The Exchanges

Q And I'm talking of the fund there itself as a new entrant to, to the highly competitive VC community. I've got a question from one of your LPs, uh, in Michael Kim at Sandana, who we recently had on the show. And he, he asks, how do you look to establish the mindshare with entrepreneurs and other VCs for SUSE?

A Yeah, totally. So I think we do, and that's a great question by Michael. I think we do four things well, and the last one's probably the most important. The first thing is we're, we're thesis driven. I think each individually, each of these things, uh, you know, are, are interesting and unique, but together they kind of make us SUSE, right? They make us a single individual in this community. So the first one is thesis driven. So we strongly believe that for businesses to create long-term value today, you have to have some form of strong defensibility or moat. And we think the best moats today are built with data network effects or economies of scale. So we literally kind of want to be, you know, the moat guys, um, and, you know, very focused on how does data network effects and economies of scale really, really build that. The second thing is bandwidth. So we strongly believe that You have to have a lot of free time to get extremely involved in these businesses. We wanted to bring the same operating model you see in late stage venture with the, you know, the amount of involvement pieces take to early stage. We thought there was a hole there. And so we'll always maintain in a really low partner to company ratio, ideally long-term kind of six to eight companies per partner, which is very unique at seed because we want to be so operationally involved. Our long-term vision for this…

AI assessment note: “I think we do four things well, and the last one's probably the most important.”

Q I want to discuss the vision and where you see Sousa in 15 to 20 years time. You know, do you want to cap this like a benchmark have done with, or a foundry with a two 25, Million say, uh, fund size, or is this a ever scaling Andreessen behemoth that we're going to see? Cause I have no doubt it will be a behemoth, but what's the vision?

A I appreciate the trust. Um, it's a great question. So where we're headed, we have a very clear kind of understanding of what we want to become. So for us, the end state, and then I'll kind of work backwards. The end state for us is 125, one hundred and fifty million dollar fund capped at that size, never getting bigger. Focus exclusively at early stage. Heavy investment into platform and services to help the companies, help the companies directly, but also help the companies connect together and help each other. You know, six to seven GPs, or I should say five to seven GPs, so super heavy on the GP side, probably more so than anyone at that size. Again, to be able to offer far more bandwidth per company than any other fund. You know, how we get there is we're taking a very methodical approach. We're in phase two of this. Again, we think of this as a startup, so we've done the seed round. We just closed our series A. As we scale the fund, we want to scale three aspects. So our check size and fund one was 25, 250 K in this fund is 500 K. We want to scale the number of deals for percentage of the deals that we're leading. So going from 20% in fund one, we're hoping to lead 40% of our companies in fund two. And obviously we still play nicely with a lot of other VCs as syndicate partners. And then lastly, we want to scale our ownership percentage. And that's obviously what the LPs l…

AI assessment note: “The end state for us is 125, one hundred and fifty million dollar fund capped”

Q LPs have very creative imaginations. In terms of, you said, uh, what makes a good fit in terms of LP and how you approach them. So what do you think does make a good fit? I've spoken to many fund managers and they say kind of LP money is LP money. It's, it's all green. So, so what makes a good fit LP wise?

A Yeah, so I'm really excited you asked that question. So we actually think about LPs in a totally different way. For us, our LP base is a hundred percent strategic to us, and we built it very intentionally. Although we got a lot of no's, we never felt desperate for capital. We never brought in people we didn't think could add value. So our fund one and fund two makeup is, is not too dissimilar. We added only some big folks for fund two, but our, our makeup is about a third late stage VCs. So these are individual VC partners investing in the fund. And obviously the benefit there is they can give us, uh, tremendous insights into the benchmarks. Our companies need to raise A's and B's. They can be mentors for our existing founders. They can write follow on checks for our existing founders. So there's a tremendous amount of value there. About a third of our LPs are private equity managers. These folks hold large portfolios of companies that our software companies can sell into. These companies can buy our businesses, um, a tremendous amount of value there. And then we have a good number of, of, uh, you know, kind of famous, well-known operators. So people that have started companies in sectors who are experts in those sectors and connect again as kind of mentors to the founders. And we leverage our LPs in a, in a massive way. They are extremely involved in our business. Obviously we…

AI assessment note: “We never brought in people we didn't think could add value”

Q I want to discuss the vision and where you see Sousa in 15 to 20 years time. You know, do you want to cap this like a benchmark have done with, or a foundry with a two 25, Million say, uh, fund size, or is this a ever scaling Andreessen behemoth that we're going to see? Cause I have no doubt it will be a behemoth, but what's the vision?

