Investing Billions - E29: Lo Toney of Plexo Capital on How He Raised LP Capital from Google, the Ford Foundation, Mass Mutual, and other Top LPs

Episode Date: January 1, 2024

David Weisburd interviews Lo Toney about his transition from angel investor to fund manager, his role at Plexo Capital, and his approach to working with founders. They discuss the importance of patience in early-stage investments, the diligence process for managers, and the strategy behind selecting LPs. We’re proudly sponsored by Bidav Insurance Group, visit lux-str.com if you’re ready to level up your insurance plans. The Limited Partner podcast is part of the Turpentine podcast network. Learn more: turpentine.co -- X / Twitter: @lo_toney (Lo) @dweisburd (David) -- LINKS: Plexo Capital: https://www.plexocap.com/ -- SPONSOR: Bidav Insurance Group The Limited Partner Podcast is proudly sponsored by Bidav Insurace Group. Today's episode is sponsored by Bidav Insurance Group. Bidav Insurance Group is run by my close friend, Ahmet Bidav, who insures me both personally and at the corporate level. Most people are not aware of the inherent conflicts in insurance, where insurance agents are incentivized to send their clients to the most expensive option. Ahmet has always been an incredible partner to me and 10X Capital, driving down our fees considerably while providing a premium solution. I am proud to personally endorse Ahmet and I ask that you consider using Bidav Insurance Group for your next insurance need, whether it be D&O, cyber, or even personal, car, and home insurance. You could email Ahmet at [e-mail]. -- Questions or topics you want us to discuss on The Limited Partner podcast? Email us at [e-mail] -- TIMESTAMPS (0:00) Evaluating young firms and the role of GP (1:00) Introduction to the guest, Lo Toney and his journey to Plexo Capital (9:34) Transition from angel investor to fund manager (11:44) Sponsor: Vidal Insurance Group  (14:58) Importance of delivering DPI and patience in early stages of investment (20:21) Diligence process for a manager that's on strategy and importance of feedback for GPs (26:44) Role of a VC and the approach to working with founders (32:37) Building an LP base: the journey from GV to Alphabet and the strategy behind selecting LPs (40:27) Managing GP-LP relationships and deciding on future fund inclusion (45:37) Assessing diversity within venture capital and the impact of fund/check sizes on returns (48:40) Introduction of GPX: A platform for transitioning investors to fund managers (54:29) Global perspective and investment scope of Plexo Capital and closing remarks

when trying to evaluate a young firm when you've made a commitment at a fund one or a fund two. You know, even the IRR is not going to really play a role until a little deeper into the life of a fund, you know, and so you're looking at things like, okay, this is what the GP told me they were going to do with regard to their strategy. They've identified a particular area where they have deep expertise, deep relationships, so they can get the right deal flow. They've proven that they have the capability to evaluate those deals correctly. They've proven they have the ability to win the best deals, right? So there are things that we can look at along the way. They said they were going to invest at this cadence, X number of

deals per quarter, a check size of this amount into a round size of no greater than this size. And they were going to get a certain percentage of ownership. Well, Lowe, I've been looking forward to this. We've been going back and forth for a couple months and I'm looking forward to our chat. Welcome to Lemon Partner Podcast. Well, thanks for having me, and thanks for your patience. This is one of my favorite podcasts because you've got so many engaging folks on here that I respect and have learned a right started. So I think you have one of the most unique stories in how you became a fund of fun and making your direct investments as well. How did you start Plexo Capital? It started when I was a partner at GV, formerly Google Ventures.

We were looking for different ways to get more deal flow top of funnel, had this insight around black general partners having access to different networks and seeing different deal flow, at least at an earlier stage than we were seeing it. And so we made five LP commitments into early stage funds led by Black General Partners. I brought in two of those. I brought in Eric Moore from Base Ventures and Charles Hudson from Precursor. And that's really where it started. I looked at the success that we had at GV getting more deal flow. And I said, hey, I think there's an opportunity to build out a model like this. That was around February of 2016. And thank goodness that even at GV, there's a lot of that entrepreneurial spirit that permeates all through the different alphabet organizations. And they let me take a look. And ultimately, I said, hey, I think that there's a there there. And I switched over to an entrepreneur in residence. And my company was Plexo Capital. And then, you know, did a few different things, like explored the market a little more, decided,

hey, what should the portfolio construction look like? At least the split between LP commitments and directs. Expanded it to include not only black GPs, but other people of color, females, and really just got deep into the weeds around understanding who are the best emerging managers, what are those characteristics. And next thing you know, it's March of 2018, and I'm spinning spinning out and Alphabet came on as our anchor. So we'll get into the LP breakdown and Alphabet's anchoring. But first on Charles Hudson, you knew him pretty early on. Why was he one of your first two checks and what did you see in him that others may have not seen at the time? Yeah, you know, the thing that I always like to say is,

and you know, whenever someone's giving feedback or answering a question for someone seeking advice I always say understand the context where that person comes from and so the context or the background for me is I had always wanted to enter venture and asked a lot of folks what's the best path and the feedback that I got there were certain things that were pretty consistent and one of the things that I heard a lot around was just being an entrepreneur yourself and then having the ability to really think about product. Because if you're looking at the early stage, the playbook for product management is very similar to the playbook for early stage investing. And so I went into product management, ultimately was running a P&L, then a CEO. And I think, you know, that was my path. And that's what I saw in someone like

