318. Founding the 1st VC Index Fund, Rethinking the Future of Capital Deployment, and Advice for Emerging Managers (Marcelino Pantoja)

Marcelino Pantoja of Measurement joins Nick to discuss Founding the 1st VC Index Fund, Rethinking the Future of Capital Deployment, and Advice for Emerging Managers. In this episode we cover:

  • Marcelino’s Background at Stanford & Tribe
  • Why He Wants to Rethink How Capital is Deployed In Later Stages
  • The Importance of Seed Fund Managers
  • Advice for Emerging Managers

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Transcribed with AI:

Marcelino Pantoja joins us today from San Francisco. Marcelino is founder and CEO Measurement, the first ever venture capital index fund. Marcelino, welcome back to the show. 

Thank you, Nick.

You’ve been on the show, of course before, you and I have connected offline many times, but we’d love to hear about the impetus for your move, right? You’ve moved on from Tribe and you’ve now started your own firm, Measurement. Why’d you make the leap? 

Oh, well, first of all, I’ve known the person that I’ve been working with now to build measurement for a very long time. So my days at Stanford, and we’ve been talking about this idea of creating a venture capital index fund for a couple years now. And we felt that the time was right, this past year to finally work on this project. And since he offered the opportunity to do so, and there was somebody who I believe is a winner, and I’ve seen so much, I couldn’t pass on the opportunity to do so and had an incredible time working with the team at Tribe. And I think they are still wonderful and have an incredible future in front of them. But to do a startup having invested in startups in the past and potentially build an asset management company startup, for the first time, I just had to take the leap and go for more.  

Can you give us an overview of the model, the Measurement model? 

So what we’re building today is a very first venture capital index fund. The concept is that there are these seed fund managers who we believe are company builders, true company builders that help their founders go through the customer development phase, and get to product market fit. What our fund does is provide the capital that they need as soon as they get to product market fit. But what they need is to scale that company through its growth before it becomes public. That’s the fund that we’re building today. To back, essentially, the best portfolio companies that come from the seed fund managers.

And so as a part of your model, talk about your sourcing, and then your fee structure. 

Of course, first, in terms of the companies that were backing, there are 10 seed fund managers that we want to collaborate with, we already have one, and we’re talking to others right now. And what we’re doing is that we’re essentially operating so we’re principle within their firm, meaning that to earn the right of information to understand how their portfolio is doing, and which companies we want to back with, we have to support this seed fund manager and support the portfolio companies build a relationship with them, if you will. And we’re doing that while at the same time validating them and building our own analysis of that fund manager in the portfolio companies. And by doing so, we can identify three to five portfolio companies that we will then want to back because they are the companies that either meet or exceed the role of metrics are masters at each stage of financing. And we’re creating a fun structure that is scalable and flexible, that can provide the capital that those portfolio companies need, so that they can just stay focus on building a scalable company. Right now, these founders today need to spend three to six months to raise capital every 12 to 18 months. And today, capital has been easy to raise that might not persist in the future. But yet the best company builders today can remove that as an activity and just work with us because we’re creating a fund that it’s an open ended fund structure. And then instead of charging a management fee and carry as other funds do, we’re just charging a management fee on aum. And by doing so, we’re recognizing that all the value that has been done has been done by the companies themselves. And we’re just capturing the returns the market returns of those companies much more economically efficient for our investors. 

Marcelino, what LP’s do you think this sort of fund is best suited to? 

For the best LPS out there, endowments and foundations, they already have a better portfolio with top tier funds that exist today; this is not going to work for them because they already have that portfolio. And they have those established relationships. Ideally, this is for other LPs that don’t have exposure to venture and would like to get exposure to it and are unable to access the Top funds. Like the Benchmarks and Sequoia’s of the world. It’s very difficult to access it or even other funds out there. But if they want to get better market returns the top decile market returns for this then this would be the best for them. And then for individual investors, they should have the ability to access returns and be able to invest and deploy here as well. 

So this will be LP’s that are newer to the asset class? 

Good question. Yes, newer to asset class are all sorts of sophisticated and understand how they ask class works and invest in funds and other asset classes. 

Yeah, many of the traditional endowments and, and other institutional investors that have participated heavily in VC, to some degree have already built their own index, right? 

If they’re investing in, in many strong venture funds over many years, the look through into those portfolio companies, they end up having an index of sorts. But if you’re targeting LP’s that don’t have as much exposure to this asset class, then you can provide that index-like breath in strong returns. But I have shared this fun with a number of those LP’s mostly because they’re peers or friends, past colleagues of mine, when I worked at Stanford, but this is also open to them as well. The thing is, my view is that they’re paying a premium for earning market returns today. I have friends that work at these late stage funds, and the hedge funds that have been participating recently and ventures, I still think that they are incredible investors themselves. But if they’re earning market returns, and venture, and yet you’re asking your own LPs, to pay a premium fee and carry for that, then it doesn’t make sense to me in my mind, why not then participate instead, and have fun that it’s much more economically efficient, which I haven’t shared yet here with you. But what we’re doing differently is that it is an index fund. So it is an open ended fund structure. 

