216. Crisis Coverage w/ Patrick Gallagher – VC Firm Survival, How Seed Investing Scales, & A Glimpse at the Road Ahead

216. Crisis Coverage w/ Patrick Gallagher - VC Firm Survival, How Seed Investing Scales, & A Glimpse at the Road Ahead
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Patrick Gallagher of Tuesday Capital joins Nick on a special Crisis Coverage installment to discuss VC Firm Survival, How Seed Investing Scales, and A Glimpse at the Road Ahead. In this episode, we cover:

  • Walk us through your path to venture
  • How did things first come together for Crunchfund w/ you and Michael Arrington?
  • Why did Michael leave and why did you rebrand Crunchfund to Tuesday?
  • Gives us the highlights of your thesis?
  • How do current events effect your approach going forward?
  • Anything you’ll avoid/be much more cautious investing in?… or anything you’re leaning into?
  • Some have said that many seed venture firms will not survive the current crisis.  I think there may be more than 1000 seed firms currently…  Do you think the volume of seed players reconciles as a result of this correction?
  • What is your reserve strategy?  How much and how do you make decision as to how you deploy reserves into current portcos?
  • Why the partnership with Frog and what does that mean for your portcos?
  • Aside from design, branding, storytelling… what is an area that is significantly under-utilized as an area of value that VCs can provide to starutps?
  • I believe you’re in Airbnb and Uber… was it difficult to invest in their later rounds while you had a young seed-focused fund?
  • Do you believe seed funds can scale?
  • Why do you think there are so many people that want to do this job?  The numbers aren’t good… it takes a long time to establish yourself, most funds fail and even the successful ones take a long time to make money.
  • Before we wrap things up, what would you say to a young individual that wants to make a career in venture capital?

Guest Links:

Transcribed with AI:

0:03
welcome to the podcast about investing in startups, where existing investors can learn how to get the best deal possible. And those that have never before invested in startups can learn the keys to success from the venture experts. Your host is Nick Moran. And this is the fall ratchet.

0:23
Pat Gallagher joins us today from San Francisco. Pat co founded Tuesday capital in 2011, formally known as crunch fund, and he has spent the last two decades investing in technology startups including airtable Digital Ocean, get lab good eggs Kolinsky and kreski. Welcome to the show. Welcome to the show, Pat.

0:41
Thanks for having me.

0:42
Yeah. So tell us your story. Walk us through sort of your path to venture.

0:47
Sure. So my path to venture was maybe not as typical as folks that are are focused on getting a job in venture today. I actually started my career in finance. I was working at Toyota Motor Credit Corporation and the corporate treasury. And we were raising debt to finance the auto leases and loans in the US. We were covered by all the banks, because we were issuing five or $6 billion a year in debt. And one of the banks that covered me was Morgan Stanley. I spent a couple years at Toyota but my my coverage officer at Morgan Stanley asked me if I wanted to come join the capital markets desk there. So I joined in 1995. As an analyst on the trading floor in New York. I spent a year there was bored out of my skull, just kind of updating credit worthy investment spreads, going and collecting data for all of our offices globally, sending it out, I mean, really just kind of routine analyst work. At the same time. Netscape was just gearing up to go public. This is again 95. I was intrigued by what’s going on in tech. And just very luckily for me, I guess Morgan Stanley’s tech banking office was run by a guy named Frank Quattrone at the time. Frank took most of the team in Menlo Park and moved over to Deutsche Bank. So it kind of left this gaping hole in Morgan Stanley’s tech banking group. in Menlo Park, they sent in reinforcements from New York, they hired people like Drew Guevara and Michael Grimes, who are still there today. And they asked sort of anybody in New York if they wanted to go out and work in this tech banking group in Menlo Park and I raised my hand immediately went out there in 96, I spent a year in the tech banking group, helping companies go public and do an m&a transactions. We happen to share the office with Morgan Stanley Venture Partners, which was the French venture capital arm of Morgan Stanley. I didn’t even know what venture capital was, frankly, at the time, cash, do

2:58
they still have that arm?

2:59
It’s called Morgan Stanley expansion partners now, yeah, they still do Wow, frankly. And people that I worked with in the late 90s, are some of them are still doing the same thing. So they’ve, they’ve continued to keep that franchise going. Amazingly, and in from my perspective, again, I was working in tech banking, I was working 8090 100 hour weeks, sharing an office with these folks who I didn’t really understand what they did, you know, companies would come in and meet them. It was much quieter, if they would, you know, they weren’t working till all hours, all hours of the evening. And it turns out that they hired I think, every other year, an analyst from the tech banking group to come work in Morgan Stanley Venture Partners. So I happened to be there one of the years that they were looking to hire somebody new. They actually didn’t approach me first they approached one of my colleagues, Ashley, big line, who’s now the CEO and CFO at Well, Fred. They offered her the job, she didn’t want it. And I was the second choice. And I took it immediately. I said this, you know, and you know, it was really just luck and happenstance and kind of being in the right place at the right time. And, and I never looked back. Good

4:18
for you. And, you know, tell us how this whole thing came together with Michael Arrington right, crunch funds. I know that originally there was there was some background with TechCrunch. But can you can you talk about how that sort of originated and and sort of the origin story there?

