The Exchanges

Q Now I want to just start with some intros. So can you first just explain a little bit about who you are, what firm you founded, and then where you focus in particular? Let's start there. And, and Terrence, why don't we start with you, given the fact David's done this twice before.

A Sure. So hello, my name's Terrence. Um, I'm a seed investor. Um, I've been fortunate over the past. 10 to 15 years to back some incredible founders, um, at the earliest stages. Figma, Notion, Hugging Face, uh, Vanta, Robinhood, um, Patreon, Front, just, just to name a few. Started off my tech career originally at, at Google. I was there oh five to, to oh 10. I did various product development and product marketing roles. Um, and then started professionally investing in 2010. I joined, um, Index Ventures, actually joined over in London and led and managed to see practice for them for seven years. Incredible experience. Did that both in, um, both in, uh, in London for a short stint and then in San Francisco. We did incredible work. Super proud of it. Um, and you know, Part of my role there, I was fortunate to give, you know, they gave me a lot of rope to innovate, and one of the, one of the things that I innovated on was actually giving capital to founders to invest, and so I incubated a fund, um, for them, um, which later was the genesis, um, for Otherwise. So, Otherwise is the fund that I invest out of. The model is we give capital to, um, a network of top founders, and they discreetly make multi-stage investments. Actually, venture investments, primarily at seed. Don't publicly talk about the fund or the strategy. So I'm going to hold to that, but I'm really happy to talk about…

AI assessment note: “Otherwise is the fund that I invest out of... I write 250 K checks”

Q another, but I tried for too long. To be someone that I wasn't as an investor, and I wish I hadn't wasted those years, so I totally agree with you. Can I ask, Terence, you said before the show, the seed market is total jump ball right now, and the most ripe for disruption. What did you mean by jump ball, and why does it make it ripe for disruption?

A Sure, so I think this actually applies to both the seed and the venture, and, um, and I think we've got like three long trends Coming. And then one, one kind of really recent one that's just really creating a absolutely really unique market right now. So I think the long trends are, if you look at like the funds, you know, the expansion and the fragmentation of, of, of both the seed and the venture market. It's the story we know and well, new, new managers, all that kind of stuff. So that, that, but that's been a trend maybe 10 years in the making. Another trend that's kind of 10 years in the making is generational change. Um, so you're having storied funds with storied partners. They're kind of riding into the sunset. You know, it's unclear, and I think this is both true sometimes even at the, at the, at the Series A and even at the Seed. It's, it's, it's unclear, like, who's going to, you know, take the reins. There's some young partners. They've got a, you know, really great, like, generational resonance, but maybe not the track record experience. So that, that's another, that's another trend. And then I think another trend that's kind of, you know, very fascinating is if you really look at like founders and in the, for lack of a better term, like the power and the optionality that they have now, it's, it's really shifted. Like when they, you know, 10 years ago when they wer…

AI assessment note: “we've got like three long trends Coming. And then one, one kind of really recent one”

Q You don't do secondaries. Wow. Terence, do you? And do you not think secondary will be an ever increasing part of early stage managers providing liquidity back in a time when liquidity is really appreciated?

A As a general rule, no. Um, No on secondaries. I do think you need to kind of hold to, to really make the fun math work. I think you just need to hold. I do believe secondaries. I mean, if you look at the charts of it, like what it's been doing, talk about something that's been compounding, like the secondary market has been slowly compounding. And just like the amount of LPs are willing to do it now, the, um, you know, these various organizations that email you every day about this company and that company, they're, they're, they're, they're compounding. Um, you know, the VC funds becoming registered, right? You know, and so now they can, now they can buy more, more common stock as a result. So I, I, I think sec, you know, if the MNA market does contract, um, you know, we'll see if that's like really long-term, but maybe I do believe the secondaries are going to, are going to be, um, a really robust option. Um, and then yeah, the company's at five, ten billion dollar valuation and you want to sell off some portion of it as a seed investor. I don't think from like a relationship standpoint, I think if a company's at a certain level, selling off a tiny bit is, is, is fine. I think if you're like wholesale, you know, as a seed investor, if you're wholesale taking the position off at like series B, that's weird. Companies at ten billion and you're taking off 20% of your position. I…

AI assessment note: “As a general rule, no. Um, No on secondaries.”

