238. GP and LP Alignment, Challenges for Emerging Fund Managers, and How the Explosion in Seed Fund Volume Plays Out (Jaclyn Hester)

238. GP and LP Alignment, Challenges for Emerging Fund Managers, and How the Explosion in Seed Fund Volume Plays Out (Jaclyn Hester)
Download_v2
Nick Moran Angel List

Jaclyn Hester of Foundry Group joins Nick on a special Crisis Coverage installment to discuss GP and LP Alignment, Challenges for Emerging Fund Managers, and How the Explosion in Seed Fund Volume Plays Out. In this episode, we cover:

  • Tell us about your background and path to VC
  • For those who don’t know talk about the approach at Foundry with both the LP and GP model
  • Foundry traditionally had no apprenticeship model and no junior investors… were you the first?
  • Pandemic… Are you making investments currently and what are you hearing from other LPs?
  • What’s your advice for GPs re. building relationships and momentum w/ LPs during these uncertain times?
  • What’s the biggest mistake emerging managers make when fundraising?
  • What do new fund managers underestimate when starting a venture firm?
  • Does it matter how specific a thesis is? Do you need to see a unique, focused and compelling edge or are you just as receptive to a generalist w/ a strong network and track record?
  • What question tends to trip up GPs?
  • What are some of the most important things GPs should ask LPs when raising?
  • What do you think are the most important things GPs and LPs need to be aligned on for a successful relationship?
  • How does the explosion in volume of seed funds affect you approach to selection?
  • How do you think this plays out — most funds fail? Returns more evenly distributed? Power law no longer applies (or is less pronounced)?
  • Fast forward 5 years and let’s assume there’s been a fundamental shift in early stage Venture. What do you think is the most likely, largest change that’s occurred?
  • What advice do you have for young people that aspire to be a VC someday?
  • Not going to ask for favorite GPs but, I will ask, if you could break quarantine to grab a cocktail w/ one GP — who do you choose? ; )
  • 3 Data Points…
    • Youโ€™re approached by an emerging VC firm raising fund II. The fund manager did not work for a large, brand-name venture firm before and she has never had an institutional investor. Net TVPI is 1.4, and Net IRR is 35% and it’s a 2018 vintage.
    • The catch is you can only ask 3 questions (for 3 additional data points) to make your decision.
    • What 3 questions do you ask?

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 full ratchet.

0:23
Jaclyn Hester joins us today from Boulder, Colorado. She’s a principal and founder group, a fund that invests in tech companies and other venture funds. Prior to venture she was a corporate attorney working at Perkins Kui and Baker Hostetler, advising startups and P firms as well as buyers and sellers in m&a transactions. Jacqueline, welcome to the show.

0:44
Thanks, Nick. Thanks for having me. Excited to be here.

0:46
So rumor has it you were accepted into the most recent class of Kauffman fellows. Yes.

0:51
Thank you that rumor is true. And public? I think I tweeted it. So yeah, I’m part of class 25. Awesome. class, we had our first module last week, successfully all via zoom. While exhausting, I think they did a really nice job of making zoom work for us, and getting the class pretty close together pretty quickly, from all parts of the world and never having met in person. So I’m thrilled to be part of it and really excited about what’s to come. Well, congrats

1:17
on that. And just remind us, what’s the duration of the program and the cadence that Yeah,

1:25
so it’s typically a two year program, they’ve extended it, so that we still get the same amount of in person time. So we get two extra modules out of it. It’s about a quarterly module. I think they’re typically four days, or at least that’s how we’re doing the virtual ones, where it’s about half the day. And then there’s some international trips involved, which is really awesome and summits with the with former Kauffman fellows as well. So you get to be part of the whole network.

1:50
Awesome. Awesome to your program. Okay, class of 2022. Yeah, well, good. Well, let’s back it up. You know, I gave this brief intro. But can you tell us a bit about your background and your path to Vc? Sure.

