The Exchanges

Q Let's finish on what does the future of micro VC hold? Is it only specialization?

A So we've seen a lot of specialization, and that's largely been a function of the fact that it's hard to be a generalist, continue to win deals at a high pace. 10 years ago, I think it was very easy to do that because you're just filling a gap that existed between angel financing and traditional series A financing. That gap's been filled. It's been filled for the last few years, and I think in retrospect, I think that specialization, which Kind of started in 2012, 2013 is probably the future. I think consolidation is, is the future. I don't see a lot of first time or second time funds raising their next fund. And it may not be a function of who they are, but rather a very different macro environment and a general understanding by LPs that we just don't need, we don't need 800 seed funds. So I would be surprised if there's more than 250 active seed funds by the end of 2019.

AI assessment note: “specialization, which Kind of started in 2012, 2013 is probably the future.”

Q the meta view of where we are today, then we're going to do a discussion on all things LPs and fundraising, and then the future of seed. So I want to start, though, on, on the meta view, and we mentioned there, kind of, the evolutions that's happened in the market, and, and discuss there about our interview a couple of years ago. What's changed over the last few years?

A There's things that have changed, and there's things that have stayed the same. So, The pace of micro VC formation, and let me, let me take a step back and identify exactly what I mean by micro VC, because there's different definitions. My definition of a micro VC fund is a fund that's under a hundred million dollars has the super majority of its, its investments in seed, and typically has one to four GPs within that bucket. We've seen continued growth. Two years ago, if you had asked me the question of where do I see the pace going? I thought the pace would have slowed in 2015 and 16, and it hasn't. Today, we have over 450 micro VC firms in the U.S. alone. If you look globally, that number is close to 700. Even today, I'm seeing one or two new managers per week. And so from the standpoint of what's the same, the pace continues. We'll end up seeing probably 130 to 150 managers. Brand new funds in, in 2017. The thing that has changed a little bit is it's become increasingly harder for first time funds to raise. Whereas three years ago, I think there, it was much more novel. There was a smaller universe today. The seed market is fairly saturated with seed fund investors. And because of that institutional investors, and we'll talk a little bit more about this later in the interview, have taken a step back both because they've already made a bunch of bets, But because it's increasi…

AI assessment note: “The thing that has changed a little bit is it's become increasingly harder for first time funds”

Q Can I ask, in terms of kind of market standpoint and expectations, in terms of timeline, how long is it reasonable to Time to expect for fundraising to take today?

A Yeah, so the average right now is 18 months. If you are a first time manager, i.e. have never done it before, you're probably going to be in that 18 month time frame, if not longer. If you're a first time fund, but have a pre-existing track record that's good, have relationships with LPs, and can generally go into a fundraising with some momentum, it's probably going to be closer to six to 12 months. I think the days of raising within three months Are really, really difficult and are probably only with respect to people that have left tier one firms. So if somebody spins out of Sequoia or somebody spins out of Excel, those fundraising periods tend to go really quickly.

AI assessment note: “Yeah, so the average right now is 18 months.”

Q Can I ask then, you mentioned the explosion there in a 150 maybe in 2017. Is that fundamentally good for the ecosystem? We hear that all money is good money. Does that not just foster more entrepreneurship?

A So, so I think the answer to that is, and I, and I vacillate between are there more pros or are there more cons right now with the amount of micro VC formation, the number of funds that are, are coming to market and the overall capital. Let me touch on a couple of those things. So first let's look at the number of funds. So 450 in the U S 700 globally with that, the dollars aren't that big. So over the last five years, those funds collectively have raised about seventeen billion dollars. Which if you look at the annual venture fundraising market, it's between 30 and 40. At least it has been for the last few years. So it's a small subset of the overall venture universe. The question around, is it a good thing? It is a good thing from a few points. So number Entrepreneurs are available to more smart sources of capital, which in theory allow companies at the early stage to get more risk capital when they need it. The other pro, candidly, which, you know, we've, we've observed is the lower barrier of entry of starting a small micro VC fund has enabled a lot more diversity. And so we looked at the numbers in terms of female VCs relative to female partners at large funds and micro VCs by numbers. Have three times as many female investors in decision-making roles as a percentage of total partners than, than large life cycle firms. And so we are very bullish about that part of it. We t…

AI assessment note: “It is a good thing from a few points.”

