Podcast Summary
GPs under pressure to demonstrate value beyond investments: GPs must be transparent with LPs about fund management and generate value to secure continued support, as the market sees a record $300 billion in dry powder and scrutiny on management fees.
In the current venture capital market, GPs (General Partners) are facing increasing pressure to demonstrate their value to Limited Partners (LPs) beyond just making good investments. With a record $300 billion in dry powder, GPs are under scrutiny for how they are managing their funds and the management fees they continue to receive. Grady Buchanan, co-founder of NVNG, emphasized the importance of managers fully raising their capital and not sitting on the sidelines. He suggested that GPs should be transparent with LPs about how they are using the management fees and generating value, as it is a zero-interest loan. The discussion also touched upon the possibility of fundraising cycles elongating and GPs returning some of the capital to LPs. Ultimately, GPs need to communicate their vision, growth, and industry knowledge effectively to LPs to build trust and secure continued support.
Decreased capital deployment leads to selective investing: VC firms are being more cautious with investments due to less capital availability, focusing on portfolio company funding and strategic investments.
The current market conditions have led to a decrease in capital deployment for venture capital firms, creating a false sense of abundance in available "dry powder." This has resulted in firms being more selective with their investments and extending the life of their existing funds. For smaller firms like NVNG, the focus is on helping portfolio companies raise additional capital and making strategic investments. Larger firms, on the other hand, are more concerned with deploying their remaining capital wisely before having to return to the market to raise new funds. The overall trend suggests a more cautious approach to investing in the current economic climate.
Market shift leads to strategic investing and fee focus: LPs prioritize returns and focus on cash in, cash out ratio, while fees are seen as necessary for strong performance.
The investment landscape has shifted significantly, with companies raising smaller amounts of capital at earlier stages and LPs prioritizing returns over dilution. This change was driven by a market slowdown and a shift towards deploying capital more strategically in promising companies. For LPs, the focus is on the cash in, cash out ratio, and while fees may be a concern, they are seen as a necessary cost if there is strong performance. Additionally, tools like OpenPhone help businesses manage their communications more effectively. Overall, the key is to ensure that fund managers are performing well and delivering strong returns, regardless of the specific strategies they employ.
Evaluating VC Firms: Beyond Management Fees: Top VC firms are valued for their track record, iconic founders, and impressive networks, while emerging managers should focus on building a firm, having a clear differentiator, and leveraging their network for deal flow.
While management fees can be a challenge, especially for new emerging managers, it's important to evaluate their long-term aspirations, differentiators, and network when making investment decisions. Top VC firms like Sequoia, Founders Fund, Union Square, and Elad Gil are highly regarded due to their track record, iconic founders, and impressive deal flow networks. For emerging managers, building a firm, not just one fund, and having a clear differentiator are key factors that can make them attractive to investors. Network is also crucial as it leads to deal flow. The investment industry is full of qualitative assessments and specific to each portfolio.
VCs consider reputation and deep pockets for follow-on investments: VCs evaluate potential investments based on a firm's reputation and financial capacity to ensure the best outcome for their portfolio companies.
Reputation and deep pockets are crucial factors for venture capitalists (VCs) when considering follow-on investments. Reputation refers to the quality and experience of the VC firm, and their ability to provide valuable resources and support to the company. Deep pockets refer to the VC's financial capacity to provide additional funding during challenging times and treat the syndicate fairly. Fred Wilson of Union Square Ventures is known for his early investments and successful exits, making him a top VC in the industry. Eli Gillis of Thrive Capital is also popular among founders due to his strong track record and focus on founder perception. VCs like Victor have a preference list of top firms they want to work with and evaluate them based on reputation and deep pockets to ensure the best outcome for their portfolio companies.
Maintaining transparency and communication in VC: Founders and investors must share info and experiences, build strong networks, and avoid firms with a history of misbehavior. LPs ensure data accuracy and hold funds accountable. Founders should conduct thorough diligence on potential investors.
Transparency and communication are crucial in the venture capital industry. Founders and investors alike must be vigilant about sharing information and experiences with each other to build a strong network and avoid working with firms that have a history of misbehavior. This can be done through various channels, such as Slack groups or industry databases, and can have a significant impact on the reputation and success of both parties. Additionally, LPs play an essential role in ensuring the accuracy of data and holding funds accountable for their investments and follow-ons. The venture capital industry is increasingly transparent, with readily available information through various sources, and founders should conduct thorough diligence on potential investors, focusing not only on the firm but also on the references and experiences of other founders in their network.