Q What's your biggest advice to managers out raising today?

A Biggest advice to, uh, is just, uh, I think that the, like the cold water plunge, just the shock to the system for any seed manager is that we live in this. Our front office job is so fast and it's like deals get done very, very, very quick. Like, and you're just used to this, like introduction to meeting, being within days decisions, this all, and you think like, that's the world that capital moves, but there's this whole other world, which is the LP world. And. They're patient, and you get an introduction, and their first meeting might not be for three months, and you just gotta just, like, this is gonna take a really long time. There's a different sort of protocol and culture around this, and it's going to be hard. It's not hard in terms of, like, intellectually hard. You're just gonna get hundreds and hundreds of no's, and you just have to slowly crank the turn, and it's just realize that fundraising, especially fun ones, can take time, and you have to be patient. 12 to 18 months is fine. People not meeting with you for a couple months is fine. People taking, you know, months if not sometimes a half a year to reach a decision is fine. It's not even fine. It's normal, right? And, and I think that's like the, I think that's like the hardest thing to understand if you're a hungry angel investor who's never, who's only dealt with like the front office, like the back office just…

AI assessment note: “realize that fundraising, especially fun ones, can take time, and you have to be patient.”

Q Do you have a reserves model, Terence? How do you think about that?

A No, I don't think Provocatively, and maybe we might get a little bit of tension here, David, opportunity funds, but the, the, on balance, I don't think reserves and follow ons, I think it actually hurts seed investing and it hurts seed investing in two ways. One is, um, it depresses DPI. So on the financial side, how does it do that? You know, you're getting into company, you know, you have whatever, a dollar to invest primary dollar for follow on. Maybe even a dollar 50. So even if you look at all that on a dollar basis, you're almost more of a growth fund there. But anyway, that's an aside. So you're taking capital and you're trying to put it into series eight companies. There is adverse selection there that the best companies sometimes are really difficult to get in. That's not to say that you won't get in because, you know, legal pro rata and all that, but will you get haircuts? Absolutely. Um, just like everyone else is getting a haircut. So now less dollars are going into the, into the right companies. Then you also have this re weird compounding factor that just because it raises hot series A, that might not be the right company into this idiosyncratic walk in seed that sleeper that kind of went from C rate is a nothing series A and also explodes at series B. And, you know, anyway, so, so there, there's all these confounding factors that I think on balance, if you just d…

AI assessment note: “No, I don't think reserves and follow ons, I think it actually hurts seed investing”

Q What's your biggest advice to managers out raising today?

A Biggest advice to, uh, is just, uh, I think that the, like the cold water plunge, just the shock to the system for any seed manager is that we live in this. Our front office job is so fast and it's like deals get done very, very, very quick. Like, and you're just used to this, like introduction to meeting, being within days decisions, this all, and you think like, that's the world that capital moves, but there's this whole other world, which is the LP world. And. They're patient, and you get an introduction, and their first meeting might not be for three months, and you just gotta just, like, this is gonna take a really long time. There's a different sort of protocol and culture around this, and it's going to be hard. It's not hard in terms of, like, intellectually hard. You're just gonna get hundreds and hundreds of no's, and you just have to slowly crank the turn, and it's just realize that fundraising, especially fun ones, can take time, and you have to be patient. 12 to 18 months is fine. People not meeting with you for a couple months is fine. People taking, you know, months if not sometimes a half a year to reach a decision is fine. It's not even fine. It's normal, right? And, and I think that's like the, I think that's like the hardest thing to understand if you're a hungry angel investor who's never, who's only dealt with like the front office, like the back office just…

AI assessment note: “fundraising, especially fun ones, can take time, and you have to be patient.”