4:35
Yeah, for sure. So, So Mike, and I have known each other since college. We went to Claremont McKenna College. We met the first day in school. We’ve been friends ever since. And our paths have crossed a bunch of over the course of the year or so before he started TechCrunch in 2005. Mike had been a lawyer at Wilson Sonsini and when I was at Morgan Stanley, both on the venture and banking side, we had actually He crossed paths there because Wilson was working on deals that I was working on. He then went to a startup called real names and recruited me to real names. I went over there and joined him. He was sort of running business development and the general he was the general counsel as well. I was on the business development team. So we work together, we’d gone to school together. After real names, he went off and started a bunch of other companies on his own, but we, you know, we’d stayed close through that time. And then when he started TechCrunch, it was pretty clear that, you know, he didn’t know what he was building, I think at the time, but it became obviously this very important publication that lots of people read. I think, in 2007, we had a conversation around some of these emerging small seed focused venture firms like first round, and soft tech. You know, there were a handful of any Felicis was was open at that time. But there really weren’t very many people focused on the seed segment of the market. You know, like there were the established brands, Sequoia and Kleiner and Greylock and folks like that. So we actually in oh seven talked about starting a small seed funds, sort of within the TechCrunch umbrella in this, it just didn’t work out from like a timing and geographic perspective. I was in New York at the time, Mike was trying to build, obviously, the TechCrunch train, but that’s sort of created this, this seed of the idea that we were going to start a fund. And then after he sold TechCrunch, to AOL, in 2011. I remember at the end of 2011, we sat down had a conversation and he said, I have to do something else. Like you know, I’ve sold my business, I’m still here for the next however many years. But, you know, I want to be an entrepreneur, I want to build something again. We weren’t sure how we were going to do it because he was technically still working in TechCrunch. We got Tim Armstrong involves we had a bunch of conversations. And it ended up that Tim anchored our first fund or AOL anchored our first fund with an $8 million commitment. And we licensed the crunch brand for venture capital activities. But Mike and I owned crunchfund on in its entirety. And it was a completely separate organization from TechCrunch and CrunchBase. Right. But it was really I mean, there again, coming back to that time, there were probably 20 or 25 seed funds that were of note in the US. And I guess when I looked at it, I saw this opportunity to to potentially build sort of the next top decile performing fund in a brand new category of venture funds, right? You know, if you look at sort of where returns are made in the venture venture world, really that the top quartile top decile funds are the ones that generate the the bulk of the returns in the asset class. And a lot of that is both brand reputation access to deal flow and things like that. And it seemed like the combination of my experiences and investor Mike sort of experience building the TechCrunch brand, writing about these startups combined with sort of the networks that we had collectively, we would have a pretty interesting platform to try to do that from.

8:04
Got it in. Why did Michael leave?

8:07
Well, so we raised a couple of funds with Mike as a general partner at the end of 2015. It had been a little bit more than 10 years since he had started TechCrunch at that point, and he had basically worked non stop in the TechCrunch ride was crazy for him, right? You know, he he was working all the time for a number of years. And I think he just kind of got burned out, frankly, and wanted to step back focus a little bit on, on himself and on his health. So he ended up taking some time there. And then really, in early 2017, started to dip his toes into the crypto markets became really, really interested in what was happening there. And I think if anybody knows, Mike, when he becomes interested in something, and kind of obsessed about something like you know, he’s, he does an incredibly good job at it. And I think he really decided he wanted to spend all of his time focused on this emerging crypto landscape. And he went off and raised his own crypto hedge fund in late 2017.

9:05
Got it? Got it, and was that did that coincide with the rebranding to Tuesday? It didn’t

9:11
know, you know, you know, we had actually talked about rebranding crunchfund as early as 2014. We don’t know we really haven’t told the story to many people. We had an agreement, we were actually going to merge with a an accelerator that we had backed in kind of rebrand the whole thing, just because honestly, there was so much confusion still in the market. Around are we owned by TechCrunch? Are we owned by CrunchBase? How are we associated with them? Of course, you know, if you got an investment from crunch fund, you’d get coverage in TechCrunch. I mean, if there’s sort of this various web of like just inaccuracies out there in the market. We didn’t rebrand them, but we’ve started about thinking about it as early as that because I think Mike and I both realized, you know, we couldn’t control the brand. We didn’t own it. And as we got further and further away from launching crunchfund, you know, we had less and less control over how things were going to play out. The other sort of catalyst was AOL had been an LP in our first two funds. AOL was acquired by Verizon, we were not sort of a strategic investment anymore at that point. And it really wasn’t clear what Verizon was going to do with the brands either. So I think really, it came down to you know, we’re on our fourth fund. Now, we’ve been doing this for a while we wanted to control our own brand and narrative around it. And, and that was really the main impetus for for the brand shift.

10:35
Got it. And for the listeners out there, can you give the highlights of your thesis?

10:40
For sure. So I’ve been doing this for a long time, I’ve been a lead investor I’ve been on on dozens and dozens of boards. I think our thesis for Tuesday capital, formerly crunchfund Now really was that we could build a platform that can invest primarily at the seed stage, that can be additive to really any investor Syndicate, we would focus on delivering help around a number of very specific areas. One is media and PR positioning. If you look at like, you know the heritage that comes from Mike building TechCrunch, we clearly have a good point of view on that and good connectivity into the tech press world. In our very first fund our LPS besides AOL included Kleiner Perkins, Sequoia COSLA, Redpoint, Founders Fund, you know, a bunch of really preeminent sort of follow on investors. Wow. So another place where we can deliver value is really making those contacts into the upstage funds they’re going to raise that are going to lead the next rounds of capital in our portfolio companies, we probably have 30, or 35, really solid relationships with follow on kinds of funders. As part of that, you know, we think about storytelling. And you know, storytelling is obviously part of what you tell to the press. But it’s also what you tell the other investors, it’s how you present your company to potential employees, it’s how you pretend to present your company to potential customers. We’ve built some services in the middle around that as well over the years, we have some graphic designer services, and videographers and photographers that we provide as a service to our portfolio companies to help them create content to tell their story more effectively. And our thesis was, and again, I’d been doing this for a long time, if we wanted to build sort of a very diversified scaled portfolio, we couldn’t do it if we were going to be the lead investor and sitting on the boards of these companies. So really, the idea was that we write a 250 to $500,000 initial check, to check size that doesn’t necessarily lead around or usually doesn’t lead around, but fits into most rounds. And we can partner with all those other funds that want to leave and sort of take more control positions inside those companies. And we find that the things that we can deliver are pretty unique, pretty additive. And then the most recent thing that we’ve done, which I think you’re gonna talk about in a minute, it was we just announced this partnership with frog, the global design, global design firm, they have more than 600 professionals worldwide focused on industrial design, UI UX design, it can be research around different markets, I mean, really, they, they are a full service design firm. And we have in our fourth fund partnered with them to really sort of sit at the table with them, because they have inbound interest from startups that are trying to do design services for equity investments. And we have a whole portfolio of I think we have 160 or so active portfolio companies that all potentially could use design services. And I think for us, you know, frog is very good at being a design firm, but they’re not a venture investor, even though they built a portfolio over time. We’re obviously in the business of being a venture fund and managing these companies over the course of their life. So it was a really synergistic opportunity for us to bring something again, unique to our portfolio companies and prospective portfolio companies, while also helping, I think frog kind of productize a little bit of activity that they’ve been doing very successfully for the last four or five years.