Transparency in VC: Protecting LPs and Making Informed Decisions: Transparency in VC is vital for protecting LPs and making informed decisions. Speaking with founders and learning from past failures can provide valuable insights.
Transparency is crucial in the venture capital industry. VC firms are entrusted with other people's money, and it's essential to protect their Limited Partners (LPs) by making informed decisions. Founders' feedback about firms is valuable, and a firm's reputation can significantly impact potential investments. Lemon.io, a platform for on-demand developers, can help startups find and hire experienced developers efficiently. Meanwhile, during due diligence, it's essential to be transparent and open about past failures and missed opportunities. By speaking with founders who didn't get invested in, VCs can learn valuable insights and make better decisions. The industry's transparency allows for informed decision-making, even for those not directly involved in the venture capital scene. Building a network and learning from various perspectives is crucial for success in the venture capital industry.
Access to top-performing funds remains crucial for LPs: University of Chicago study shows top-performing funds continue to deliver strong returns, but gaining access can be challenging, leading some to use unethical methods.
Access plays a significant role in limited partners (LPs) investing in venture capital funds. The University of Chicago study, as highlighted in Stepstone's report, shows that a considerable number of top-performing funds continue to deliver strong returns in the future. However, gaining access to these funds can be challenging for smaller investors. Some firms have used unethical methods like hiring third parties to extract information from competitors or even impersonating recruiters to lure employees for intelligence. While these practices are unethical and potentially illegal, they demonstrate the lengths some go to gain an edge in the industry. Ultimately, LPs, including NVNG, need to adapt their strategies to find returns, recognizing that access remains a crucial factor in the venture capital landscape.
Access and picking are crucial in venture capital for success: Successful access to promising opportunities and wise investment decisions lead to high returns, building a strong network and brand in venture capital
In venture capital, access and picking are crucial factors for success. The ability to access promising opportunities and make sound investment decisions based on a deep understanding of the market and the companies involved can lead to high persistence of returns. This is because successful investments can build a strong network and brand, attracting future opportunities and investors. For emerging fund managers, it's essential to learn from the practices of established firms and focus on building a solid team and internal operations to increase chances of success. The importance of previous performance in venture capital is evident, as it often indicates future success due to the network and brand effects. Just as random success can inspire individuals to strive for more, a few successful investments can motivate emerging fund managers to further develop their skills and build a successful venture capital firm.
Continuous learning and adaptation are key to business and fund management success: Successful businesses and funds adapt and learn, finding new skills and resources to grow. Maintain focus, access resources, and articulate vision to achieve growth.
Success in business and fund management requires continuous learning and adaptation. What got you to product-market fit may not be what gets you from a million to a hundred million in revenue. Similarly, what worked for venture capital funds in the past may not be effective in achieving billion-dollar exits today. It's crucial to have programs that deliver value to founders, evolve with the industry, and maintain a disciplined approach to investing. Starting a business has become easier with services like Northwest Registered Agent, but growing it to the next level requires new skills and potentially different resources. Finding and supporting GPs who can articulate their vision and growth strategy is essential for LPs, especially in today's crowded market. The funds that have been successful in the past and are expected to continue doing well are those that have maintained their focus and access to resources while avoiding bloat.
Building relationships with potential investments: Investing success depends on GPs' ability to build relationships, communicate effectively, and consistently evaluate potential investments over the long term.
Building and maintaining relationships with potential investment opportunities, even after passing on a deal, can lead to future success. By keeping open lines of communication and showing genuine interest in a company's progress, investors may be able to re-engage and potentially make a successful investment in the future. This approach requires time and effort behind the scenes, focusing on intangibles such as building a strong team and network, and consistently evaluating potential investments over the long term. Ultimately, the success of a General Partner (GP) depends not only on their ability to identify promising investments but also on their approach to relationship-building and the value they bring beyond just financial resources.
Investing in a Midwest VC firm for local market insights and recurring revenue opportunities: Invested in a Midwest VC firm, Victor, for access to local market expertise and successful hardware-as-a-service investments, like Corral and density.io, providing recurring revenue through software subscriptions.