Q You don't do secondaries. Wow. Terence, do you? And do you not think secondary will be an ever increasing part of early stage managers providing liquidity back in a time when liquidity is really appreciated?

A As a general rule, no. Um, No on secondaries. I do think you need to kind of hold to, to really make the fun math work. I think you just need to hold. I do believe secondaries. I mean, if you look at the charts of it, like what it's been doing, talk about something that's been compounding, like the secondary market has been slowly compounding. And just like the amount of LPs are willing to do it now, the, um, you know, these various organizations that email you every day about this company and that company, they're, they're, they're, they're compounding. Um, you know, the VC funds becoming registered, right? You know, and so now they can, now they can buy more, more common stock as a result. So I, I, I think sec, you know, if the MNA market does contract, um, you know, we'll see if that's like really long-term, but maybe I do believe the secondaries are going to, are going to be, um, a really robust option. Um, and then yeah, the company's at five, ten billion dollar valuation and you want to sell off some portion of it as a seed investor. I don't think from like a relationship standpoint, I think if a company's at a certain level, selling off a tiny bit is, is, is fine. I think if you're like wholesale, you know, as a seed investor, if you're wholesale taking the position off at like series B, that's weird. Companies at ten billion and you're taking off 20% of your position. I…

AI assessment note: “As a general rule, no. Um, No on secondaries.”

Q Can I ask you, Terence, speaking of, like, the zone of clarity to make investments from, you know, you obviously have a founder-led model in terms of the investors on the front lines. Why do you think founders make better investors?

A So the otherwise models, there, there, there, there's two. There's the founders making the investments, and there's myself making the investments. The founders making the investments, I, I think it's a really simple, I mean, I mean, CPIC win. They're, they're, the, the C is off the charts. I mean, they're, they're, they're out to dinner. They're in their, Their chats, like the amount of like founder community and camaraderie is just, is, is, is incredibly high. And there is, and there is differentiation in alpha. They're a hundred percent. So, so they see, and then they also win, right? So you could just take those two pieces of like, let's just, let's just take picking outside, pull it out for a second, but just seeing and winning there, they are a standard deviation ahead of David and I, and we just have to add.

AI assessment note: “just seeing and winning there, they are a standard deviation ahead”

Q Well, my question was, you know, do you think you can even pick the winners at such an early stage? I just think it's like.

A But that's, but that's, but I think that's, that's the point. I think it, you know, post series B, these things become not only like, they become painfully obvious and it's picking is not the thing. It's just access, right? I mean, you just, you know, so, um, up to series A, I mean, up to series B, it's super hard, right? And so you're, you're, you're really putting a tremendous amount of capital On this really, really hard game and a game that if you're doing the job well, which like David articulated, it's, it, it, it's a totally different game than, you know, whatever running cohort analysis or customer reviews and all this kind of jazz, which is, which is a little bit more in the later stage. So I don't do it. Um, yeah. And, and, and I think it's, I think it's a net benefit. I do think it is a hangover of. There's some conventions that LPs want to hear. Um, some of them have good rationale. Some of them I think can be fairly questioned. Um, but like the convention is have 30 to 50 shots on goal. Have a reasonable reserve strategy. So be concentrated, have some reserves. Like you go to talk to that to an LP. They don't, they don't think right. If you say, Hey, listen, we're going to do no reserves or maybe have larger portfolios. Like you're getting out of outside that those norms and they're harder conversations. And because they're harder conversations, a lot of managers s…

AI assessment note: “up to series B, it's super hard, right? ... So I don't do it.”

Q another, but I tried for too long. To be someone that I wasn't as an investor, and I wish I hadn't wasted those years, so I totally agree with you. Can I ask, Terence, you said before the show, the seed market is total jump ball right now, and the most ripe for disruption. What did you mean by jump ball, and why does it make it ripe for disruption?