Q No, I, I hope so too. But, uh, speaking of kind of, uh, the, the fundraising process there, I'd love to hear your thoughts on kind of raising the full fund. And then when's the right time to do the first close and what percentage do you think is enough?

A Multiple closes are candidly the, uh, the norm. It's very rare for a fund to do a one and done. Typically speaking, you know, we're seeing managers do anywhere between two and five closes before they get to the final close. The average is about two and a half. So what I usually counsel managers is if you have a target of X amount, the first close should be at minimum 30 to 40% of the fund. Raising less than that as part of the first close sends a bad signal, and I think it really, you know, questions the overall viability of the fund managed to raise the entire amount. So I think it is tough to get to a cover and there's a little bit of a chicken and an egg, which is there are a lot of LPs that are happy to get into funds when it's the final close, but getting LPs in the first close is the toughest. And so one way to get around that is get those soft commits, get to a point where if you're raising a fifty million dollar fund, you have at least 20 done before you hold that first close.

AI assessment note: “the first close should be at minimum 30 to 40% of the fund.”

Q Awesome. Well, let's, let's dive into the world of micro VC then. So we often hear the term micro VC itself bandied around. Are there any common characteristics and criteria that we can attribute to micro VCs that discern them from traditional VCs?

A Yeah, I, you know, and, and, you know, I'll say this first, and I think the, uh, the term micro VC probably isn't the best term. I, you know, I'm not a big fan of it, um, but for lack of a better term, at least for this interview, we'll use it. Um, the common characteristics of what people consider micro VCs are firms that are raising funds that are sub a hundred million dollars, typically 25 to 50, uh, no more than about three partners, so usually one or two. And, uh, and fundamentally are focused on investing in the seed stage. In terms of distinctive characteristics, I mean, I think the two observations I've made within the micro VC market, one, micro VC GPs tend to be very collegial, which is a little bit different than if you think about the traditional, you know, sandhill venture capital firms that are investing across life cycles that tend to have sharper elbows and are very ownership driven. Um, and then number two, I, I've just found the micro VC market to be very entrepreneurial, and so a lot of the, uh, the VCs that are starting are really just running startups, um, with, um, the difference of just, instead of writing codes like their, their companies do, they're just writing checks.

AI assessment note: “sub a hundred million dollars, typically 25 to 50, uh, no more than about three partners”

Q And how do you think, then, these micro VCs actually, uh, charge enough in management fees, um, to really generate it being worth their time? I mean, I've interviewed, uh, Some micro VCs with eight million, with twelve million. How is, how is that really enough for, for partners or so to, to make a genuine good living? Do you think?

A Well, it's, it's not. I mean, if you think about a 10 or fifteen million dollar fund that's putting out three to 400,000 dollars in fees, especially in certain markets, the Bay Area and New York, it's impossible to, to live. A lot of them have come from some sort of wealth, and so, You know, the, the pressure of using the management fee to live every day is just not there. And, and remember, a lot of those, um, smaller firms, the GPs are actually writing significant checks as their GP contribution. I, I think the whole concept, though, is, is creating alignment with, with the LP and being more carry focused. And, and fundamentally, you know, if that first, let's call it eight million dollar fund does well, at least in the early days, From a tracking standpoint, the thought is that you can start getting another fund online, and now you have fees, you know, drawing from two funds. But originally, it's, it's very tough to live up those fees.

AI assessment note: “Well, it's, it's not. I mean, if you think about a 10 or fifteen”

Q And LPs for these micro VC funds, are they fundamentally very different to the traditional LPs for normal venture funds? I mean, are we seeing a lot of high net worth individuals as opposed to family offices and kind of endowments? Is that much more the characteristics of it?

A Yeah, I mean, there, there's certainly an element of that. So if you think about traditional venture firms, I mean, it's pension funds, endowments, uh, fund of funds, uh, foundations, uh, very little in the way of, you know, high net worth individuals. Most of the micro VC firms, and about 48% are 25 and under in, in size. Those are, those typically have no endowments, very, have no pension funds, very rarely have, um, any sort of institutional backing, but are primarily family office High net worth backed. Um, that said, you know, funds that are, you know, thirty million and above typically have one or two institutional investors. Typically a fund to fund or a small endowment that, um, you know, is looking to sort of invest in the next great franchise.