The speaker identified an opportunity to expand their investment portfolio into the Midwest market by investing in a Midwest-focused venture capital firm, Victor, whose team invests heavily in the region and has a strong understanding of the local ecosystem. The speaker was impressed by Victor's focus on the Midwest, his investment in high-capacity managers, and his alignment with the speaker's investment strategy. The investment in a hardware-as-a-service company called Corral, which uses technology to optimize ranching operations, was described as a successful example of this strategy. The speaker also mentioned their investment in density.io, a similar hardware-as-a-service company that optimizes space usage. Both investments demonstrate the potential for recurring revenue streams through software subscriptions and the importance of understanding local markets to identify promising opportunities.
Investing in AI-powered tools and second-time launch founders: Investors prioritize AI-powered tools and second-time launch founders with successful track records. Small AI companies offering affordable solutions are exciting investments. Founder University supports pre-product startups with a 12-week course and $25,000 pre-launch funding for 2.5% equity.
AI-powered tools and second-time launch founders are key areas of interest for investors. Jack, a generational rancher, innovatively used technology with dog collars on his ranch, inspiring the creation of "how we dot a i h o w i e dot a i," an AI-powered scheduling tool. Investors prioritize second-time launch founders with successful track records, as seen with Raul and his company Super Human, which received a $500k investment. Small AI companies offering affordable solutions are exciting investments, as they have the potential to disrupt industries just as SaaS, Cloud, and internet companies did before them. Out of 20,000 applications for funding, about half are pre-product and lack the necessary resources. To address this, investors started a Founder University, offering a 12-week course and providing pre-launch funding of $25,000 for 2.5% equity. Despite skepticism from the internal team, 80 such investments were made last year. The waiting game for investors against serial entrepreneurs or returning applicants may depend on various factors, including the strength of the idea and the founder's previous success.
The importance of relationships and past successes in investing: Successful investors value relationships and look to back those with a proven track record, even if they've made mistakes in the past, for new ventures.
Successful entrepreneurs and investors often seek out those who have previously supported them, creating a valuable network and a desire to repeat past successes. This was illustrated through personal stories of founders reaching out to previous investors for new ventures, emphasizing the importance of relationships and intangible benefits in the investment world. Additionally, investors like Jake are open to meeting and considering individuals with a track record, even if it includes past mistakes or unsuccessful ventures, as they offer valuable insights and lessons learned. This approach allows for continuous growth and learning within the investment community.
Investing in Midwest firms with a focus on software-wrapped-in-hardware companies: Consider firms like High Park Venture Partners, based in the Midwest, for a diversified fund of funds portfolio due to their focus on software-wrapped-in-hardware companies and deep understanding of local industries.
When looking for venture capital firms to invest in, it's essential to consider those with a portfolio aligned with your region and an understanding of local industries. High Park Venture Partners, based in the Midwest, is a firm that fits this criteria. With a focus on software-wrapped-in-hardware companies and a background in the Midwest ecosystem, High Park has a strong track record of investing in large, enterprise-focused software companies. Their founding partner, Dan Shanahan, has extensive experience in the industry and a deep understanding of FinTech. While Decian Venture Capital is a more specialized fund focused on FinTech, High Park offers a more generalist approach with a strong Midwest focus, making it an attractive addition to a diversified fund of funds portfolio. Additionally, High Park's preference for a fewer number of investments aligns with the fund of funds' investment strategy.
Verifying Founders' Authenticity in the Pre-Seed Stage: Investors prioritize founders who are actively building the product and engaging with customers during the pre-seed stage, despite having a little MRR and few customers. It's crucial to ask specific questions and look beyond the surface to separate genuine founders from those who are just good at pitching.
During the pre-seed stage, having a little MRR and a few customers is a crucial signal for investors. However, it's essential to verify the authenticity of the founders' involvement in building the product and engaging with customers. As David Sack mentioned, going from zero to one customer is significant. In the past, it was easier to identify genuine founders as they didn't have a well-polished pitch or a clear playbook for getting venture capital. Nowadays, everyone knows how to pitch, making it crucial for investors to ask specific questions and look beyond the surface. Companies where founders are actively building the product and talking to customers are more attractive than those where the founders are just good at pitching but lack hands-on experience. When it comes to competition in the AI-built tool space, separating theatrical from real is a challenge. It's essential to assess competition with the team and be cautious of overcrowded markets, but keep in mind that there will always be winners. As investors, our role is to identify those founders who have a genuine product-market fit, are building a kick-ass product, and are committed to engaging with customers.
