The Exchanges

Q And on the discussion, then, of the evolution of the seed environment, as you said, we've seen it change fundamentally over the last five years. What do you think is the fundamental shifts, and do you think they're good for our economy?

A Well, I think the, the, the proliferation of seed funds is good. It's never been a better time to be an entrepreneur, at least to start a company. Certainly a lot of different, uh, sources of funding, uh, aside from seed funds through, you know, accelerators, corporate VCs getting, uh, more active. So, you know, I think there's a plethora of, of cap, early stage capital available to an entrepreneur. So clearly it's a really good time to be one. The real trick, of course, is being able to scale your company, attract additional Financing and then ultimately get a successful exit. Is it good for the economy? Absolutely. I think without a doubt, innovation is, is emanating from these startups. You know, a large portion of the NASDAQ today are from companies that were venture backed. Uh, I do think that, um, from a jobs perspective, obviously the great recession in 2008, 2009 was very painful for many people, but it allowed and enabled and facilitated companies like Uber, Airbnb, TaskRabbit to start what effectively become, ah, the, the shared economy.

AI assessment note: “Is it good for the economy? Absolutely. I think without a doubt”

Q as an industry is, is due to the portfolio construction thesis of, uh, Of being so heavy, and he obviously, uh, very much advocates for the, uh, spread, very diverse portfolio, citing that only, you know, half a percent turn out to be unicorns, and so it's about how many deals you're in, not how heavy you're in them. So, so how do you respond to that, then? I'm intrigued.

A Yeah, Dave is a very smart person, a very nice person, and I love talking to him. He and I have publicly disagreed many times about his portfolio construction, and my thoughts on What the right approach is. You know, I'll give you a simple example. 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 return for your invested dollars, but one million dollars back does not move the needle. So in a way, ownership of a portfolio company is That is extremely important, and fundamentally, seed funds are not geared toward investing the life cycle of a company. They're not investing their full pro rata in the Series D, for example. So what that means is that the seed funds actually have to buy their ownership up front. So we're focused on groups that are, as I mentioned, that are leading their deals, specifically so that they can get the 10 to 15% ownership And ultimately, you know, in the Series A, they may do their full prorata to defend their ownership position, but ultimately, they won't be able to maintain their full ownership position, and they ultimately, and they get diluted. And so, if you're starting out at 15%, you might get diluted down to seven and a half to eight perce…

AI assessment note: “He and I have publicly disagreed many times about his portfolio construction”

Q You said that about adverse selection. Is it, is it not, not adverse selection? It's just purely optionality because you are an LP in a fund. And so you see the deal flow before other people. Is that not the potential case?

A Well, there's some of that, and I think that that's the dynamic that we hope to, uh, to take advantage of, where we are working very closely with our fund managers. Over the next two to three years, they're identifying companies that progress from C to A to B, and we're familiar with the company, and we can invest, you know, efficiently into those. But I do think that, in general, 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 like Sequoia comes in with a ten million dollar series A. They're not going to make room for anybody else. The larger VCs like the Sequoia, Excel benchmarks, Greylocks of the world, um, are very focused on ownership into the best companies, and that, that dynamic itself precludes, uh, outside parties

AI assessment note: “Well, there's some of that, and I think that that's the dynamic”

Q last week, and, and, and he suggested that we'd see a lot more LPs investing in startups directly, and that we'd actually see kind of the integration of LP and GP into one role, and almost the cutting out of the middleman. So do, does that strategy of investing in startups directly play a big role in Sandana's approach, and do you agree that we might see this intersection appear?

A Right. 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 manager himself or herself feel that they can't raise the capital from people who do this full time, i.e. the venture capital funds? So I think adverse selection is a major issue. I do see LPs are a lot more interested in investing directly. I do think that it happens at the later stages as opposed to the initial stage, and 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. Um, these companies have ten million plus of revenue. We think that technology and market risk are largely mitigated. And, you know, the idea when we formed that was, if you believe that our fund managers have a very strong portfolio of seed funds, or seed companies, as they bubble up to series A, and as a subset of those bubble up to series B, those are ostensibly the best companies in our fund managers' portfolios, certainly the most mature. And from that subset, uh, we select 20 companies to build a portfolio of direct investments. So the answer is yes,…

AI assessment note: “So the answer is yes, we do direct investments, Yes, we do see LPs”

Q You said that about adverse selection. Is it, is it not, not adverse selection? It's just purely optionality because you are an LP in a fund. And so you see the deal flow before other people. Is that not the potential case?