A I appreciate the trust. Um, it's a great question. So where we're headed, we have a very clear kind of understanding of what we want to become. So for us, the end state, and then I'll kind of work backwards. The end state for us is 125, one hundred and fifty million dollar fund capped at that size, never getting bigger. Focus exclusively at early stage. Heavy investment into platform and services to help the companies, help the companies directly, but also help the companies connect together and help each other. You know, six to seven GPs, or I should say five to seven GPs, so super heavy on the GP side, probably more so than anyone at that size. Again, to be able to offer far more bandwidth per company than any other fund. You know, how we get there is we're taking a very methodical approach. We're in phase two of this. Again, we think of this as a startup, so we've done the seed round. We just closed our series A. As we scale the fund, we want to scale three aspects. So our check size and fund one was 25, 250 K in this fund is 500 K. We want to scale the number of deals for percentage of the deals that we're leading. So going from 20% in fund one, we're hoping to lead 40% of our companies in fund two. And obviously we still play nicely with a lot of other VCs as syndicate partners. And then lastly, we want to scale our ownership percentage. And that's obviously what the LPs l…

AI assessment note: “The end state for us is 125, one hundred and fifty million dollar fund capped”

Q And in terms of the larger fund, because I want to discuss fund two, you know, recently raised, as we said, uh, you have the capacity for more reserves and more follow-on money. So how do you approach the reserves aspect of your fund construction with Sousa, and what's your strategy towards that?

A Yeah, that's a good question. So in fund one, just to give you a benchmark, we were about a one-to-one in terms of upfront to follow-on capital in terms of the ratio. So for every dollar we invest up front, we have a dollar for follow-on. Uh, what we learned in fund one, which is really important to inform what we did in fund two was that these companies that grow really quickly for us, it was companies like Robin hood where we invested at seed and a year and a half later they had raised a fifty million dollar series B was our pro rata in these companies was getting pretty large pretty quickly and that our reserve strategy just really wasn't, um, the right one for the, for the firm we were trying to build and the ownership we were trying to maintain. Uh, And so in fund two, we've shifted to a dollar up front to two dollars follow on. And who knows in the future that might change again, but, uh, that's the model in which we're going to operate this time. And, and I think having more reserves is going to be, you know, definitely the way to go for us.

AI assessment note: “in fund two, we've shifted to a dollar up front to two dollars follow on”

Q professionalization and institutionalization of funds, Nick Charles at Notations written before about the circularity in VC, how the likes of Clavier, Saka, start with small angel funds and then professionalize up and scale and scale, and the same seems to be true with the second cycle of seed funds. So are you definitely seeing this, Chad, and do you see this as the evolution of the industry as a whole?

A Yeah, I mean, I think no question that's the way to go, and I think the simplest reason for why that's the case is, as an angel, you can build an actual portfolio and track record, right? So when you want to go institutionalize that and finally go raise money from LPs, there's a portfolio of companies that those LPs can look at. One of the things we did when we raised the first fund, I think that helped in a tremendous way, is we pulled some of our angel investments into FundOne at cost. So we took some investments we had made the year before, put them in the fund at cost, even though some of them had some markups, And it was super helpful, one, for LPs to say, okay, you say you're going to do all these things, and here's a basket of companies that live up to what you say you're going to do in terms of the type of companies you want to invest in, the stage you want to invest in, the type of founders you want to invest in. So there is actually something to go on. And I think that's the reason why you've seen people start as angels and move to institutional funds in that kind of order.