Charles Hudson. We'll use Charles as an example. You know, Charles was experienced professional in a career setting. He was a early employee at Google, did very well there. He then had a stint as a VC, but then also had a stint running a company as well. So he had the ability to be able to kind of think about his product. The founder and CEO is kind of like a product manager. And those are the characteristics that we like a lot. Someone that's been an operator, especially someone that's been a CEO of a startup company. On the other side of the table, when a VC is sitting down with an entrepreneur, if the entrepreneur knows that that person across the table has actually been in their shoes, maybe has some empathy, the dynamics of the conversation change. And that's one of the

things in addition that we like, you know, put aside for the moment, the playbook aspect of the similarities between product management and being an early stage venture investor. I also think that empathy plays an important role as well. And I don't think that there's any person that can have more empathy sitting across the table from an entrepreneur looking to raise money or talk about some of the challenges with their company at a board meeting than to have that person on the other side in the role of a VC having actually been in the shoes of a founder. Do you not just see a generalized empathy that leads to success at the early stage, even for those that are not founders?

Oh, absolutely. You know, I always like to bring up certain people that I've encountered that I just think have that ability. And I don't think it solely rests within someone that has a background of doing product management. There are many other paths. That's why I said at the very beginning, remember context. And my context is I came from the world of management. So that's always going to play a role in how I shape and perceive the world. To answer your question, without doubt, there are other individuals. I've met many of them, have written LP commitments. One that stands out is probably Richard Kirby of Equal Ventures. Richard is someone that I've known throughout his career. I think he has a very good product feel, a very good

kind of almost intuitive feel around product. And no doubt in going through the process of doing the reference checks very, very early on, actually, we might have been the first to commit to his fund one. And without question, what surfaced, what emerged naturally, organically, without much prodding, was the fact that he is very empathetic in his approach to dealing with founders, almost just anti-transactional and really cares deeply about his founders. You mentioned you were the first check in Richard's fund. Why would you ever be the first check?

Isn't that just taking additional risk without additional upside? What's incentive? Yeah. So this wasn't necessarily driven by any incentive. I didn't get any preferential economics or deal terms. Really, this was more about the relationship that I had built with Richard over a course of many years. We pride ourselves in being able to identify those types of individuals very early on in

their career. And so, you know, we take pride in having the ability to make that early commitment and having a level of comfort with that risk. Do you make a distinction between first-time fund and first-time investor? A lot of LPs will say, we'll invest in first-time funds, but not first-time investors. What's your philosophy on that? That is a really good question within the world of emerging managers. And quick answer is we prefer first-time fund managers, not first-time investors. We provide as much flexibility as possible as an institutional investor to be able to assess someone starting their firm with an existing track

record that might have not come from another shop with portable attribution, that might not have come from any of the traditional methods, but maybe they're a prolific angel investor and they've written a lot of checks and maybe, you know, they have a seven figure angel portfolio that's done quite well. So that's something that we'll do that maybe others might not give as much credence to. But the other something that we'll do that maybe others might not give as much credence to. But the other thing that we'll do is we'll even look at someone that is looking to start their own firm, raise their first fund that has done SPVs in the past, right? That's actually something that's interesting as well, because what that can also show is the ability to get the trust

of people to invest into those vehicles, and that can be a signal for success that someone might be able to have raising their first-time fund. So we don't necessarily like first-time investors, although there's nothing wrong with being a first-time investor. It's just not our model. We do like to see some evidence of the ability to be able to have pipeline, show the ability to evaluate the correct deals, select the correct deals, invest into those deals, and then understand how have those deals played out, and then get the feedback from maybe other investors around the table about this individual and what they bring to the table from the lens of another investor, or from the perspective of the founder to understand, hey, what is it that this individual

has done to be additive and earn their way onto your cap table? I think first check and first time fund is pretty bleeding edge enough. So I understand why you wouldn't want to pile on additional risk there. You mentioned you want to take somebody that has been an investor but has not yet had an institutional fund. How does that break? What are the skill sets that are needed to go from a great angel investor to a great fund manager? It's interesting because there is this learning process of what it means to be a fund manager. Being an investor, especially investing one's own capital, the ability to move quickly and not have to answer to anyone,

to not really think so much about delivering returns in anticipation of building out a track record with DPI and then advancing to the successor fund. Those are all elements that are very important in being a fund manager. The ability to understand how to kind of create a firm, all the documents and paperwork that need to be in place for those structures, the structure for that first fund, putting pen to paper for an LPA or getting the right legal counsel to be able to assist with that process, understanding what the negotiations look like and

how they differ between a high net worth versus an institutional, what's important to a high net worth may not necessarily be important to an institutional investor. Having to put together a strategy to fundraise and successfully raise a fund while thinking about it within the context of where's my sweet spot for investing? How many investments do I need to have? What should the check size be? Should I think about following on in those investments as I look towards potential dilutions and down rounds? All of those things around portfolio construction, thinking about how to maybe harvest some early wins and provide some liquidity back to LPs so that you can start to kind of get them, what's important for an LP is get their money back. And then just thinking about the reporting

and the infrastructure that's necessary for a fund, having the right tax and audit, having a back office administrator, having the right banking relationships. It doesn't necessarily mean that just because someone's a great investor that they'll go on to be a great fund manager. Today's episode is sponsored by Badaw Insurance Group. Badaw Insurance Group is run by my close

friend, Amit Badaw, who insures me both personally and at the corporate level. Most people are not aware of the inherent conflicts in insurance, where insurance agents are incentivized to send their clients to the most expensive option. Amit has always been an incredible partner to me and 10X Capital, driving down our fees considerably while providing a premium solution. I am proud to personally endorse Amit and I ask that you consider using Badaw Insurance Group for your next insurance need, whether it be DNO, cyber, or even personal car and home insurance. You could email Ammet at Ahmet at LuxSTR.com. That's A-H-M-E-T at L-U-X hyphen S-T-R dot com. Thank you. I'm going to ask that all LPs kind of cover their ears. Of all the things that you mentioned, are any of those just superfluous, just kind of nonsensical, quote unquote, institutional