A Well, there's some of that, and I think that that's the dynamic that we hope to, uh, to take advantage of, where we are working very closely with our fund managers. Over the next two to three years, they're identifying companies that progress from C to A to B, and we're familiar with the company, and we can invest, you know, efficiently into those. But I do think that, in general, 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 like Sequoia comes in with a ten million dollar series A. They're not going to make room for anybody else. The larger VCs like the Sequoia, Excel benchmarks, Greylocks of the world, um, are very focused on ownership into the best companies, and that, that dynamic itself precludes, uh, outside parties

AI assessment note: “Well, there's some of that... But I do think that, in general”

Q evaluate the market today. And, and we've seen this year really an increased amount of dollars flowing into a much more concentrated amount of funds with the Much more established funds seeming to raise a lot of money. So what do you make of this kind of narrowing of the VC funding environment this year? And where do you think the market opportunities are that lie ahead for you, Sundana?

A Right. Well, you know, clearly there's been a lot of funds raised, but they were from the absolute top tier. The aggregate dollars are very large because the absolute top tier of these firms are, are, are very large. They're very large funds. And recent Horowitz just Announce their billion and a half dollar fund. You know, that moves the needle in terms of overall VC funding. What you really have is the, the dynamic of have and have nots. The absolute top tier can raise at will. They decided to, uh, bulk up, uh, in the first quarter, second quarter of this year, so that they have the dry powder available. If there is a downturn, if valuations do come down, that's actually a great opportunity. There are a lot of studies that show, particularly in private equity, that returns actually increase coming out of, out of recessions, and as I mentioned, great companies can be formed coming out of a recession like Uber or Airbnb. Those were funded, those were formed in 2008, 2009. So I do think there's some of that, but ultimately, I do think that what you have right now is this dynamic where the best funds can raise at will, A lot of them did, and so now institutional LPs are largely out of capital for the year. A number of LPs I know, uh, have already spent their budget or have already allocated their budget to, to these re-ups, and it's also not just in the U.S. There are a lot of re-…

AI assessment note: “What you really have is the, the dynamic of have and have nots.”

Q Fantastic. Well, thank you so much for that, Mike. Uh, and then what's been the best pitch you've ever had, and why was that, if there's a name that comes to mind?

A That's a good question. You know, I think, um, I would say it's, uh, Jeff Clavier and the SoftTech team. We're their largest LP in their newest fund. It's a relationship that I've had, uh, since the early 2000 when Jeff was A so-called super angel. We had great discussions about portfolio construction, about reserves, about areas of investing, the style of investing. In terms of Jeff as a GP, extremely thoughtful. He's French and very successful, so one would presume that he has an air of arrogance, but actually he is the most down-to-earth person. Very straightforward. You know, one element that is particularly attractive about What soft tech does and what Jeff has done specifically, he has sought to build a long-term platform. And so when he brought on, uh, Steph Palmieri a few years ago, he would specifically make time, you know, give her airtime either, uh, in conferences or in pitch meetings. And so I thought that kind of development of the next generation is important. 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 the success, the key to success for a long-term platform. Jeff and SoftTech leading contenders to being that for the next few decades.

AI assessment note: “I would say it's, uh, Jeff Clavier and the SoftTech team.”

Q last week, and, and, and he suggested that we'd see a lot more LPs investing in startups directly, and that we'd actually see kind of the integration of LP and GP into one role, and almost the cutting out of the middleman. So do, does that strategy of investing in startups directly play a big role in Sandana's approach, and do you agree that we might see this intersection appear?