14:02
You know, I’m curious, I think it was Aaron Griffith used to talk about how there were a lot of parallels in sourcing, undiscovered, interesting startups for articles. With, you know, the the investors, the early stage investors, seed investors that were looking for interesting deals, trying to find those before others with some of the routes that your fund has in the media world. Are there any sort of deal flow sourcing strategies or tactics that that you’re using that come from that original sort of media background? Yeah, I

14:39
wouldn’t say I mean, by the time things typically, I mean, and again, this was another fallacy sort of, at the very beginning, people thought we were kind of getting our deal flow source to us from TechCrunch. But again, the the fact is, by the time a story ends up in any tech publication, you know, the financing has happened, if not weeks, potentially months, or even years before that. So I think there’s this lag and sort of, again, you know, you want to find the companies that hadn’t been written about if you’re a tech journalist, and I’m sure true of talking to your network of early stage investors and trying to figure out what people are using and not using is probably a good way to identify promising companies early. There’s some similarity to that. But I think every venture fund does that. I will say like one of the one of the things that we have built over time is a pretty good network of other funds that we co invest with at the seed level. And there’s a lot of deal flow sharing that happens between those funds. And because we’re not competing with anybody, because we’re not leading rounds, and writing check sizes that really squeezed anybody out. We rely a lot on that for deal flow. You know, my my point of view on deal flow has sort of changed and evolved over the years, I used to sort of think, you know, the more that we saw, the better in there was a point where we were seeing I mean, I still think we see a couple 1000 investments a year. But we were seeing even more than that. And it just, it’s too much, frankly, and like the signal to noise ratio is too high. I’ve been spending way more of my time focused on kind of a much smaller number of kind of trusted sources, whether they’re co investors and other funds, angels, whatever it is, to try to find things that fit inside that circle, and maybe look at a lot fewer things. But maybe the least the Fit ratio is better for the kinds of things that we actually end up investing in.

16:30
Interesting. Yeah, I guess a couple decades in, you’ve probably gone through many different iterations and cycles of, you know, sourcing strategies, vetting strategies, which ones work out which ones are the best fit. And so I assume that you’re kind of in a much more evolved place from that standpoint than many of us early folks.

16:51
I just I think, again, you know, you want you want to see everything at some level, I guess, right. And I think this, there’s, there’s this tension, there’s this fear of missing out versus sort of staying the course and being confident in what you do. I do think like, early on, we probably more specifically had more of a fear of missing out and over time, as just sort of grow more confident in your ability to discern things that you think are interesting, that actually ended up becoming good investments, you know, you lose some of that, because at the end of the day, in this business, you are gonna miss a ton. Right, whether you see it and don’t do it, or you don’t even see it. Right. And I think I haven’t, I’ve decided that wasting energy on that is not a good, good, productive use of my time. Yeah.

17:37
So, Pat, I mean, we got to talk about this. The there’s a pandemic going on. Right, yeah. How does, how do these current events affect your approach going forward? And I, I know that it’s early. So it’s probably hard to say, with certainty, you know, exactly what’s going to happen from a macroeconomic standpoint. And for Tuesday, specifically, but, you know, where are you at right now? And how do you think it’s going to impact you know, the way you guys are investing in looking at looking at potential startups as well as working with your existing?

18:13
Yeah, I mean, I think there’s been a lot talked about and written about this in the venture community. And again, I’ve was an investor. In the Oh, eight, crisis, I was a, I just gotten back into venture in late oh, one to early 2002. So I was sort of at the at the very investing in that part of the market where they were starting to come out of the 2000 2001 prices. But I think the natural inclination, and I think this is what’s happening with a lot of funds is that you go and you kind of do your portfolio triage, right? You go through and you figure out who has how much cash do your companies have? How much runway do they have? What are the the things that they can do to extend that runway? Because I think right now, in this pandemic, the biggest concern that I have is just the absolute uncertainty as to when things will normalize again, right? Because so many large segments of the economy have completely shut down. How do you prepare for a world where this could be three months, six months, nine months, you know, 12 months when think before things revert to normal? So in terms of the things that we’re doing, we’re obviously spending a lot of time going through that with the portfolio companies. I can’t remember I saw a tweet a few days ago. I can’t remember who posted it, but they said, you know, you go through this analysis and your companies come up with a list of the six or seven things they can do to cut costs, and the mistake they make is just doing one or two of them, like when they should do all of them. Right, I think right and take the pain upfront. And I think we’ve been having a lot of those hard discussions with our portfolio companies around either right sizing the team right now to to give them really as much cash runway As they can have, you know, that dovetails into the new investments that we’re looking at right now as well, I think we certainly are looking at new investments. Although our pace is slower than I think we’re sort of being a little bit more cautious around a couple of different areas. One, obviously is the actual runway of the company that’s raising. So if this is a pre seed or seed startup, you know, do they really have a round size, that’s going to enable them to get 1824 30 months out, to sort of get clear of this and have a chance to kind of go build and win whatever market that they’re growing in. And I think, before this happened, we were willing to fund seed rounds that, you know, maybe they’re raising for 12 months, right, maybe they had 12 to 15 months, which meant they were really going to be raising again in seven or eight months. And I think the market was was receptive to that kind of cadence in terms of company’s ability in, you know, the markets ability to and willingness to fund those kinds of companies. So, we are being far more pragmatic about the runway, I think Roger Ehrenburg, at ie ventures wrote a good post about sort of when I ventures looks at these things, you know, really, they’re, they’re thinking about like a three year runway, when they come in and make a seed stage investment, which, for them, they’re pretty big fund, and they can write a two plus million dollar lead check. So they’re round sizes, maybe are a little bit bigger at the precede round, you know, at the pre seed stage, it’s pretty hard to get to three years of runway without raising a pretty big round. Yeah. So you’re trying to balance the tension of like, how much should you raise, to give you a enough runway now as six to 12 months because of the kind of pandemic uncertainty in that’s kind of the number that you are arriving at? So I think those are the things we’re primarily doing. I mean, I think like everybody else, you’re trying to figure out what market segments are going to have beneficial effects as a result of kind of what everybody’s going through, right?

