Investing Billions - E13: Shai Goldman on What Differentiates Venture Funds that Generate DPI and How Brex Generated $100M Using a Growth Hack Most Startups Ignore

Starting point is 00:00:00 We are back with the Limited Partner Podcast this week after our hiatus last week to hold space for the victims of the terrorist events of 10-7, both Israeli civilians as well as Palestinian civilians suffering from the war. As a first-generation refugee who's fled anti-Semitism in Russia and whose family was murdered by both Adolf Hitler and Joseph Stalin, it has been deeply disheartening to see the open celebration and silent approval of war crimes at the highest level of our institutions, including my alma mater, Harvard University. We hear your silence, and the silence is deafening. With that in mind, we must now focus on what is known in Judaism as tikkun olam, which roughly translates to healing the world, which means de-traumatizing the innocent victims on both sides of the barbaric

Starting point is 00:00:45 acts of terrorism on 10-7. This week's episode is with Shai Goldman, an Israeli-American who has worked tirelessly for the Starbuck community since 2001. Shai and I are both personally supporting United Hatzalah, a volunteer-based first responder organization in Israel, and we ask that you consider doing the same. Full information and show notes below. We now return to the previously recorded episode. Those are interesting glasses, David. What's the scoop?

Starting point is 00:01:15 I'll take them off for the podcast. Actually, J. Cal, I just interviewed him a couple weeks ago. He put me on this. I do know J. Cal. He's supposedly the best moderator in the world. That's what I hear. His track record is pretty interesting. He's pre-Sea Investor, Sea Investor and Wealthfront, Robinhood, obviously Uber, Superhuman. I do have a J. Cal story. I met Jason when he was doing Open Angel Forum. When the Super Angels were coming about in the micro VCs back in 07, 08,

Starting point is 00:01:44 a lot of folks were cutting checks, but the super angels were. So he would get together a crew and he called it the open angel forum. And I was in the room when Uber presented to the group. So a lot of people had a first look at Uber. It was in San Francisco at Pier 38, which was Dogpatch Labs. And so I do remember seeing the Uber pitch at the really pre-seed stage. So he helped put that together. A lot of people don't realize that if SF had good taxis, there's a good chance that there would be no Uber. It's pretty wild how something so local could become so global. It's kind of the power of startups.

Starting point is 00:02:36 Well, Shai, thanks for coming on. You've been a super connector since 2001. So you've seen so many cycles. You were at SVB at that time, and then later 500 Startups, and today at Brex. Welcome to Limited Partner Podcast. Well, thanks, David, for the invite and for having me. Great to be here. Great to have you on. So before we start, I did have a mutual friend ask me about the Brex campaign, the billboard campaign that famously Brex did as an early stage company. Tell me about that. When Brex went through YC, they actually pivoted from a VR startup to what is Brex today. So I went through YC, pivoted during Brex and was ready to launch. The big campaign for Brex was really out of home billboard advertising. And so I believe the first employee, non-founder employee was Michael Tannenbaum.

Starting point is 00:03:20 He had worked at SoFi. SoFi had interesting campaigns right out of home. And so I believe it was his idea and maybe Sam Blond as well, who's a chief revenue officer to do an out of home billboard campaign. And so they bought all the inventory in San Francisco. It was very inexpensive because there's very little competition. So for around $300,000, they bought every billboard on 101 and SF, all the bus shelters, every billboard available they purchased or rented. And that was a massive launch that got them a lot of press, a lot of customers. And it was relatively inexpensive for a major launch.

Starting point is 00:03:59 And the credit card for startups was really the moniker that was used at the time. And everyone still remembers that pitch. And since that time, now you see a lot of startups using out of home and billboards as a way to market themselves. And so Brex was really the first one to do a major campaign of that scale. So it's very effective. We still use it today for the Brex corporate. We also use it for client shout outs. We also do free advisory services for

Starting point is 00:04:26 clients who want to do major billboard campaigns. We'll do free consulting for them. Henrique, who's CEO of Brex, has said that that campaign, that original campaign, generated $100 million in revenue for the business. One of the reasons I like that campaign is because, of course, every venture capitalist believes that they're impervious to biases. And that was basically a way to make Brex seem much bigger at the time. And a lot of VCs fell for it and ended up growing into this behemoth that we have with Brex today. So we'll get back to Brex. But you've had a really storied career, as I mentioned, from 2001, starting at SVB. So you've seen everything. You were in SVB in the 2000s. Tell me about

