116. Index Investing, Mastering Dealflow & Seeing Everything at Series A, Part 1 (Galen Mason & Brian Axelrad)
Galen Mason & Brian Axelrad of Service Provider Capital join Nick to cover Part 1 of their unique approach to using service providers to source high volume dealflow, LPs and to employ an index investment fund strategy. We will address questions including:
- How did your experience as attorneys reveal an opportunity in startup investing?
- Can you tell us the story of how you first began thinking of the SPC model and implementing it in the midwest?
- Can you explain the basics of the Service Provider Capital investment model?
- So are LPs primarily made up of service providers?
- What is your investment criteria?
- Do you consider this an index strategy… why or why not?
- What are the top 10 categories of service providers and which types of service provider have made the best partners?
- Service Provider Capital
- Galen on Twitter
- Brian on Twitter
- Part 2 of the interview with Galen and Brian
Nick: Today #Galen Mason and #Brian Axelrad join us from Chicago. #Brian and #Galen are Co-Managing Directors of #Service Provider Capital and practice law by day. #Galen is also Founder of #Catapult, a very prolific incubator here in Chicago. And in addition to managing #SPC, #Brian also runs a small impact fund and teaches at the #Chicago Booth School of Business. #Galen and #Brian, thanks for making the time today.
Brian : Thanks for having us.
Galen : Thanks a lot. It’s good to be here.
Nick: Yeah, so I’ve been very intrigued by the story, #Galen, you and I have, have known each other for some time, #Brian, we just met. But the #Service Provider Capital model is, is very unique. So I’m excited to dive deep today. But before we jump into the topic, can you each kind of walk us through your backgrounds and how you became involved in venture?
Galen: Sure. Yeah, the uniqueness of #Service Provider is what I think drew #Brian and I to it as well. So we’re looking forward to talking about it. You know, I am an attorney by trade. As you mentioned, I’m one of the co-founders of #Catapult. So between being a, a counselor and advocate to companies in this space and then helping form a co-working space that is really focused on getting them, getting early stage companies, or as I kind of think about it is people doing really interesting things. The resources that they need investing in them, doing some of that personally and then in a more organized way was kind of a natural evolution.
Brian: Yeah and I, so I think #Galen and I are good compatriots in part because we both are lawyers that don’t feel like we really all the time want to be lawyers. And so, you know, I started my career at a big firm doing traditional corporate attorney stuff. And kind of gave up on practicing law for a bit, tried to get into venture capital on the investor side. That’s how I got into impact investing. And, you know, eventually found my way back to practicing law but have done it now with a focus on technology startups and venture capital. And I think I kind of got a really awesome opportunity to learn venture capital from people around town, at the time when Chicago didn’t quite have the same community of startups in tech. And then as I moved over to the legal side, it was to help build that. And I think that’s something that #Galen and I both have in common is, you know, despite being lawyers and spending time in documents and things like that and helping other people, we’re both sort of builders at heart. And that’s probably why I think it resonated with us to do #Service Provider Capital because now we’re building a fund. So it’s really exciting. And it’s good to be an entrepreneur as well as being a lawyer at the same time.
Nick: And when did you start the, the impact fund?
Brian: So I got involved at the beginning of 2011. So it’s been probably five and half years now I think that is almost six. And it was a originally a private foundation for a couple that was doing impact investing with their own capital, and then they decided to, to move it to something that would raise money from others and build a team around it to build out their infrastructure from an investment standpoint. So I was, I was their first sort of team member that joined, and have been sticking around ever since.
Nick: Awesome! And then, #Galen, can you tell us a little bit about the, the #Catapult story? I think I first visited #Catapult, by the way, in what, what year was it, three years ago. Three years ago and it was a thriving community at the time, wonderful company. It felt like they were sort of some of the graduates of the tech community, not the early stage bread board solutions but, but well established companies. Met with a brilliant set of founders from a company called #Scholastica over there
Nick: who I have reconnected with recently,
Galen: Good, great guys
Nick: but yeah, can you tell us more about the #Catapult story, you know, where that all came from and how it’s evolved?