AI assessment note: “Those are... primarily family office High net worth backed.”

Q the meta view of where we are today, then we're going to do a discussion on all things LPs and fundraising, and then the future of seed. So I want to start, though, on, on the meta view, and we mentioned there, kind of, the evolutions that's happened in the market, and, and discuss there about our interview a couple of years ago. What's changed over the last few years?

A There's things that have changed, and there's things that have stayed the same. So, The pace of micro VC formation, and let me, let me take a step back and identify exactly what I mean by micro VC, because there's different definitions. My definition of a micro VC fund is a fund that's under a hundred million dollars has the super majority of its, its investments in seed, and typically has one to four GPs within that bucket. We've seen continued growth. Two years ago, if you had asked me the question of where do I see the pace going? I thought the pace would have slowed in 2015 and 16, and it hasn't. Today, we have over 450 micro VC firms in the U.S. alone. If you look globally, that number is close to 700. Even today, I'm seeing one or two new managers per week. And so from the standpoint of what's the same, the pace continues. We'll end up seeing probably 130 to 150 managers. Brand new funds in, in 2017. The thing that has changed a little bit is it's become increasingly harder for first time funds to raise. Whereas three years ago, I think there, it was much more novel. There was a smaller universe today. The seed market is fairly saturated with seed fund investors. And because of that institutional investors, and we'll talk a little bit more about this later in the interview, have taken a step back both because they've already made a bunch of bets, But because it's increasi…

AI assessment note: “The thing that has changed a little bit is it's become increasingly harder”

Q So how are LPs reacting to this then? With the dilution in talent, the bloated valuations potentially, how do LPs respond, and what are their thoughts today?

A Well, I think we have to delineate between type of LPs. So if you look at the institutional LPs and institutionals are endowments, fund of funds, foundations, large multifamily offices that are sophisticated in venture, they are taking a step back and really looking at investing in certain type of managers. And typically speaking, those are managers that have done it before that have shown the ability to institutionally manage a portfolio or institutionally manage a fund. And so The number of allocations from institutionals are much, much lower than they were before. The bar is incredibly high, and the likelihood of a first-time fund getting money from an institutional without any prior experience is next to zero. High net worth individuals, family offices are still allocating, and that's largely a function of the low-yield environment. If you look at any asset class right now, particularly here in the U.S., it's expensive, whether it be real estate, public equities, fixed income, and The one area that people look at getting some alpha is investing in alternative asset classes like venture, especially today, where I think the tech industry is romanticized. It's much more interesting being an investor in Uber than it is owning stock in some public company that's been around for 30 years, and so we've seen the high net worths and the family offices continue to put in, in money be…

AI assessment note: “I think we have to delineate between type of LPs. So if you look”

Q But I do want to know, specifically from potential fund managers, we said about it being hard to raise. We spoke about LP mindsets. I want to talk from the perspective of potential fund managers and how they can manage expectations. So what expected fund size do you think would be appropriate for a first-time micro VC today?

A Again, I think we have to bifurcate this a little bit. So there's a difference between a first-time fund and first-time manager. If you are a first-time manager, i.e. you've never been in an institutional shop, and perhaps you've been an operator or an angel investor, It is very unlikely that the market is going to bear a fund. That's more than about twenty million dollars. Apps in a case where you have some are preexisting relationships with large sources of capital and the 15 to twenty million dollar fund is probably enough to build a very small portfolio with small check sizes. And I think that's probably the realistic number. If you were a first time fund, but not a first time manager, The market will likely bear something a little bit north of that, assuming, of course, you've had a good track record and you have the ability to demonstrate that in the deals that you've done in the past where you've been successful are consistent with the, with the hypothesis of the new fund that you're raising. And in those cases, the fund sizes are any, anywhere between 30 and forty million, but it's, it's largely a function of the market and it's largely a function of your strategies. If you are a post seed fund and are in writing bigger checks and want to be deeper in the stack, a fifteen million dollar fund just doesn't work. And so you have to really think carefully about your portfol…

AI assessment note: “the 15 to twenty million dollar fund is probably enough”

Q Wow, fantastic. And did you know then from the offset that it was the career for you, or did it take some time to get used to it?

