On this special segment of The Full Ratchet, the following Investors are featured:
- Tomasz Tunguz
- Frank Rotman
- Alan Patricof & Abby Miller Levy
We asked guests to share the best question they’ve ever been asked by an allocator.
The hosts of The Full Ratchet are Nick Moran and Nate Pierotti of New Stack Ventures, a venture capital firm committed to investing in founders outside of the Bay Area.
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Transcribed with AI:
0:18
Welcome back to TFR on today’s special segment, we ask guests to share the best question they’ve ever been asked by an alligator. Here’s the segment called Best LP question.
0:36
On today’s special segment, we have Tomash, Tang goos of theory. Tom, what is the best question and LP has asked you
0:43
show me your business model. So I mean, you must remember like, during the early days of venture, there’d be financial plans. When we invest in companies, there was a p&l, and there was a cash flow statement, even at the seed, and the financing amount was the sum of the negative cash flows plus some buffer Yes, that’s what the financing amount used to be. And then the venture asset class grew from 80 to 175 billion hit 300 along the way, and the financing amount was no longer driven by the capital needs as a company was driven by the auction dynamics of the process. Yeah. And so I remember one investor very early on when we were raising, he said, Show me your business model, how do you expect to generate the returns? That you are like, what does it look like? And we had one prepared, because we had thought a lot about this. But I think that’s not a question that’s very often asked or analyzed, either as a VC or an LP. And that it really demonstrates been, I think, we had a pretty good answer. But if you have mastery of that answer, I think it’s critical. It’s, you need a good plan. So
1:52
if we just look at entry point, how have you navigated the auction nature of of the environment in order to invest in underwrite your out your investments to an outcome that produces venture scale returns? That’s right.
2:06
Yeah. So I mean, so one of the questions is, let’s assume every year you have a certain number of exit dollars available, right? Let’s call it 50 billion, whatever it is 50 billion of one of the questions is what market share of those exit dollars does theory need each year to produce a reasonable rate of return? Right? And if if we raise $30 billion in our first fundraiser drinks, right? Your is 30 billion in your first fund in order to generate like a two or 3x, you probably need some meaningful fraction of those exit dollars for the next 10 years. In order, right. And so one of the questions for us was, what kind of market share do we need? So let’s calculate that, then the next analysis we did is if we take a look at the pure set of firms, what is the average outcome? And what does that mean, in terms of like, average ownership? What is the return? The third factor we looked at was, what is the overall failure rate of investment, total loss is that typically across ventures about 40 to 50%. So you put all those numbers together into a big model. And that really informed our initial portfolio construction around how we thought, and we were wrong on certain things, right? We were wrong on series a check size, they’re actually larger than we had modeled this, the seeds are right there. But the A’s have been bigger, we had modeled actually a decrease in a little bit of a decrease about a 10 or 15% Decrease in series A because the Fed had raised rates and so we didn’t have private markets would respond, and now
3:33
it didn’t happen. Interesting.
3:41
On today’s special segment, we have Frank Rodman of QED. Frank, what is the best question and LP has asked you this
3:48
question and LP has asked me I mean, the reason for existence in the marketplace is really important. And the value that we can really aid founders with being able to ask and answer the question, why would a talented founder with a great idea, take your money? And being able to articulate that and being able to win deals and being able to have founders proactively seek you out? Like you really do have to have a good answer to that. And I think most VCs, they could use a little refinement. And again, it’s not me casting stones or patting myself on the back, because I actually think we do have a good answer to that question. But a lot of VCs, it’s hard to actually answer that question where some of them you could almost pull them out and put any other VC in, and you get the same answer.
4:43
On today’s special segment, we have Alan Patricof and Abby Miller levy of primetime. Alan and Abby, what’s the best question that LP has asked you? When
4:53
can I get this product? You know, I say that because I think having LPS who are so that you keep very knowledgeable about what you’re doing and vice versa. That it’s a strategic relationship. And it’s a strategic relationship, because venture is relationship business. And I think we’ve done a pretty decent job of viewing our LPS as strategic partners and not just as sources of capital. And so when they’re aware of what’s going on in the portfolio, they have within it and they’re asking for when can we get one? Or when can we try it? I think that’s indicative of that, that how close that relationship is, one of the things we did recently is we hired a head of business development or in what some venture funds called Platform Manager, we’re pretty small fun to have a dedicated person in this role as our fifth team member. But we did it because we know that with all the enterprise relationships we’ve built as a fund, we want to make sure we connect that to our portfolio founders and let them tap into it, but also to make sure we’re nurturing and relationship with our LPS in a much more collaborative way. So that would be my answer.
6:01
Nick, I’m gonna give you a different thing. I’m gonna give you the opposite. I’m giving you a question they don’t ever ask. Okay, and maybe you could say you could be the another one that don’t use because so far in an hour, you haven’t asked it, which is I am going to be 90 in October. And nobody asked whether I will be here for the end of this fund. And no one has ever asked me. In the last funds, I raised a great graft, or the first one we raised at prime time. So I would say that people believe I in my book, I say, I’m gonna live to 114. And nobody doubts it. And I think a lot of people who exercise and keep an interesting life and work keep working. I believe in spite of the statistics saying the aid project, which shocks me every time I read it, that the age expectation is going down by you know, this little bit here or there. I think people are going to a birthday party next week. For somebody who’s 95 friend of mine, I’m having dinner with about to tell you what, man I made dinner tonight with Dan Lufkin, who started Donaldson Lufkin and Jenrette. He’s going to be 95. Next week, I’m seeing John Rosenwald, who was vice chairman of Citibank, who’s named he’s, I think, going on 96. I see a lot of people in the people I see around me, are people who are still working, keeping themselves active exercise, I’m going to try to walk the marathon this year again. I did it two years ago, I’m going to try this year at 90. I’m not sure I’ll make it or they’ll actually get there. So I don’t get asked that question. And it’s too late for you to ask the question. I’m
7:42
not going to ask you if you’re going to be around. But how many more funds do you have? I honestly,
7:46
in that sense, I would say fun three of primetime will be Abby is the managing partner, by the way. I mean, that was a first step. I recognize that Abby shouldn’t be that. I bet that everyone everyone asks us but we always say it. for my own sake. I like to say Abby is the boss. But I picked a very good talented managing partner to be involved with and works very well. Together. We do a pretty good job filling each other’s sentences, but she’s a lot younger than I am
8:17
very good.
8:24
That will conclude this installment of investor stories. If you’re enjoying the program and would like to see it continue. Take a moment and leave a five star review in iTunes. Okay, that will wrap things up for today. Until next time, over prepare, choose carefully and invest confidently thanks for joining me