AI assessment note: “no question that's the way to go”

Q LPs have very creative imaginations. In terms of, you said, uh, what makes a good fit in terms of LP and how you approach them. So what do you think does make a good fit? I've spoken to many fund managers and they say kind of LP money is LP money. It's, it's all green. So, so what makes a good fit LP wise?

A Yeah, so I'm really excited you asked that question. So we actually think about LPs in a totally different way. For us, our LP base is a hundred percent strategic to us, and we built it very intentionally. Although we got a lot of no's, we never felt desperate for capital. We never brought in people we didn't think could add value. So our fund one and fund two makeup is, is not too dissimilar. We added only some big folks for fund two, but our, our makeup is about a third late stage VCs. So these are individual VC partners investing in the fund. And obviously the benefit there is they can give us, uh, tremendous insights into the benchmarks. Our companies need to raise A's and B's. They can be mentors for our existing founders. They can write follow on checks for our existing founders. So there's a tremendous amount of value there. About a third of our LPs are private equity managers. These folks hold large portfolios of companies that our software companies can sell into. These companies can buy our businesses, um, a tremendous amount of value there. And then we have a good number of, of, uh, you know, kind of famous, well-known operators. So people that have started companies in sectors who are experts in those sectors and connect again as kind of mentors to the founders. And we leverage our LPs in a, in a massive way. They are extremely involved in our business. Obviously we…

AI assessment note: “our LP base is a hundred percent strategic to us, and we built it very intentionally”

Q And I'm talking of the fund there itself as a new entrant to, to the highly competitive VC community. I've got a question from one of your LPs, uh, in Michael Kim at Sandana, who we recently had on the show. And he, he asks, how do you look to establish the mindshare with entrepreneurs and other VCs for SUSE?

A Yeah, totally. So I think we do, and that's a great question by Michael. I think we do four things well, and the last one's probably the most important. The first thing is we're, we're thesis driven. I think each individually, each of these things, uh, you know, are, are interesting and unique, but together they kind of make us SUSE, right? They make us a single individual in this community. So the first one is thesis driven. So we strongly believe that for businesses to create long-term value today, you have to have some form of strong defensibility or moat. And we think the best moats today are built with data network effects or economies of scale. So we literally kind of want to be, you know, the moat guys, um, and, you know, very focused on how does data network effects and economies of scale really, really build that. The second thing is bandwidth. So we strongly believe that You have to have a lot of free time to get extremely involved in these businesses. We wanted to bring the same operating model you see in late stage venture with the, you know, the amount of involvement pieces take to early stage. We thought there was a hole there. And so we'll always maintain in a really low partner to company ratio, ideally long-term kind of six to eight companies per partner, which is very unique at seed because we want to be so operationally involved. Our long-term vision for this…

AI assessment note: “I think we do four things well... The first thing is we're thesis driven.”

Q And in terms of the larger fund, because I want to discuss fund two, you know, recently raised, as we said, uh, you have the capacity for more reserves and more follow-on money. So how do you approach the reserves aspect of your fund construction with Sousa, and what's your strategy towards that?

A Yeah, that's a good question. So in fund one, just to give you a benchmark, we were about a one-to-one in terms of upfront to follow-on capital in terms of the ratio. So for every dollar we invest up front, we have a dollar for follow-on. Uh, what we learned in fund one, which is really important to inform what we did in fund two was that these companies that grow really quickly for us, it was companies like Robin hood where we invested at seed and a year and a half later they had raised a fifty million dollar series B was our pro rata in these companies was getting pretty large pretty quickly and that our reserve strategy just really wasn't, um, the right one for the, for the firm we were trying to build and the ownership we were trying to maintain. Uh, And so in fund two, we've shifted to a dollar up front to two dollars follow on. And who knows in the future that might change again, but, uh, that's the model in which we're going to operate this time. And, and I think having more reserves is going to be, you know, definitely the way to go for us.