A I, it took me a while. I, it wasn't until probably 2004, 2005 that I decided I actually liked working within venture and tech. If you think about it, I, you know, I started in 99, a year later, the tech bubble burst and, you know, I was looking at the world and saying, what the hell did I get myself into? And, you know, now I look back and, you know, consider that my character building year, but it was tough the first couple of years, sort of going through a, through a downturn. Um, it was, in retrospect, it was a great learning experience. But it was around 2004 when I started, you know, seeing some of the companies I had worked with early on actually scale and become big companies and build, and, and that's when I sort of knew that this is, this was definitely the sort of the path that I wanted to take for the, for the rest of my career.

AI assessment note: “it took me a while. I, it wasn't until probably 2004, 2005”

Q And then one habit that you think is most effective in successfully adding and contributing to your life?

A Yeah, um, well, I'm gonna give you really quickly three. So, number one is every morning spend 20 minutes just reading. Don't check email. Don't, don't, uh, log into the external, external world except for read a book, read something, read an article, read a blog post, whatever. Um, I think it's an incredible way to start the day. Number two, I think, um, you have to spend an hour a week self-reflecting. Disconnect completely from any audio, visual devices. You know, challenge conventional thinking. Challenge your own thinking. Uh, for me, that's been an incredible way for me to sort of stick, get, get out of the, the normal day to day run and actually, you know, do things that I think have been, you know, very, very, uh, you know, interesting and very, um, important to my career. And the third one, which I'm not good at, is, uh, you know, carving out two hours a day where you're just not connecting, you're spending time with family and friends. It's, it's incredibly therapeutic. It's very hard to do.

AI assessment note: “I'm gonna give you really quickly three. So, number one is every morning”

Q Wow, fantastic. And did you know then from the offset that it was the career for you, or did it take some time to get used to it?

A I, it took me a while. I, it wasn't until probably 2004, 2005 that I decided I actually liked working within venture and tech. If you think about it, I, you know, I started in 99, a year later, the tech bubble burst and, you know, I was looking at the world and saying, what the hell did I get myself into? And, you know, now I look back and, you know, consider that my character building year, but it was tough the first couple of years, sort of going through a, through a downturn. Um, it was, in retrospect, it was a great learning experience. But it was around 2004 when I started, you know, seeing some of the companies I had worked with early on actually scale and become big companies and build, and, and that's when I sort of knew that this is, this was definitely the sort of the path that I wanted to take for the, for the rest of my career.

AI assessment note: “it took me a while. I, it wasn't until probably 2004, 2005”

Q And what do you think then of, like, the Maiden Lane's, uh, model where they charge, I think they charge zero percent management fees, but then they charge 30% carry. Is that, is that purely exclusive to Maiden Lane, or are we seeing more micro VC funds have a, have a less management fee and a higher carry?

A Uh, You know, I haven't seen too much of that yet. So, I mean, I think, you know, in general, if you, if you sort of look at all the, the new micro VC firms that have been formed in the last, you know, four to five years, nearly all are between two and two and two and a half percent management fees. I do think we will start to see some that are more carry focused Uh,. I don't know if we'll get to zero percent, but I think uh, we will see some firms raise funds where it's more of like a one in 25, a one in 30. a one And perhaps even higher carry based on hitting some performance metrics.

AI assessment note: “I haven't seen too much of that yet.”

Q Um, I, I have a lot of seed investors and Series A investors on the show, maybe even Series B, but it's quite rare that we get Series C and D, and, and that obviously relates back to the funding barbell. Do you see this, um, massive funding gap in that, uh, stage of the funding cycle, uh, between the seed and then the growth capital that we have now?

A I, I, you know, I think it's a, it's a very astute observation. I mean, I think if you think about it right now, you know, there are, there's a ton of capital at the seed stage, um, you know, vis-a-vis both, uh, institutional seed as well as platforms like AngelList. And there's a lot of capital on the very late growth side, and some of this is coming from non-traditional investors, hedge funds, mutual funds, but if you look at C and D, you know, there are very few investors that, that are actively investing in, in, in sort of that segment, and if you look at the valuations of B, C and D, I'm sorry, B and C companies, The valuations aren't, you know, overly bloated, um, relative to what we see at the, at the very later stage, D and above, and also at the seed level. And so I think, you know, we are seeing, um, an environment right now where I think there's opportunities at that C and D level where, you know, we have companies that have hit product market fit or in scale mode, have great growth metrics, but haven't seen, um, you know, massive upticks in valuation.