Galen: Yeah. So, so #Catapult, boy, I, I guess on it’s surface to those that haven’t heard about it, it, it’s a co-working space type incubator. So that means there’s, there’s companies that come there, they work there for a time and then they, they leave. Typically they’re either doing very well and growing out of #Catapult or they’re, they’re, they’re not making it and they’re throwing in the towel. But #Catapult, it’s, it’s a part of a much bigger trend in all the co-working spaces. Some of the things that I think really set #Catapult apart are it’s a not for profit, so it’s a physical space. It’s supported by relatively low rent from the companies that are there. And then also by the, a number of service providers in, in the market that ultimately work with and want to work with these growth companies. So lawyers, accountants, web design, real estate, a number of folks where they don’t want to throw up a billboard, they’ll say hey we’ll help build this space. I, I say from their perspective when I’m selling things to them, I usually say hey, help us build the barrel that you’d not only shoot the fish in but the fish want to jump in because it’s such a great place. And so I think some of the distinctions too for #Catapult has been that it’s for companies that have shown a little bit of business traction, and what does that mean leads us really to I think the most important differentiator for #Catapult companies, which is peer selection. So
Galen: in thinking through, I’ve always felt that the midwest has a bit of a maybe a network effect problem. If you’re, if you’re in the space long enough and certainly years ago, you hear a lot of people, you know, the, the founders would say there’s no money, you know, this place is terrible, these investors don’t get it. And then you’d sometimes hear investors say well there’s no one’s doing anything worth investing in, right. And so we had a network effect problem where, you know, how do you get started, what do you get going? And others are solving things in a different way. There’s #1871 really creating an atmosphere when there’s so much going on now. But at the, at the time, and I think to this day, our theory was creating just a relentless focus on, or as best as we can certainly, creating a group of the best founders and the best companies. And so that doesn’t mean they have to work with any of our service providers, doesn’t mean they have to meet their neighbors. But by putting those folks collectively together, and those that have already shown a little bit of traction, and letting them choose one another, we felt like we were able to come up with Chicago, the midwest, so a kind of PayPal mafia. So that’s the quick overview of the design. And, you know, those companies have raised, god the last track was a hundred and maybe now at a hundred and twenty million, something like that, a hundred and ten million in the last 4 years in terms of venture capital. So they’re doing well. And then I think personally, I think it, I think it’s, it’s quite simple where, you know, I grew up in Kansas City, I moved to Chicago because I thought there’d be bigger and better and cooler things. And I didn’t find, you know, the first half decade of my career that, it was okay but I really wanted to find and work with people that were doing more interesting things. So I think myself and a bunch of other service providers around me felt the same way. And we wanted to do whatever we could to make the world here more interesting.
Nick: Well, I do want to transition over to the #SPC stuff, because I think that you guys are doing something more innovative on the deal flow front than, than I’ve seen. I think you’re taking a unique look at how to process deal flow, how to make investments. And I appreciate the fact that you’re willing to do this interview and, and tell us a little bit about the nuts and bolts. So, can you start out with sort of the origin story of the #SPC model, how you guys got turned on to it, and why you decided to implement it here in the midwest?
Galen: Well, why don’t, I’ll, I’ll do a quick , because I think coming from #Catapult is a quick way to explain it and then #Brian probably can explain the model and how he got to it. But, you know, I just mentioned #Catapult has a, a group of service providers that are part of that model. So for a number of years, I had been going around town talking to any service provider that would take the meeting, saying hey this is, this is really cool, we have to do this, look at this, I understand you don’t just want to put up some billboard advertising, come in, roll up your sleeves, work with these folks, this is going to pay off for you. And, oh, by the way, it’s fun as hell. And so, I think in doing that and then working in the space, I had inadvertently put my name around as someone that was connected with service providers. And so when #Noah and #Jody, the, the founders of the #Service Provider concept started calling on Chicago to say who’s involved, I’m sure there were many, many names that were put in the hat, but mine may have come up more frequently because I had probably inadvertently been putting myself in their way. But #Brian can give you the,
Nick: And quickly, can you tell us who #Jody and,
Galen: Yeah, so, so #Noah Pittard and #Jody Shepherd, so they’re the founders of #Service Provider Capital. And they both live in Denver. And they, so the first fund started about two years ago. And it covers the Rocky Mountain region. And they, #Jody by day is a, a venture banker at #Square 1 Bank. And #Noah is a lawyer at a law firm in Denver called #Cooley. And so they are very much themselves are service providers, and #Brian can give you the model in which you kind of see how that fits. But they’ve done a, I think they’ve closed maybe a $3M fund. It’s been up and running for two years, and have done, I want to say 35, 40 investments, last time I spoke with them.