Okay, right. 

And that means that it makes it more flexible, and easier to scale it to deploy to the best companies that the seed fund managers help build. Now, by making an open ended fund, similar to an index fund in the public markets, we’re just charging a management fee instead of fee and carry, because we recognize that these companies, all the values being created within the companies itself by the founders inside of those, in that all the value add that are other fund managers, and the later stage, how they do that. It’s not really there. It’s really just market returns that have been made by the companies themselves. So why should an investor pay more than just a management fee? Especially now in the public markets, which is much more economically efficient for investment fund? Why shouldn’t it happen in the private markets as well? 

Got it. So you will charge no carry? 

We’re charging no carry, right? Because we recognize that these companies are the ones that are doing the work, not us. Don’t get me wrong, the seed fund manager, they have their fee and carry, and earned their fee. And they’re the true VCs in this asset class. Anybody participating after that is not really venture capital, because the risk has diminished much more significantly, by the time a company gets the product market fit. It also assumes that the role of the series A and or Series B venture capitalist is less important than the traditionalist thing. They play less a role in coaching and value added services and strategy is they went and deployed and they wouldn’t deploy capital, if the if the founder and team didn’t already have a lot of what they say they provide to them, would you really take that kind of risk with the amount of capital that you’re deploying at a Series A or B, or C, if you didn’t see the executive team, having them already being skilled and experienced in scaling this kind of company? Now at founding, you do take that risk, because it’s early days, but you wouldn’t do it once there’s already a business in there already, users, clients, customers, I’m not trying to discredit the other fund managers. There’s a big market out there, of course, and there are more than enough capital from LP’s to these investors to these companies. But I just find it a bit absurd that it seems to not be recognized how much more sophisticated founders and their management teams are today. And I think that’s the part that bothers me a little bit more about how the markets operate. It’s much more efficient today than it was in the past. Andy Ratcliffe used to say that it used to be that he would take technical risk, and there was no market risk. And that today is more market risk. And it is technical risk. I haven’t figured out what it is. But I believe that there is no technical risk and no market risk. By the time you get to that point. The technical risk part is that it’s easier to build whatever products out there, the question is whether there is demand. And it’s easier to capture that demand. Once you build a product. And you could even iterate and experiment on it. Like building a startup today is completely different from 10 years ago, and definitely from 20 years ago. Though there may be a risk when you’re experimenting, even the process of experimentation is pretty refined, and to build a new company around a new cost. I mean, look at I have a little familiarity here. But look at entities and web three, creator economy, look at all these concepts that people are trying to experiment and try to build something here where you can then build a startup and go after that.

These are experimentation that are done every day. And you can see the same playbook upgraded every single time with a new term or a new technology or new concept. So by the time they find something, and they have product market fit, and they’re beginning to scale, that’s where then there is a process are a playbook to implement there. And that process or playbook is being done by the team, not by the fund managers that provide the capital to the team that’s building the company. 

You had mentioned enterprise SaaS before. I’m curious about sort of the categorical types of businesses that you will index on or that you will invest in with your index, you know, when it comes to deep tech, or consumer, or you just mentioned web three, which is kind of this, you know, new emerging category with different economics and tokenomics? Are there certain types that you will invest in with your index in some that you won’t? Or what are your thoughts at this stage on that? 

I believe it really depends on the seed managers that we work with, and what they find exciting. But the reason we want to collaborate with these hedge fund managers, we’ve identified at least 25. And we want to collaborate and work with 10 of them. But even then, we’re still doing the work to evaluate them. And what we’re evaluating, which is what we’ve already done with Tim, who I take the world off of, of course, is that they are company builders, first and foremost. And regardless of what the technology or sector or whatever it is, they help build companies at scale. So to us, whatever sector it is, that’s what we want to work with. Now, what we’re doing at the same time is I didn’t invent metrics, there are other fund managers out there that have written about it or published their own numbers, or developed frameworks and tables that I’ve gathered over the years, and put together to see what the relevant metrics or mass was a lot of it was done also an enterprise SAS, where is much more focused on those metrics and numbers. But they do have a belief that, like, right now, deep tech, perhaps doesn’t have that, and doesn’t have that as much as it does. And in enterprise, SAS where the numbers are, the data is there to capture. But there is a way to build something to identify what that is, even in the sector, and over time where we’re going to create that. And our goal is to then polish it and share it as much as possible. 