2:03
So I’ll say growing up, I didn’t know anything about tech, I certainly didn’t know the words venture capital, grew up in a small town on the East Coast in Connecticut. My parents owned a small retail shop. And so I didn’t really know anything about this stuff, went to college at Emory, ended up living in New York for a couple of years, and then applied to a bunch of law schools, got a scholarship to see you out here in Colorado and was ready to leave New York. So sort of ended up here without having spent much time in Colorado and 10 years later, I’m still here. I went to law school wanting to be a corporate lawyer and do business work. And again, didn’t know much about startups, even then, I had an MBA because I thought it would make me a better lawyer for businesses. And then through really the the foundry guys. And boulder generally got introduced to all things startups and entrepreneurship and tech, and sort of had this feeling that you know, this is, this is what I should do with my practice of law should be part of this, but never really expected to go into venture capital at all. And at the time, foundry really was adamant about they never hired anybody. There weren’t a lot of firms around here. In VC, I didn’t see myself moving out to Silicon Valley. And so I stuck to sort of my path and plan. I’m very much a planner, of working for a big law firm, and hoping to get to work with tech companies and startups. And I did a bit of that. Also, at the time, my husband and his family. Were building a startup from scratch, called fair Harbor, which ultimately was sold to booking.com, a couple years ago. And so I was part of that whole journey as well. So I certainly had the startup bug. I had run something in school called Startup Colorado, that Brad Feld was on the board of one of the foundry partners also taught a class on venture capital in the law school. So I knew about it from there, too. In any case, went into went to the practice of law ended up the second firm I was at, ended up at in an m&a practice, and just could tell pretty quickly that it just wasn’t for me the big law firm thing. And so and maybe even the practice of law, and so started thinking about doing something else, probably earlier than most people do. I know a lot of a lot of people who started in law and have since switched to doing something else, but you typically spend a bit longer practicing. So about a year and a half, and I realized it wasn’t for me. I really wanted to work more closely with startups and building companies and thinking about different ways to do that. ran into one of the foundry partners sort of just at the right time. I’m very much a believer in in the give first ethos, it’s uh, I think Tech Stars maybe owns that hashtag or trademark. But it’s all about sort of, you know, you put yourself out there you say yes to things, you do stuff for other people. But it’s not entirely altruistic, right? Like, you know, I believe in sort of universal forces. And you know, it’ll come back to you at some point, if you just keep sort of sprinkling good out there. And so that’s what I did. And people showed up for me a lot in this community. And so I did the same and so I have Been to say yes to an event at the law school where we would, you know, they wanted to help teach law students had a network. Lawyers are not particularly great networkers. And so I thought that was a great cause I was in the middle of an m&a deal. I drove up, I was living in Denver, at the time, drove up to Boulder, and said, Sure, like you guys have done so much for me, I’ll do this. And that was very fortuitous timing, because I happened to run into Jason Mendelsohn, who’s a Partner at Foundry and had been my professor and he said, How you doing? And I said, I need a new job. And so he offered to have breakfast with we we talked through potential operating jobs within the portfolio, possibly working at Tech Stars. And then he mentioned Hey, you know, we, we’ve never hired anybody, like, you know, foundry doesn’t have junior people, but we are bringing in a new partner, he’s gonna do a new strategy. And he’s interested in potentially hiring someone. And so that was Lindell, Ackman, who took a chance on an unhappy lawyer and brought me in and 2016 When we started, the Foundry Group, next family of funds, where we decided, or with the firm decided to institutionalize something that they had been doing with Personal Capital for years, which was backing the next generation of great managers, typically seed funds, great for us in the sense that we didn’t have a big team. We didn’t want a big sort of legacy transition. That was how the firm was built from day one. And so it was a way for us to stay close to and mentor the next generation of great managers, almost like a distributed firm if you think about it. And it’s also great for deal flow. And we love sort of the volatility, that volatility and alpha that you can create in these small early stage funds when you’re getting in really early and keeping the fund size relatively small. So So yeah, that was that was my foray into venture and Lendl hired me and took me in really as an apprentice. And it was it was really slated as a two year gig where I would just get introduced into the world of venture, see a ton meet a lot of people build a great network, and then find something else to do. And here I am, four years later, so I hope I get to stay forever.

7:05
Good for you. Well, I remember talking to you about this last year in Boulder and Lindell as well, but Foundry Group was known for not doing this apprenticeship model, right, having no Junior investors, all general, all general partners, I believe, were you the first.

7:22
I believe I was, I know, there’s been other people that have done, you know, stints with and certain project work. And I think, more on the analyst side, I believe I am the first. So that’s exciting. And I, you know, I feel very sort of grateful that I got to stick in there, and they were willing to take a chance on me, I think it took a little while for everybody to sort of be on board with what my role is, it’s, you know, it’s challenging to navigate a role that doesn’t exist in a path that doesn’t exist. So I didn’t have someone to follow. I don’t really have any peers within the firm. And so it was, you know, for a lawyer were, you know, you know, I was always great, you know, good in school, right? You have specific rules, and there’s a path to follow. And you need to have this many credits, and you need to answer these questions on a test and you know, what everything becomes. And the same with the legal practice, and most law firms where, you know, you, you know, how many years it takes to become partner, and how many hours you have to build to get a bonus, and all of this lockstep very certain system. And it was a big risk, I still work on on dealing with uncertainty, and ambiguity. And so it’s, it’s been a it’s actually been, it’s been great for me to sort of develop into having to, you know, be okay with some of that. That’s

8:40
great. Yeah, no, I do recall. Maybe it was Brad that wrote it. But in talking about not sort of building out this apprenticeship model internally, they found kind of an alternative, or you guys found an alternative to succession planning internally at the firm, which was to build out this essentially a fund to funds practice. Were you back? You know, the next emerging GPS, can you can you talk about foundry, just briefly foundry as sort of a GP that’s investing directly as well as investing in other GPS?

9:15
Sure. So talk a little bit more about our structure today. So our current fund is $750 million vehicle. And about 25% of that will end up being the fund of funds capital. So really, our core business remains, you know, being a direct investor into high growth companies. And so that’s, you know, that that’s where we get our alpha. From a portfolio construction perspective, if you think about the three to 5x, targeted return for early stage funds, our funds allocation could really be could really return capital on the fund. And then our directs investments into companies, you know, is all upside and so I think that’s the beauty and the genius behind this model. We’ve seen you know, a lot of GPS at larger later stage firms and by later stage I mean, you know, even Series A, but the firm’s have gotten bigger. You know, they want these relationships and they want the deal flow. And so a lot of GPs have been investing their personal capital into early stage fund managers for that reason. I think when we started doing this institutionally in 2016, there was a real inflection point in seed funds, and really angels and microphones becoming sort of an institutional product. And so we’ve seen, it’s been an interesting timing for me to enter, when I did is that there’s been a huge influx of seed funds, and microphones. And so there’s, you know, first republic, I think, put out a report that there’s at least 1000 out there today, it feels like a lot more as an LP with the inbound that we’re getting. And so there’s just, there’s just so much opportunity there to bring that in, the way that we’ve invested. You know, we, we talk about networks, right, and TechStars is a network, Brad will tell you everything he’s ever done in his career, as an investor has been about networks. And so we think of this, as you know, we have a network of our portfolio companies and the founders and every everybody that they bring with them, and the partner funds, as we call them, which are RGPS. And then, you know, the 800 plus companies that we have exposure to on a look through basis, not to mention the probably 1000 other companies that these partner funds worked with in their in their prior funds, where we don’t have exposure. So we think it’s a really powerful network, we had a powerful network going into it. And so a lot of what we did was sort of try to take certain people and certain funds that were already in the network, right, where we had written a personal check or CO invested with them, or knew them really well, and bring them closer, right as really to be this extension of our firm. But we also think about what’s accretive to our network, and where are we missing? And so those are the considerations that we make when we bring in a new fund. I mean, there’s a ton of great funds out there, there are a ton of managers that were will be successful. We can only write so many checks. And so we really, we really think about our network and our portfolio construction as we do that. Got

