Investing Billions - E75: Insight Partners’ Direct and Fund of Funds Strategy

Starting point is 00:00:00 All the people tell me all the time is like, I love that you guys actually put your management dollars to work. If you take those dollars and you're not trying to get rich off fees, you're actually trying to kind of reinvest that into the business and reinvest that into people and programs and ops dollars that like actually make sense and that differentiate you over the long run. So how we look at GPs and their check size relating to this strategy really kind of goes back to the GP thesis fit idea, right? And so in terms of we have both managers that have larger portfolios, smaller ownership across earliest stages, we also have more concentrated GPs that are post-seed series A that are taking 15, 18% per deal. And because we have both in the portfolio, we're trying to evaluate each of them in terms of how effectively is the GP able to source and win those deals at that scale? How fast is the half-life on information on the benchmark and data? Is this something you have to keep up every month or is more of it like

Starting point is 00:00:48 evergreen in nature? For more ideas on how to raise venture capital in this market, make sure to subscribe below. Samer and Dion, I've been excited to chat ever since our good friend Sarah Smith of Sarah Smith Fund introduced us. Welcome to 10xCat. Great to have you guys. Dion, you've been at Insight for seven years. Tell me a little bit about Insight's strategy. Sure. And I'll do my best to do the poor man's version since Insight's been around for 25 years. Our core find invests directly into companies. So investment focus area-wise,

Starting point is 00:01:17 it has and always has been focused on software investing. We've kind of always believed that economics of these types of businesses are better and more scalable in the long run, particularly when you factor in the gross margin qualities, as well as recurring revenue qualities. On the approach side, look, I think it's always been a bit of a humble one, which is a general belief that capital and isolation is undifferentiated. So to really find an edge, we need to be better at finding and picking companies, or we need to be better at providing value and winning, or obviously a combination of both. And without this strategy, you generally end up in bidding wars where the only lever left is price, which can kind of erode your returns. One of our maybe better known approaches is that we have a sizable sourcing team who are specifically really geared out to

Starting point is 00:01:57 outbound companies. And what this does is it widens our reach. So we're able to really generate kind of unique at-bats or unique investments in areas where others might not be playing. I think this generates about 50% of our proprietary deals. Outside of emerging managers, Insight really focuses on quote-unquote underhyped companies, but it seems like it's more or less an efficient market as companies scale. How do you guys find these underhyped opportunities? The sourcing team that we've talked about a little bit is one strategy to kind of achieve this. So this is a group of individuals and investors who are early in their careers, who are really there to kind of learn about the space and really connect with founders at the ground level and speak to them, learn about their stories, learn about their trajectory. That means that the deals that we're looking at, they're not just

Starting point is 00:02:36 inbound. Half of them are, at least half of them are outbound as well. And so we're able to kind of speak to companies that might not be thinking about fundraising today. What this enables us to do is kind of shift the conversation away from only companies that are kind of in very public, very active fundraisers, where we would expect to meet a lot of other kind of capital allocators in the mix, but really extend our space to other opportunities as well, where we might be the only investors actually speaking to. You guys are known for doing some majority deals, not just minority investments.

Starting point is 00:03:03 Tell me a little bit about that. One of our differentiators is that we are able to be really flexible. And that refers to both kind of sides of investment, as well as kind of the structure of it, whether that be minority or majority. Look, I think every deal is kind of a partnership and conversation between ourselves and the founder, right? So we don't know what they need or what they want or what their goals are. To some founders, they really want to prioritize ownership. They want to partner along the way, but they are never going to be willing to give up that majority ownership.

Starting point is 00:03:25 That's okay. I think we're willing to work with that. And on the flip side, you have other founders who are willing to kind of make that trade off earlier in order to kind of have a slice of might be a bigger pie later down the line if you have kind of like the right capital partners early in the process. So I think that flexibility is really important to us because at the end of the day, I think it's worth separating the company and the opportunity and what's that that's going to turn into away from like the structure of the actual deal.

Starting point is 00:03:48 Absolutely. And Samer, you have a unique background. You became an immigrant and now running a fund of funds at Insight. How did you come to run a fund of funds at Insight Partners? It was a bit of a circuitous route, to be honest. And I'll shout out Dion and the team for sticking the bet on me. But I think I took a bit of a non-traditional path to venture where prior to joining Insight, I was a member of an organization called Black VC, which is a professional org for black venture investors. And kind of throughout my career, I've been really focused on the intersection of racial equity and just economic quality broadly and using entrepreneurship and capital as a vehicle