So Marcelino, I know, you’ve been through the data, I haven’t seen all the data. So I’m just free thinking here. But if you were to compare your returns to a similar size fund to funds that invest in early stage VC, does your growth index outperform the early stage fund to fund index that has this additional layer of fees? 

I love that question. Because you don’t even have to look at the data, you just have to think about the structure itself. And how it is set up. One, there’s, if you look at the fund of funds, there are fees on top of fees. And then there’s it’s not even just a management fee there’s carry on top of carry that an LP would have to invest. And then you have to think about a fund of funds and create a follow on opportunities for their own LP’s into the best portfolio companies? And how much are they able to then access and deploy? And then is it discounted to their own LPs. So there are fees on top of fees within follow-on fees that are also to their LP, so to me, there’s a lot of big leakage there in their field leakage over time, it just diminishes the possible returns a compound on. So my view is that no, it’s much better to be in the fund that we’re creating, whether it’s just one fee management fee. And it’s a management fee that the market is actually used to paint in the public markets. Now they had the opportunity to do so here. And in terms of our performance, all I can say is that our first fund manager we’re collaborating with and with two others that were that we’re hoping to collaborate with, later this year, like they build multi billion dollar companies. And we recognize that the teams behind the multibillion dollar companies, they’re skilled and experienced in scaling that company, and that is going to be much more economically efficient to capture the value that’s being created by those companies. 

I assume you don’t take a board seat? 

Nope, no board seats at all. And if anything, what makes us different is that we’re asking right now the seed fund managers that build these companies, many of them do lose their board seats over time, not that they lose it. But rather they’re asked to just be board observers, yep, because other fund managers demand board seats, and a founder is trying to manage who’s on their board and who should be there. But our views, by the time a company gets to product market fit to begin to scout, the seed fund manager that provided and help them get to that point, can continue to be the relevant board member and run point, all the way to exit they can do that today. They just don’t have the capital to do so. That’s why they are asked to just step aside and be a board observer instead. But with us back in them, we asked that as each one made or remains on the board. And all that we asked is that independent board members be added instead of us and that these independent board members also be skilled and experienced scaling companies essentially got CEOs or executives at other tech startups to be on that board. And that can provide the relevant insight or advice or guidance that the founder needs to help scale that company.

Marcelino, Chris Douvos was on the program and cited that top quartile persistence is going down. Basically saying, if you’re a top quartile VC firm, it’s less likely that you’ll remain in the top quartile for the next fund, there’s about a 13% chance that the next fund will also be in the top quartile. This was from an interview a couple years ago. So if you’re sourcing from proven managers with previous success, is there any risk that established manager performance may be declining? And you may miss on the emerging manager performance that is on the rise? 

Yes, you’re right. It is possible. If you don’t also look for and identify up and coming fund managers there have the potential to become the builder with a similar track record as a company builders today. One of the things that I learned working my personal and then at tribe and then with other funds out there is that I’ve been given the experience of identifying what those emerging fund managers, what are the skills, the traits, characteristics of that fund manager that we should be collaborating with, and sourcing from as well. And then working with them in sourcing is the wrong word, because it sounds like we’re just getting their deals is not, we’re asking to work with them and partner with them, meaning that help build up companies by providing the capital that they need. But there are emerging fund managers today out there that do have the skills, but it just takes time for that track record to show over time. And what we’re doing is spending the time to meet with as many of them as possible, in order to be able to recognize and see what’s out there. And then I share with them advice guidance, like what does it take to build an institutional quality fund, I do help with LP introductions and help them with if needed, or a vast, sort of like a how to how to build that kind of fund, that institutional piece would like to invest in as much as possible, so that there’s a relationship being built already beforehand. Before we get to that point where we decide to collaborate in the future, if it’s there. 

Awesome. Marcelino, are there any areas or anything you won’t be investing in as an index, you know, a source opportunity through one of your 10 managers that, you know, it’s just off limits? 

That’s a good question there. The way I see it is, by identifying the fund manager willing to collaborate with, then we’ve already recognized what areas we want to invest in. So we see more in that way versus thinking like we have to exclude this, because if we had to exclude a certain group of portfolio company opportunities then why are we collaborating with that fund manager in the first place? 

Got it. So that level of selection would happen at the fund manager level, right? So if a fund manager is deploying into businesses, that would not be acceptable, for some reason, you guys wouldn’t partner with that manager. 

Those true company builders as a founder in the first place, but then the seed fund manager that helps these company builders or help them get to that stage, and those are the people that we want to collaborate with, and then provide a capital as economically efficient as possible to their best portfolio companies so that they can scale. 

Marcelino, switching gears just a bit, what advice would you have for emerging managers, you know, in the context of capital allocation, and you know, just for the audience, Marcelino has been very generous with many, many emerging managers over time, myself included, with some very sage and wise advice. So any thoughts for the group today? 