Nick: Great! And #Brian?
Brian: Yeah, so, #Noah and #Jody came to Chicago looking to spin off essentially their fund and do a second fund in the midwest. They’d identified that as the next region they wanted to tackle and replicate their model and find sort of the same type of person in the community that they represented in the Rocky Mountain region. So #Galen mentioned he was on their radar. Somehow I got to be on their radar as well. And I think what’s interesting, you know, #Galen and I, partly I think we’re on, on their radar because of the, the variety of things that we do to get around. You know, you mentioned a few of the things that we both do in the intro. And so I think as I talked to them I was immediately convinced of their model. And we’ll talk about that in a minute. But immediately convinced of their model, what they were doing. I was very intrigued as an investor myself and investing in the fund. But I would definitely say that I was pretty strapped for time and they had to convince me and twist my arm a little bit to, to be willing to, to devote the time to to, to be the, the boots on the ground I guess. And I think where the, the inflection point or the tipping point for me in those conversations, because I must have said no four or five times. And they said look, we’ve got this other guy identified, we’re talking about #Galen, who I’d known of. And I think #Galen had known who I was but we had never met. You know, because you don’t always, as a practicing lawyer in the space, you don’t necessarily always talk to other attorneys if they’re not at your firm. And so they said look, meet with #Galen, let us know what you think. And if you’re still not comfortable doing it at that point, we’ll just basically, we’ll stop bothering you. And I said fine, I don’t have a whole lot to lose other than sitting down with #Galen for coffee. And I want to say we probably had maybe a 30 minutes schedule on the calendar, maybe an hour, but, you know, we met at a Starbucks not too far from here. And we probably sat down and talked for like two hours. And it was an immediate kind of meeting of the minds, both in terms of being attorneys and what we face in the day to day but also kind of what we saw as a vision for #Service Provider Capital, where it could go, the things we could do with it. And I think the thing for any entrepreneur and for people who are part of the early team founders, the biggest thing is going to be who you’re working with and who the team is. And I think, you know, I was sold as much on wanting to try to do this with #Galen as I was, and with #Noah and #Jody, who I liked a lot from the very beginning as well. I think I was sold on the team. You know, an investment of time is sometimes more meaningful than an investment of money. And so I was willing to invest my time in this endeavor partly because of the team behind it and wanting to be part of the team.
Nick: Alright. So let’s get to it. So what, what are the nuts and bolts of this,
Nick: this model and why is it unique?
Brian: So the model, the idea here is sort of centered around the insight that there’s a whole bunch of service providers in the space, as #Galen alluded to before, lawyers, bankers, accountants, insurance brokers, real estate brokers, who, you know, are very invested in the day to day and their time and their clients with the venture capital technology space. And while they can invest their time and they’re very tied to it from a professional sense, they don’t necessarily have the financial investment opportunities. And in the meantime they’re seeing all these companies grow and get excited about and work with on a daily basis. But not necessarily have quite the skin in the game. And every service provider faces a similar set of challenges, which is if they want to invest financially in a client, they have to think about things like conflicts and what that means for their own sort of personal incentives. But also they’re at the mercy of their own client base for their deal flow, so they may not see everything. So my clients would be one window into the, the market, but I wouldn’t necessarily see #Galen’s clients as deal flow or the next attorneys or the next accountants or so on. So you’re at the mercy of your deal flow, so it’s a limited pool. Combined with the fact that if you’re making investment bets, you either invest in all of the them, which for most service providers is not a feasible opportunity to invest in all of them. And also, they’re pretty sizable cheques even at a, you know, 10- $25,000 amount for a service provider to cut cheques one at a time and to deals. You’re going to be pretty heavily invested. So you have to explain to clients that you don’t invest in why you didn’t, when they find out that there were clients you did invest in. You’re writing bigger cheques and all of a sudden it’s just this mess of challenges that I think most people look at when they’re from the service provider standpoint, just like, it’s not worth it to just, to try to do that. So I think most people stay away from it. Combined with the fact that it’s also difficult to invest in funds because the fund minimums are very high, and there’s a handful to choose from. And so how are you going to be able to get broader exposure to the market. So that’s, the insight, which is that it’s a big problem for service providers. The solution was what if you raise a fund, principally focused on that from an LP standpoint. And go to service providers and say we’re going to raise a fund to invest in deals on your behalf, we’re going to try to get one commitment from you for what otherwise may be is what you’d put into a deal or two, and we’re going to have the fund deploy on your behalf broadly into the market. And because we have a network of service providers who are seeing all of the deals, who are talking to all the founders, that’s going to be our inside track into those deals. So we’re going to know when a Series A happens because the LPs that we have as our base of investors are going to say to us hey, this deal is happening, let’s get you in.