LP stuff that doesn't really drive alpha or doesn't really drive, you know, performance? Look, there are some things that without a doubt, if I were just to isolate and think about alpha, right? So a lot of those things on the back office, those things aren't going to drive alpha, like the ability to be able to have, you know, your reports structured a certain way and have some associated documentation. Those in and of itself, those are not necessarily going to drive alpha. But what they are going to do is they will put the GP in a position to be in good favor with their limited partners, their investors, which will allow them to continue, hopefully downstream, to be able to raise the additional

funds to continue to drive the investment process. If I'm not from this world and I'm wondering, okay, what would make an investor want to re-up or invest again into another fund from a GP that they've had a prior relationship with? You know, the thing that jumps out is, well, they have to be delivering performance. They've got to be delivering money back. What's fascinating to think about is for institutional investors, what ends up happening is often it may not necessarily be performance that may make a relationship deteriorate to the point where the LP doesn't re-up. of statements. It could be things around deviating from strategy, even though maybe those deviations have led to some nice investments. It's all of these other things aside from performance, you know, that could end up making a relationship deteriorate. So to your question, are some of these things necessarily important for driving alpha? Not necessarily for driving alpha, but for the ability to be able to continuously raise

funds. For raising a fund two and raising a fund three. Yeah. Exactly. I think what is also curious about the asset class and many asset classes is that you don't really know how good somebody is until they're fund four. So then the next question becomes what happens between fund one, fund three? And that's what you're talking about, the back office stuff, the LP communication,

staying on strategy, all those things. You mentioned something pretty controversial, delivering DPI to LPs. That is a point that some LPs care about, some LPs do not care about. Why do institutional investors care about DPI early on? Or is that just a function of the market today? So Chris Duvose has this great saying, you know, it's the moolah and the koolah. These other things like TVPI, those are really nice. But at the end of the day, you know, TVI can't pay my kids college tuition, I think is the way that Chris frames it up. And so at the end of the day, if one were to think about, you know, what's important for a limited partner, it is going to be at some point, it's going to be DPI.

It's the ability to be able to get the cash back. That is very important. Now, in the early days, especially within the asset class on the early side, pre-seed, seed, you know, it's much, you have to be a little bit more patient. You know, actually the conversation, Jamie, was really good because like talking about that difference in the ability for the LP to have that patience to not realize liquidity. That's right. The compounding and to not realize that early liquidity that may surface, maybe if there's a secondary opportunity, someone wants to buy your interest, but to hang out and actually make it all the way across that 10-year threshold, or maybe even as at fund one to see, OK, are we actually getting those dollars in? The dollars in are important because for an LP, we need to have dollars back. If you're a firm like mine where I have to go out and raise money, it's nice to get dollars back because we can recycle those dollars as well, right? You know, you have to look at other

things along the way when trying to evaluate a young firm when you've made a commitment at a fund one or a fund two. You know, even the IRR is not going to really play a role until a little deeper into the life of a fund, you know? And so you're looking at things like, okay, this is what the GP told me they were going to do with regard to their strategy. They've identified a particular area where they have deep expertise, deep relationships, so they can get the right deal flow. They've proven that they have the capability to evaluate those deals correctly. They've proven they have the ability to win the best deals. So there are things that we can look at along the way.

They said they were going to invest at this cadence, X number of deals per quarter, a check size of this amount into a round size of no greater than this size. And they were going to get a certain percentage of ownership. Do you think that LPs have too much of a bias to re-up with managers? There's a saying that I heard early on, which is LPs will never say this, but they're looking for an opportunity to invest into three funds, right? So if they're investing in fund one, they may not say it, but they're already mentally thinking, okay, if I make this commitment to this fund one or fund two, then I'm definitely committing to funds two and three or funds three and four. So there is a little bit of that

mentality. And I think one of the things that I learned at GV, which is very important, it's similar from a GP perspective. It's, you know, am I going to follow on into this investment into a company that I've already done the diligence on? I've already gotten to know the team. And am I now just going to re-up in this downstream round? And, you know, at GV... Defend your pro rata. Exactly.

I always thought that I have a pet peeve with that. But continue. Yeah. So maybe this is an alignment. So at GV, every new financing was looked at as an opportunity to take a fresh lens, to almost look at it as a new investment again. And to just not say, OK, well, we're just going to re-up, defend our prerata. We've got the relationship, have to keep the relationship. It's important to make sure that the deal actually still makes sense. And I think that should be applied to the LP perspective as well with the re-up is, you know, does the deal still make sense? Did the GP do the things they said they were going to do? Because to your point, it's probably too early, you know, if we're

looking at two, three year cycle, it's probably too early to look at that prior fund. So then it's more about, okay, am I going to just re-up just because I'm re-upping or am I going to take a look at and see, okay, is anything changing with the strategy or any new learnings being applied? We don't want to make the process too onerous for a re-up. So if we're happy and we've been tracking the GP and saying, okay, GP, you said you were going to do this. Is this actually what's playing out with the fund where we first committed for the beginning of the relationship? If everything is staying on track