12:08
it? Got it? Yeah, well, I do want to go deeper on kind of how you select and how you look at GPS as well as the seed market. But But before we do so, you know, the pandemic is, is really spiking right now, you know, you’ve got states like Texas, Florida, California that are getting record rates, you know, the markets are suffering because of it. Hospitals are filling up. It’s it’s pretty severe, right at the moment here on the 26th of June. You know, what have you seen since the beginning? So this started back in March? And how is that affected? You know, foundries approach and your approach to making investments in GPS, you know, Have you have you deployed capital since the crisis broke in? And do you plan to?

12:54
So we were already, I think, starting about a year ago, or so we were already slowing way down on new allocations. Because we had a network in place, we moved really quickly for an LP, when I started, like, we were doing a fund a month, we sort of had a list that we knew, we wanted to invest with, between, you know, the foundry guys in their personal investments that they had made, and then lentils, relationships that he brought with him from new TIMCO. And also through a fund called Cendana, that he was an LP of that had vested in a lot of microphones. So we were at a really fast clip at the beginning. And that was, that was pretty intentional, right? If you think about the length of a fund cycle versus a company, and so you want you sort of want to front load those commitments if it’s all in the same fund. So we moved quickly at the beginning. And so we were already slowing way down and really not engaging on many new funds, and have been super focused on direct investments, where we’re looking at to our partner funds, who are mostly seed funds, and looking at their portfolios and tried to partner with them. When companies get to our stage of investing, which is typically at Series A, and you know, sort of catalyzing rounds, and working with our partner funds on that next round. So that’s where we had been focusing our time anyway, I like being helpful. So I’ve been I continue to talk to emerging managers, you know, during that time, but we knew we’d be adding sort of a, you know, zero to three year for the remainder of the time. So when COVID hit, it didn’t really change. I don’t I think how we thought about investing as an LP because we were already slowing down and sort of knew what we wanted to do. With respect to direct investments, what’s interesting is that we’re actually in a really good, really strong position. And our strategy is really proving out right now, where, you know, a lot of what’s being done is you have to invest via zoom, which we all love so much and not having met a founder, and that’s a really big change for a lot of investors and certainly for us. However, we had already started developing this muscle of investing with founders that we hadn’t necessarily met in person because we have Have our partner funds, our trusted crew of partner funds already invested in these companies already working with these founders, we’ve already known about the companies, maybe we’ve met one of the founders at their annual meeting, or what have you. But having a trusted partner in place, is extremely helpful in this kind of environment. And I’ve also noticed our partner funds feeling that way about each other. Because we’ve built some community around it, and they know each other well. And so they can collaborate on deals, and they’re more comfortable doing that. If it’s like, hey, you know, we’re both in the foundry portfolio, we know each other and one of us knows this founder really well, let’s, let’s call it let’s co lead it.

15:36
Got it? Got it. You know, as you’re speaking with GPS, now, you know, what, what would you advise them on building these networks and building relationships, with LPS trying to gain momentum trying to gain, you know, interest in future commitments, during a really sort of uncertain time?