22:06
Without being too temporary, right? Without being to temporary

22:09
route, right? Exactly. Like, you know, does this shift forward, sort of the move to, you know, touch lists, voice enabled kind of interfaces, probably, there’s probably gonna be some more of that. You know, we have an investment in a company called grub NGO, which is doing cashierless checkout in grocery stores, they go in and retrofit stores, right. And I think, you know, we thought that was a natural thing that was going to happen when we made the investment three years ago, I think what’s happening today only accelerates those things. Now, the problem as a venture investor is that everybody else is thinking about the same things, right? So if you’re looking at all the same segments, that now we’re going to be directly beneficial those companies, you’re going to be able to raise capital on more attractive terms, and then, you know, are you gonna still make a venture return? So anything

22:54
that you’re super cautious about that you’re kind of, you know, avoiding maybe moving forward?

23:03
You know, I think we are a generalist fund, I think we invest really broadly across categories, we never sort of say we do or don’t do any categories, because we don’t know what’s going to kind of move in and out of demand from a market perspective. I think historically, we’ve stayed away from ad tech companies, we just, we don’t love that space for for the the outcomes that can happen as well as sort of just how crowded it is. And I think that’ll continue to be one area that we’ve really spent a lot of time thinking about, but haven’t made a lot of investments is sort of ed tech related stuff. I do think I mean, I have two young kids at home. We’re doing online learning with both of them. And, you know, there is going to be I think some shift that happens that probably is a little bit permanent around how kids are going to be delivered educational content. Now, do I think selling to kind of parents of K through 12 students is a great market, maybe Yeah, I think you can build some big businesses there. We shied away from those things historically, because it’s been a sector that’s a bit harder to monetize. But again, I think terms of staying away from completely mean, certainly we never looked at really large capital intensive things typically, just because we’re a small fund. And we’ll continue to really not kind of back things that require tons of capital, at least just sort of prove out the technology. You know, it can require a lot of capital to scale. Once you’ve proven something, but again, we’re we’re looking for pretty lean, cash, cash efficient, startups still

24:38
got it. Got it. You know, some are saying that, you know, many, many seed venture firms are not going to survive this current crisis. I think last time I looked were at over 1000 seed funds across the states. Do you think that the volume of C players reconciles as a result of have, you know this current situation and correction?

25:04
You’ll I mean, it’s, I thought it had to reconcile even before this, I think this is gonna put even more pressure on, on the overall ecosystem of seed funds. Right? I think if you look again, at the return, the distribution of returns and venture, you know, if you’re not a top quartile fund, or near the top quartile, your returns just aren’t that great. And I think, you know, a lot of folks have have flocked into this asset category that our non traditional kind of institutional investors see of family offices and strategics. And folks like that. And I think anytime you see market downturns, some of those folks start to leave, you know, asset categories, like venture that are long, illiquid, you know, the return, you know, high fee kinds of businesses, right, because again, if you’re not invested in some of the higher performing funds, it’s not necessarily a good decision to make, in terms of diversifying your investments. You know, the other thing that that I think, I’m surprised hasn’t happened more so is that, you know, if you raise a 20, or $30 million dollar fund, and you are like a former entrepreneur, maybe an angel invested before that, and you wrote 25, or $50,000 checks, you can get into all your friends, companies taking that and productizing it and turning it into a business of a fund itself, where you have LPs, where you have to write bigger checks, or you have to sort of fight to get into deals. Oh, and by the way, you probably exhausted network pretty quickly of like the deal flow that’s going to come through that. You know, now you’re in it for 10 1215 years. Like that’s a really long haul on a relatively small capital base with you know, without the promise of like, fantastic returns, you don’t, if you don’t have good returns, you really don’t make very much money in this business. Yeah, which I guess creates good alignment between LPs and GPS. So I’ve been talking to, you know, the Silicon Valley Bank folks, and the First Republic folks for the last three or four years waiting for sort of some shakeout to happen and if anything is sort of accelerated in terms of fund formation. You know, that being said, I think there has to be a natural shakeout, just because of a performance B, I think people are going to find like, the job that they thought they signed up for is one that is just radically different in like a tough market than it is in a bull market, it’s going to be harder to raise your next funds, you’re gonna have companies, you know, that go out of business, you’re gonna have write downs in your portfolio, you have to manage through all those things. And like, that’s part of this job, but it’s a part of this job that I would say most of those new managers have never experienced before. Right. Right. And, you know, you’ll see you kind of sticks on the other side, right?

27:47
Well, maybe the tourists, you know, wash out with us. But you bring up a really good point. I mean, why do you think so many people want to do this for a living? I mean, the numbers are not good. I mean, it takes a long time to establish yourself, right? Most funds fail. Even the successful ones, it takes a really long time to make money. Please don’t say Shark Tank. But why do you think people want to do this?

28:17
Well, I think I think there’s this there’s this huge misconception between sort of the perception of what being a venture capitalist is, versus the actual reality of like, making it your career. Yeah, I, I do this job because I get so much absolute joy and intellectual stimulation for meeting people that are always almost always smarter than me who like are solving problems that they themselves specifically experienced and have like a better solution for and like if they actually can deliver on that actually meaningfully changes, potentially how people live their lives. And I think, just the sheer intellectual curiosity that I get solved by being able to work with so many different founders, I find to be incredibly fulfilling. Now, the secondary piece is that if I’m successful and good at this job in like 10, or 15 or 20 years, I could potentially make a lot of money. Right? I think that’s, that’s sort of the the flip side, I think people getting into venture look at the, you know, I have a friend who was a seed investor, or an angel investor, and he put 25k into Uber seed round, right? And he and he made three and a million dollars or whatever, whatever the number is, and I think there’s sort of these these stories that exist out there of the success stories, that kind of glue or all these other people in and I also think people again, don’t realize the job isn’t like you invest into companies for a year or two, and then you just harvest all of these companies, right? You know, like for sure at the seed stage, you know, once a Series A or Series B or a big fund comes in and sort of owns a lot of the company. They You’re gonna do a lot of the heavy lifting. Yep. But it doesn’t change the requirements that you have to try to help your portfolio companies to assist them wherever you can to stay on top of them and manage them from just like a fiduciary standpoint for your LPS its purpose, I think there’s just like a really going commitment. Exactly. And I think, you know, the, there’s a term that I use inside my house to like, raise, raise my kids, which also applies to venture like use the term radical patience, right? You know, you’re, you just you have to have just the utmost patience, to kind of take the ups and downs and take the long term view. Because everything takes longer, everything takes more capital, nothing goes as, as planned. And if you can’t kind of weather those storms in a graceful way, like this is not going to be a good job for