and I see that new learnings are being incorporated, it's a pretty quick process. Where we need to take a step back is when the, maybe it's the portfolio construction is going to change. Maybe they're investing in a different round. Maybe they're trying to staple on an opportunity fund. When these other things start to crop up, then that's when we start. Or if we've noticed that the GP wildly deviated from what they told us they were going to do with the fund where we first engaged with them. Those are the areas where

we dive a little deeper. You mentioned if somebody deviates, let's say they don't deviate. What is the second or third time a fund meeting go? Is it just a 30-minute lunch? Hey, what are you doing? Okay, you've been updating me. Great, congrats. Can I get allocation? How do you actually diligence a manager that's on strategy and that you've had a good relationship with? It's pretty fast. It's actually pretty fast. We usually will schedule time to actually get the pitch. And there's two reasons for that, right? So first, I think your question presupposes that we've been following the manager, we've been testing to make sure that they've done what they said they were going to do. Okay, so once we get all that out of the way, we do want to hear the pitch. So we will take the access to the data room, we do want to hear the pitch. So we will take the access to the data room. We do want to

hear the pitch. And it's partially just to make sure just as a sanity check and making sure that we've done our process to understand, okay, is this looking like what we thought it was going to look like for this N plus one fund? So that's one thing. And then I think also just to give some feedback, right? It's always good to give a little bit of feedback to the GP as they're going out and doing the process. And then I think another thing is just to refresh the memory, because one of the things that we'll like to do is to try and see if we can be helpful with any of the LP relationships that we have if a GP has someone that we know on their prospect list. Okay, well, then I need to hear the pitch because I might know a trigger that one of these LPs has and, or, you know, a trigger positive or bad. And then I can kind of coach the GP by giving them some feedback by seeing the pitch as well. But for the most part, you know, if everyone's happy, we're happy. And the GP has been doing what they said they were going to do. It's a good meeting. It's a quick process. We don't go deep on, you know, we're not anchoring. So we're not

going deep on changes on the LPA. We do want to understand the changes. We've got some simple things in a side letter. And, you know, that's pretty much it. You mentioned delivering feedback. You've seen so many managers. You've seen great managers, tier ones, tier twos, tier threes, tier fours. Is it true that the tier ones all are receptive to feedback? Or do you think that's something, you know, that Steve Jobs hardheadedness sometimes is a sign of greatness as well in GPs? Yeah, you know, so most of the GPs are pretty receptive, that we engage with, are pretty receptive to feedback. And in some instances, maybe they're coming to us for feedback. So they're explicitly saying, hey, please give us feedback. You kind of want it to be a little bit of a give and take. There's

instances where maybe there's three buckets, right? Maybe there's, you know, feedback where I haven't really thought it through, but it's just something that came to mind. And so I'm just kind of, you know, off the top of my head, I see something, I react to it, and I don't really maybe expect anything. Maybe I just want the GP to acknowledge it, digest it, take it and do what they want to. And maybe there's another bucket of feedback where it's like, okay, I've kind of seen this before. I probably have a little bit of data on it. I have some perspective that gives me a fairly strong point of view. And I want to give them this feedback and have them understand that, okay, this is feedback where I really want you to listen to it. You know, maybe there's something in the GP's mind that they haven't said that they can then tell me.

And then I'll say, oh, okay, totally makes sense. I get it, right? Or the GP might say, oh, wow, I hadn't really thought about it. Let me actually take that back and follow up on that one, though. And then there's, I think, a third bucket of feedback where it's kind of like this thing that was done, this action that was taken or this statement that's being made, like this is not good. And this is one where I'm highly suggesting you listen to me and take that back. Now, that's a very, very small percentage of the time. And it's delivered in that tone, I'm guessing. Exactly, exactly. But those are pieces, you know, where it's like, hey, you know, you really want

to make sure that it's a good relationship with the GP because you don't want to, you know, where it's like, hey, you know, you really want to make sure that it's a good relationship with the GP because you don't want to, you know, you don't want to sugarcoat these direct pieces of feedback when you know that it's in the best interest of the GP. So if it's not the right personality type or if it's not the right relationship, you know, these are very, very long relationships. So you got to make sure on the front end, you know, that this is going to be, you know, a good marriage of sorts is what people often term it as. So, you know, you got to make sure that the person is willing to take that feedback. But there are instances where I do want the GP to stand firm on their ground in that middle bucket, right? I don't want someone that's just going to let me sway them

to a decision. I want them to be thoughtful, have conviction, and it's okay to push back, especially pushing back with data or the reason for that point of view, because it might make me reflect and be like, oh, well, I hadn't thought of that. I'm guessing you're looking for that strong personality, especially during diligence, right? You're testing them. You're testing how they're going to react to feedback very strongly. And then once they're in the portfolio, it's probably a different dynamic. You're kind of already pregnant with them. You have this relationship and you have to do the best that you can do. That's right. Are there ever cases where somebody has such an edge or such an alpha and they're just impervious to feedback?