Starting point is 00:05:05 that experience. I joined SVB at the nuclear winter, which is the 2001-2004 time frame. People call it that because it was post.com. It was post 9-11. And really, the Valley was severely impacted from a layoff perspective and venture activity. So I joined in 2001. SUV was the few companies I was actually hiring at that point. So I graduated from university and was fortunate enough to get a job. So I came during this nuclear winter where there was very little venture activity. Founders really had to bootstrap.

Starting point is 00:05:42 It was probably the toughest market that I've seen for founders. And so if you made it through the 2001, 2005 timeframe, you came out of it in 2006 in a really good spot because you bootstrapped the business, you've gotten to revenue, you weren't well-funded and just burning a lot of VC money. So it was actually an interesting time to build pretty large companies. You've been through 2001, 2008, now the 2022 downturn. How do you compare those three? 2001 was really the hardest from a founder VC perspective. 2008 was pretty short-lived in the sense of there's a lot of tailwinds with AWS and cloud computing, which was new and really lowered the cost for founders. There was Facebook

Starting point is 00:06:25 apps. Everything actually started building on Facebook until they pulled the plug. Same thing with Twitter and then the Apple store. In a similar vein, very little venture activity in 2008, 2009. So founders did have to really bootstrap and figure out how to fund their business without venture activity. And I'd say this current market relative to the other two is the easiest from a founder perspective in terms of, there's still capital available. There's still a ton of VC funds that have dry powder. You can still get revenue from different sources, whether it's B2B or B2C and the subscription. And so it's still not easy now, but it's easier than the last two downturns from my

Starting point is 00:07:06 perspective. In terms of those last two downturns, how did VCs and how did investors, super angels, micro VCs, as they used to be called, fare during those time periods? Yeah. So 2001 to 2005 or so, a lot of VC firms imploded. They had raised massive funds leading up to 99, 2000, the dot-com, Y2K era. It's really good to study our history of tech. And so a lot of VC firms imploded. VC firms had to reset and figure out what their new focus is going to be. Many firms didn't make it through the dot-com. The 2008 is actually, I think, the most interesting from my perspective, because that's really the rise of the micro VC. At the time, it was called Super Angel. These were small funds

Starting point is 00:07:51 that are all household names today, which we can talk about later. But really, these small $50, $100 million funds, from my perspective, sort of ate the lunch of these behemoth funds on Sand Hill Road. They're a lot more scrappy and really made a name for themselves and really changed the game of how you interact with founders. These platform services that really came out of 2008, the blogging, the content, the value add, those are all things that kind of rose from the 2008 market. It really kind of changed the game in a sense from the venture perspective. It seems like VC has really bifurcated into this artisanal crowd of basically, you know, the Mike Maples and the Roger Ehrenbergs of the world, and also this late stage platforms like Andreessen, Sequoia.

Starting point is 00:08:38 Where's VC going in the next five years? Yeah, so it's sort of barbell. You know, I think that's kind of a continuation of what we saw the last five or six years. It's either small funds or super large funds and not much in the middle. So it's kind of these sub $200 million type funds or billion dollar plus vehicles. And the middle, kind of the $200 to billion was sort of the sweet spot for venture for many years and decades. And now you're either smaller or larger. And so I think there's just a continuation of that. A lot of the mega large funds will continue on. We've seen them raise new funds this year,

Starting point is 00:09:18 this vintage. So they're in a pretty good spot. And I think where the change is going to happen is zero to 200 is 0200. Well, there'll be a lot of new names, just similar to 2008. There's a whole crew of new VCs that came out during that downturn. But I think, look, ventures is still more or less the same thing. I think the question really is what I've seen right now is founders who don't want to raise a lot of venture money. So really the last, I'd say six, seven years, you saw founders who aspirationally want to raise a lot of capital,

Starting point is 00:09:52 multiple rounds. And through this downturn, I'm running into more founders who say, you know, I want to raise a pre-seed or seed round, but then get to revenue and breakout and not be dependent on venture capital. And I think that's a healthy thing to do. So I think there'll be less companies that want to pursue these mega rounds. And so the question is, these large funds that have $1 billion, $5 billion, not AUM, but current fund size, is there enough opportunities for them to actually deploy capital? Let me push back on that. On my second startup, I raised less than $2 million and I had a nice exit.