30:53
you on top of it, you got to show up every day and be great and put everything you got into it, right? Like you can’t sleep on your founders, when they show up and they need you. You can’t, right for sure. If it’s if it’s 3am on a Sunday, which doesn’t happen often. But if it is, you got to be there. And I don’t know, it’s it’s always interesting, because I see so many young people that want to get in this industry, I think it’s the either the number one or number two question I get like Nick, you know, give me advice on how to break into Vc. But a lot of these young folks just don’t quite realize that. You have to be great to do this long term. And to be great. It, it requires so much. I think John for Jonas was talking about that on the show just the amount he has to put into this business of himself his time that, you know, the sacrifice is real. And it’s significant.

31:55
What is I mean, again, we also we talk about ourselves as a startup that funds other startups, right. We’re our own little business. And I think, you know, we have to innovate on the product side, this is this is a services business, you know, you have customers that are your portfolio companies and customers that are your LPs. And I think, you know, I think the other thing that people don’t appreciate enough is like, ultimately, this is very much a sales job. You have to have, you know, you have to be inquisitive and have, I think, good experience that can deliver value to the portfolio companies. But you also have to convince a lot of people that you’re the person that they should work with, especially in sort of a capital rich environment like we’re in today. So, you know, I think for a lot of these we know, we have associates that have come through our program. My hope for many of our associates is that they come in to venture see kind of what it’s like for a couple of years and actually go work at a company. Yeah, right. Because I think, you know, frankly, the opportunity cost of venture is quite high. Versus like, a lot of the things, the folks that are in it could do otherwise. And many of these are very seasoned experienced operators that have been angel investing on the side, they’ve decided to go sort of institutionalized and raise their own funds. I think those folks will realize at some point like, wow, I could go start another company, and in control, control things more directly. Because that’s the other thing that you give up in this job is control. Right? You know, we, if I am spending time, you know, making product decisions with my portfolio company founders, then I have failed as an investor, right? Because, because my job is to hire people smarter than me it the thing is that they know better than anybody else. Yeah. And honestly, let them go try to succeed or fail, and I can help them raise more capital, I can give them guidance around pitfalls. I’ve seen other companies experience going through either kind of growth or contraction stages. I can be a cheerleader for them, which is like a big component of this right, just kind of being emotional support for some of these founders. But I think ultimately, you have to give away control. And that’s also very hard I found for some of these emerging venture managers.

34:07
Well, it’s it’s part of the beauty of it, right? There’s no called strikes. So yet, you get to choose who you want to work with. But in that selection process, you’re you’re also choosing, you know, not to insert yourself into, you know, their, their C level team. You’re you’re believing in them and then trusting them to run their business. Yep, exactly. So cool. Well, let’s, let’s switch gears a bit. You know, what’s the reserve’s strategy at Tuesday? And how do you make decisions on how to deploy reserves in the current portfolios, you know, there’s, there’s offensive strategies defensive, and I’d like to hear how you guys think about this.

34:49
Yeah, I mean, I guess I’ll step back and talk a little bit about our portfolio construction strategy, which then leads to a sort of a reserve strategy. So I think for us, we’re a little bit different than maybe some of the lead funds that we invest in, you know, we’re building really pretty diversified portfolios. On a very similar size fund, we’ve raised 330 ish million dollar funds. And our fourth fund is targeted to be around $40 million that we’re investing out of right now. So a little bit bigger, but really consistent in terms of fun size. We’ll have north of 50 companies and fun for I think we had 54 companies in fun three, we had 77 companies, 78 companies, and fun too. We had way too many companies and fun one we had 149. That was just, that was silly. We, we, we learned, we learned not to be that diversified. But I think coming back to kind of where we are. Where we play in the market, our goal is to build a portfolio that gives us enough shots on goal. And we believe with sort of the the experience we have the access that we have in sort of honestly the network that we feel like we would live, we leverage our network for deal flow our founders and other founders our way, you know, our CO investors and other companies our way, we now are starting to back repeat founders from fund one and fund two that we’ve now known for 789 years. So all those things, I think, give us an advantage. But we still I would still say that, you know, Ventures is a hits driven business, the bulk of the returns are going to be made through just a couple companies. Our fun size enables us on a 250 to $500,000 initial investment to have a return profile, where if we have, you know, a handful or even less than a handful of companies in any fund that are really homeruns that those things can kind of return the fund. And then we have upside from there. Because again, our goal is to deliver a net 3x fund to our LPs. That’s what we tell them. Yep. As part of that, you know, we reserve half of our fund for follow on. But I think the thing that makes us maybe I don’t know if it makes us different, but our strategy is, we treat every follow on as a brand new investment decision. So again, because we’re not leading, it doesn’t put us in the position of sort of having to follow on if our companies raised the follow on round, and we’re very upfront with our companies when we make initial investments. So if we do a seed stage company, and they go to raise in a, you know, we’ll look at the A holistically, almost as if it’s a brand new investment opportunity and sort of try to figure out what the risk reward trade trade off is for that additional investment. And what that ultimately means is that even though we reserve about half of our funds for follow on investments, we probably only end up writing follow on checks into about 20% of the companies that raise follow on rounds, maybe 25%. And again, it concentrates capital where we think, like we can make the highest return. And it doesn’t mean that we you know, sometimes we don’t do follow ons into companies where the company has great milestones, great team great market opportunity, and like the valuation honestly, on the round has just gotten to a point where we’re like, okay, maybe we can only make three to 5x on this, at this point, you know, with a lot of risks still attached to it. Let’s take those reserve dollars and find something earlier in the portfolio or sort of more with with a higher potential return on a risk adjusted basis where we could, you know, maximize the overall value for the LPS.