They say, you know, F it. I'm just going to roll the dice. This guy has alpha. This woman has alpha. And we're just going to invest in them. I have had that. I'm not omniscient around every topic where I have the ability to be smarter than someone. Right. I mean, part of this journey, you know what? I think some of the best GPs or LPs are people that are naturally intellectually curious and want to learn more from very smart people. And so it's often very clear when meeting someone that has that attribute to themselves. They are just very smart around a range of topics or can go extremely deep in a topic. And so then I think there's a level of

humbleness that has to happen on the lp side as well and obviously you have to do the diligence to make sure that you've actually you know gotten a level of comfort through others or through your own research that this person actually does know what they're talking about but once that is the case and it's clear okay this person is smart. They're very well respected as well. That's important because you never want hubris to get in the way of them winning a deal, right? So it's one thing to be very smart, but you want it to be done in a way where, okay, I know if this GP is going after a founder, the founder will look at their intelligence as, wow, this GP really gets it. Like they really understand what it is

that I'm trying to do. I want to work with this GP, as opposed to, you know, if hubris gets in the way where the GP is trying to show they're smarter than the founder, and that's a turnoff, you kind of don't want that. So it could be the same level of intelligence, but it's almost the way that it's delivered by the GP. There's ways to show your intelligence and have someone be very comfortable on the other side or even want to engage more. And that's what we're looking for for those types of GPs that just have that just rock star super intelligence. It also depends what seat you're in. Sometimes it's operators turned VCs and they don't realize they're now a VC and they're playing a different game.

One of the first pieces of feedback that I got, I was lucky. I went to a dinner for a Fortune Brainstorm Tech in San Francisco. And I got to sit next to Mike Moritz. And I just started my venture journey. And the thing that he said is, hey, Mike, I just started the VC journey. What advice can you give me? And he said, what's your background? And I said, well, I'm an ex operator.

And he does an operator, you know, and it was like, you know, the problem with operators is too often in switching to the other side of the table. An operator turned VC when trying to deal with the founder will want to roll up their sleeves too often and dive in and actually do the work. Right. Like that's not the approach. It's almost similar to when someone joins a board of directors. It's the ability for an operator to take all of that knowledge that happened over the course of years to become a successful operator and translate it instead of trying to act and do, do, do, is to be able to ask the right questions to the founder, to the CEO, to kind of elicit a higher level of thought for the founder to almost find their own path as opposed

to the VC, operator turned VC, trying to go in and force a path. Coaching versus playing. Very different skill set. There's a consensus that the best entrepreneurs are non-consensus, right? Do you find the best GPs are non-consensus, right? Do you find the best GPs are non-consensus, right? I believe if one wants to find the outliers, they're not going in herds, right? And so there has to be the ability for a GP to be able to have a non-consensus point of view, but that can express that point of view in a way that's somewhat respected. You

don't have to be respected by everyone. It's kind of like politics to a degree, but somewhat respected, heard, and be thoughtful around it. Because at the end of the day, look, we know that this is a power law game when you're investing at the early stage, and it's all about the outliers, right? That's what drives that tail, and that's what pulls the median away from the mean. If we had the world as a place where everyone was going to the outliers, there wouldn't be any outliers. The distribution would return to a normal distribution

because almost by definition, you have to be non-consensus to be part of an outlier. And so I do think there have to be non-consensus to be part of an outlier. And so I do think there needs to be a GP with a feeling around how do I identify these opportunities where I can not be too far out there, right? Because you have to have other folks that believe, right? The founding team has to believe, other investors have to believe, But it's not part of this general pack of individuals that are just trying to chase the latest hot thing. You almost have to go outside of where the echo chamber is. You brought up a really interesting point I've never thought about,

that you can't be so non-consensus that you can't build a team, you can't raise a pre-seed round. To me, it's always been about first principles thinking. I know that's also something that's now overused, but really it is first principle thinking, which is it has to break some kind of narrative. Let's say scooters are not good, but underneath that narrative violation, there has to be a fundamentally sound business that's growing. Have you found that to be the case? This kind of embedded first principles thinking that violates the narrative? When looking at the early stage, the pre-seed, I mean, this is almost, you know, I almost think of it as, you know, what are some of the traits and characteristics that are seen early on where one can start to identify that? And I go back to

my time at Zynga, where, you know, when you think about, you know, things that are almost being treated like a game or they're not really being taken seriously or, you know, they're like this activity where a very passionate group of people. If you look at your scooter analogy, you know, what is it about like scooters are almost like that's a kid's toy. Like, why would anyone think about scooters as a method of transportation when it's a kid's toy? An adult would never do a kid's toy to get to work in a suit, right? And this is like kind of that type of thinking. Well, anyone that rides a scooter, they must be trying to relive their childhood, right? It's almost like it's fun, it's passionate, it's a game. And I think those are some of the things that we try to look for. You know, what are these activities that almost look like they're fun, they're games, they might even

have game mechanics associated with them. Naval famously said that by the time the economic opportunities in certain industries, the alpha and the edge has been competed away. Bill Gates famously started playing with computers just for fun. Mark Zuckerberg started Facebook to find a girlfriend purportedly. And I think there's something to that. So now going from your LP hat as an LP and GPs to your GP hat now as you are a fund manager as well, you've arguably have one of the most incredible and most institutional LP base for what was a fund one. How did you get all those LPs into your fund one? Well, I'm very, very blessed, first and foremost.

I don't take any of this lightly. You know, it's a very, very tough business. It's hard for everyone to fundraise. And then there's gradations for different folks from different backgrounds. Look, I was fortunate to be at GV and was able to take this idea that we had at GV and make a business out of it. Once I got Alphabet to commit, you know, then that was kind of like started to tip the dominoes. Then I was able to go after other corporates. I was like, well, shoot, if Alphabet's interested, maybe there's others. You know, I went

to Cisco, I went to Intel, was able to get them as GPs, and then started to think about, okay, well, I also would really like to have some institutional folks because you don't want to be too weighted with a particular type, especially in this environment with everything that's happened on the corporate side. So then I was going after folks like the Ford Foundation, a very well-respected and well-regarded institutional investor with a long history of investing into venture capital, the private markets, alternative assets. Hampton University, which is where I went to school and is a client of Cambridge Associates. Cambridge is like one of the premier consulting firms advising plan sponsors

on who they should allocate their funds to to meet a certain objective. And that's really kind of how it got started. And, you know, next thing we know, we had another foundation and health forward coming into our fund, too. We were able to get some more corporates like Hearst, who else, the Home Depot, we were able to get I really wanted to get an insurance company, we were able to get MassMutual. It kind of really played out well for us, but I think it was that Alphabet domino tipping that really started because at the end of the day, I think people said, okay, he was at GV.