Nick: Got it
Brian: And so that gives the LPs the ability through the fund, to sprinkle a little bit of money across the market, right. So if you’re bullish on early stage venture in the midwest, this is a great diversified basket of stocks to essentially purchase through the fund. And allow the fund to do the work and then give you sort of good exposure to that asset class on a diversified basis. That solves all of those other challenges that we talked about at the beginning.
Nick: Got it. So the, the LP base in the fund is primarily made up of these service providers,
Nick: that each have their own pools of deal flow and access to startups because they’re providing various services for them.
Nick: And so it’s this network or this web of service providers that are kind of pooling capital and working together?
Brian: Yup. And that’s the secret sauce. I mean, that’s where I think what we’re doing is different, because we’re not saying that we have special channels of deal flow except for the fact that we see everything, right. And it’s that index component that says alright, if you just want to put a marker down on venture in the midwest, this is your way to ride the ups and downs. And who knows? I mean, I think we’re all super bullish on it. But if it doesn’t work, that ideal, you know, theoretically this, this fund is going to mimic the market because it’s going to be spread across the market. So our job as managing directors is to be talking to other people, to be talking to our LPs and those who aren’t LPs, to make sure that we’re seeing everything and getting a crack at everything.
Nick: Yeah. Certainly. A few months ago, when #Galen and I were talking, I was thinking that I may have some of the most deal flow in the area. But after talking to #Galen, I was like I, I don’t! You guys have more! Which is pretty incredible. So, just to back up, can we, at a high level, talk about the investment criteria and philosophy? Is it every Series A deal that you see in the midwest you want to get into? And, and what’s the cheque size, and what are the, the criteria for you guys deploying capital?
Brian: Yeah, so at the highest level, what we’re doing is we’re co-investing in Series A deals. These days the way you define Series A is very, you know, foggy, right? So what we’ve done through our criteria is tried to define what a Series A deal really is. So we say that it’s the first typically priced although, you know, these days we see kind of little flexibility on that, but first priced institutional round that credibly led by a VC. And so when you drill down on that, we, we say that an institutional round means that there is a fund or fund-like entity that’s leading it, and that essentially is doing due diligence, has LPs or stakeholders that they have to justify the due diligence to. And institutional in the sense that they also have pockets sufficient that, as happens in a lot of cases, a post Series A company goes sort of laterally for a little bit. I don’t want to say sideways because sideways tends to have a negative connotation. But companies tend to go laterally after they get their first financing. And so a fund that will have deep enough pocket to bridge them to the next round to make sure that they get to the Series B. And it has to be credibly led in the sense that that institutional VC is putting in at least 500,000 or more in the round that’s at least a million or more at closing. So when you kind of put that into like a checklist, if we check all those boxes, that’s essentially how we say in spirit regardless of whether you call it a seed deal, an A deal, a D deal or whatever, that’s how we sort of define a Series A deal. And if it checks the boxes, that’s what we’re looking for. And so when we have these conversations with entrepreneurs, you know, we tell them like don’t, don’t worry about prepping for the meeting, don’t come prepared to pitch us the 30 minute powerpoint or go to meeting or something, like this is our criteria, you check these boxes, it’s a fit. If you don’t check the boxes, we’ll, you know, talk to you all day long about what works for us and that way you can come back. And by the way, what can we do if you don’t have sort of that institutional VC on the hook, who you want to talk to, right? Because if they get funded and we can make the intro, that’s going to be good for us to get into the deal. So that’s where we have an incentive to make sure that everybody is seeing stuff. And I know #Galen and I have both been, you know, we have existing relationships with investors going back before #SPC. But a lot of the investors that we know have now sort of reached out to us and said hey, you know, let’s talk more frequently, you guys are seeing the stuff that we want to see, we want to make sure we’re seeing everything. Because for every VC, their lifeblood is their deal flow. So we, you know, there is again that relationship where there’s a lot of, as #Galen put it, a commercial reason for everybody to be aligned on this. And we can just help, you know, provide a little bit of I guess lubrication to the ecosystem.