A Sure, so I think this actually applies to both the seed and the venture, and, um, and I think we've got like three long trends Coming. And then one, one kind of really recent one that's just really creating a absolutely really unique market right now. So I think the long trends are, if you look at like the funds, you know, the expansion and the fragmentation of, of, of both the seed and the venture market. It's the story we know and well, new, new managers, all that kind of stuff. So that, that, but that's been a trend maybe 10 years in the making. Another trend that's kind of 10 years in the making is generational change. Um, so you're having storied funds with storied partners. They're kind of riding into the sunset. You know, it's unclear, and I think this is both true sometimes even at the, at the, at the Series A and even at the Seed. It's, it's, it's unclear, like, who's going to, you know, take the reins. There's some young partners. They've got a, you know, really great, like, generational resonance, but maybe not the track record experience. So that, that's another, that's another trend. And then I think another trend that's kind of, you know, very fascinating is if you really look at like founders and in the, for lack of a better term, like the power and the optionality that they have now, it's, it's really shifted. Like when they, you know, 10 years ago when they wer…

AI assessment note: “creating a absolutely really unique market right now”

Q Do they even need to win, though, because they're not competing, are they?

A Well, we write small checks, and, and yeah, I mean, well, sure, I mean, sometimes, like, the rounds are closed, or there is, like, do I take, do I take this founder's money, or box group, you know, you know, what I mean, there, there, there are some times at, at, at, at, you know, on the edges, tight situations, and, and, and, and, and I think, You know, founders of exceptional companies with exceptional reputations, they, they, they, they see and win without exception. And I would even argue that they're, they're very, very good at picking. And I'll tell you why, like most founders are just investing in people they know or in things they know. And then, and then, and then I, that I do think that because they're, they're either investing in their, in their networks. Or they are being sought out by someone building an analogous company, or that's someone in their domain. Founders are rarely chasing heat at YC Demo Day at some random thing, and you know, they're, they're not playing that game. They're, they're, they're playing a very, not always, but I'm saying unbalanced, and I think, so, so I think you combine that, that unfair scene, that natural high accuracy picking, and that winning, Uh, they, they, they are very, very good investors.

AI assessment note: “there are some times at, at, at, at, you know, on the edges, tight situations”

Q Do they even need to win, though, because they're not competing, are they?

A Well, we write small checks, and, and yeah, I mean, well, sure, I mean, sometimes, like, the rounds are closed, or there is, like, do I take, do I take this founder's money, or box group, you know, you know, what I mean, there, there, there are some times at, at, at, at, you know, on the edges, tight situations, and, and, and, and, and I think, You know, founders of exceptional companies with exceptional reputations, they, they, they, they see and win without exception. And I would even argue that they're, they're very, very good at picking. And I'll tell you why, like most founders are just investing in people they know or in things they know. And then, and then, and then I, that I do think that because they're, they're either investing in their, in their networks. Or they are being sought out by someone building an analogous company, or that's someone in their domain. Founders are rarely chasing heat at YC Demo Day at some random thing, and you know, they're, they're not playing that game. They're, they're, they're playing a very, not always, but I'm saying unbalanced, and I think, so, so I think you combine that, that unfair scene, that natural high accuracy picking, and that winning, Uh, they, they, they are very, very good investors.

AI assessment note: “there are some times at, at, at, at, you know, on the edges, tight situations”

Q Can I ask you, Terence, speaking of, like, the zone of clarity to make investments from, you know, you obviously have a founder-led model in terms of the investors on the front lines. Why do you think founders make better investors?

A So the otherwise models, there, there, there, there's two. There's the founders making the investments, and there's myself making the investments. The founders making the investments, I, I think it's a really simple, I mean, I mean, CPIC win. They're, they're, the, the C is off the charts. I mean, they're, they're, they're out to dinner. They're in their, Their chats, like the amount of like founder community and camaraderie is just, is, is, is incredibly high. And there is, and there is differentiation in alpha. They're a hundred percent. So, so they see, and then they also win, right? So you could just take those two pieces of like, let's just, let's just take picking outside, pull it out for a second, but just seeing and winning there, they are a standard deviation ahead of David and I, and we just have to add.

AI assessment note: “seeing and winning there, they are a standard deviation ahead of David and I”