AI assessment note: “if you look at C and D, you know, there are very few investors”

Q Okay, and then finally, Micro VC, you, who do you respect the most?

A You know, I don't, I don't know if I have a single person. So I, I mean, I respect anyone that's actually going out and, and raising a first time fund. I think it's incredibly difficult. It's incredibly taxing and challenging. Um, but, but I will answer it to a certain degree and I'll say, I really respect the pioneers of this industry. The, the ones that first took the plunge, you know, folks like Mike Maples and Michael Daring, uh, Steve Anderson, Jeff Clavier, uh, Um, they started the micro VC trend and they started raising these small funds when it wasn't even a thought. Um, so I have a lot of respect for what they've done to within sort of the industry. And number two, this is more general comment. I respect, uh, any VC, any micro VC that, um, fundamentally is just, it has an authentic desire to help the innovation community, um, and stays humble about it. I think that's an incredibly tough I think for a lot of people in this industry to do, but staying humble and just trying to help, I think it is, uh, is something, you know, I look for, and there's guys like, uh, Ashmeet Sedano, Jeff Clavier, that, that have sort of embodied that in my mind.

AI assessment note: “folks like Mike Maples and Michael Daring, uh, Steve Anderson, Jeff Clavier”

Q And now you're at First Republic, so how did that move come about from, was it straight from Silicon Valley Bank to First Republic, or was there an inter-gap?

A No, there wasn't an inter-gap. Um, so I spent 13 years at Silicon Valley Bank. My first 10 years were working with technology companies, primarily Series A, Series B companies, you know, providing them things like venture debt. Uh, in 2009, uh, you know, post Lehman and Bear Stearns and the world blowing up, You know, post the housing bubble collapse, um, you know, I moved to the venture group at Silicon Valley Bank, uh, did that for about four years, and then decided to make the move to First Republic along with a few other Silicon Valley Bank employees, and, you know, my, my role right now is really focused on leading our team, um, as it relates to early stage VC, a lot of micro VC, as well as, uh, you know, working with early stage tech companies.

AI assessment note: “No, there wasn't an inter-gap. Um, so I spent 13 years at Silicon Valley Bank.”

Q And we've seen an explosion, as we said, of, of this sector and, and the real growth of the funding barbell. So why do you think there has been this big growth? What are the drivers of this micro VC sector, do you think?

A Well, you know, it's, uh, it's, it's a very accurate term. So you use the word explosion, and it's been nothing short of that. So when I started really, really focusing on this space about five or six years ago, there was a handful, maybe a dozen, maybe a couple dozen micro VC firms. Today there's close to 300, um, you know, globally, of which 225 are here in the U.S., um, and there's another 50 to a hundred that are fundraising. And so explosion is the right word. It's been this exponential growth curve. I think there's a few reasons. Um, you know, the biggest reason really stepping back to what we've seen over the last 15 years, which is capital efficiency of startups. Um, today startups can get off the ground at one 100th of the cost of what they had to, uh, to sort of, uh, encounter back in 99 or 2000. And so a small 250,000 or 500,000 dollar check is actually meaningful. And as a micro VC, you can run a fund that's twenty five million dollars, build a diversified portfolio by just investing small tax. And so the viability is there now because the, the cost of starting companies has come down so far. Uh, the second thing, you know, and this is something I observed back in 2009, I think everyone did, which is, you know, the performance of the venture industry over the past, you know, decade, decade and a half had been pretty bad. So if you look at 99 to two, uh, 2002, the av…

AI assessment note: “I think there's a few reasons. Um, you know, the biggest reason... capital efficiency”

Q Awesome. Well, let's, let's dive into the world of micro VC then. So we often hear the term micro VC itself bandied around. Are there any common characteristics and criteria that we can attribute to micro VCs that discern them from traditional VCs?