Nick: Do you consider this an index strategy? And why or why not?
Galen: We do, we say yes. I think, I would say we would describe ourselves as an index fund of midwest Series A deals.
Galen: You know, we’re not the #Vanguard Total Stock Market Index where you literally, mathematically to a spreadsheet go out and acquire in the right proportions those deals. Right? So the index is, is descriptive of how we do what we do. As #Brian mentioned a minute ago, if you hit our deal criteria, you’re in the midwest, you know, it’s a preferred stock financing
Brian: Yeah, I should, I’ve, I’ve left out that it needs to be a midwest company.
Brian: I’m glad you mentioned it.
Galen: then we’re in. Right? I, I usually joke that look if you have a lead investor that believes in you and you’re selling, say you’re selling dog* on the moon and you get our criteria, we’re in. All day long we’ll back you. And then
Galen: Then I have most of my questions. Because what we really want to do is know when we can add value if and when you need it, right? Because we’ve got the, this combination of like insurance and the mafia, where if you’ve got all the most connected service providers in your round, if and when you need something, we’ll be there. So in terms of an index, I don’t, you know, you’re not going to get every deal like if you, if I said hey go out and find every private deal in the midwest, you’re going to be amalgamating things from #PitchBook, from #CB Insights, newspaper articles, google searches, your word of mouth. And you, then you have to ask yourself was this one Series A? Well who is in this one, was it uncle Joe that led it or was it a real VC? And how much did they put in? You literally can’t go get probably at perfect index. We’re going to, we’re shooting for it and we’re, and we’re getting a high percentage and, and right now I think it’s as you get the word out about what you’re doing, and as we go to these other regions in the, within the midwest. So I was in Madison in Kansas City last week meeting with all the service providers and some VCs there. And so I considered, you know, turning Kansas City on doing the same thing in Madison, now turning them on so they know we’re out there and then stay in touch. I think we’ll begin to see pretty close to a, certainly more than anyone I think has ever done in, in the venture or private company space.
Nick: You guys mentioned some of the categories of service providers. What are sort of the top 10 categories of these service providers, and which service providers make some of the best types of partners?
Galen: So, really anyone that is providing a service, right, that has this, this idea of I’m, man, I am locked out of this. Right? You know, I’m fostering this growth. But, but we have everything from, you know, real estate folks to HR services to outsource CFO, lawyers, accountants, web design. There are even some venture capitalists in the Rocky Mountain fund. Well what am I missing, I mean, there’s a lot of people
Brian: A lot of managers
Galen: Oh yeah, well, there’s a lot of people that are going to identify with our mission of hey, let’s get together and through our collective network we can one, get in to these deals and we can write a cheque collectively that is appropriate for the funds. We can all use our, our network. Right? I think the other thing too is there’s reasons that larger venture capital funds have these minimums that they do that, that box most of myself and my fellow service providers out financially. But we, we’ll have some other high net worth folks or folks that will invest in the fund, that will allow our fund to write bigger cheques so that you can do that across the entire midwest.
Nick: Are there particular types of service providers that you find are sort of specialized in the startup tech area and have been great partners and great sources of deal flow?
Galen: So I think, I, I mean, the one thing that I’ve thought is interesting and one of the reasons I wanted to do this when I heard about it, other than I just, I like the model but it’s always helpful to step out of your own mindset in a way and look at the world in a little different way. Right? So here’s an example of how #SPC has sort of taught me that, which to me guides now how I operate. So what service provider’s most likely to raise their hand and say hey guys, I see a deal. Right? You guys should look at this, or let me plug you in. And if you look at it in our experience and then in, in, in the early days of asking #Noah and #Jody what they were seeing in the Rocky Mountain fund, is it tends to be lawyers and this, this role of an outsource CFO or financial outsourced financial services, and
Galen: you know, oh great, okay, I’ll go execute on that. And then, you know, you, you start thinking about it on the train or wherever you’re mulling things over in life, and you realize oh that makes sense because look if you’re a service provider and you’re helping with legal, of course you’re going to know, because someone’s called you and said hey, I got to raise this A round, help me to think through who to do it and all these things. So now you’re aware. Right?