Starting point is 00:04:18 to get there. And I personally had a few folks that were on the Insight team running the fund of funds and was really aligned with the mission and the focus to invest in emerging fund managers that are underrepresented specifically with the idea that they do come from differentiated backgrounds, do have different perspectives and problems that they think are important to solve through venture capital. And felt that, you know, there was a massive opportunity to prove that this community can drive returns, which ultimately will unlock additional LV capital coming up the sideline. This seems to really fit into Insight's theme of being contrarian or going where others are not competing in. Give me a couple examples of how underrepresented minorities are able to go after markets that majority represented groups are not able to unlock. And this kind of ties into what Insight does in terms of getting proprietary looks. At the earliest stages, pre-seed and seed, oftentimes, if you really want to be able to get in early with the best founders and actually get some meaningful ownership without

Starting point is 00:05:07 crazy valuation, you really need to know these founders at the earliest stages, potentially before they've even decided to spin out and launch their own companies. And the reality is there's tons and tons of early stage investors these days, whether they're angels, multi-stage firms coming early or just traditional kind of pre-seedence seed shops. And so to be able to differentiate there, you have to know founders and different communities that may not be tapped already. And whether that is just through being connected into the big tech, but also having identified different pockets within it, whether that's a lot of underrepresented GPs are also based in areas that are not necessarily the Silicon Valley, New York, Boston kind of focus or finding early stage founders in the Midwest,

Starting point is 00:05:45 in the Southwest, and in places where valuation is a little bit more modest. And they're helping them actually think through taking that leap and launching their companies. And oftentimes we see them getting in at the earliest stages, right? Right at our own corporation, we love to be bad. And so I think so much of being able to win at early stage is finding the best founders before everybody else does. And if you're fishing in the same pools that everybody else is, then you're kind of goes back to the point of you're competing most likely on price and that can really hurt ultimate returns. In terms of value add outside of providing capital, what does Insight help emerging managers with? It really depends by manager, right? So I think across our portfolio and how we approach it is we are typically not the largest LP. We are making

Starting point is 00:06:21 the largest commitment to these GPs. We are a significant LP and we want to be as collaborative as possible. So some GPs are early in their fund one going to fund two, and they're thinking about how are they going to do their first AGM? They're making their first few hires and thinking about where should they prioritize these roles and where should they recruit talent? A lot of advice that's really kind of more mentorship driven and kind of other folks sharing notes about best practices. And so we like to both connect our GPs to each other because oftentimes many of them have just gone through that journey so they can kind of share notes. But then we also have a series of kind of like more programmatic webinar-based kind of sessions where we're bringing in our head of IR, we're bringing in experts on our

Starting point is 00:06:54 onsite team who can talk through, you know, best practice of building out some of the function. For some of our other GPs, they really just benefit from deal sharing with the firm, right? And so we see them having built a lot of relationships with investors within the firm, which is, I think, a plus on both sides and allows that continuity of capital. And I think there is some level of kind of signaling effect of inside making an LP commitment to an early stage fund that might be one of the first institutional investors that can also help them get some local credibility and hopefully some momentum in their fundraising process. I think in the long run, we hope to kind of help the abridge to a lot of these kind of talented GPs towards reaching institutional LPs themselves. So we're already starting to see

Starting point is 00:07:28 some of this happen with just even the nature of our fund. Our fund one for Vision Capital 2020 was purely internal capital partners pitching in internally towards this idea. And now when you look at our fund two, we've kind of since raised external capital with some really amazing LPs in the run, right? So MassPrem and P-Service, for example, have kind of come to support our fund too. And through this, they are getting now direct access to some of the GPs that we're funding. So I think our hope is that in the kind of medium to long term, that will be kind of our value add to them is the ability to increasingly push them towards an LP-based thorough. There's a lot of multi-stage VC firms that are now investing in emerging

Starting point is 00:08:01 managers, whether for diversity or just for deal flow. How do you look at multiple VCs investing in a fund? When you look at the trend of, as you mentioned, VCs starting their own emerging manager funds, there was a really big spread of energy in 2020 around the time of a lot of the alum movement and other, but a lot of those have been one-time funds, which is a bit disappointing. But I think that there are fewer VCs investing in this space than there could be or should be. Remains like a pretty big gap there. when you look at the dollars that could go into this space and the dollars that are. And a lot of those funds have not actually turned into repeat funds. Samar, you told me something a bit controversial. You said that it's difficult to be differentiated in terms of sourcing and value add for early stage emerging managers.