15:57
Yeah. It’s tough man, it’s tough out there is it I will say, it’s a great time to have just closed a seed fund. Right, having dry powder in this market, I mean, there’s gonna be great companies built in this market, people are really opening their eyes to new ways of thinking, there’s gonna be a ton of innovation coming out of this, companies are going to operate differently probably more efficiently, because they have to remote work is really, you know, becoming a real thing. And so I think there’s a lot of positive there. Again, if you have have a fresh round of capital, I think for later stage funds, it’s challenging, and even for us, because you have a mature portfolio, and the companies have, you know, pretty high burn and big teams. And so there were a lot of hard decisions that had to be made early on. But back to your question. You know, I think the first thing and I say this, regardless of the environment is like, make sure you really understand if you’re just starting out what it is to be a VC and to run an institutional fund, and all the things that come with that, because it’s not just investing in meeting cool founders, there’s a lot more to it, you’re really running a company at the back office stuff is hard. Fundraising is hard. You know, all of it. And so I always encourage people to really think about how dedicated they are to all of that stuff to making sure you want to do that. And it’s a really long feedback loop, right? You don’t really know if you’re good at this for five, 710 years. And so you got to be comfortable with that. The other thing about fundraising is you’re not really making money while you’re fundraising, right. And so you’ve got to be willing to take that leap, and that dedicate to it. And in the fundraising, we typically for a new fund, we say, you know, think about 12 to 18 months could be longer in this market, it might be longer. So that’s number one is make sure you really want to do this. And that you’re not leaving something that’s a lot more stable. And you’re comfortable with the risk, right? The second thing I would say is, you know, most first first time funds, and that’s, that was necessarily a question, but emerging managers, often the smaller funds are raised from family offices and high net worth individuals. And so while this is certainly a hard time for the bigger institutional LPs, and we can talk about that separately, you know, those folks may have challenges around liquidity as well, I may not be so comfortable putting their money into an asset class that takes so long to return. And so I think just, you know, like, understanding who you’re talking to, what their concerns are, you know, having empathy for for for the, for the potential LPs and being patient with them. You know, one thing we’ve said, and and heard is, and I think maybe this is changing now, but certainly, like, right at the beginning of COVID, was, if you push for an answer, you’re probably going to get a no, because saying no, right now is just the is the easiest, safest thing to do. And so you just have to be patient with people, I would say, where you have momentum, really go for it, you might start with A, you might start with the first close, that’s a little bit lower than what you expected. We’ve seen a lot of firms take their headline number down to more of an MVP of like, what do I really need to get in business and have this and make this fund work, which means you might have to change your check size of your portfolio construction, that may affect your ability to hire, you know, to hire a team, because, you know, if it’s smaller fun, then you have less management fee. So those are real considerations. So I think, I think being more comfortable with with potentially, you know, some rolling closes, maybe a smaller fund size, those are important things to consider. And being patient with LPs, you know, leaving people alone for a little while, but but also just trying to, you know, stay on their radar in a in a reasonable not pushy manner. And then also, I think, you know, a lot of people believe that by September, we’ll sort of know where we’re at what things are going to look like. I don’t know if that’s true. I think that’s, that’s helpful. A lot of people talked about September being the second wave. I don’t think the first wave has ended. So I think it’s gonna just be a flow right into that. Um, And so you’ve got to be really, really comfortable with all of the uncertainty around this and the need to be really patient. And so that’s a huge consideration to make. One interesting thing I’ve seen people do for funds that are sort of, you know, that are raising fun too, but already have a fun and existence is, you know, you always want for potential or often want potential LPs to come to your annual meeting, you they get to see you and your partnership and how you report to your LPs, hear about the funds, hear from your, your, from your founders and sort of see it all happen without it being a real, you know, a pitch to them. So it’s a little bit, sort of a nice environment, a little bit more passive for the LP. But people don’t want to get on more planes and go to more annual meetings, like LPS just go to tons of these things, right. And so, you know, if you’re, if you don’t live in that city, it’s you’re definitely not going to go right. But now with most of these things being done virtually, we’re actually seeing potential LPS tune in to a fund where they probably wouldn’t have gotten on a plane to show up, but they’re happy to spend the hour and turn their resume on. So I think that’s been a nice strategy that I’ve seen, actually working surprisingly.

21:10
That’s good to hear. Yeah, we’re just planning our our virtual summit this year. And we’re certainly hoping for that. You know, what, what do you think fund managers underestimate most when going out to raise an early fund, you had mentioned before, you know, the challenges of fundraising, also all the admin. But you know, what has been kind of the, the biggest misstep and or area that that you found early fund managers under estimating?

21:40
Yeah, I think for those whose who’ve done angel investing, or have seen early stage companies raise, it’s not that it goes really quickly, but you tend to get your nose more quickly. And so you can just keep moving through a process and you sort of you might have a couple of meetings, and then you and then you want them to make a decision. I think the thing that people underestimate with LP relations is just how much longer the relationship building cycle is, before especially an institutional LP is going to want to write you a check, it might even be an entire fund cycle, right? And so, you know, the, the thing that I think will turn to LPS off is, and I’ve seen, I’ve seen this I’ve I’ve experienced it is like first meeting, like, you know, is this something you would invest in, like, are you gonna write us a check. And that’s just how it works. You know, this is, it’s a, it’s a long term partnership, really, you know, the, the fund may be slated for 10 years, but it’s going to last 15, if not 18 years, maybe even longer. Just a really long term partnership that you have to think about, and understand sort of that LPs are getting, or are approaching it as that as a partnership. And so there’s a lot more that goes into it. Not that that a you know, a fund investing in a company is not a partnership, it’s just different. And so I think that’s a thing that newer managers just aren’t aware of. And, and so may may take offense to this neat, like, you need to know me for two years before going to invest in my fund. And that’s sort of the deal. So I think, being patient and about the relationship building and intentional about it. And then also, I think, you know, I know, it’s frustrating for GPS when they don’t feel like they have a lot of transparency with LPs. And so I think it’s important to ask the questions up front, especially for emerging managers. Like is this something you do a lot right to the LP, if you’re the first VC they’ve ever looked at, like, you know, that’s gonna be a tough sell, and just wrapping their heads around that risk. And the same with emerging managers. And so I think, getting a better understanding of the LPS business, you know, I always tell founders, when they’re gonna go raise their first round of capital, like, you should ask a bunch of questions to this VC about their business, you should understand, you know, what drives them? Like, what, you know, how big is their fun? How big do they have an outcome today? How much ownership do they need? Like, how much are you going to matter to them? What’s driving, you know, what’s incentivizing them? What drives their business model? And I would say the same thing, you know, this is just another level up. And so really understanding that LPS business, sort of what their allocation is to venture, how frequently they’re investing in venture, you know, what they’re really looking for, and, you know, and what their process looks like. And so I think just getting a lot of that stuff out upfront will reduce some of the the frustration with like, I can’t read this LP, they they’re stringing me along, you know, that six meetings now I still don’t have an answer. And so knowing that stuff upfront is helpful.

