As my Podcast 2017 Tour continues, Nick Moran from Chicago’s The Full Ratchet was kind enough to have me on his show again a second time. Two years ago, I was a guest on The Full Ratchet discussing the intricacies of how seed-stage companies graduate to institutional Series A rounds. For version 2, in this episode, Nick and I dissect my earlier post on the process (and emotions) of raising a first-time institutional VC fund — I process I tried to capture in this post earlier this year.
The feedback to that post a few weeks ago has been deeper than I had imagined. Folks also listened to Harry Stebbing’s recent pod with me. And, they should listen to this one with Nick, too — Nick’s podcasts are longer (this one is about an hour) and Nick goes through every detail on his notes page. He knows the right questions to ask at every turn, so I’d recommend this new episode…here’s what we discuss…
-Maybe we can start off with how your investment focus has evolved since the last time you joined us.
-What are your thoughts on how seed has split into pre-seed, seed, seed extension, and post seed?
-Are you investing once with a company or reserving for these various stages within seed?
-You just closed fund 3… tell us about the first two funds that set the stage.
-Would you do things differently if you could go back?
-Which raise was the hardest?
-How did the expectations of LPs change from the early funds to the institutional fund?
-What surprised you most about the raise?
-Did you connect w/ prospectives through referrals, cold calls, a combination?
-Walk us through the metrics… how many targets, meetings, avg commitment amt, etc.
-Did you ever think you might not complete the raise?
-What’s the best advice you got on the raise and who’d you get it from?
-In our first interview, you talked about how you couldn’t get a full-time job at a venture firm. I’m sure you’ve had plenty of offers as you’ve built a track record. Did you ever consider making the jump?
-When I sent my fund deck to you, you said “Awesome and looks good. As I always say, the deck matters much less than having capital partners who believe in you” For anyone listening that aspires to raise… talk about what you meant by this comment.
…and especially recommend it if you’re just starting out to invest and/or already have a small fund. When I mentioned I was surprised, it seems like there’s no stop to the rate of new small fund formation. Three years ago, people said the same thing — “How can there be 250 new small VC funds?” And, every year, that question remains the same, with the number going up. By the response to my post, it feels like even more next year. I have been thinking about the gale wind forces driving this trend, and I’ll share a few here below:
1/ Global instability makes the U.S. an attractive place to park money. Money around the world seeks a safe haven, and despite our current troubles here in the U.S., relative to other regions, this country remains a very attractive location to put money to work. That trend has only been increasing in intensity over the past few years.
2/ When foreign money comes to U.S. shores, it often travels west. The money coming in is going to the coasts (another issue, yes), and primarily the Bay Area, which has led to a new kind of local area inflation. It means pre-seed rounds of $1M pre-product, and lots of early investment in new things, lots of talent fragmentation, higher rent, harder recruiting environments, intense competition, etc.
3/ Large, new financial players like hedge funds, banks, and sovereign wealth funds seek to diversify. I don’t want to lump all these folks as their motivations are slightly different, but the Tiger Global’s, the Blackrock’s, and the SWF’s of the world have big asset balances and investing earlier in technology is a good way to diversify. One could argue Softbank’s much-covered Vision Fund is a product large enough to accept checks from major SWFs and give them exposure, essentially picking off the best companies from ever going public and hitting public stock exchanges.
4/ Traditional VC firms may have gotten too large and not planned succession well. Many firms have ballooned from around $200M a decade ago to over $1B per fund now. The nature of those funds and their business models have changed. Larger funds, I believe, will need to be hybrid funds which engage in direct investing, yes, but also fund investing, secondaries, and the like. So, smaller funds are rising to fill that early risk gap with capital that is just seeking alpha.
5/ Founders, at least in the early stages, seem to prefer collecting small checks from operators vs bundled checks from institutions. So, the money is moving where the market is. Let’s see how long it lasts.