A Right. 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 manager himself or herself feel that they can't raise the capital from people who do this full time, i.e. the venture capital funds? So I think adverse selection is a major issue. I do see LPs are a lot more interested in investing directly. I do think that it happens at the later stages as opposed to the initial stage, and 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. Um, these companies have ten million plus of revenue. We think that technology and market risk are largely mitigated. And, you know, the idea when we formed that was, if you believe that our fund managers have a very strong portfolio of seed funds, or seed companies, as they bubble up to series A, and as a subset of those bubble up to series B, those are ostensibly the best companies in our fund managers' portfolios, certainly the most mature. And from that subset, uh, we select 20 companies to build a portfolio of direct investments. So the answer is yes,…

AI assessment note: “So the answer is yes, we do direct investments, Yes, we do see LPs”

Q as an industry is, is due to the portfolio construction thesis of, uh, Of being so heavy, and he obviously, uh, very much advocates for the, uh, spread, very diverse portfolio, citing that only, you know, half a percent turn out to be unicorns, and so it's about how many deals you're in, not how heavy you're in them. So, so how do you respond to that, then? I'm intrigued.

A Yeah, Dave is a very smart person, a very nice person, and I love talking to him. He and I have publicly disagreed many times about his portfolio construction, and my thoughts on What the right approach is. You know, I'll give you a simple example. 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 return for your invested dollars, but one million dollars back does not move the needle. So in a way, ownership of a portfolio company is That is extremely important, and fundamentally, seed funds are not geared toward investing the life cycle of a company. They're not investing their full pro rata in the Series D, for example. So what that means is that the seed funds actually have to buy their ownership up front. So we're focused on groups that are, as I mentioned, that are leading their deals, specifically so that they can get the 10 to 15% ownership And ultimately, you know, in the Series A, they may do their full prorata to defend their ownership position, but ultimately, they won't be able to maintain their full ownership position, and they ultimately, and they get diluted. And so, if you're starting out at 15%, you might get diluted down to seven and a half to eight perce…

AI assessment note: “Small one percent positions imply that you need You're required to have billion dollar exits”

Q ago. Jeff and Andy McLaughlin on the show a while ago, and we've got Steph coming on, so that's fantastic, but no, we absolutely love them. And then finally, let's finish on the vision for you with Sandana. What's the ultimate goal? Is this, is this a desire to be the kind of mass billion dollar fund of funds moving upstream or are we going to remain true to Sandana?

A I think most venture capital fund of funds are terrible. They're asset, uh, gatherers. They want AUM. They want management fee. A lot of them don't even charge carry. We are extremely focused on carry and And I think that's the best alignment of interests with our investors. My fundamental objective is to make our investors as much money as possible. And so, in my mind, what that means is being disciplined in what we do, maintaining the appropriate fund sizes for ourselves, and also going after and staying, staying focused on where we think a lot of value can be created. Certainly, you know, non-US areas like China, perhaps Europe, The ecosystems are, are very interesting and perhaps getting better, but we've been focused on the U S down the road. We may look at potentially working with some groups outside the U S. I think the key to long-term success is discipline and staying focused on what you're best at. So we have zero interest in becoming a multi-billion dollar asset gatherer and living off our fees and having swanky offices. That's completely opposite of what we do.

AI assessment note: “we have zero interest in becoming a multi-billion dollar asset gatherer”

Q And on the discussion, then, of the evolution of the seed environment, as you said, we've seen it change fundamentally over the last five years. What do you think is the fundamental shifts, and do you think they're good for our economy?

A Well, I think the, the, the proliferation of seed funds is good. It's never been a better time to be an entrepreneur, at least to start a company. Certainly a lot of different, uh, sources of funding, uh, aside from seed funds through, you know, accelerators, corporate VCs getting, uh, more active. So, you know, I think there's a plethora of, of cap, early stage capital available to an entrepreneur. So clearly it's a really good time to be one. The real trick, of course, is being able to scale your company, attract additional Financing and then ultimately get a successful exit. Is it good for the economy? Absolutely. I think without a doubt, innovation is, is emanating from these startups. You know, a large portion of the NASDAQ today are from companies that were venture backed. Uh, I do think that, um, from a jobs perspective, obviously the great recession in 2008, 2009 was very painful for many people, but it allowed and enabled and facilitated companies like Uber, Airbnb, TaskRabbit to start what effectively become, ah, the, the shared economy.