AI assessment note: “in fund two, we've shifted to a dollar up front to two dollars follow on”

Q Okay. Um, so in terms of the professionalization of moving from angel to VC, I'm really intrigued to hear how the mindset Mindset shifts for you from the fiduciary responsibility of having LP and institutional money behind you compared to the early days of angel investing with your own capital?

A Yeah, no, it's a great question. I mean, I think the first thing I'd say is they're just completely different animals, right? When you're angel investing, a lot of things are different. Your tolerance is probably a little bit different. Um, you don't really need to have, uh, as much of a cohesive story and thesis around how you're investing and how much capital, uh, you want to deploy. The consistency between checks doesn't need to be quite as clean. So I think just in general, angel investing is a lot more flexible, right? It's obviously your capital. Uh, you're not reporting to anybody else. No one else is kind of watching over what you guys are doing with the capital. And so, you know, a lot of people want to stay at the, the, the angel stage because it, because of that flexibility. But for us, you know, all of us having run companies wanted to build a startup fund, right? We've always thought about the fund as a startup. And for us, like institutionalizing, it was Really the only way to go for us, and all the challenges that came with that were exciting to us, and we can talk about those.

AI assessment note: “When you're angel investing... you're not reporting to anybody else.”

Q Okay. Um, so in terms of the professionalization of moving from angel to VC, I'm really intrigued to hear how the mindset Mindset shifts for you from the fiduciary responsibility of having LP and institutional money behind you compared to the early days of angel investing with your own capital?

A Yeah, no, it's a great question. I mean, I think the first thing I'd say is they're just completely different animals, right? When you're angel investing, a lot of things are different. Your tolerance is probably a little bit different. Um, you don't really need to have, uh, as much of a cohesive story and thesis around how you're investing and how much capital, uh, you want to deploy. The consistency between checks doesn't need to be quite as clean. So I think just in general, angel investing is a lot more flexible, right? It's obviously your capital. Uh, you're not reporting to anybody else. No one else is kind of watching over what you guys are doing with the capital. And so, you know, a lot of people want to stay at the, the, the angel stage because it, because of that flexibility. But for us, you know, all of us having run companies wanted to build a startup fund, right? We've always thought about the fund as a startup. And for us, like institutionalizing, it was Really the only way to go for us, and all the challenges that came with that were exciting to us, and we can talk about those.

AI assessment note: “angel investing is a lot more flexible... you're not reporting to anybody else”

Q professionalization and institutionalization of funds, Nick Charles at Notations written before about the circularity in VC, how the likes of Clavier, Saka, start with small angel funds and then professionalize up and scale and scale, and the same seems to be true with the second cycle of seed funds. So are you definitely seeing this, Chad, and do you see this as the evolution of the industry as a whole?

A Yeah, I mean, I think no question that's the way to go, and I think the simplest reason for why that's the case is, as an angel, you can build an actual portfolio and track record, right? So when you want to go institutionalize that and finally go raise money from LPs, there's a portfolio of companies that those LPs can look at. One of the things we did when we raised the first fund, I think that helped in a tremendous way, is we pulled some of our angel investments into FundOne at cost. So we took some investments we had made the year before, put them in the fund at cost, even though some of them had some markups, And it was super helpful, one, for LPs to say, okay, you say you're going to do all these things, and here's a basket of companies that live up to what you say you're going to do in terms of the type of companies you want to invest in, the stage you want to invest in, the type of founders you want to invest in. So there is actually something to go on. And I think that's the reason why you've seen people start as angels and move to institutional funds in that kind of order.

AI assessment note: “no question that's the way to go, and I think the simplest reason”

Q And in terms of the specialization itself, uh, on the data and the network effects that come from that, how much of a role does that play to your competition for the hottest startups within data, within the data landscape? You know, are you much more favorable to those startups because of your preference compared to a more generalist VC, do you think?