Starting point is 00:08:38 Tell me about that. If you're looking at pre-seed and seed and what kind of breakout sourcing, these are small teams. Typically, it's the GP, right? You're really heavily relying on their network. And a lot of people are fishing in the same places, right? Whether they spun out of big tech or big startups, whether they were in a venture firm in the past. And so it's really hard to be able to kind of uncover those companies at the earliest stages consistently, right? And on the value add side, I think generally speaking, early stage founders are looking for fundraising support, early hires and early customers. And so

Starting point is 00:09:04 most early stage funds that we've come across, their value add is specifically targeted to those three areas, right? Which as it should be. That being said though, it's hard to seem truly differentiated and have your value add be your specific right to win if what you're providing looks similar to the next 10 GPs that we're talking. Everybody kind of can say similar things. And so as we're going two or three layers deeper about like their sourcing and value add angles, we're really looking for something that's compelling and there's like proof and evidence that they are able to do this to the same degree consistently. Dionne, how does Insight systematize value add for your portfolio companies?

Starting point is 00:09:35 It's multi-pronged. It's, we have people programs and kind of content approach to it. On our people side, we really near our internal advisory structure to the needs of our companies and, you know, what their management teams look like. So, for example, we have a pillar that is focused on sales, on pricing and marketing of product so that we have kind of topic experts on any of these fields for our companies to be able to kind of chat with them and kind of get that functional expertise at any given point in time. We are very active in publishing content. And, for example, we have periodic table of elements of kind of the core key metrics that a growing software company would kind of want and use and kind of refer to. We publish benchmarks, we publish how-to guides on a lot of kind of scale questions that our companies have and publish these and share them. We have kind of community

Starting point is 00:10:15 that we lean into, whether that be CEO summits or other, but just internal forums for portfolio company executives, founders to be able to speak to each other because sometimes they can help each other more than we can help them, but really leaning into the infrastructure around this so that they are able to access that community through us and through each other how has that value-add platform evolved over the seven years that you've been on insight it's just gotten kind of more complex more trauma developed to the very very beginning when i joined our entire platform team was i don't know like six people who were just generalist strategists trying to help these companies as best that we could. Over the seven years that I've been a part of the fund,

Starting point is 00:10:49 we have grown that operations platform team to 150 people. Again, kind of mirrored across the different strategies that I discussed. But you look at the scale of that investment, I think that's pretty astounding. When we started this, the Vision Capital 2020, I spoke to some of our LPs and just kind of got their advice of like, why did you guys invest in Insight? How did you think about why this stood stood out to you to kind of help myself and Sam or kind of orient ourselves around the LP mindset and what they found valuable. And something that LPs would tell me all the time is like, I love that you guys actually put your management dollars to work. You take those dollars and you're not trying to get rich off these, you're actually trying to kind

Starting point is 00:11:19 of reinvest that into the business and reinvest that into people and programs and ops dollars that like actually make sense and that differentiate you over the long run. How fast is the half-life on information on the benchmarking data? Is it something you have to keep up every month or is it more of it like evergreen in nature? It's not evergreen. It's definitely something that I wish were evergreen. It'd be a lot easier if it were to be honest. Even something as simple as if you look at pre and post, let's say 2020, 2021, the expectations of what is like a healthy composition of the rule of 40 of how much companies should be kind of spending dollars for the sake of growth versus approaching a more balanced point of view. That like super, super high level metric has evolved over, you know, what investors and what the public expects. Now you boil that down to the smaller benchmarks and metrics, that starts to get really, really hard.

Starting point is 00:12:05 So it is a changing picture and something that we try to keep really current. Samer, speaking of benchmarks, you've looked at hundreds of emerging managers. Tell me a little bit about check size and strategy at Precedency. What check size dictates what kind of strategy? We'll get right back to the interview.

Starting point is 00:12:19 But first, to stay up to date on all things emerging managers and limited partners, including the very latest data on venture returns and insights on how to raise capital from limited partners, subscribe to our free newsletter at 10xcapitalpodcast.com. That's www.10xcapitalpodcast.com. That's a good question. How we look at GPs and their check size relating to this strategy really kind of goes back to the GP thesis fit idea, right? And so in terms of we have both managers that have larger portfolios, smaller ownership across earliest stages. We also have more concentrated GPs that are post-seed, series A, that are taking 15, 18% per deal. And because we have both in the portfolio, we're trying to evaluate each of them in terms of how

Starting point is 00:13:00 effectively is the GP able to source and win those deals at that scale, right? And so like consistently be able to get the ownership that they're targeting. If you're going to be getting those 15, 18, 20% ownership at the seed or series A, then we really expect a very comprehensive ability to engage, win these deals, specific kind of subject matter expertise that can be compelling enough to compete with some of the multi-stage firms that are coming in versus much scattered, kind of like much larger portfolio across a lot of companies. We expect the value add to kind of be scaled to check size. You know, something that we have seen though, and I think is it ends up being a compelling, or it gets us excited is when, even when the fund has a smaller check size, or maybe a third or

Starting point is 00:13:36 fourth largest kind of check in a specific round, but the founders have held open the round specifically to let them in or have pushed to let them in. And because what they deliver is typically kind of over what their ownership would suggest, but it then just creates this compelling kind of flywheel for them for the next round and next time the founders that they're trying to back because it shows that it will show up for you regardless of how much that ownership is.

