity Challenges and the Role of Secondaries | 4 | 7 | 4 | 2 | Semil outlines the structural decline in IPOs and traditional M&A exits, educating listeners on why seed managers must master secondaries. Harry presses on why secondary liquidity remains a taboo topic among VCs. | |
| Quickfire Round with Semil Shah | 3 | 5 | 2 | 1 | In the quickfire round, Semil gives candid answers on podcasts, placement agents, and backing founders in sectors he personally dislike such as legal tech. |
Statements from this episode (21)
VCs backed Shah's first fund instead of hiring him directly
“A couple of them hiring me as a kind of consultant to moonlight with them, while I was working at startups, and actually, it was a lot of VCs that put me, you know, they wouldn't hire me, but they would put me in business with a little small fund”
Institutional LPs evaluate venture fund managers on ten-year timeframes
“For the most part, when institutions come with you, they'll stay with you and think about you in a ten-year lens, almost.”
Notre Dame endowment has not backed new VC funds in two years
“Notre Dame may not have invested in a new fund in about two years, considered one of the most selective university endowments out there.”
MIT endowment does not invest in VC funds under $140 million
“And MIT, they haven't invested in a fund that's below one hundred and forty million, which was a stretch for them.”
Top endowments expect other LPs to absorb first-time VC risk
“First of all, they're not going to invest in a small fund right off the bat. And second of all, they're kind of expecting the risk associated with that new fundraise to be outsourced to other LPs.”
Venture pre-marketing to LPs should start over six months in advance
“I know I had written six months in the post that I wrote. I'd probably say even longer. So the pre-marketing is just the casual, like reminder, the casual, Hey, here's what I'm doing. The casual, Hey, what do you think about this? Do you have any feedback? It'…”
Prioritize feedback from micro-fund LPs over multi-asset mega-fund managers
“If somebody is an LP and helps start a great micro fund of funds and is also a direct investor in 10 different funds that you know, they probably have really good feedback that no matter how harsh it is, you've got to listen to it, versus somebody who's managi…”
Pitch decks win meetings, but personality closes LP commitments
“So I kind of feel like the email deck is the way you get the meeting, but you close it with your persona, your conversation, your personality.”
Seed fund LPs substitute follow-on signaling for track record
“In this world, we don't have Results yet. So everything people look at are proxies for real results. And the proxies in seed are who follows your deals? How much money is put behind those deals? Can you continually do that? Can you intercept the good deals?”
Seed LP proxies may not correlate with actual fund returns
“The problem with all that that we're going to go through probably in the next three or four years is those may not be correlated with results.”
Shah details reserve allocation percentages across Haystack Funds II and III
“In fund two, What I did was I put a third of the fund across four companies, and I kind of bulked up just to show that I could write a bigger check and follow. And then in fund three, which I just finished, I did quite a bit of one-to-one following, and then I…”
LPs mistakenly apply traditional VC reserve models to seed funds
“I think the majority of LPs have taken the history of how VCs, institutional VCs, A, B, and C reserve and bolted that on to seed, whereas I think seed is a completely different asset class.”
Early-stage VCs should maximize upfront ownership instead of heavy reserves
“I think early stage investors have to do the same thing. I think a few can and will be really good at investing in a lot of things and then pouncing on the things that are working, but most people won't have enough bandwidth to manage that.”
Venture funds over $40 million must strictly focus on ownership
“I'm sort of the paranoid belief that in any vehicle, if you have over forty million dollars, you have to be so laser focused on ownership, regardless of how many GPs you have, in order to have a really good fund.”
Startups will not see capital-fueled immense growth for three years
“And I think we've exited this period where companies are kind of on steroids with capital and growing at immense rates. That's just not going to happen in the next three years again.”
4,000 fewer US public companies exist today than 20 years ago
“There's 4000 fewer publicly listed companies on the NASDAQ and New York Stock Exchange than there were 20 years ago.”
Seed VCs must master secondary sales to return capital
“Every early stage manager, myself included, yourself included, we're going to have to get really, really good at understanding of how to sell in secondaries and when.”
Haystack's early funds relied on $10,000 to $25,000 checks
“When I raised my first, second fund, I just went to people I knew, like founders I've backed, VCs that I worked for, and would literally be collecting 10 K checks, 25 K checks. You know, still took some 10 K checks on this fund from people I know.”
Early-stage and smaller fund managers should not use placement agents
“If you're an early or unproven fund, early stage manager, smaller fund, it just doesn't make sense. I think you have to build those relationships on your own.”