38:21
How do you assess that, though? Very early stages, right? Once it’s a

38:26
continuum, right, I think when we do pre seed stuff into seed, you know, I’d say the follow on rate from pre seed to seed is pretty good. Honestly, probably much higher, just because you have, you’re still very early on, if they’re directionally hitting their milestones and you still believe in the market, then you write that next check. Now you may have lost faith in the management team over like the nine to 12 months, or or you may have lost faith in the market. And those would be good reasons not to do it. But I think you have a little bit more latitude, but the return profile is obviously much higher on a company raising a kind of seed at a 15 million or $10 million valuation versus a company raising a Series A on $100 million valuation. Right. So all of that gets factored in and I think it really is case by case honestly, we have a portfolio company in fun three right now we’re, they’re raising money at 100 plus million dollar valuation in you know, we’re putting we’re more than doubling down in that company. Because again, we look at the market opportunity, the execution. And, you know, sort of the milestones that we’ve seen the company hit work, and we’re confident like the return profile that is still exceptional, right, and, you know, we’re gonna, we’re gonna more than double our investment into that company. So, you know, a lot of this is just time we’ve seen we have invested in more than 300 companies, I think since since inception.

39:54
What are the vintages of the previous ones? In 2012

39:59
2014 2016 And then we’re in the midst of raising our fourth fund right now. So it’ll be a 2020 Vintage

40:07
are the 14th and 16th funds are the reserves on those fully deployed,

40:11
they are not no. 14, we have probably have maybe 5% of the funds left to still deploy into that. And we have companies in that in that fund that even though it’s 2014 funds, some of the last investments we made, maybe have just raised their A’s, we may even have a couple of companies that are still in their seed rounds, honestly, that just been incredibly capital efficient. And then in our 2016, vintage fund, we have about 20%, maybe a little bit less 15 to 20% of that fund left, for follow on

40:43
investments. Got it in any cross fund investing.

40:48
We have done we crossed and invested in two companies. We got we got advisory approval for two companies, radically different segments. One is kreski, which is a micro lending business that operates down in Mexico that is doing incredibly well. And the other is a satellite company called saddle logic. Where again, we sort of deployed sort of the our maximum comfort level of dollars into those companies from the funds that they originally invested in were originally invested from and decided that we wanted to be able to continue to support them.

41:23
Got it. Got it. So So Pat, you mentioned this before the partnership with frog? Well, first things first, I’m familiar with Parag. I don’t know that all the listeners are so maybe just an overview again of you know who they are, what they do. But, but why the partnership, you know, this is this is unique for a venture fund. You know, why do this when the existing model that Tuesday was was working? Well?

41:47
Yeah, I think it will, I’ll step back for it. So I’ll answer your question on frog. So frog is a design firm, it’s been around for I think, north of 50 years, it’s really one of the most iconic design firms. I think a lot of people know, IDEO, which is maybe the closest comparable to them, in terms of design firms, in terms of pedigree and just age, you know, they worked on, oh, gosh, a bunch of the original Apple products they worked on, like the original Sony Walkman, you know, they’ve just, they’ve really had their hands on a lot of things, they did have the hardware design of the original Oculus Rift. So sort of over time, they’ve consistently been at the forefront of design, both from an industrial design standpoint, and then, you know, increasingly from a UI UX sort of user experience standpoint. So we feel really quite lucky to have been able to build a relationship with them. They helped us with the rebrand to Tuesday capital, which is how we got to know them and worked closely with them, and really saw how they could interact. And they actually worked with two of our portfolio companies on design projects, kit, aptiv, and orchid. Before we sort of made this this additional investment in the partnership, I think for us, I mean, this goes back to, you know, what Tuesday capital was doing was great. We had, you know, a good product market fit, we were delivering services that we thought were compelling and value added into our portfolio companies. But you know, this is an ever changing market. This is a competitive market. And for us, if we think about ourselves as the startup that funds other startups, and our product is sort of the services that we can deliver. If you can bring one of the very best design firms in the world to the table, to even just spend time with your portfolio companies. So all of our portfolio companies have access to Frog design professionals for free for things like office hours, we’re working on a designer in residence program with them to potentially actually place frog employees inside our portfolio companies for you know, two to four weeks to actually how to bring that that expertise in house. But then if you need to actually go roll out a much bigger design project. You know, most startups don’t have access or can’t get on the radar, even a frog, frankly, because most of their customers are sort of fortune 100 kinds of customers, right? So this gives companies that really never would have had access to Frog access, both for a whole host of things that don’t cost them anything. But then even if they want to spend money, they’re going to get more out of those services than they would have normally. And again, you know, if you think about trying to deliver value into the startup ecosystem, this is a really compelling partnership for some of our portfolio companies, you know, some are gonna need it at all. But I think some of them will look at this and say, Wow, this is really interesting. And on the flip side, now, all of a sudden we have deal flow that’s unique, because it’s coming from their side, right companies that are approaching them that want to do design for services. Those aren’t companies that are necessarily raising other capital or a normal round of capital, right. So we’re gonna see things from our LP These prospective that are going to be unique and interesting investment opportunities. And again, frog has been doing this for almost five years, they have top quartile results from the things that they’ve built, or the portfolio that they’ve built for these design for equity projects. So again, I think, you know, we view this as a really, really interesting, compelling new addition to sort of the toolkit that we bring to our portfolio companies. I’ll go back a little bit to sort of our portfolio concentration strategy, again, we’re trying to build diversified portfolios, we’re also trying to figure out how to manage and deliver services at scale into this portfolio. So for things like media and PR positioning, you know, companies should do press maybe once or twice a year. So it’s sort of an infrequent, but high value ad thing, companies should only raise their next round of capital every 12 to 24 months. So we can help those things. Again, infrequent, but high value, when we can help them with those things, or design services that we built, you know, we wouldn’t not at embedded graphics designers, photographers, videographers, we pay for them. But you know, it doesn’t take our time to deliver those services. And then with this frog partnership, again, you know, we have partnered with them, they end up doing the work for the portfolio companies, we get the leverage. So this is something that scales right, in terms of the the ability to offer this to the portfolio. And one of the things I thought a lot about when I was starting crunchfund with Mike, was how do we build something that we can scale and manage with a very small team, and it doesn’t really work? If we were on the boards of 300 companies, right. And we were leading these rounds, and we’d have to raise much bigger funds. And there’s all these sort of secondary effects. So we’ve really tried to build a platform, that’s purpose fit for kind of what we’re trying to do.