A Yeah, I, you know, and, and, you know, I'll say this first, and I think the, uh, the term micro VC probably isn't the best term. I, you know, I'm not a big fan of it, um, but for lack of a better term, at least for this interview, we'll use it. Um, the common characteristics of what people consider micro VCs are firms that are raising funds that are sub a hundred million dollars, typically 25 to 50, uh, no more than about three partners, so usually one or two. And, uh, and fundamentally are focused on investing in the seed stage. In terms of distinctive characteristics, I mean, I think the two observations I've made within the micro VC market, one, micro VC GPs tend to be very collegial, which is a little bit different than if you think about the traditional, you know, sandhill venture capital firms that are investing across life cycles that tend to have sharper elbows and are very ownership driven. Um, and then number two, I, I've just found the micro VC market to be very entrepreneurial, and so a lot of the, uh, the VCs that are starting are really just running startups, um, with, um, the difference of just, instead of writing codes like their, their companies do, they're just writing checks.

AI assessment note: “common characteristics of what people consider micro VCs are firms that are raising funds that are sub a hundred million”

Q I often hear with regards to the second fundraise and fund two, managers having kind of significant RRR and big upticks on some of the companies in their first portfolio. I'm intrigued. How much of a role does that play in LP willingness to either commit or recommit? And is it really, as Chris Duvall says, really all about the mula in the cooler, so to speak?

A Yeah, I mean, it's tough because, right, if you go out to fund two, if you look at the normal fundraising cycle for most of the funds, it's two to three years. And two to three years with a seed sort of focus is It's unlikely you're going to see a lot of dollars back. Distributions aren't going to come, and the best distributions for the biggest companies likely won't come for seven to 10 to 12 years. So what you're dealing with as an LP looking at a second fund is, did the manager execute on their hypothesis? Have they invested in companies that seem interesting? I'd say in the past, maybe 2013, 14, and 15, IRR multiples meant a little bit more. Right now, Quite candidly, it's, it's a little bit meaningless and it's more qualitative in function. So if we see a manager that's, you know, tracking at a 1.3 X, that's fine. But the reality is it means very little. And in a market where a lot of companies have gotten series A's upticks, you know, it's kind of the price of admission, but it's not going to drive LP behavior that much. It's more a function of, are you executing as a manager? And have you proven yourself to be somebody that can run an institutional franchise? With respect to a lot of the funds that have raised 10 or 15 or twenty million, in the past, the thought was you raise a fund one of that size. It serves as a proof of concept. You go out and raise fund two, and th…

AI assessment note: “it's kind of the price of admission, but it's not going to drive LP behavior”

Q How do you think about signaling within a family office and kind of LP co-investment rights and why they're seeing those deals and potentially getting into them?

A Yeah, I, it's a good question. I think that, I think it's a bad idea, to be honest with you, and I'm going to get a little bit on, on a soapbox. I think too many people think that investing in venture is easy. It's not, and if you look at the history of venture funds that have been successful, even the venture funds that are the best, they are not producing top decile returns fund after fund, and so when I see family offices that are putting a lot of money in direct investments without a lot of background, you know, it does scare me, and I think that To me is one of the big risk factors that I see right now, which is you have these micro funds that are raising money from, from family offices that are promising co-invest rights. Those co-invest rights are often used because the micro funds are big enough to take on the pro ratas. But candidly speaking, the vast majority of high net worth individuals and family offices should not be doing direct investments. It's too hard. There's too many red flags that are sitting on the horizon. And I think it's going to end badly for a lot of people.

AI assessment note: “the vast majority of high net worth individuals and family offices should not be doing direct investments”

Q How do you think about signaling within a family office and kind of LP co-investment rights and why they're seeing those deals and potentially getting into them?

A Yeah, I, it's a good question. I think that, I think it's a bad idea, to be honest with you, and I'm going to get a little bit on, on a soapbox. I think too many people think that investing in venture is easy. It's not, and if you look at the history of venture funds that have been successful, even the venture funds that are the best, they are not producing top decile returns fund after fund, and so when I see family offices that are putting a lot of money in direct investments without a lot of background, you know, it does scare me, and I think that To me is one of the big risk factors that I see right now, which is you have these micro funds that are raising money from, from family offices that are promising co-invest rights. Those co-invest rights are often used because the micro funds are big enough to take on the pro ratas. But candidly speaking, the vast majority of high net worth individuals and family offices should not be doing direct investments. It's too hard. There's too many red flags that are sitting on the horizon. And I think it's going to end badly for a lot of people.