Galen: You may be more likely to go spend the money you raise in your A round on real estate or web design. So they may find out after the fact, not as useful. Right? Those folks may still have relationships that are key for us to get into the deals. And they may be aware of them. But statistically speaking, I think a lawyer is more likely to know. And if I had to guess, I think some of the outsource CFOs, you know, these are folks that are hey, here’s my, can you help me get my books in order, can you help me do some financial planning? Well, the person who’s very job it is to say hey, this is how things are going, this is money you have in the bank, and oh by the way, you know, knucklehead, you’re going to run out of money in 6 months. You need to go raise a Series A. This is the early, I mean, they are literally the early warning radar systems. So it makes sense that they may be more likely to raise their hand. So that’s what I had to begun to see as you, you understand better the role, not just the, the specific role but the timing of those roles that people play in the market.
Nick: If they want to keep their engagement with these early stage companies, the, the companies need to be well funded. Right? So it’s kind of a natural fit for them to, to play a role in this process. And as I think about sort of all the touch points that an early stage tech company has in the ecosystem, the first one is not a venture capitalist. The first one, there’s so many other different players in the ecosystem. So that’s part of the reason why I was so intrigued and compelled by the model, because you’re probably getting in touch with some of these companies long before they’ve, they’ve ever formally gone out for capital.
Galen: Yeah, and I think VC, #Brian can touch on too, but then getting to know the VCs is really important as well. And then what we also need to touch on is this it’s as much about getting in as it is adding value. Right? Just like any other investor. So that’s something we, we definitely should touch on.
Brian: Yeah, I think, you know, the, for us, you know, we are trying to get in not as service providers but as investors. And part of the value that we provide is just being sort of these connector nodes in the community. And having relationships, not just within our own LP network and service providers but across the landscape. And, you know, the, the market already knows us sort of in, in a number of respects in this regard. But what we want people to be thinking about from #Service Provider Capital’s perspective is when an entrepreneur or founders, when they’re trying to go out to market to talk to people about fund raising early on, as you point out, we should be people that they talk to. One, to just sort of hear okay, let’s learn a little bit about the business. But for us it’s a quick conversation, you know. We get inbounds all the time, whether it’s intros through somebody or somebody reaching out cold and they’ll say let’s set up a call, and we say sure. 10, 15 minutes, let’s hop on the phone, we’ll tell you exactly what we do because we have pretty good, strict criteria, we can communicate quickly to people. And say, if it’s a fit, awesome, we want to be in. If it’s not a fit, here’s what we need, what we need exactly so that you know when to come back to us. And in the meantime who do you want to talk to, right? And not necessarily, we don’t want them to think of us as okay, this is just a group of service providers out there trolling for work, right. That’s not what we’re doing. You know, if you want a real estate broker, we can absolutely introduce you to a real estate broker. But #Galen and I do that in our daily jobs. If you talked to us and you need space, we can help you find a real estate broker to talk to. You don’t need #Service Provider Capital for that. But what we can do is we can sort of think about it specifically wearing the investor hat and say okay, you’re in market, what can we do. And #Galen likes to talk about this as a cell tower network through not just the midwest but also nationally and sort of region by region. Because, you know, we’ve had situations where we had a fund that was based out of Texas that had an investor seeded in Ann Arbor that focuses on internet and tech, internet of things that we can connected with an entrepreneur in Minneapolis. Right? And those are things that prior to being involved with #SPC, #Galen and I might not have necessarily, certainly I wouldn’t have been able to make those connections work. But that’s just making sure that an entrepreneur who’s doing IOT in Minneapolis is talking to an investor in, in Ann Arbor. And making sure that those connections are happening. And making sure that they’re on our radar and then we can connect the dots from there. #Galen talks about this as the cell tower network because we have these different outposts everywhere where we can say alright, you’re, you’re in this type of industry, we know investors in the Rocky Mountain region, in the Great Lakes region, in the Southeast region, let’s make sure you’re talking to these folks. You’re a fintech business, well there’s a fintech fund in Atlanta you should be talking to. Right? And that’s I think we want to make sure that when everybody is doing their rounds in Chicago, you’re an entrepreneur, you’re going to go talk to #Chicago Ventures, #Origin, #Pritzker, #HPVP, right, you’re going to talk to all of those, the usual suspects. We want to be included in that conversation. Partly because we want to make sure we know the deal, we want to get into the deal if it fits our criteria, but also because that’s just a way we can help people.