46:43
You know, I, I’ve seen it, I think, storytelling, design branding, I mean, those are areas that many, especially like, technically, you know, world class, technically very oriented businesses, you know, they could use a lot of help. When it comes to design side of things, storytelling, et cetera. You’ve seen you’ve worked with a ton of firms, you’ve seen a lot of different models out there. I’m curious, are there any areas that are very underutilized as you know, sources of value for startups that that you know, VCs could provide that you’ve seen? Well,

47:18
I think one of the things that I think that people don’t spend enough time on, especially at the seed stage, because it’s actually probably really hard to do. But there’s firms like workbench, do you know, the workbench, guys? I don’t know. So they’re a New York based seed stage firm that’s really focused on enterprise software, enterprise focus technologies. But they have built a network of probably the 20 or 25, largest kind of financial services companies in the world, this sort of is in their network. And they, they can almost deliver customers, I would say, to their startups, right. So if you think about a unique value add, if you can come in and say, and I think some of the very vertically focused funds probably do this to where they have a bunch of really high level strategic relationships with sort of the big companies that operate in whatever vertical segments, they’re, they’re investing, investing in, right and say, I can make the right introduction to the head of AI, or Morgan Stanley or JP Morgan, right. And as a seed stage company, well, that’s, I mean, having lived inside a large financial services organization for a bunch of my career, like that’s a two to a double sided sword, double edged sword, right? Because if you take on a huge enterprise customer too early on, they can kill you as well. Yep. But I think there are firms that probably are exploiting this opportunity to go in and say, I can walk you into, you know, if you’re mobility focused on I can walk you into the head of autonomous vehicles at GM and Volvo. And, you know, Chrysler, I don’t know what whatever, whatever it is. And I think doing more of that, I think there’s an opportunity to kind of build more pathways for early stage startups and deliver sort of true customer value to those to those companies. And that seems like an area where I think if, if you were me, I’d probably try to figure out if there’s a way I could execute on that strategy. I think the other the other place is sort of really super regional firms, I think, you know, inside Silicon Valley in New York, and LA and Seattle, and maybe Austin there, there’s a fair amount of early stage capital. But I think you go outside of those markets, and you go to places, especially with sort of this explosion of kind of work from anywhere going on. You know, you can have startups started in Florida, in Atlanta in Milwaukee. And I think if there are seed stage funds that are focused on kind of knowing that ecosystem inside and out, understanding kind of what the opportunities are and providing capital into them, I think that and then potentially being a bridge to other capital from outside region, I think that’s a really interesting place to think about adding value as well, a grid. So I mean, those are a couple areas. I think that, that there’s opportunities still good,

50:13
good. You know, Pat, I had a conversation earlier this week with a friend and she recently raised first fund seed fund. She also has really strong networks in certain areas. And so she was telling me how she had has access to some later stage opportunities, more AB opportunities that are pretty high profile, and she can get in those right. And so she’s going through this debate herself, you know, she raised the fund on a thesis, a seed precede early stage thesis, you know, ownership focus. And, you know, she’s, she’s debating, you know, does she take the access, she can get to some of these later high profile? And I looked through your, your portfolio, and I noticed that you’re an AirBnB and Uber, I assume and believe that you got into those at later stages. If that is the case, then you know, how, how did you make that decision, that decision early on to invest in those later rounds? When you had a young, you know, seed focus fund?

51:23
Yeah, I think I mean, those, those are maybe a little bit unique, just because my co founder, Mike had good relationships with the founders of both of those companies. And when we started crunchfund, in 2011, we really, you know, if we had had a fund earlier than that, we would have invested I think, or I would have hoped in Uber and Airbnb, but we didn’t. So we invested in the very first rounds that they raised, sort of after we had a fun, so we invested in the series B for Uber in the series B for Airbnb. And for us, the because our thesis wasn’t sort of ownership driven, or, or, or sort of sector driven, you know, we were pretty, we have a pretty broad base set of things that we can do, I think, for us, we wanted to be in the best companies, I also think for a first fund, some of it is marketing. Some of it is like being in good companies and showing that you can be in good companies. And I think, I know CMOS talked a lot about this, I think, you know, in that first fund, especially your target of proving that you have access, versus proving like you can deliver on your funds business model, right, it’s all mobile, because by the time you raise a second fund, you know, the early stage bets you’re going to make probably aren’t going to show too much data yet in terms of traction and value appreciation. Some of the later stage things that you do, even if they’re A’s and B’s may show quicker traction, just because they’re further along as companies. But it’s also a function of like showing that you can co invest with other great investors in perceived at least great companies.

52:58
Different things you need to prove at different times in your career, for sure.

53:01
Well, I also think it depends on what your LP base is, like, if you have if you have been able to line up a bunch of institutional money in your first fund, they’re not going to they’re going to be much more conscious of you sticking to sort of your your strategy, right? They, they do this for a living, they think a lot about portfolio construction. And ultimately, if you veer off of that significantly, you’re gonna get penalized for it in terms of coming back to them. Yep. You know, if you’re going to family offices and strategics, and individuals that are less sophisticated, or honestly just spent a lot less time thinking about this, I think they’re going to be more interested in saying, Oh, my gosh, look at the great companies that this this fund is invested in, even if you only own you know, two tenths of 1%. of, of, you know, XYZ hot company. Yeah. I do think it depends a little bit on what your LP base is, when you start out. A lot of a lot of this business is staying alive long enough to see how you do as an investor.

54:03
Right? Right, you have to have an opportunity, right? If you Yeah, can’t even get going, then it’s hard to know, if you could ever make the model work.