Starting point is 00:10:30 And I totally understand that. But if I had scaled, I would have had to take on a lot of money. And the reason for it is that if I wouldn't have done that, I was first in the space, the competitor would have emerged and basically eaten my lunch. So we don't operate in a vacuum. So how is it that companies, even if they're post-travelers, how could they possibly compete with a company that has a war chest? Just being in this market for about 20 years, I haven't seen really data that say, you know, the more money you raise, the better spots you're in or that you're actually going to win. I'm sure there's anecdotes of that. But generally speaking, when I see companies raise a lot of money and usually too much

Starting point is 00:11:07 money from my perspective, there's sort of a lack of discipline of how you spend money. Because when you have a lot of money in your checking account, you actually usually spend it and you have a two-year runway and the board wants you to grow, grow, grow. And you have all this capital and it's all about getting more and more revenue and the CAC increases. And so I think too much venture capital is a disservice for most companies. And so I think smaller rounds, less capital can put you in the spot to win. And maybe you don't become the number one player, but as the founder, if you own most of the company and you get to a really nice exit, you're actually going to do much better than raising seven rounds of financing,

Starting point is 00:11:52 being heavily diluted, and then only owning 1%, 5%, 10% of the company. Also, one of the most underrated trends that I see in the next 5, 10 years is AI. Not because AI is not what everybody is talking about, but because AI is not what everybody is talking about, but because AI is going to lead to significant efficiencies within business, the verticalization of AI. One of my personal theses is startups will need significantly less capital in the next five to 10 years to scale to get past product market fit. And if and when that happens, they'll also have access to much less dilutive capital. Because once a company is truly de-risked, there's access to other forms of capital that I think will be available to startups, potentially from the megafunds, potentially from a new

Starting point is 00:12:32 asset class. We're excited to have you on because you are one of the super connectors in emerging managers. You're infamous for your data set. What led you to start collecting the information on the Emerging Manager data set? And how do people access it? And where does it stand today? I've always been a numbers-driven individual, even going back to when I was a kid. And so for me, it's been a way where I'm curious about data and then I want to share it. Luckily enough, I've had access to resources before PitchBook, which has been around for a long time. There

Starting point is 00:13:03 was VentureSource. And so I always had access to these databases that are pretty expensive. They have a lot of content, but they don't always serve it up to you. And so just querying and pulling up data that I think is interesting and sharing, and that's really why I got to where I am today as far as data. I also started tracking VC firms that are below $ million in size. When I was at 500 startups, part of my role there, I was wearing a lot of hats, was really helping portfolio companies think about their next round of financing. They've gone through the accelerator. Now they want to raise that seed round or now they call it pre-seed round. And so I would ask the founder to, hey, go look at this list, do some homework, come back to me with 10 or 20 firms that you think are a good fit for you.

Starting point is 00:13:47 And let's figure out which ones we can make introductions to. And so it was really a resource for my role at 500 for the portfolio companies. And then once I left 500, I continued that on. And so that's been going on for about 14, 15 years now. I think it's a great resource. And that's where the velocity of new funds are in that size. And so we'll continue to upload that. If anyone has a fund they want to add to that, please reach out to me on Twitter. And you mentioned the zero to 200 million. There's a consensus around some of the top people in the emerging managers that a lot of those,

Starting point is 00:14:20 up to 50% of those will cease to exist. What are your thoughts on that? VC funds are just like startups in many ways. I mean, they're trying something new. Sometimes they swing and miss. Sometimes there's not a lot of discipline, which we can talk about later. So you're going to naturally going to have, I think, a higher turnover. And just like startups go out of business, venture funds do. And so I think it's always been like that. You know, when you're starting a venture fund, you're taking this risk. There's a lot of things you can't control, like some of the macro and whether LPs are writing checks or not.