This is a strategy GV was using. They let him incubate this inside, and then he was able to get Alphabet for us. No question of attribution at that point, right? You had the signal. You had where you were at was what's backing in, and it happened to be alphabet. It's a pretty good signal, but it's the sequoia of corporates. You mentioned something curious there. You said, I wanted to get not only all corporations, I wanted to get endowments, and also I wanted to do an insurance company. Obviously, that reveals how much demand you had.

Tell me a little bit about your strategy around your LP base. What exactly are you optimizing on? Yeah. If there's this product market fit and if there's GP founder fit, if there's GP thesis fit, LP GP fit, without question, there is this notion that, well, hey, I can if all money's green, right? And so I could just focus and optimize just to complete my fundraise as quickly as possible. But then I think there are important attributes of certain LPs that can be additive to your portfolio and your ability as a GP to be able to drive value to your entrepreneurs. And one of the things is that if it's, you know, careful selection of LPs, the right LP can help with your fundraising, right? The ability to have a certain name can open doors. You know, the Ford Foundation, for example,

has been very helpful in having us understand the landscape of foundations and providing introductions as appropriate. We do have some large family offices, but these are like, you know, multi-billion single family offices. The thing that I think is really unique about these family offices is in order to create a multi-billion dollar family office, someone had to be really good at something, right? Like it just doesn't magically happen. And so usually that something can be applied towards the portfolio companies. I'll give an example. We have a family office out of the Middle East and they made their money in the automotive segment, but also are very active in life sciences. And so we've been able to provide some introductions to our GPs focused on life sciences who in turn have introduced this family office to some of their portfolio companies. We've even introduced a couple of our portfolio companies to this family office and it's

led to some deals, right? You know, there's other types of LPs, in our case, LPs that are also very interesting. I'll take Cisco as an example. So one of the things that Cisco likes about working with us is that through our GP network, all the Plexo Capital GPs, we have access to their portfolio companies and kind of understanding, you know, what's going well, which ones are driving the funds that we've invested into. What are some of the companies that we've invested into, what are some of the companies that GPs are really excited about, and then the ability for us to understand at Plexo Capital, understand, hey, what are Cisco's priorities for investing, and then make introductions to either GPs or directly into companies that would be of interest to Cisco.

And so I think with all know, with all these different types of LPs that we have, we always try to think about the relationship being two way. You know, obviously we want the money, but what is it that we can do to help their objectives? And then how can we really have a partnership that goes beyond just the LP writing a check and us just appearing every two to three years when we're raising our next fund. Some GPs will tell me family offices are both the best and the worst LPs.

What do you think about that? We're very blessed because our composition of our LP base is different than most emerging managers. I still think of us as an emerging manager just because we're so heavy on the institutional side. And the family offices that we have, they're a little different. You know, they have investment staffs

and they behave more like an institutional investor. But I understand the point of some of the GPs. You know, some family offices can be high maintenance. You know, there's a saying, you meet one family office, you've met one family office, right? So I don't think there's any bucket that we can place all of them or a majority of them into. But yeah, I could see a GP getting frustrated. But then there are family offices that are just absolutely outstanding, which is what I

would call our family offices, because we've just got this relationship. We're almost like an augmentation of their team. These are slimly staffed folks. And if we can be experts in venture capital or early stage venture capital and do things to make their lives easier, that puts us in a really good position. So I think it just depends on the type of family office and the relationship. So let's say NLP is not a fit. You mentioned some could be high maintenance. The worst is not a fit. You mentioned, you know, some could be high maintenance. The worst thing is a high check from somebody, a low check from somebody that has a lot of time. Those two things should be at least positively correlated. It plays out so often, too. You know, it's kind of like some of the most work that you have to do is like an LP that you

let in as a friend. You're like, dude, you can't do this. I mentioned this on a previous episode. I won't mention a very large private equity fund. One of their IR persons shared this really brilliant side letter that they do if you invest less than $10 million, basically saying, you don't get access to the AGM. We will never meet with you. We will only send you quarterly things. We will not do markups. It's pretty fascinating. And like I mentioned on that episode, I'll mention it again. For the top funds, I'm always happy. Benchmark, reach out to me.