Galen: Yeah, I think, you know, just in hearing that, I would add if this was another, you know, I mentioned earlier that #Catapult was selfishly part of this idea of how can I work with really cool people in Chicago. And as #SPC has evolved and I met #Brian and others, it, it was an opportunity to say oh wait, wait, wait, wait, I get to now work with really cool people throughout the entire region. Right? And then that’s beginning to have connections even beyond that. Like to and through the Rocky Mountain fund and #Service Provider Southeast is, is just beginning or looking like it’s going to come together. And so that, that’s really interesting. But I think the midwest as a whole, the idea of these connections of these already locally plugged in people having a commercial reason to, to talk to one another and send signals and information back to forth, improves the overall market as a whole. As #Brian mentioned, there may be a, a fund or an investor that, that finds his or her way to something they wouldn’t have otherwise seen it’s a real fit. And I think that vetting process is, it’s interesting to watch that evolve. It’s hard work to be in there. And, but it’s a lot of fun too.
Nick: Yeah. Your point about sort of this, this ecosystem network, these cell towers and these nodes is, it’s well taken. I just wrote a post called “The ecosystem network effect”. And it was about this very thing. You know, creating these connections between people and branches between nodes, you know, it’s, it’s hard to do.
Galen: To top off, again, there’s a commercial reason to do it. Right?
Galen: So we can go out and say hey let’s, let’s, let’s keep in touch. Right? But #Service Provider is, creates a reason to do it and incentives of both sides of the message. Right? For the company, for the venture capitalist, for the service provider. It’s sort of, the more I, I’ve thought about it and I’ve talked about it, it has this really positive unique outcome from every angle. Thus far, anyways.
Nick: So we’ve kind of touched on this, but why do you guys think that this approach is differentiated and can drive better returns?
Brian: So I think part of that is I, you know, the idea of for people who don’t have access at all, or have, have this sort of mess of challenges that they can’t navigate. There’s sort of the bind area of well I can either find myself an investment opportunity that’s intriguing and appealing, or I have nothing. So from the perspective of better returns, I think for some people it just gives them an opportunity they wouldn’t otherwise have had. And in a way that is different. And so we’d like to think that that’s, that will drive good returns. Strictly from sort of the finance theory of it. You know, return and risk are correlated and we would look at a diversified basket of stocks, you know, using portfolio theory, is going to yield perhaps less volatile returns. So maybe not necessarily as high a return, but also won’t come with the same level of risk. You’re diversifying over that portfolio. So that’s where I think we would say it’s one, for people who don’t have the opportunities, giving them an opportunity to participate. And then on the other hand it, as #Galen mentioned, you know, I can’t remember if it was during this or before we started when we were talking, just chatting. But we think that there’s a, there’s a whole separate category of people outside the service provider network that sort of fits our core LP base. But people who understand investing, who want to participate in the space, they know that there’s something going on in technology in the midwest. But they don’t necessarily have the time, energy or resources to do the vetting themselves. And for these people, they have an access problem. So service providers have access but don’t have the financial resources, versus people who have the financial resources but don’t have the access. Right? And all of a sudden, now we have another opportunity for them through us, to gain access that they don’t have right now. So again, it’s sort of this idea of, you know, going from zero to one. And from, from that perspective for people who are investment professionals, family offices, high net worth folks, who understand investing, who understand asset exposure, who understand diversification, we think it’s just a natural fit for their existing financial investment strategy.
Glaan: That’s once you just, I have to mention this because it’s such a, in my mind it’s just another one of these examples in the model that you think through where it has this, I need to come up with a better term but I call it the self reinforcing benefit to the parties involved. But you go to a, you go to someone that’s, that doesn’t have the network and wants to access the space. Right? So they write a bigger cheque which allows the fund to write bigger cheques into individual deals more so than you can do just with these service providers, who by definition can’t typically hit the minimum for the venture funds. Right? So now you made in theory the fund slightly more, more attractive because that’s one less coffee, one less pitch instead of a 25 or writing a 50, a 75 or a $100, 000 cheque. The fund itself became more attractive. So we can only write so big a cheque and do a Series A deal. But to me, it’s this model of both the service providers win, the entrepreneur wins, the venture capitalist wanting to fill his round wins, or makes sure that there’s someone in the round that has the right connections that may help when they don’t know they may need it, and the investor writing the larger cheque wins.
Nick: Are there concerns that you will not get access to competitive allocations or the entrepreneur can choose their investors?
Posted in: Podcast Episodes
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