Starting point is 00:14:53 So yes, well, I think we'll have more turnover there. And I find it sort of a natural process. One of the reasons I started this podcast is to help the industry during a difficult period. It may not be 2001, may not be 2008, but it's up there. So let's focus a little bit on the positive. If 50% of emerging managers will come out of the market, that also means 50% of emerging managers will stay in the market. What is going to make the emerging managers that succeed, succeed? There's always a narrative of there's too many VCs out there. That's always been

Starting point is 00:15:23 the narrative since I started in this community for 20 years. The positive thing is that there's always an opportunity for a new venture fund. And that's mainly because they're really disrupting the incumbents. And the incumbents are usually larger funds that have had some shift in strategy and check size. And so there's always a new space to fill in. And so as the venture fund gets larger, it gets more challenging to write smaller checks. And so it creates an opportunity for a new fund to write smaller checks and be a little more scrappy. When you are the incumbent, you get a little more relaxed. You don't have as much as that fire in the belly.

Starting point is 00:16:01 And this is not just for VC firms, but for startups and companies who are incumbents, there's always room for a new entrant. And so I think that's true for emerging managers, and I'm excited about that. What makes them interesting, it really depends on what their strategy is and the team makeup and their LP Rolodex. I think to increase your chances of success in venture, it's really important to be disciplined across many various areas. And so it's easier said than done to be disciplined in venture, and it's across a few facets. So think about fund size. I think about vintage. I think about size of team and strategy or sector focus. And what you've seen, usually when VC firms have a challenge or collapse or go out of business,

Starting point is 00:16:58 it's because they had a substantial shift in one of those four facets. And so if you stay in your lane, and I'll give you some examples, you're going to increase your chance of success as an emerging manager. So if you look at some of the firms out there, Foundry Collective, IA Ventures, USV, K9, Pivot North, those are firms that consistently have a similar strategy. And so they might have increased their fund sizes a little bit, but not drastically. The team hasn't changed that much as far as number of investors. The sector or strategy hasn't shifted and they're not raising funds back to back years. And so what we saw the last three or four years is really a lack of discipline. And I'll give you some example. One is around vintage. You're supposed to be deploying a fund

Starting point is 00:17:45 in usually three or four years. And that's, if you're state disciplined, you sort of stay in that cycle. And over the last couple of years, we saw people raise funds every year. That's unnatural and lack of discipline. I think the biggest one is really chasing subsectors that are hot.

Starting point is 00:18:02 And the firms that I mentioned, they know the lane that they're in and what they're focusing on. And then there's like team size, right? I think it's hard to generate 3x DPI in 10 years when your fund sizes get much larger and you have more GPs and you're managing more people. And so there's a question of like, does venture scale, if that's your goal of 3X DPI in 10 years, it's hard to do that when you're a larger fund. If you're an emerging manager,

Starting point is 00:18:32 my advice would be stay consistent and disciplined around vintage, fund size, team, sector, and you'll be in a better spot. Doesn't mean you're gonna win or you're gonna make it through the other side, but I think it's gonna make you in a much better spot to win. Hey, we'll continue our be in a better spot. It doesn't mean you're going to win or you're going to make it through the other side, but I think it's going to make you in a much better spot to win. Hey, we'll continue our interview in a moment after a word from our sponsors. The Limited Partner Podcast is proudly sponsored by AngelList. If you're a founder or investor,

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Starting point is 00:19:30 assurance, employee stock management, 409A valuations, and more. I've been a happy investor in AngelList for many years, and I'm so excited to have them as a presenting sponsor. So if you're ready to level up your startup or fund with AngelList, visit www.angelist.com slash TLP. That's AngelList slash TLP to get started. Back to the show. A couple of things to unpack there. I was watching our sister podcast, Eric Tornberg's Turpentine VC interview on Mike Maples, and he was actually talking about Roger Ehrenberg. And one of the things that he talked about is Roger Ehrenberg's discipline and investing in software like business models and winner take most economics. I think one of the difficult things about discipline is similar to diet. It's simple, but not easy. And it's not

Starting point is 00:20:15 in a vacuum. As you mentioned, today, it's AI. Two years ago, it was crypto. Three years ago, it was AR, VR. It's very difficult to stay disciplined in the face of financial temptation. And I think that's what makes their greats great, their ability to be confident in their strategy enough to stay disciplined. And part of the things that is implicit in their discipline is their conviction in their own strategy. The deeper the conviction, the deeper the discipline. And a lot of VCs emerging and even established VCs are just following trends. They don't know. They might be following Sequoia or Benchmark or Floodgate. And they don't know why those firms are doing what they're doing. When the winds shift, they change as well because they're not rooted in their strategy and rooted in their discipline.