AI assessment note: “Is it good for the economy? Absolutely. I think without a doubt”

Q evaluate the market today. And, and we've seen this year really an increased amount of dollars flowing into a much more concentrated amount of funds with the Much more established funds seeming to raise a lot of money. So what do you make of this kind of narrowing of the VC funding environment this year? And where do you think the market opportunities are that lie ahead for you, Sundana?

A Right. Well, you know, clearly there's been a lot of funds raised, but they were from the absolute top tier. The aggregate dollars are very large because the absolute top tier of these firms are, are, are very large. They're very large funds. And recent Horowitz just Announce their billion and a half dollar fund. You know, that moves the needle in terms of overall VC funding. What you really have is the, the dynamic of have and have nots. The absolute top tier can raise at will. They decided to, uh, bulk up, uh, in the first quarter, second quarter of this year, so that they have the dry powder available. If there is a downturn, if valuations do come down, that's actually a great opportunity. There are a lot of studies that show, particularly in private equity, that returns actually increase coming out of, out of recessions, and as I mentioned, great companies can be formed coming out of a recession like Uber or Airbnb. Those were funded, those were formed in 2008, 2009. So I do think there's some of that, but ultimately, I do think that what you have right now is this dynamic where the best funds can raise at will, A lot of them did, and so now institutional LPs are largely out of capital for the year. A number of LPs I know, uh, have already spent their budget or have already allocated their budget to, to these re-ups, and it's also not just in the U.S. There are a lot of re-…

AI assessment note: “What you really have is the, the dynamic of have and have nots.”

Q you, ah, but I was on a panel last night, ah, and, and someone said on the panel that actually a lot of the seed money is dumb money, and that that only worsens the quality of our ecosystem. Do you agree that even if it is dumb money, ah, is that a bad thing, do you think? Is, does that not all still go to the funding of innovation?

A Well, let's take a step back and talk a little bit about taxonomy. You know, angels, I think, are individuals who, as a hobby, invest in early stage startups. You know, super angels, which I don't think most people talk about anymore, but super angels are ones who are using their own money and doing this as a full-time profession. And then you have the institutional quality seed funds, which is where we are focused on. These are groups that raise outside money and And are doing this full time. So I mentioned that taxonomy because I think, um, the composition of a seed round, which today is about one to two million in the U S sometimes larger as, as large as three million. In fact, I think those seed rounds are, especially in the high quality companies, you will see one or two high quality institutional seed VCs. You may see, um, a few individuals that the company may feel are strategic to the company. And, and what they're trying to accomplish, and maybe one or two smaller seed funds. 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 know, pony up, uh, and become, uh, and, and form a syndicate. Problem with those, number one, they may or may not have deep pockets. They ma…

AI assessment note: “Problem with those, number one, they may or may not have deep pockets”

Q Okay. So, so, so if we take, if we take some of them, so if we take say Chad at Sousa, how, how do you tell the eye of the tiger in Chad as a potential investment opportunity? What are you really looking for? Because he's selling himself as the product, really, with a fund.

A Right. You know, I think it'd be helpful for us to describe sort of our black box on how we evaluate fund managers. The first filter that we use is ecosystem. For us, that means three vectors. High quality entrepreneurs, high quality co-investors, and a ton of fallen capital. So what that effectively has meant for us is that we're focused on the Bay Area as well as New York. We actually recently made a commitment in Los Angeles, and we have some exposure to Boston, but to use an example, if you're the go-to seed fund in Cleveland, we are not likely to take a look, because there aren't that many larger VC funds that are based in Cleveland, so those companies are relying on the Sand Hill Road or the New York City VC funds to fly in, and I think early stage investments are hard as it is, and so, um, we, we, Are very focused on robust seed ecosystems. The second filter that we use, and I think this is an extremely important one, is portfolio construction. So what, what we mean by that, we specifically look for GPs who are leading their deals. They're writing the largest checks. So in a typical two to three million dollar seed round, they're writing a million dollar check. They have the credibility with the entrepreneur to organize that syndicate and ultimately be a partner to To the entrepreneur and helping build the business. So actually a lot of our GPs are ex entrepreneurs becau…