Starting point is 00:13:56 Sometimes we hear founders referring to them almost as like extended co-founders, right? They're really, really seen as part of kind of the building team and family and expected to deliver that kind of value and time. But, you know, with subsequent funding rounds, I think there is a natural kind of shift where the onus shifts a little bit to GPs of subsequent stages. And Samar, you mentioned third or fourth largest check in rounds. Give me some benchmarking around what you see in pre-seed and seed funds in terms of the largest check, the second largest check.

Starting point is 00:14:21 What kind of numbers are we talking about? With pre-seed where you're seeing kind of rounds get up to two, three million use points, scale up a little bit more. The largest check could be 1.5, right? And so 1.5 to two. And so it really depends on the scale of the round themselves.

Starting point is 00:14:34 Dion, you've been at Insight for seven years. What do you wish you knew before you started? Investing is really challenging. And I think that my realization of this job a little bit is I think when I came in and maybe others thought the same thing, but I think a lot of people have this like TV image of what it's like to be an investor or to be working with in this space. And I had the TV image was a bit of it was a bunch of people sitting around a room trying to predict the future and placing bets where they saw the future going. And I think the reality is that it's really, really, really hard to predict the future.

Starting point is 00:15:02 And even if you kind of do know pockets where you expect things to pop, you then need to further know who is going to do it and who's going to be the game changer. So I think it's a little bit of understanding that it's not actually the investor, but the founder who is closer to being able to predict that, particularly at least in their domain. And I've learned over time that this job is a little bit less sitting up high and up here hypothesizing in a room. And it's a lot more learning from the ground up and looking at like, Hey, customers seem to be buying this product. I don't really understand why, but let's figure out why and go and understand that. And I wish you knew that in some ways the job is less sexy than it looks like from the outside and more of just an ongoing learning process where every time you think you

Starting point is 00:15:40 understand a space, it kind of moves fast enough that you need to really run it all over again. And just really, really being willing and open-eyed to going through that learning fly a little bit over again. At which stage are you more underwriting the company than the founder? Somewhere between five and 10 million in revenue, it feels like you were starting to see real kind of product market fit there where there is evidence beyond the founder that there's traction there in a business there and like something pulling it. So I think before that, and even in companies with revenue, I would say under five million, I don't want to put a hard math to it, but it's really, really easy to have false positives where you might have one or two

Starting point is 00:16:10 big customers giving you a shot to still change. Samer, what has been the most surprising thing about backing GPs? Evaluating performance for venture funds is just difficult. It's such a long tail. A lot of, you just really don't know what returns will look like until, you know, you're seven or eight. You have to one, dig a lot deeper into the underlying portfolio companies, start to get a realistic picture of where their performance is. And it's actually a pretty significant, valuable resource that we have at Insight, given our sourcing team is so strong and talking to a lot of companies. Very rarely do I come across a portfolio company of a GP I'm looking at that isn't in our system in some way. And so I'm able to cross-reference what I'm hearing from the GP and potentially other GPs and start to build our own perspective on the portfolio. So that part has been a huge resource, but I think underlies the challenge

Starting point is 00:16:53 of evaluating early stage response in general. And then just monitoring our portfolio consistently. It's a constant kind of digging through a lot of different buckets to try to get as holistic of a picture as possible. Thank you for jumping on the podcast. What would you like our listeners to know about you, about Insight, or anything else you'd like to shine a light on?

Starting point is 00:17:10 A lot of people don't think about funds in the same ways they think about companies, with regards to the fact that they are businesses themselves. And like any other business, funds are not static, right? It's an evolving competitive landscape where everyone from founders to early GPs to large funds will basically really need to keep innovating to succeed in the long run.

Starting point is 00:17:28 So it's, I think when you start to think of funds that way, it starts to really help answer some of the questions that we talked about in regards to, you know, what are good funds? What are good GPs to bet on? When you think about their ability to respond to that environment. All I would add is that early stage emerging GPs are so much early stage founders where the team is still developing. Their product market fit to a degree is still being kind of honed in terms of their sourcing angle and right to win. And there has to be a collaborative approach to backing emerging

Starting point is 00:17:54 managers that enables that growth and provides the support while also holding them accountable to the returns and strategy that they've set. But we still think it's an incredible time to be backing emerging managers today and think we have some incredible vintages over a Saturday night. Dion Sammer, I really appreciate you taking the time to sit down and chat and I look forward to sitting down in the real world very soon. For more ideas on how to raise venture capital

Starting point is 00:18:15 in this market, make sure to subscribe below.

Investing Billions - E75: Insight Partners’ Direct and Fund of Funds Strategy

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