24:45
You know, we see this, especially on the show, you know, I’m interviewing a range of experience VCs as well as emerging managers, and we see this really wide range of theses and claimed edges right? People that are super special cific hyper focused on a certain sector trends, maybe a geography even. And then we have some that are are generalists, right? They maybe they pick a stage or two stages and just invest invest in great founders right and claim to have a really good network is, is there something that you look for? On either side? I mean, are you willing to do both like the hyperfocused, as well as the generalists then? You know, what is it that really gets you excited? When you’re speaking with a GP? Is there something that stands out with regular frequency?

25:40
Sure. So really, it’s a people business for us. I don’t like the skin of cats metaphor. So I need to come up with something else. But there are just so many different ways to do this business. And there’s, it’s really about playing to your strengths as a human. And so whereas one person might be a deep expert in something, and so it totally makes sense for them, because they have this really specific thesis about a certain area, it makes sense for them to do that. Whereas a person that’s really it’s more about network and the founder, coaching and whatever else. And that’s probably going to be more generalist fun. And so I think the thing that we look for is that you’re really playing to your strengths, that the strategy fits who you are, and your experience and your network, and sort of, you know, what your superpower is. So for us, it’s that fit that we’re looking for, you know, similar to founder market fit, right. And so, so, I think there’s that I think we’re also just looking for, you know, compelling, dynamic individuals. And I know that that’s not particularly helpful or specific. But there’s something about this job that is about spotting talent. And so it’s a very human driven business, right, like VCs are really just middle people, right? You’re, you’re, you’re taking money from LPs, and you’re getting it into companies, yes, you’re doing a lot of helping along the way. And I’m not trying to minimize the job at all, it’s a hard job. But if you think about the role that you’re playing your job, especially as you know, in pre seed and seed and early stage is to go identify talent, there’s, you’re not gonna be able to invest off, you know, off a spreadsheet here, these companies are super early, there’s a ton of risk that you have to be comfortable with. No, you don’t know the numbers yet. And a lot, you know, the only thing we know about a model is that it’s wrong, right. So you also have to be a person that’s going to attract interesting founders, that doesn’t mean you have to be an extrovert. There’s plenty of introverted GPUs that are awesome and have, you know, the right type of founder for them. But it’s really about being a dynamic person that’s gonna attract talent. And so there is an aspect of network there, right, because that’s where most deal flow comes from. There are certain firms that are more they have, you know, a special software algorithm driving it. I think you need to have both. But we’ve seen a little bit more on the product creation side. For our part, we haven’t done any funds that are super vertical. But we do have funds that specialize. So we’ve got funds that specialize in a you know, b2b SaaS and enterprise companies only funds that specialize in the future of retail and commerce, funds that specialize in you know, the the overlap between software, hardware and software. So we do have a bit of that, but it’s still generally broad. And if we think about how we are, you know, our investment thesis has always been somatically driven. Our themes are very broad and horizontal, human computer action interaction is one, distribution marketplaces, protocols, glue, which is, you know, sort of how computers talk to each other. And so given that were relatively horizontal and somatically driven, we’re naturally drawn towards folks that sort of fit either into to one or more of our themes, especially because, you know, part of the strategy is looking for direct opportunities, and then also just, you know, sort of alignment and how our GPs are investing. But I’d say, you know, it’s a broad range, it really, we’re really just focused on like who the people are, the strategy has to make sense. If there’s, you know, there needs to be a compelling thesis of some kind, we look for networks, we look for, you know, we say the good human test is at the top of the funnel, like, there’s a lot of ways to make money in this business. There are a lot of people in VC that will be successful. We don’t always necessarily want to partner with those people. So the people thing matters for us sort of a shared ethos. And then, you know, like, the reputation with founders is really the most important thing. The ability to help founders, the ability, whatever that is, right? You can help them with operations or maybe you’re awesome and helping them raise their next round. So there’s, there’s lots of different ways that people can play here.

29:55
Love it. Love it. Jacqueline. What question do you ask GPS that tends to trip them up.

30:02
There are a few. I think, you know, one thing that I think GPS, don’t expect to get questions on as frequently as they shouldn’t, on all LP should ask about this. And maybe it’s not in the first conversation but questions around, you know, economics and you know, if there’s a team element, like, what’s everybody’s steak who owns the management company? That kind of stuff is uncomfortable. But you’ve got to have answers to that. And the team needs to be aligned around it and comfortable with it. When you talk about that. So I think those types of questions sometimes GPUs just aren’t totally ready for and comfortable with. You know, one question we’ve asked partners before, especially when it’s a new partnership, because I would say partnership risk is among the highest risks in emerging managers, especially when there’s sort of limited working history together is how do you fire each other? And I can’t tell you how many times people have not been prepared for that question. And they sort of look at each other. And so these are things like, first of all, you should know that if you set up a firm for your own benefit, but it’s a hard question that you need to be able to answer.

