117. Index Investing, Mastering Dealflow & Seeing Everything at Series A, Part 2 (Galen Mason & Brian Axelrad)

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Galen Mason & Brian Axelrad of Service Provider Capital join Nick to cover Part 2 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:

  • Their concerns about adverse selection and not receiving allocations in the most competitive deals
  • More on their process of collecting and vetting dealflow
  • How much dealflow they are actually seeing
  • How they help portfolio companies post-investment.
  • And, as always, we’ll wrap up w/ some standard questions, key takeaways and a tip of the week.



Guest Links:


Key Takeaways:


1- Discovering Opportunity in the Dealflow

As attorneys in the venture industry, Galen and Brian quickly realized that they, and other service providers across the ecosystem, had early access to nearly every deal. This is a major information and access advantage, but the service providers didn’t have the means to cut large checks into these companies. While the investors that did have the means, are unable to get access to this volume of opportunities. Therein was the value. If they could connect the key points of access with the major sources of capital, everybody wins. And, in parallel, they brought down the entry barriers for service providers to participate. Maybe your standard service provider can’t cut a $100k per deal, but maybe they can cut a $100k check to a fund that invests in all qualifying deals. In this way, these service providers could:

* Participate
* Help the companies they work with
* Share in the upside of their clients
* and get diversification across a very risky asset class

And this “cell tower network” of Service Providers, as they called it, includes:

* Real Estate
* HR Services
* Outsource CFO
* Venture Capitalists
* Wealth Managers
* Lawyers
* Accountants
* Web Design
* Insurance

The final note here that they mentioned is that the key service providers that seem to get earliest access to dealflow include lawyers and outsource CFO.


2- An Index Fund with Ongoing Value

Galen and Brian are employing an index-like strategy. They are attempting to invest in every credible series A deal in their region. Recall Jerry Neumann’s comments from the episode on non-Unicorn investing, that if one were able to invest in every venture deal, they would yield a percentage return in the low to mid 20’s. Now that spans all geographies and all stages but it’s still an astonishing figure. And the guys have chosen the midwest and the series A stage for their index. Are they going to be a top performing fund? Nope. But will they have much more diversified exposure to venture in their core region? Absolutely. If you’re an LP seeking 10x returns, this is not the fund for you. If you’re comfortable with a diversified, more modest return, you believe in your region is an underserved area and you want to support the tech ecosystem through investment, SPC may be a great fit.


3- Mechanics of the Model

The first step for Galen and Brian was to…

1. Build a network of service providers in their startup ecosystem
2. Then Service Providers that work w/ early-stage companies as clients, begin referring dealflow to the SPC Managers
3. Also, those same Service Providers become the core base of LPs in the fund
4. Then the guys put referred deals through the following checklist criteria:
* Is the company in the Midwest?
* Is the round being led by a credible, institutional investor?
* Is it a preferred equity round?
* Is that institutional investor investing $500k or more
* Is the round size $1M or more
* And if the answer to each of these is yes, SPC invests. If not, SPC will make introductions to other investors that may help the startup fulfill this criteria.

And their involvement, of course, does not end upon investment. They provide unique, ongoing value to the startups they invest in. They have the cell tower network. They know each of the service providers and how they can provide value. When a startup needs office space, financial help, talent acquisition help, legal, or development work, they can call on Galen and Brian for intros to the provider that’s the best fit for what they’re doing.


Tip of the Week:    of the Week:   Hubs and Spokes… Product AND Channel Innovation