I will sign out. I will even forego my quarterly updates. I'm happy to do that. But going back to the question at hand, how do you deal with those? Does this just naturally cycle off? How do you deal with somebody that really is not necessarily a fit,

somebody that you might not want in a future fund? How do you deal with that that really is not necessarily a fit, somebody that you might not want in a future fund? How do you deal with that delicate situation? That's challenging. And hopefully the GP has had enough time before the relationship puts pen to paper to really understand what this relationship is going to look like. But that doesn't always work, unfortunately. And I think what needs to be done first on the GP side, recognize that this is a service business. So in essence, our LPs are our customers. And if we have a situation where we have a customer that's unhappy, you know, you can kind of start with the old adage, well, the customer's always right. So if they're unhappy, I'm going to take that seriously and then sit down with the

customer, the LP and talk to them. You know, what is it that maybe the GP knows exactly what hasn't gone right. And so then it's a time for self-reflection, you know, a little bit of humbleness, you know, a little bit of just kind of exposing oneself and being vulnerable and just accepting that, hey, I did something that wasn't correct. I don't want to ever do that again. Let's talk through this because I recognize it. And here's the things that I'm going to do to make it better. Or it could be the case where it really is, you know, maybe it's these requests that are coming in from the LP and maybe in the, you know, the GP's mind, I've done everything right. But maybe in the LP's mind, you know, it's, well, I've done everything right. But maybe in the LP's mind,

you know, it's, well, actually you haven't done everything right. So then it's a question of, okay, how do I sit down and have this open conversation when it might be a little tense? And to your point, maybe it gets to the point where the GP says, God, you know, I just don't know if I can have this LP and have this dynamic in my next fund and funds moving forward. At that point, I think, take a step back, look at the composition of the LPs and see, okay, is this relationship that's not going well? Is this an outlier? Like, do I have all my LPs look like this, but then I have this one that looks like this over here, because then it's a conversation that can abstract away the LP as an individual. And it's like, hey, you know what? We're looking at our composition of our LP base

moving forward. And we've determined that it makes more strategic sense for us to have this base and you're kind of out here. So then it's not personal. It's kind of our own internal decision, right? Now, we're a minimum check size. We're not going to we're not going to waive your minimum check size. You gotcha. You gotcha. Or it could be a minimum check. It could be some characteristic. But I think that's the first step. Now, if it's the case that, nope, that LP looks like every other LP, the check size is the same. Then I think, you know, you might have to have that tough conversation. Now, here's here's what my IR person would say. Don't do anything until you make sure that all of your paperwork is signed

for everyone in that next fund. You hit your target. And if it's a brand name LP, you better have another brand name LP to replace that LP. That's what my IR person would say. You know what I say to that? Life is short. And one of the greatest luxury is working with who you want to work with. But funny enough, you mentioned if you want to look at the composition, if it's one LP or all the LPs, essentially if it's all the LPs giving you this feedback, then you're the toxic one.

You're essentially impervious to their feedback versus this being a problem LP. Obviously, you have a very unique, you go after African-American as well as Latino and female GPs. Does that really change the way that you assess things? Is there a different outfit in diverse managers from non-diverse managers or is it just a different sourcing mechanism? Yeah, I think it could be a little bit of sourcing. So one of the things that we saw was just in some cases, there were just different networks. There was the overlap of the traditional, I don't know, you know, Sand Hill Road VC network.

But then there were these other networks that might be affiliated with a maybe certain type of company or industry that this GP came from that others typically don't or university that they went to undergrad or something. So, you know, just access to different networks. I think that's one thing. The second thing can be the ability to look at an opportunity differently. So, you know, it could be the case where, you know, if it's a female looking at femtech or some type of, you know, health and beauty geared towards women, you know, obviously a woman is going to have a different perspective in looking at those types of opportunities and may see things that other folks might miss. So, you know, it could be a little bit of both. I will say there's

one other thing, which is, you know, the demographics are changing so much just around the world that even with our strategy, and I mean, you know, we have white men as well, but I would say even with our strategy on the diversity side, when we're looking for people of color and women, we'll still find ourselves investing alongside other LPs that don't have that particular mandate or focus. So at the end of the day, I would say that what really weighs most in our process is the ability to find GPs that are building the next generation franchises within our industry. To push back on that, some of the best returns, if you're looking three times, are the investors that are very good at investing,

but very poor at scaling their organization. They keep their funds, their check size and their fund size small. What do you say to that? The data shows, right? Like when you're looking at fund one, fund two, sub 25 million, those are some of the best returns that you're going to see. And so there is a challenge when we look at people that we think are going to build franchises. And we think of it a couple of ways, right? Like I think of what Cece over at Boom Capital, right? Like in my mind,

she is building a franchise, but she has deliberately decided to keep her fund size very small. And your fund size is your strategy, as Beezer would say. So then therefore her check size is also small. But then I would also look at someone like, you know, Ade and TJ at Base 10 Partners. And, you know, we were one of the earliest LPs to commit to their fund one. And it was very clear that they were going to build a different type of firm than CC. It was very clear they wanted to build a multi-billion dollar, multi-stage firm. Totally fine with that as well. To your point, it's much more difficult to get the high multiple net on a large fund writing bigger checks than it is a smaller fund, right? I mean, that's just the way the math plays out. Yeah. Do you just say, you know, great,

I'm going to invest in your first three fund and then, you know, we'll be friends and maybe he'll be an LP in my fund. But do you just kind of take that as it is? Or are you really looking at, you know, do you really want to scale that far? Right. So we're focused much more on smaller funds. And so the way that we've done our model is we've got fund sizes and kind of three buckets that we focus on. Funds of $25 million and less, funds of $25 to $100, and that's really our core focus. And then funds of $100 to $250. And the commonality across all of these funds has to do more with the stage that they're investing. And so we could see a fund between 100 to 250 that could still, in essence, be an early stage fund, right? If the majority of their checks,

let's call it 50% of their checks, are going into round sizes less than 20 million, really less than 10 million, that can still be an early stage fund. So we focus a little bit more on the round size, which is another way of saying the stage, right? Funds in that third bucket of 100 to 250, our target net return multiple is lower than fund sizes of 25 million and less, right? Like we just inherently want to look for a higher net multiple of like about a 5X for those smaller funds. And so this goes back to your question, I guess, because since I was using based in partners, yes, people can graduate out of Plexo Capital.