31:12
Good, good. So we talked before about kind of the volume of seed funds and how has exploded, you know, how, how has this affected the way that you guys operate, and the investments you make in GPS, if, if at all,

31:28
we’re more tired. You know, it’s, it’s, there’s like an exhausting level of of inbound. You know, I think that we feel super fortunate to sit where we sit and get to look at everything, and get to partner with some incredible people. And it’s hard to, you know, it’s hard to say no to people that when I meet them, when I look at them on paper, and all the things like this is a person far more impressive and accomplished than I. But we just can’t do them all. And so I think, you know, one thing you have to do, and this is, you know, it’s 10 times harder for VCs, right? Because there’s, there’s way more companies out there than there are funds. I think that it’s, you know, we have to, we have to figure out how to differentiate, and that’s really hard with VC, because, you know, money is a commodity, right. And so that’s sort of the GPS job is to figure out how to articulate their edge and their story and their point of differentiation. But it’s also our job to look for that and to try to find that. So you’ve got to know what you’re interested in, which is, which is hard for everybody, I think. And then having I think having some bright lines can be really helpful. And just ways to say no, quickly, I mean, that’s what a founder wants to, like, if you’re gonna get a no, you want it quickly, so you can move on and go to the next thing. And so we look for that, too. And so maybe it’s around, maybe it’s around font size, maybe it’s around geography, maybe it’s around, you know, certain themes, or certain types of companies. You know, so I think that that’s, it’s important to have some rules to just help you sift through. But at the end of the day, like, you’re taking a lot of meetings, you’re right now, it’s a lot of zooms. And you’ve got to meet a lot of people, I think, you know, it took me a long time to even get to like, develop my own tastes. And what I was looking for. Limbo used to laugh that I was writing everybody a check, like, we walk out of a meeting, I was like, That person was awesome. And so I think you go through this phase, where you start out, like, everybody’s awesome, and then you sort of become cynical, because you’ve seen so much, and then you start to see some of the some of the patterns evolve, and some of the same BS over and over again. And so then it’s like, you know, everybody’s awesome, and it’s, nobody’s awesome. And then you start to strike the balance, I think I’m finally in that phase of being able to sort of like, know what I’m looking for no one I like, you know, flag when I see something awesome. Also looking for red flags. There’s just, it takes a while to, to develop that. But you know, there’s a sea of them. And so we we’ve got to, we’ve got to know what to look for. And then I think also, like, I understand how the referral nature of this industry can be disproportionately, negatively impacting certain types of founders. And so for us, like, to me, the most important thing is making sure you have a really broad network that’s inclusive, making your network accessible, but it is so much, you know, just as far as like building efficiency into your process, having some kind of reference or connection to a person, through somebody that you trust is extremely helpful and can also really help you sort of figure out where to prioritize, but I do understand the need to be to be open and to be accessible, and to be inclusive in your network.

34:55
That’s great advice. Yeah, I was talking with Samir about this when he was on the show. Oh, you know, this proliferation of seed funds. And I think a couple decades ago there were less than 50 venture capital firms. And now we’ve got

35:06
over 1000. Right. Everybody wants to be a VC. Right? Well,

35:11
and I’ve kind of long said, I mean, I think the venture world has gotten a lot more flat. And I think the gating factors for getting into Vc, traditionally, were not the same factors as having success within the asset class. And so, you know, we had this power law, and we had, you know, big winners, and many, many losers. You know, how do you think this whole thing plays out? Do you think returns will be more evenly distributed? Do you think the power law will change or be less pronounced, you know, any, any predictions on what this huge number of firms entering venture capital will do to kind of overall performance of the asset class? Get out your crystal ball.

35:56
Yeah, I don’t feel like I’ve been doing this long enough to make those kinds of predictions. Listen, I think that I think it’s great that there’s so much more company formation. And the thing that happened that I think enabled there to be more funds is that it’s, it’s more, there’s more, I think there’s been democratized access to even being a founder, and there’s still work to do there. But if you think about how expensive it was, and sort of you know, and sort of the Moore’s Law aspect of how much easier it is now, and less expensive it is to start a company, yes, there’s more competition, right? And so like, especially if you’re trying to, if you’re a consumer world, and you’ve got to acquire customers, there’s a ton of noise, like, yes, that is harder for sure. But just the ability to to get going and build a product and get it to market is just so much less expensive, and easier and faster today, right. So there’s just more companies. And so with more companies, there ought to be more funds. I think also, you know, venture, they’re used to, like, their technology used to be a sector, right, that’s not the case anymore. Technology is everywhere. And so I think that there’s just because of that, there’s just gonna be so much more formation, and there’s just a bigger footprint that that venture can have. You know, that said, not every company as a venture bankable company, I think that there could be more distributed returns, because there’s more, if you’re just looking at like, if you’re looking at multiples, right? Because there’s, there’s more of these small funds. And if you’re just looking at, you know, multiple cash on cash returns, the smaller funds can actually have outsized performance, because you only need to hit a couple for that to work if you keep your fund size small. And you have the right portfolio constructions that you’re concentrated enough for it to work. So I just think you’re gonna see more winners in the microphone category. And so that may that may spread things out. And I don’t know that it’s true anymore that like, you know, there’s only 20 companies a year that matter, right? I think that because there’s so much more formation, I think you’re seeing so much go on outside of Silicon Valley, which used to not be a thing, I just think there’s a lot more opportunity for upside across the board. And for more people to succeed in, it doesn’t need to be so concentrated at these, like top big firms. And actually, it’s a lot harder to return a billion dollars of capital multiple times over than it is to return $20 million of capital multiple times over. And so that’s where I think you’ll get the distribution.

38:17
Yeah, I wonder if we looked at recent exits, if ownership distribution across different venture firms is more spread out, or if it’s still as as centralized as its as it’s ever been?