AI assessment note: “helpful for us to describe sort of our black box on how we evaluate fund managers”

Q Okay. So, so, so if we take, if we take some of them, so if we take say Chad at Sousa, how, how do you tell the eye of the tiger in Chad as a potential investment opportunity? What are you really looking for? Because he's selling himself as the product, really, with a fund.

A Right. You know, I think it'd be helpful for us to describe sort of our black box on how we evaluate fund managers. The first filter that we use is ecosystem. For us, that means three vectors. High quality entrepreneurs, high quality co-investors, and a ton of fallen capital. So what that effectively has meant for us is that we're focused on the Bay Area as well as New York. We actually recently made a commitment in Los Angeles, and we have some exposure to Boston, but to use an example, if you're the go-to seed fund in Cleveland, we are not likely to take a look, because there aren't that many larger VC funds that are based in Cleveland, so those companies are relying on the Sand Hill Road or the New York City VC funds to fly in, and I think early stage investments are hard as it is, and so, um, we, we, Are very focused on robust seed ecosystems. The second filter that we use, and I think this is an extremely important one, is portfolio construction. So what, what we mean by that, we specifically look for GPs who are leading their deals. They're writing the largest checks. So in a typical two to three million dollar seed round, they're writing a million dollar check. They have the credibility with the entrepreneur to organize that syndicate and ultimately be a partner to To the entrepreneur and helping build the business. So actually a lot of our GPs are ex entrepreneurs becau…

AI assessment note: “I think it'd be helpful for us to describe sort of our black box”

Q And I'm really intrigued as to kind of which segment of the market you're most excited by. Is it still very early seed stage in San Francisco, or are there other market segments you're particularly excited for?

A I think one important element of seed investing, our hypothesis is that it's actually an asymmetry of risk. And what we mean by that is that on the upside, you know, you have outliers like Uber, a seed investor in Uber has done extremely well. But, you know, if a company exits for a hundred to a hundred million to a billion dollars, the seed investor does very well. On the downside, we actually think that risk is a lot more limited. What I mean, what I mean by that specifically is that A seed fund that invested, let's say, a million dollars into a company, the team builds out, the product never gets the market fit that's, that's required, so they need to sell. They can sell the company for a few million dollars, and the seed investor gets some capital recovery, if not a profit. I think the, the downside is actually less than what most people think. 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. And, you know, I do think that, uh, 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.

AI assessment note: “I think one important element of seed investing, our hypothesis is that it's actually an asymmetry”

Q you, ah, but I was on a panel last night, ah, and, and someone said on the panel that actually a lot of the seed money is dumb money, and that that only worsens the quality of our ecosystem. Do you agree that even if it is dumb money, ah, is that a bad thing, do you think? Is, does that not all still go to the funding of innovation?

A Well, let's take a step back and talk a little bit about taxonomy. You know, angels, I think, are individuals who, as a hobby, invest in early stage startups. You know, super angels, which I don't think most people talk about anymore, but super angels are ones who are using their own money and doing this as a full-time profession. And then you have the institutional quality seed funds, which is where we are focused on. These are groups that raise outside money and And are doing this full time. So I mentioned that taxonomy because I think, um, the composition of a seed round, which today is about one to two million in the U S sometimes larger as, as large as three million. In fact, I think those seed rounds are, especially in the high quality companies, you will see one or two high quality institutional seed VCs. You may see, um, a few individuals that the company may feel are strategic to the company. And, and what they're trying to accomplish, and maybe one or two smaller seed funds. 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 know, pony up, uh, and become, uh, and, and form a syndicate. Problem with those, number one, they may or may not have deep pockets. They ma…

AI assessment note: “Well, let's take a step back and talk a little bit about taxonomy.”