AI assessment note: “I think that, I think it's a bad idea, to be honest with you”

Q Before we dive into the quickfire, you said one word there, which really resonated with me, and you've said it to me before, and it's franchise. And you've stated there's a difference between raising a fund and starting a firm and building a franchise. So how do you differentiate between the two?

A I ask this question a lot to managers I meet, which is, why are you doing this? And what is your goal in raising a fund? And a lot of people say, look, I've had a long history in investing in startups. I want to help startups. And I think, given my unique, whatever it is, differentiation, value add, that I think I can actually do well in raising a fund. And that's fine, but I think it gives rise to a lot of hobbyists, which is, it seems cool to raise money, invest in companies, but actually raising a, and starting a venture franchise is completely different. Raising a venture franchise means you want to do this for the next 20 to 25 years. You want to create a brand. You want to actually, you know, create something that is Incredibly compelling for your stakeholders, which are both your entrepreneurs and your LPs, and you have long-term viability that you've thought about. And I find a lot of people want to raise a fund, but don't necessarily want to do a full venture franchise, nor really understand what it takes to, to actually start and subsist with running a venture firm for five, 10, 15, 20 years. There's a lot more than just investing in companies in running a venture franchise. A lot of which, you know, some of the people raising funds right now just don't want to do.

AI assessment note: “Raising a venture franchise means you want to do this for the next 20 to 25 years.”

Q And what do you think then of, like, the Maiden Lane's, uh, model where they charge, I think they charge zero percent management fees, but then they charge 30% carry. Is that, is that purely exclusive to Maiden Lane, or are we seeing more micro VC funds have a, have a less management fee and a higher carry?

A Uh, You know, I haven't seen too much of that yet. So, I mean, I think, you know, in general, if you, if you sort of look at all the, the new micro VC firms that have been formed in the last, you know, four to five years, nearly all are between two and two and two and a half percent management fees. I do think we will start to see some that are more carry focused Uh,. I don't know if we'll get to zero percent, but I think uh, we will see some firms raise funds where it's more of like a one in 25, a one in 30. a one And perhaps even higher carry based on hitting some performance metrics.

AI assessment note: “I haven't seen too much of that yet.”

Q Absolutely. And I guess the question then from this chat is, is this explosion good? I mean, obviously it's brilliant for the startups. Uh, there's a lot of liquidity around, but I mean, obviously it's tricky for the venture firms. There's a lot more competition. And is it good for the ecosystem, do we think?

A I think, I mean, I, you know, I, I sort of vacillate between the two in terms of, if I'm thinking from an LP's perspective, I don't, I, I think a very few percentage of these micro firms are going to produce the type of returns expected. Um, and I, I think it's going to hit sort of the normal distribution of which, you know, 10 to 20%, you know, have, have a nice, uh, return model. The rest are going to, you know, sort of disappoint. But, you know, to me, the more important thing is, um, is what it does for the innovation economy, which I think is far more important. And so you sort of noted that, you know, there are more funding sources for these early stage companies of all types and sizes to be able to, um, leverage, you know, early institutional capital. And I think that in itself far outweighed any sort of negatives of having too much money come in.

AI assessment note: “far outweighed any sort of negatives of having too much money come in”

Q mean, I think what's very interesting is actually also a model that I've seen emerge is with like notation capital, uh, with Nick Charles and then, uh, Paige Craig with Arena VC, they have the kind of mutual coexistence of the fund and Angel List Syndicate together, which is quite an interesting one. I mean, what other, then, trends and kind of emerging themes have you seen in the space?