38:31
Yeah, I mean, with the with the with the more like the seed players, and actually having like a fun name, as opposed to just the angels, I think your seat like you’re seeing the funds that got in early didn’t have to buy that much for it to be a big outcome for them. Again, if their fund was small. You know, by the time a Series A happens, there’s probably been like two institutional rounds, if not three, because you’ve got the you know, precede is now called the thing and there are funds that do precede that are sort of institutional microphones. And then you’ve got a seed round, there’s a lot of seed two rounds, I’ve seen seed three rounds. So the amount of capital that’s like, it’s no longer sort of the friends and family Angel, and then straight into the Series A, there’s a lot that’s gone on before that at this point. And so I think that that’s where you get more of that distribution. You know, the other thing with series, like, you know, one thing that we’re excited about for our strategy is, you know, the series A funds have gotten really big. And it’s super competitive. And like, because of the way their models work, they need to come in and write a giant check in the elbow, everybody else out. And the way that we’ve built our model is that we can be, you know, we can be collaborative with our GPS and come in and we can write a two to $5 million check instead of the five to $10 million check. And if you do enough of those, it works. And so, so we like how our model works is that like sort of the insiders can play. It’s supportive of our own partner, we already have exposure to the deal. So we’re sort of layering on top of that. And we think that’s really interesting. And I think we’re just starting to see more alternative models in the market. And so there’s there’s other ways for people I mean, you see, like, there’s the crowdfunding side of things. You’re seeing alternative models that have profit sharing or something for companies that maybe aren’t going to have huge, huge outcomes, but still could be, you know, still can work as fun returners, if you keep the portfolio construction. Right. So I think you’re gonna see more people having access, I hope to this asset class. And so that may, you know, sort of distribute, where those where the impact is for those big exits.

40:33
Hope you’re right. Okay, we’re now going to go through our three data points question. So this is where I’m gonna give you three data points, give you a hypothetical, and do your best to make a decision. Even though this is not how things would really work, especially per many of your answers on relationship building. But let’s say you’re approached by an emerging VC firm raising fund to the fund manager did not work for a large brand name venture firm before she started. And she’s never had an institutional investor. But her net TVP is 1.4. Her net IRR is 35%. Let’s say it’s a 2018 Vintage couple years old. The catch is you can only ask for three or sorry, you can only ask three questions for three specific data points. To make your decision, what three questions you ask.

41:25
Okay, I’m gonna assume it to solo GP, because you just said, you just said she has a singular, so I think I get to just cheat and steal that one. Okay. Um, so I three things I would ask. One is around network and deal flow. Two would be around, I would ask for a full portfolio, track record. And information about the companies and talk talk her through sort of how those investments came to be her level of involvement, all of that, for me, like Net TV PII and IRR from two years ago, like it just isn’t meaningful at this point, right. So I really care about the portfolio of companies. And the third thing would be around portfolio construction. And so that’ll include some asking, I’m getting a bunch of questions. You’re asking for more. But that would include things like portfolio construction is a single idea, or single concept, but includes a whole bunch of things, including number of companies, cheque size, reserve strategy, stage of entry ownership targets, and so that would sort of that would get me to understanding the strategy a bit better. On

42:42
the second point, you know, unpacking the portfolio, and the individual companies is just learning more about kind of the level of interaction and the quality of those companies are what are you looking for with that question?

42:52
Yeah, so the the portfolio that you build, certainly, like if she can’t remember if she has, she has to she has an existing portfolio, right? So the portfolio you build is really all you have to show in your first fund or two. Right? So we like to save you’re committing to fund one, you’re committing to fund one and fun two, because you won’t know enough about fun time fund one by the time fund two comes around. Other than Did you know, did the partnership blow up? Did somebody act really egregious slight, like some, you know, save for some, you know, big obvious thing, you’re probably going to back this person again, as long as they did what they said they were going to do. And so really the thing they have to show is the portfolio of companies, I always tell founders, like you’re the shiny toys, right? So like, you matter the most of these people. The other thing you get from a portfolio review is sort of, you know, especially in an in person conversation, you just get to see where the GP lights up, right, like, so what, what gets them excited. So I cheated there too, because that’s another question I would ask. But you also sort of get an understanding for their taste of deals, what gets them excited? Is it is it really about who the founder is, is that certain, you know, certain thesis around how companies should be built or business model or whatever. So you get to see that too. And then I think you get to hear about, here’s a bunch of stuff baked in there. And this is why like we always say tell stories, you know, fundraising is storytelling. And you know, nobody wants to like, read through your long case study. But you sneak the case studies in right. And so all you should be doing in fundraising is telling stories about companies. So you also get to see, you know, a story about a company should include this is how I met this, how this company came to me, this is why I was excited about it. This is how I won the deal or got my allocation depending on the model. This is how I have helped the founder and the way that I’ve engaged with the founder since and again, that should play to the strengths it doesn’t it’s not like a set thing of what you have to do. And sort of and this is where the company is at today. So sort of, you know, the last piece is is starting to identify Is this person a good picker and are they picking successful companies and sort of getting them to their next round of funding? So I think you get a lot by just going through the portfolio and spending time understanding. You know, why these companies? Why did they pay These companies and why are these companies exciting? Awesome.

45:02
Jacqueline, what advice do you have for young people that aspire to be a VC someday?