This is something that I know is some advice, I have to take myself as well, which is, share as much as you can with not only your existing investors, but prospective investors as to how you build your fund. I’ve seen that a lot of early stage venture fund managers don’t share as much about what they do, while in other asset classes they do much more often. And whether that’s like a, whether that’s just writing a quarterly letter, or publishing a news or monthly newsletters, and sorry, if they could do that much more often, then that will help that would help their cause because it would help them be able to share their investment process, while also getting to meet potential investors that that are building a conviction in them and would want to support them. So I definitely recommend that. 

I also think about deciding what kind of fund manager you want to be. If you want to be a VC, which that means you’re investing at the seed stage, build the type of fund that can help you do that and ensure that your fund structure and your fund size in your fund strategies are aligned, because then you’ll attract the right investors for that and the right opportunities to work on that. If you decide to become a larger fund, then I’m maybe biased here but that part of the market is changing is becoming much more efficient and capital allocation there’s going to be different

Curious, with the increases in seed valuations that we’ve seen, especially the strong uptick last year, is that kind of redefining the size of the seed fund, the traditional cap was, I think, like 100 million, kind of one of the upper bounds, lots of LPs will say, you know, I look at seed funds, but nothing over 100. You know, is there a bar in your mind for sort of Max seed fund size? 

I don’t necessarily have a number. But building a startup today is actually very cheap. It’s scaling, where, because it’s much more expensive, to get to product market fit, like experimenting, that part, it’s cheaper to do, right. And the amount of capital that it takes to run those experiments and how to go about it. That’s where it’s becoming much more economically efficient. But once you get to product market fit, now, you know which process to scale a company. And that’s where more capital is needed. So in a sense, seed stage funds that are becoming like 100 million dollars in size or more, they’re transforming into larger funds, but that my point of view that they’re transforming to much larger funds, is not that seed stage companies are becoming bigger, good. Any predictions for 2022. We saw.

We saw record venture capital deployment in 2021. Any thoughts on you know what we can expect this year? 

You know, I don’t know. But I can tell you that, here’s the weird thing about venture: the world is becoming digitized. Software is eating the world. That whole trope is true, right. And even the pandemic has accelerated a lot of those trends, technology will just continue to grow and take more and more of the rest of the world and be more integrated into the rest of the world, right? So the way businesses are run today, or whatever economic activity, that will include a lot more technology, and that will always have conviction. And I think the part that people need to recognize is that as a venture, there are extreme highs and extreme lows as an asset class. And that people will come in when it does really well. And then they will come as soon as it starts going really bad. But throughout that process, and throughout the time and years and decades that that happens. There are still company builders out there that continue to work on new companies and help them get to product market fit, and then help them scale. And as long as you’re working with those company builders and collaborating with them and just be part of that, then that’s the one that will persist and outperform over the long run. And it’s more of a mindset thing than anything else. You can think about numbers or whatever. But in reality, as long as you have the mindset that people have a problem, we can build a solution for that problem. And we know how to scale that. So we can solve more of that problem out there. And that’s there. It’s been the markets recognizing them more and in even with the concept of like, scaling companies and building companies is spread more because of the way venture in startups operate today. But sometimes, when there’s a down market, which could happen in the future, as long as you’re working with company builders, then you’ll be fine. That’s all regardless of up and Whopper down. Whatever happens, just be ready for it. And as long as you work with the right group of people, you’ll be set. 

Marcelino, before we wrap up here, can you give us a sense for where the Measurement platform is that today and what we can expect for the future of measurement in the coming years?

Yes, we are in the beginning. And we already have our first seed fund manager we’re collaborating with. And we’re also in the beginning in terms of raising capital, from the investors that want to deploy to these opportunities, and to do so through our fund. And yet at the same time, we will always be raising capital and we will be collaborating with Future Fund Managers whose portfolio companies we want to continue to back. What makes it exciting is that we get to build something new for the first time and an asset class has operated inefficiently. So I am thrilled to be doing this and can’t wait for others to hear more about it. And finally here Marcelino what’s the best way for listeners to connect with you and follow along with measurement. And definitely recommend to go to our website at measurement fund and to sign up to find out and learn more. Because we are in the beginning. I am personally reaching out to every single person who signs up in sharing with them what we’re trying to build. And our goal is that we can share that as broadly as possible with everybody that wants to learn more. 

Wonderful. Well, Marcelino, it’s a sincere pleasure to speak with you again today. Congratulations on the launch of such a novel model for VC. I haven’t seen it before, and can’t wait to see you know how things play out and get you back on the show to talk more. So thanks again for spending the time today in sharing your insights. 

Thanks Nick.

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