A Yeah, I mean, over the past couple years, right? So we've seen this explosion. People have had to adapt. There's, there's been a few things, right? I think there's a clear bifurcation actually within sort of the, the micro VC market. You know, as I mentioned, you know, nearly half of the firms are 25 and under. They tend to be, you know, proof of concept funds. Um, they tend to be, you know, part of a syndicate, not leading rounds. And then on the other side of the barbell, you have sort of a lot of the first-generation folks, like Felisa's Ventures, Floodgate, that have become bigger, um, and have been, and in a lot of ways, look and feel like full-stack VCs in terms of, you know, taking board seats, leading rounds, investing deeper into the cycles, and actually, um, you know, investing out of the fund, you know, uh, you know, across not only the A round, but oftentimes the B and C rounds. So that's one. Uh, the other thing I'm seeing right now is, um, As firms continue to try to be differentiated in this industry, again, there's 300, that's a lot, is that we're, we're seeing, um, differentiation through thematic and vertical focus. So, you know, now, not every micro VC fund is a generalist. I think first generation, almost every micro fund was a generalist. Now we're seeing, you know, funds that are very focused on certain segments, whether it be B to B, whether it be, You kn…

AI assessment note: “I think there's a clear bifurcation actually within sort of the, the micro VC market.”

Q Um, I, I have a lot of seed investors and Series A investors on the show, maybe even Series B, but it's quite rare that we get Series C and D, and, and that obviously relates back to the funding barbell. Do you see this, um, massive funding gap in that, uh, stage of the funding cycle, uh, between the seed and then the growth capital that we have now?

A I, I, you know, I think it's a, it's a very astute observation. I mean, I think if you think about it right now, you know, there are, there's a ton of capital at the seed stage, um, you know, vis-a-vis both, uh, institutional seed as well as platforms like AngelList. And there's a lot of capital on the very late growth side, and some of this is coming from non-traditional investors, hedge funds, mutual funds, but if you look at C and D, you know, there are very few investors that, that are actively investing in, in, in sort of that segment, and if you look at the valuations of B, C and D, I'm sorry, B and C companies, The valuations aren't, you know, overly bloated, um, relative to what we see at the, at the very later stage, D and above, and also at the seed level. And so I think, you know, we are seeing, um, an environment right now where I think there's opportunities at that C and D level where, you know, we have companies that have hit product market fit or in scale mode, have great growth metrics, but haven't seen, um, you know, massive upticks in valuation.

AI assessment note: “if you look at C and D, you know, there are very few investors”

Q And you mentioned that AngelList, um, what effect have you seen AngelList having on the micro VC environment?

A You know, not too much yet. So, I mean, it's, it's still early. The amount of, uh, capital in the platform is still fairly low, although we're seeing much more of it now. Uh, you know, I think it's been augmentative. I think it's very difficult still for early, early stage companies to get institutional seed, and so for a company that's, let's call it pre-products, uh, you know, AngelList is a great avenue to get 250,000 or 500,000 dollars. Uh, I, You know, over time, we will see how it evolves. I actually do think that, um, Angelus is going to play a more prominent role, you know, across all, you know, cycles, not just the, the seed cycle, but I think it's going to be in fits and spurts. I don't think it's going to be linear. I think if you think about the type of investors investing, a lot of our, a lot of people investing on Angelus are tourist investors, or they're investing during a very good time, but if the market turns and if there is a contraction at some point, A lot of those investors are going to retract. Um, so, you know, again, I think it's going to be a more prominent thing. I think it's actually very complimentary to, to venture versus looking to completely disrupt and eliminate it. Um, I also do think that, you know, if you think about some of the micro VCs out there, I think the next generation of sort of these proof of concept funds that are, you know, five o…

AI assessment note: “You know, not too much yet. So, I mean, it's, it's still early.”

Q Absolutely. And I guess the question then from this chat is, is this explosion good? I mean, obviously it's brilliant for the startups. Uh, there's a lot of liquidity around, but I mean, obviously it's tricky for the venture firms. There's a lot more competition. And is it good for the ecosystem, do we think?

A I think, I mean, I, you know, I, I sort of vacillate between the two in terms of, if I'm thinking from an LP's perspective, I don't, I, I think a very few percentage of these micro firms are going to produce the type of returns expected. Um, and I, I think it's going to hit sort of the normal distribution of which, you know, 10 to 20%, you know, have, have a nice, uh, return model. The rest are going to, you know, sort of disappoint. But, you know, to me, the more important thing is, um, is what it does for the innovation economy, which I think is far more important. And so you sort of noted that, you know, there are more funding sources for these early stage companies of all types and sizes to be able to, um, leverage, you know, early institutional capital. And I think that in itself far outweighed any sort of negatives of having too much money come in.

AI assessment note: “I think that in itself far outweighed any sort of negatives”