45:08
Sure. I think the general advice I give to all young people is, and certainly when they’re going to college or whatever, it’s like, just figure out how to become an interesting person. A lot of that is just like developing interests and having experiences meeting lots of different people being open, to figuring out like, You got to figure out like, what is your superpower? What are you really good at, and coffee, and we do this exercise, about finding your zone of genius, you have a zone of excellence where like, you’re really good at something, but then the zone of genius is just another level where like, you’re just, you know, this is your superpower, you enjoy doing it so much, you’re really good at it, and you’re maybe better than most others at it, and finding a way to spend your time in your zone of genius. I think sort of more tactically, which is probably the question you’re actually asking, is, you know, getting experience in tech and in startups on some level, and or in investing. And so you know, having a strong operator background, in either a startup or a tech company, and building a network is sort of one path I’ve seen people, you know, come at it from, and then you know, another could be doing the the more finance track where you get you really had understand and investing, and you understand how to build models that can be really valuable to firms when you’re early on. So I feel like getting some level of relevant experience, building a brand for yourself, whatever that means, you know, going deep on some things, and having a real perspective, and being able to carry a conversation vocabulary is a big thing in this industry. Excuse me, if you think about accessibility, like a lot of its vocabulary. And so there’s a ton of resources out there. For people that want to get into venture and tech and startups, our venture deals book that, that some of the foundry partners row is a great introduction. And so just educating yourself as much as you can. And there’s a ton of information out there. So I think that like, you know, if you want to get hired into a venture firm, coming with a little bit of a network and a brand and some really relevant experience, and to sort of differentiate yourself, you are a product, right? You are entrepreneurial in yourself. And so think about yourself that way. So I think there’s lots of different paths in my path is certainly not typical, although there are a bunch of X of X lawyers and venture that often don’t admit their lawyers until you ask a bunch of questions. But no path is traditional. And so I’d say just be patient with it. Not everybody. First of all, not everybody should be a VC or will like that career. I know, it seems really cool. And it sounds really exciting. But there’s a lot of hard pieces of it and unenjoyable pieces of it, not everybody would would want to do. And it does take some time to develop a real sort of perspective and enough experience. I know pattern matching, pattern recognition isn’t always a good thing. But you just got to you got to see a lot in some respects before you can, you know, be investing other people’s money and making really hard decisions and trying to help companies and make introductions for them and all of that. So I think some patients around it to that, like it may not be your job out of college. But there is a path there. A lot of people don’t get into venture until they’re like, you know, in their late 30s or 40s, or even later. So I think having some patients around it, too.

48:26
Yeah, I think there’s a good parallel with what you said before about getting into Vc. And even when you’re in VC there, there are folks that specialize just in investing, right? Maybe they work in a big firm. And then there are some people that go and create their own firm, and they’re, you know, a new founding GP. And those those are not necessarily the same skills. It’s just a different job, right? Like being an investor at another firm and focusing on on deal flow and vetting and sourcing etc. And then, and then running a venture firm are different jobs,

48:59
very different. And I’d say, you know, for, I think one of the most interesting things that makes you the most interesting is like just, you know, especially when you’re young play, go start a company, you can take a bunch of risk at that time, or go join a founding team or a really early startup, you learned so much doing that. And that makes it whether it fails or not like that makes you really attractive. And you just develop so much. And then I would say on the if you do if you are in the sort of, you know, more institutional VC firm type role, then a thing that you ought to do well, two things. One is, you want to understand what LP relations look like that is hard to do when you’re Super Junior, but you can ask questions around it and just under like, understand the operational back office stuff that may not touch your day to day job, but are things that you have to do if you ever want to go start a firm and to figure out ways to get some some of that knowledge. The other thing I would say to anybody and I should have mentioned this earlier is when you are young is when you start to develop your network. When you go To raise a fund someday, you will want to have like, diversity matters, right. And you want a diverse partnership for a lot of reasons. You know, the two most being that they, you know, diverse teams perform better. And I think also LPS really care and founders really care. And that that trend is not going away. And so if the challenge that I’ve seen is that when people go to start these things, they look around their network for who they would partner with and who they’re closest with. And it’s typically someone that looks exactly like you. And on a lot of levels, not even just sort of like race, gender, ethnicity, those things, but also experience and what you’re good at and all of and you know what your skill set is. And so when you’re young is the time to start building a more diverse network on all levels, and build those relationships so that you can have some history with people. And then when you’re ready to start your firm, I’m telling you, it being a solo GP can be very lonely. I hear this all the time. And so to have a partnership can be a really powerful thing. But you have to have a diverse network. Now it’s the same thing when that you tell companies like when you start building your teams, make sure diversity is a priority from day one. If you do it, you know, a couple years in it’s too late by then.

51:11
Grid grid. Jacqueline, what do you know, you need to get better at

51:18
rambling last, which anybody that listened to this episode of your podcast, could probably identify. You know, like I said, patients and presents, I think are the two most important things just trying to slow down and saying, No, I still struggle with that, because I like helping people. And I like spending time with people. If I talk about, like, if I looked at my zone of genius exercise, it was like spending time with people, which is sort of funny to think about that as a job. And it’s a big part of the job. But you’ve got to draw the line somewhere and be kind to yourself, and you will be better if you do those things.

51:57
And finally, Jacqueline, what’s the best way for listeners to follow along with foundry and connect with you?

52:02
Sure. So we’re like pretty out there. Our website is foundry group.com. All of our info is on there. I’m easy to find I’m J free stir on Twitter. I don’t do Facebook, and then I try to keep Instagram to be not a professional thing for me. I really like to start writing more and doing more blogging. So you might see some of that for me. But yeah, we’re around.

52:25
And should we expect any new commitments from Foundry to fund managers this year?

52:31
Um, you know, possibly, I would say probably, we’re certainly I mean, you asked the question before they didn’t answer was have we done any since COVID. And we’ve definitely done rehabs with our existing portfolio. And we are likely to add one or more this year. But we’re still sort of working through some of that.

52:51
We’ll get your videos ready. She’s she’s taken all comers.

52:57
We’re certainly making new direct investment. So I will I will say that. Good.

53:01
Well, Jacqueline, this was a real pleasure. I’m glad we had a chance to set it up and look forward to reconnecting you know when things open up again in Boulder.

53:08
Absolutely. I hope to see you I hope to see many people live some

53:18
that we’ll 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