Starting point is 00:21:03 Just to add, I did leave a few venture firms out, Bloodgate and First Round Capital. And there's definitely a good crew there who stayed pretty disciplined and consistent. Being disciplined is boring in a lot of ways from the outside looking in, right? Because you have to be disciplined over 15, 20 years. And so for the next 20 years of your life as an emerging manager as a gp you're basically doing the same thing for 20 years with not you know raising much bigger funds and getting the press and adding a bunch of headcount and chasing the shiny object reminds me of a couple quotes one is jack welsh used to say when ceos get bored they start doing acquisitions it's one It's one of the fastest way to destroy edge in

Starting point is 00:21:46 traditional businesses. The other one is Warren Buffett, when he used to visit factories, he would look at the factory. And if the factory was very boring and just humming around, he would be very excited. And if there was always some kind of fire or something going on, he knew that there was the wrong psychographic of the management. That's true for startups. I mean, I think a lot of the startups that maybe sound boring where there's not a lot of press or drama or heat on the deal and they're not raising a bunch of money all the time and they seem kind of boring. But then if you talk to the investors and the employees and the founders of those companies, they're actually doing really, really well. They have good margins and unique economics and the CAC makes sense and LTV, and they're actually really, really solid businesses. So boring is good in our business.

Starting point is 00:22:33 One counterintuitive advice I have for CEOs that might find it difficult to be very disciplined, you know, there's a lot of very creative people. Obviously, an extreme example of that is Elon Musk. Unfortunately, not everybody is Elon Musk, so very few people could actually pull that off. But one advice I have for those kind of entrepreneurs is to actually become a micro VC and have, you know, a rolling fund, you know, $5 million, $10 million to maybe be able to write small checks into other companies. It's a little bit counterintuitive because a lot of VCs see that as not being disciplined,

Starting point is 00:23:04 but it allows entrepreneurs to live vicariously through others so that they're able to stay focused on their business. It also gains a lot of knowledge and you're able to learn in parallel instead of waiting for the next startup to be a serial entrepreneur. So I think it depends on the CEO, but that could actually work pretty well for a lot of entrepreneurs. I think if you could balance investing and deploying capital while running your business, you should, especially there's some alpha there and it's interesting. So the question is, can you balance all those things? I know the job of a founder and talking to them, it's really challenging from a time perspective, but you're also meeting a lot of interesting people and why not back them if you think they're interesting and they're not joining your

Starting point is 00:23:44 company, but you wanna invest in them. It's all based on the individual. If you have a really strong itch, it's better to scratch it and not to sabotage yourself. If you don't need to do that, it's better not to do it and to focus on your startups. In terms of the current landscape,

Starting point is 00:24:00 you mentioned the 3X DPI, which I think is a good benchmark for a successful fund. What do you see among funds that are able to achieve a 3x DPI, which I think is a good benchmark for a successful fund. What do you see among funds that are able to achieve a 3x DPI? Being a VC is easy, but making money and making good money for your LPs is extremely hard. And so I think a lot of folks are in the camp of deploying capital. And that's not the game of venture. It's really returning a lot of capital to your LPs. And so one is I think a lot of people have the wrong lens and it's not about deploying capital and sitting on boards is how do you actually make money? And the 10 years is important

Starting point is 00:24:37 because a lot of these funds now are 16, 18 years and they're doing multiple extensions. And so there is this 10-year framework that LPs and GPs have agreed to, and not too many people can do that in that set parameter of 10 years and 3x DPI. I think a lot of it's around the discipline that I mentioned earlier is important. And then there's certainly the conversation around ownership. I think it is important to have meaningful ownership in companies. If you want to consistently deliver 3x funds, can you do three funds of 3x DPI? Not too many folks have pulled that off. You can get not lucky, but you can have 1% ownership in a company, and it's a major, major home run, and you have a 3x DPI, and maybe it's a Coinbase or Uber or DoorDash or Airbnb,