54:14
It’s, it’s, you know, it’s a balance that, you know, I think, as a manager, I still think about today, you know, we do precede seed seed extension, those are sort of the three kind of main, so broadly seed in its entirety. But one of the things we certainly think about is, you know, if we are getting towards the end of a fund or thinking about raising a new fund, do we want to put in a precede company that could have eight to 10 years of life left in it, you know, on a 10 year fund with, with, you know, two one year extensions, and then you gotta go to your LP base to keep keep going, or do you want to put in something that’s much further along that, you know, could get liquid in six or seven or eight years? Right. And I think you start to think about those things as a manager. As you stay in this longer, longer

54:59
You know, as we’re talking about the seed stage, specifically, you know, we’ve got different camps here, we’ve got like, the folks at Founder Collective, for instance, Eric Paley and company that have institutional institutionalized around this particular stage, they’ve built a brand and a franchise. It is, you know, their preferred stage, and they will shout from the rooftops about why seed is, is best overall and best for them. And then you’ve got, you know, like Chris farmer, who will at signal fire, who says that, you know, seed is not an asset class seed cannot be scaled. If you want to build a long term franchise, you know, you can’t stay at seed. Where do you land? On this?

55:43
One? I think it just depends on your approach. So if you’re a in it, I’ve thought a lot about this, if you’re a seed fund that leads rounds and takes governance roles, you’re constrained somewhat by just the sheer number of companies you can manage, right? I’ve been on I think the most boards I’ve ever been on in my career is eight or nine at one time in man, that’s hellish, right? It’s just, all you do is spend all your time helping those companies. And frankly, there’s one or two of them that are doing pretty poorly, almost always, and you’re spending a lot of your time just trying to figure out how to recover capital. And, you know, it’s written as a reputation based business. So I think you have to put in that time, but it’s, it doesn’t necessarily feel like a great use of time when you’re going through it. You know, if it, I think the other thing that’s put tension on these models is sort of just the increased cadence of when people raise funds, you know, used to raise funds every four years. And then it was every three years, and now we’re in a cycle where new funds are being raised every sort of two, two and a half years. So again, now you’re building portfolios much more quickly, you have a lot more demands. If you have a relatively large partnership, I think you can, you know, and you’re willing to continue to add to that partnership and sort of add capacity to manage portfolio companies, I think you can scale a sort of seed focused fund, right, I think I was talking to Tim Connors at pivot north. And I think he thinks sort of like 30 to $40 million per sort of general partner in like a fund that wants to, to lead rounds. So 30 to $40 million per partner per funds. If you have two partners, that’s a 60 to $80 million fund. But again, that’s thinking about deploying it over sort of three to four years, not over two years. So I mean, again, coming back to this idea, like, Yes, I think if you can stay disciplined and keep your fund size, relatively constant and clear to keep your dollars per general partner relatively constant, you know, you can scale the platform. I think the allure for many people is that you can scale if you’re successful, you can scale dollars much more quickly than people. And then all of a sudden, you’re in this situation where what you were very successful at, which was maybe writing one to $2 million lead checks into seed rounds. Now it turns into now I need to write three to $4 million lead checks into sort of seed extension or small series A rounds, which both changes the competitive dynamic in the market, it changes sort of the kinds of companies that you’re going to be looking at. And I think again, it, it’s, it’s really, it’s hard to change things on the fly and be as good at it as you weren’t the thing that made you successful in the first place, right.

58:30
Which is, we do see a lot of firms growing up. And as they grow up, they they’re moving, you know, Deleter, in later stages.

58:39
They are because they have more capital, they have to write larger, larger checks. But you know, and then again, you know, you have great companies in your portfolio. So you do raise it an opportunity funds so that you can like double and triple and quadruple down or lead round in those saving, there’s all these sort of management questions that I think emerging managers have to go through and figure out. But I will say, one of the hardest things, for any of these platforms that want to scale, once you get past a handful of folks is like, these are partnerships, right? There’s a lot of interpersonal dynamics, there’s a lot of trust that has to be built and come with sort of the the team that’s deploying the capital. And it is a lot harder, I think, to add new partners to funds than it is to add more capital. And I think that becomes a problem for a lot of these funds over time.

59:34
Pat, if we were to cover any topic here on the program, What topic do you think we should address and who would you like to hear speak about it?

59:42
You know, I know you had mg Siegler on before I really enjoy listening to mg. He was one of one of my partners when we started this out, back in 2011 2012. I always enjoy listening to sort of his his take on the world from a product perspective and from a consumer user perspective. So it’s really encouraged you to have him back on. And again, I find the frontier SEC stuff, Frontier tech stuff really interesting. And you know, I’m always looking for more content and more sort of smart minds around that. So I think if you can push stuff on that front, I think that’d be really interesting.

1:00:15
Pat, what’s one thing that you know, you need to get better at?

1:00:20
What I say the answer isn’t one thing, it’s everything, you know, this, this job is one of like, I need to be a better listener, I need to be more patient, I need to provide more more value to my portfolio companies, I think, you know, the thing I find most challenging and most rewarding about the job is that you can literally, you know, work 24 hours a day, seven days a week and still have things that you could do better or or deliver in a better fashion. So I think for me, one of the reasons I do this and I’ve done this for so long is that I find so much just satisfaction in sort of learning every day on this job about how to be better at it or things not to do again, but I learned every day and I just I find it really find that I find myself feeling very lucky that I am where I

1:01:18
am. Well, in the limited time I’ve known you pat you strike me as a radically patient and very engaged listener. So well.

1:01:27
Yes, Radek radical patients I really like the days what is it when you have kids, they say this to you. The days are long, and the years are short, and I think so. You gotta you gotta just, you gotta, you gotta get the right mindset to get through it.

1:01:42
I can hear my son yelling for Daddy upstairs, right? And then finally hear Pat, what’s the best way for listeners to connect with you?

1:01:49
They can just email me I’m peih gee@tuesday.vc. So, Pat gallagher@tuesday.bc All

1:01:59
right, he is Pat Gallagher. The firm is Tuesday. Pat, thanks so much for you know, the candid feedback and all the thoughts on funds structure and portfolio structure and reserves and everything. I really appreciate you being an open book and helping us out,

1:02:14
Nick. Thanks for having me. I really enjoyed it, likewise.

1:02:22
That will wrap up today’s episode. Thanks for joining us here on the show. And if you’d like to get involved further, you can join our investment group for free on AngelList. Head over to angel.co and search for new stack ventures. There you can back the syndicate to see our deal flow. See how we choose startups to invest in and read our thesis on investment in each startup we choose. As always show notes and links for the interview are at full ratchet.net And until next time, remember to over prepare, choose carefully and invest confidently thanks for joining us