And that's totally fine. And that's great. That's fantastic. That's a sign of success. Yeah, exactly. A mutual friend asked me multiple times, ask Lowe about GPX, ask Lowe about GPX. So what exactly is GPX and tell me about that.

So GPX goes back to one of the first things we talked about, which is this transition from someone already being a great investor and then transitioning to be a great fund manager. So throughout my journey, and I'll use Richard Kirby again, when I was going through the process of establishing our firm, I was kind of keeping track of all these different things that I was learning, right? And they really fell into three buckets. Ultimately, it was like forming a firm and a fund, raising a fund and managing a fund. And so I was keeping track of all these things that I was learning. I had some great

advisors. I would understand what I needed to know. And once I know what I need to know, I'm pretty good about going out and finding some research on it, whether it's a white paper, a blog post, you name it, I'll find it. And what I started to do was in keeping track of these, if someone asked me a question and Richard Kirby was the one always asking questions, hey, do you have budget for thinking about back office expenses? And I was like, well, actually, I actually do have a budget for that. I sent him the spreadsheet. Hey, do you have kind of the most important things to negotiate with an institutional investor in an LPA? It's like, actually, I found something on that. And I sent that to him. Over time, I said, you know what, I should just start to send this out to other

people. And so I would just, these were just links, right? just start to send this out to other people. And so I would just, these were just links, right? I would just send it out to every GP that I met. And I got really good feedback. And me being a product manager, my light bulb went off. And I was like, oh, wow, there's a challenge that a lot of people have with trying to make this transition from being an investor to a fund manager, and they don't know everything they need to know. And so what I ended up doing is I started to go out to all the people in my network, you know, Lyndall Ekman, Beezer, people from the Ford Foundation, people from Cambridge, and I got them to create these videos. They're about 20 minutes on average under those three buckets, forming a firm slash fund, raising a fund and

managing a fund. And what we ended up with is almost using Y Combinator as our North Star. So we got over 30 video content modules professionally done. They all consistent. We put them on a platform for ed tech called Kajabi. And that's similar to startup school for YC. So anyone that's a GP can register and then go get access to all of this video content. Right. But then we said, OK, but we should probably also go a little bit deeper because we were getting feedback from the content. And so we decided to create cohorts as well. just finished our fourth cohort. We usually have between 12 and 15 GPs from 10 to 12 firms, and they'll go a little bit deeper. So we'll do things like we'll have guest speakers. Like we had Paige Craig from Outlander. He's a Plexo Capital GP. I think we've been to dinner with Paige multiple times. Oh, nice. Yeah. Paige is great. He loves his dinners. And Page is really good with using Affinity. And so we did a session on building a tech stack with the CRM at the core. And then Page came in and did an overview on Affinity. It was one of our most well-received

sessions. So we'll do a bunch of these sessions. And then we have the culmination happen during our Plexo Capital Summit, where all of the GPs from the cohort, they will do their demo day pitch. So they'll do a five minute pitch. And then, you know, they can interact with LPs. We did it this year at the Capital G office on the Embarcadero in San Francisco. And we had a bunch of the Plexo Capital GPs, other LPs that are Plexo Capital LPs, even LPs that aren't Plexo Capital LPs. And they're listening to all of these pitches. They're interacting with the GPs. It was great. And we also decided with this last cohort to do it geographic focused. So we did it based off of investors living and investing into Latin America. So, you know, kind of a little bit of a

focused cohort. But look, we love the program so much that we really want to expand it even more and have a separate vehicle so that we can, again, using Y Combinator as our North Star, invest into all the folks that go through the cohort. We use the same process to select cohort members. It's kind of like a slimmed down process for the Plexo Capital selection process for our flagship fund. Why not have a separate vehicle so that we can actually invest into all of the GPs? But we've helped to raise over $30 million for the Plexo Capital, for the GPX cohort members. So I think that's very, very timely and a great market to be providing this value add. We'll link it to the show notes so everybody could learn more about it and see if it's a fit for them. And finally, you've really allowed me to ask a lot of

inappropriate questions. That's why I love this podcast. I get to ask questions I can never ask LPs in a regular conversation. So thank you for that. And thank you, Eric Torenberg and Beezer Clarkson, for being insistent about me interviewing you and bringing you on to the Limited Partner Podcast. What would you like our audience to know about you, about Plexo, and anything else you'd like to shine a light on? We're very intellectually curious. We love to learn about new industries when GPs are targeting

a specific area, geography, or industry. So we have a database of over 1,800 firms, and we've had conversations with over 600 firms at this point. My son works with us as an analyst, and he's taken 400 of those 600 meetings. So we highly encourage anyone to reach out. If it's the case that it's an emerging manager, so a fund size of really less than $250 million, but mainly focused on these early stage investments, if it's a fund one, fund two, fund three, if it's the right fund size, you know, we want to talk with you. No matter where the GP may sit across the world, we're global. So we're not only investing in the United States, we're in Canada, Mexico, Brazil, Colombia, Nigeria, Egypt, the UK. We like to have a global perspective and we want to talk to everyone. Thank you, Lo. And thank you for spending the time.

If you pull my leg, I'll come out to LA in the winter. But otherwise, we'll meet in New York or on the East Coast very soon. That sounds good. Thanks so much for having me. Thank you for listening to this week's episode. In order to make sure you do not miss out on next week's episode, please make sure to subscribe below. We thank you for your support.