A Yeah, I mean, I think it's probably less so that we're Competitive because that's our thesis. It's probably more so that, like, we actually believe for businesses that are building defensibility through, through data and data network effects, we can be the most helpful. You know, the reality here is a company that's building a data type company will probably go talk to other founders in this space, right? And ideally, those founders are going to speak really highly of us. Like, you know, the reason to talk to Susan is not because, hey, they have that thesis. It's because, hey, if you're building a company like that, they're going to be one of the most helpful investors in the Valley to help do that.

AI assessment note: “we actually believe for businesses that are building defensibility through data... we can be the most helpful”

Q And in terms of the specialization itself, uh, on the data and the network effects that come from that, how much of a role does that play to your competition for the hottest startups within data, within the data landscape? You know, are you much more favorable to those startups because of your preference compared to a more generalist VC, do you think?

A Yeah, I mean, I think it's probably less so that we're Competitive because that's our thesis. It's probably more so that, like, we actually believe for businesses that are building defensibility through, through data and data network effects, we can be the most helpful. You know, the reality here is a company that's building a data type company will probably go talk to other founders in this space, right? And ideally, those founders are going to speak really highly of us. Like, you know, the reason to talk to Susan is not because, hey, they have that thesis. It's because, hey, if you're building a company like that, they're going to be one of the most helpful investors in the Valley to help do that.

AI assessment note: “it's probably less so that we're Competitive because that's our thesis.”

Q So talk to me, Chad. Second fund just raised. A huge congratulations for that. But, but how did you get into the industry with, with your own fund? And what was the starting point for you?

A Yeah, I mean, I guess the starting point for me was really growing up in the Bay Area and being fortunate to, you know, uh, be raised in SF and then moved down to the Bay Area near Stanford University. And as an early kid, I was exposed to tech and entrepreneur, entrepreneurship and VC. Um, which was pretty special. And I guess a couple of funny caveats, uh, or stories. I remember being one of the first sellers on eBay, uh, during the beanie baby craze in the late nineties. So I was 11 years old. I'd set up this like little business flipping beanie babies, uh, on eBay. I would go to the summer camp where I had a friend from China and he'd bring me beanie babies from China and I'd sell them on, on eBay and turn a pretty good profit for an 11 year old. And it was kind of A great example of being in the right place at the right time and trying these new products and that kind of love affair for tech continued for my whole childhood, being exposed to some of these biggest companies at the earliest stages. I remember trying, you know, early Google, uh, it wasn't quite as powerful as it is today, but it was a pretty mind blowing experience. And that really continued. So after college, I knew I wanted to get some operating experience. I knew I wanted to work in tech. I'd been obsessed with it my whole life. And so I spent six years at two different companies. In various product roles.…

AI assessment note: “the starting point for me was really growing up in the Bay Area”

Q So talk to me, Chad. Second fund just raised. A huge congratulations for that. But, but how did you get into the industry with, with your own fund? And what was the starting point for you?

A Yeah, I mean, I guess the starting point for me was really growing up in the Bay Area and being fortunate to, you know, uh, be raised in SF and then moved down to the Bay Area near Stanford University. And as an early kid, I was exposed to tech and entrepreneur, entrepreneurship and VC. Um, which was pretty special. And I guess a couple of funny caveats, uh, or stories. I remember being one of the first sellers on eBay, uh, during the beanie baby craze in the late nineties. So I was 11 years old. I'd set up this like little business flipping beanie babies, uh, on eBay. I would go to the summer camp where I had a friend from China and he'd bring me beanie babies from China and I'd sell them on, on eBay and turn a pretty good profit for an 11 year old. And it was kind of A great example of being in the right place at the right time and trying these new products and that kind of love affair for tech continued for my whole childhood, being exposed to some of these biggest companies at the earliest stages. I remember trying, you know, early Google, uh, it wasn't quite as powerful as it is today, but it was a pretty mind blowing experience. And that really continued. So after college, I knew I wanted to get some operating experience. I knew I wanted to work in tech. I'd been obsessed with it my whole life. And so I spent six years at two different companies. In various product roles.…

AI assessment note: “the starting point for me was really growing up in the Bay Area”