Starting point is 00:25:33 but can you do that consecutively in three funds? I think it's hard to do when you have low ownership. And so ownership is still really critical. If you talk to a lot of VCs who have DPI, they'll tell you that ownership is critical. Now, there's another side of the camp that says you can generate DPI without having substantial ownership. But I'm in the camp of you need to have 10%, 15%, 20% in order to be consistent in this business. But they're always outliers and you could get a 3x fund without having that.

Starting point is 00:26:09 One of the most interesting guests that we had was David Clark from Vencap. He analyzed their returns at Vencap from 1986 to 2017. I believe that was the timeframe. Over 250 funds, over 11,000 positions. And one of the things that they found is that of all the 3x funds, 90% of them have had a fund returner. So the path to a 3x or higher in 90% of cases has been to have a fund returner. Now I would preface that as well, they don't do pre-seed and seed, so the rules of the game are a little bit different. We may have a debate on that. There are, as you said, two camps, two very intelligent camps on this very topic. I have a personal preference that I will not state here. We'll leave it to the debate. Another interview that we had was with Abe Othman. And one of the things that he found out was how important it is to get enough of a distribution of returns in order to get closer to the mean. The mean in venture is roughly 50% IRR. The median

Starting point is 00:27:07 is roughly 10%. So if you're not indexing the mean, as Abe Othman would say, as Jamie Rowe would say, sampling the mean, you're very likely to get the median. And the dispersion in venture capital is more greater than any other asset class. I totally agree. This is all about grand slams and outliers, the business that we're in. A couple of comments on that though, the top company that drives the 3X does not look like a super top company, generally speaking, at the pre-seed round. And so I guess some anecdotes of being in the Valley when these companies were established, Uber, even up to the Series B, there's still questions of whether that's a real business or not. There are ways to get into that deal. A lot of firms passed on the A and B round of Uber.

Starting point is 00:28:01 Uber was also available on AngelList. Anyone on AngelList was able to invest in Uber. Was that their Naval syndicate? I think it was before syndicates existed. It was just a deal on AngelList. And Menlo was involved in Series A. Similarly, if you look at Airbnb, I remember when they went through YC and Sequoia invested in them. And it was called AirBend and Breakfast. And people were like, what the hell is Sequoia doing? This is a couch surfing startup. Couch surfing was actually a startup as well. It was a thing that people did around the world. And so there's a lot of stories like that. It was not going to be clear that they're going to be amazing companies, at

Starting point is 00:28:37 least for the outsiders, maybe the, obviously the founders thought so, and maybe the initial investor, but you're taking a risk. And really, the thing with the grand slams are usually ones that are not obvious and are usually contrarian bets. Seems that there's a special factor to the founders' ability to be different and ability to be non-conventional. I believe the technical term is be unconventionally correct and then have the market catch up to you soon enough to raise the next round. That's always the caveat. If you're unconventional for too long, you're not going to get funded in the next round. You mentioned what you look for in startups, but what do you look for emerging managers or even emerged managers?

Starting point is 00:29:21 What is that secret sauce that makes them able to pick out that next Uber, the next Airbnb? I think it's usually one that we talked about this earlier is one where you're not chasing the trends. You have a point of view and the point of view usually varies from others in the market. You have some unique insight or maybe maybe you're chasing code boring subsectors. To me, what stands out with a GP and emerging managers, do you have a unique lens or unique network or just a unique perspective, or you're just an individual that gets into really interesting deals? And someone like Samil at Haystack, you come from like unconventional backgrounds,

Starting point is 00:30:11 you have maybe some venture operating experience. You know, I also look about the background of the GP, how hungry and scrappy they are. And I don't think there is a natural path to venture that makes you really successful. If you look at some of the biggest names who've driven DPI to LPs, they're usually individuals who are somewhat outsiders. They didn't work at a major fund, didn't have a successful exit.