Focus on a startup's unique value proposition during seed stage: During seed stage, investors should assess a startup's competitive advantage, niche market, team experience, and potential market size instead of solely focusing on competition.
During the seed stage of investing, it's essential to focus on a startup's unique value proposition rather than solely on competition. The competitive landscape may seem daunting, but it's not the only factor to consider. Instead, assess whether the startup offers a significant competitive advantage or caters to a niche market where customers are willing to pay for the product or service. Moreover, investors should be cautious about dismissing a startup based on the assumption that someone else could do it or that the market is already saturated. Instead, they should consider the team's experience, the size of the potential market, and the startup's ability to differentiate itself from competitors. For instance, in the case of Self-Funded Health, a company trying to enter the crowded health care insurance market, the team's experience, the size of the potential market, and the shift towards self-funded health care plans were compelling reasons for investment. In summary, competition analysis is crucial, but it should not be the sole determining factor when evaluating a seed-stage startup. Instead, investors should focus on the startup's unique value proposition, the team's experience, and the size of the potential market.
Vertical industries in software market offer opportunities for efficient solutions and substantial returns: Companies focusing on vertical industries like construction and equipment can lead to significant returns due to efficiency gains and lack of specific software solutions. Opportunities include SaaS companies like PayWise and de-risked startups in less competitive markets.
There's a significant opportunity in the software market for companies focusing on vertical industries, specifically those dealing with vertical construction and equipment, as opposed to horizontal infrastructure like roads and pipelines. An example of this is a SaaS company called PayWise, which streamlines the paving process for contractors, including managing invoices and paperwork. The investment in such companies can lead to substantial returns due to the efficiency gains and the lack of specific software solutions currently available to these industries. Another trend observed is the de-risking of startups in less competitive markets, such as those outside of major tech hubs, who come with lower valuations, less capital, and a focus on running lean operations. A notable upcoming investment opportunity is DeepTrustAI, which aims to provide an API to verify the authenticity of audio recordings to combat deep fakes.
Leveraging APIs for Business Growth and Combating Deepfakes: Building an API can lead to business growth, especially for companies attracting developers. However, with the rise of deepfakes and malicious activities, there's a need for new tools and protocols. Founders can learn from each other's experiences through events like Founder Fridays.
Building an API can lead to rapid growth for companies, especially when they attract developers. Twilio, for instance, started with a focus on detecting deepfakes in audio and has seen significant success. However, with the rise of deepfakes and other malicious activities, there is a growing need for new tools and protocols to combat these issues. When it comes to investing, Jason Calacanis and his team make smaller bets on likely winners and assess their potential based on their progress. Founders, in particular, can benefit from connecting with each other and learning from one another's experiences. That's why Calacanis and his team have launched Founder Fridays, an event by founders for founders, where they can get together, share notes, and learn from each other's successes and challenges. By hosting these events in their own cities, founders can tap into a network of like-minded individuals and gain valuable insights that can help them overcome obstacles and grow their businesses.
Connect and learn from other founders at non-commercial events: Founder Fridays offer founders free access to expert speakers and networking opportunities, hosted by founders for founders, with events rolling out continuously in various cities
Founder Fridays, an initiative by Startups.com, offers founders an exclusive opportunity to connect and learn from each other in an intimate setting. Unlike traditional conferences, Founder Fridays are non-commercial events, free from service providers trying to sell software or services. Instead, founders can engage with some of the world's greatest speakers on their own time, without having to pay for tickets or travel. Hosted by founders for founders, these meetups are vetted to ensure authenticity and provide a platform for knowledge sharing and networking. With the use of software like River, founders can join existing meetups in cities like San Francisco, New York City, Toronto, Los Angeles, Las Vegas, London, and India, or start their own. Founder Fridays begin on February 2nd, and are rolling out on a continuous basis. This is your chance to connect with like-minded individuals and grow your network as a founder.