Starting point is 00:30:39 There are people who really were scrappy to get into Build Fund One, had something, a unique angle. And so I think more LPs should think less about pattern matching and really try to figure out what is the background of the GP and what's driving them, what's motivating them and what unique angles they have. Speaking of the background, unique angles, one of the things that really has me scratching my head is that it seems like a lot of the top, the hall of fame of early stage is littered with generalist investors, not specialists. You would think that somebody that's close to the ground,

Starting point is 00:31:16 maybe an engineer, maybe a data scientist, or somebody that's really focused on specific space will be the first one to that alpha. Why do you think that the generalists are able to capture so much of the early stage home runs? This camp of generalists versus specials, I think you make money in either camp. And so I don't agree with the dogmatic perspective where you either have to be a generalist or a sector specialist. And that's true for, again, going back to the GP's background. I don't think you need to be an operator or a founder or a GP somewhere else. You can make money in many different ways in venture. And I don't think there's a clear path to 3x DPI. And I see examples in both camps where you can make a lot of money. the generalist, it's more around, do you have the EQ to capture really the best founders who

Starting point is 00:32:08 are diligencing the GP? Why do you get an allocation? Why does the founder believe in you? And a lot of times it's the founder picking the GP. It's like the EQ, intelligence, and unique perspective. This is a service business. At the end of the day, I know the limelight, generally speaking, is on the venture community. But venture is a service business. At the end of the day, I know the limelight, generally speaking, is on the venture community, but venture is a service business. If you're a GP and you have that mindset, which I don't think the majority have this lens of being in the service business, really you're serving the founder and the LP and you're doing all you can to be scrappy to find founders and help them and not be an

Starting point is 00:32:46 asshole and that sort of thing. It sounds like we need to study grit and hard work and create a metric for that in GPs, not only founders. Moving on to the LP community. So we've seen a lot of shifts. I've seen data that less than a fourth or fifth of funding is going into emerging managers today. We're in Q4 2023. What do you see on the battlegrounds of GP fundraising and LP community? A lot of people scratch their head of why LPs aren't leaning into emerging managers. Because if you look at the data, the data shows you there's alpha with emerging managers. Fund one, two, and three, usually sub $209 in size.

Starting point is 00:33:27 The data indicates there's alpha there, although I do appreciate the C that the LPs are in. If you want a diligence and really understand all the emerging managers, you have to meet all emerging managers. And that's tough to do when you're only, one $5 million checks and your checkbook is $200, $300 million. And so you can't meet every emerging manager out there. And so I think the challenging part of an LP when you're dealing with the space is how do you meet everyone? And it's really hard to do unless you're only focusing on emerging managers.

Starting point is 00:33:59 And there are some LPs that do focus and do well here, some of the fund of funds. And so I think if you're an LP, it makes sense to have someone on the team who is only focused on emerging managers because the time it takes to understand who is networked in, who is really going to drive alpha of the four or five hundred, who are the four or five interesting names, it's hard to do that part-time while also deploying capital into established VCs, established private equity firms, maybe hedge funds. If you're investing in the broader private equity bucket, it's really a time issue. And so I think that's the biggest issue of why there isn't a lot of capital from LPs to emerging managers is the time allocation that's needed to really diagnose what's interesting. In addition to that, you sort of saw the last couple of years, just like GPs and a lot of founders were overextended in terms of capital raised as a fund or as a startup.

Starting point is 00:34:55 LPs fell into the same camp where LPs were overextended and made too many investments. And now I need to say, hey, you know what? Let's stop. Take a breather. We're not writing more checks. We're not adding new managers. If we are adding new managers, maybe one or two names and we're actually cutting back people. And so I think everyone got overextended and now everyone's kind of licking their wounds and that includes the LPs. One of the only consensus things that

Starting point is 00:35:19 I've learned interviewing a dozen and probably three or four dozen offline that didn't go on an interview, is that the three-year investment period seems to be the best case for everybody, for GPs, for LPs, for startups. And deploying heavily has a significantly increased risk to the fund and the franchise without any incremental real benefit. The other thing that I'll note on your fund-to-fund, I've said this several times and I'll say it again, investing in fund-to-funds in venture capital over other asset classes makes a lot of sense. There is verifiable alpha in the space.

Starting point is 00:35:59 And as you mentioned, basic first principles thinking, if you have a team of six full-time people trying to meet with every emerging manager and VC or emerging managers, 5% of your portfolio of your three-person family office, there's literally a 0% chance that you're able to replicate the amount of hard work and diligence that that team will do. Yeah, I have a lens there. During my time at Silicon Valley Bank, I spent time and was part of the process of the fund-to money too. And they have operating costs and they're charging a fee as well. And so LPs get hung up on this idea of fees on fees, which again, if you do the math like you were saying, you can either hire a bunch of people or pay the small fee to get alpha. It makes sense to outsource it to a fund to fund.

Starting point is 00:37:02 So I think this lens that LPs have of not investing in the fund to fund because there's fees on top of fees is a bit ridiculous and very short-sighted because it's just a matter of doing math. The alpha is there. The data shows that there's alpha in emerging managers. You're not going to hire a team because it's too expensive to your point. And so then you start kind of doing it on your own. You're kind of doing a half-assed job.

Starting point is 00:37:26 In terms of the fees, I'll go out there, hopefully I don't get shot next week. But the fee structure for fund to funds seems to be roughly around 5% carry up to 2.5x and roughly 10% carry after that, some with catch-ups, some would not. To your point, it's very reasonable. It's out of the entire amount. And the management fees tend to be very little. So you are paying in many ways for performance. So I'm a big fan of the product. I actually invest personally in both. Of course, I invest in 10x. But I also invest, I tried to find alpha, where I could get allocation to like the very, very top. And I also sometimes invest the fund of fund as well. So I do the combination of that because I do want to get the mean,

Starting point is 00:38:11 but I also want to get the outperformance. We'll see if I get the outperformance. I'm in year eight, so I don't yet know. If you're a limited partner and you're exploring merging managers and you really want to think about that, I'm happy to connect with you one on one. Again, feel free to reach out to me about that, I'm happy to connect with you one-on-one. Again, feel free to reach out to me on Twitter through DM and happy to connect with all LPs who are exploring emerging managers. I think it's an asset class, at least that category that should get more LP money. The question is, how do you do it from a time allocation and dollar perspective? First of all, I wanted to say thank you for taking the time. Thank you for letting me grill you. I'm asked tough questions because I think a lot of people want to know and I believe that transparency over long term will be very good for

Starting point is 00:38:53 the industry. Maybe there's short term inefficiencies that somebody could capitalize on. But if we are deploying more money into emerging managers, into merge managers, into startups, I think it aligns with everything on the highest level, even as a public policy. In terms of for you, what would you like our listeners to know about you, Shai, and about Brex and anything else you'd like to share? Going back to Twitter, it's been a great medium to meet a lot of individuals. So always have be a resource to founders and GPs and LPs. In terms of Brex, you know, our focus is fast-growing startups all the way to public companies. And so I'm focusing on working with founders at inception as soon as they incorporate and are looking for a checking account and kind of the credit cards.

Starting point is 00:39:37 That's where we insert ourselves into the relationships. I have to connect with founders who are at the earliest time in their process, even before incorporation. Happy to be a resource for all folks. We'll also link the Emerging Manager link below that Chai keeps up. As far as I know, it's the most up-to-date public database out there.

Starting point is 00:39:57 If anybody has more, please send them my way as well. One thing I'll say about Chai is I actually don't know when we met. I think it's 2009 or 2010. I know it's one of those two years we've known each other for 14 years, but you are one of the true super connectors. You put your money where your mouth is in terms of your career. You've been building communities for, I assume, since the early 2000 before I ever met you. So I really

Starting point is 00:40:20 appreciate you being such a resource for the community, such a resource for startups, GPs, LPs. David, I appreciate the comments and appreciate you also having me on the podcast today. Thanks for listening to Limited Partner Podcast. If you like this conversation, please like, subscribe, and review on YouTube, Spotify, or Apple. Thank you for your support.

Investing Billions - E13: Shai Goldman on What Differentiates Venture Funds that Generate DPI and How Brex Generated $100M Using a Growth Hack Most Startups Ignore

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