This Week in Startups - Dry Powder in Venture Capital, VC Ratings, and more with Grady Buchanan and Victor Gutwein | E1895

Episode Date: February 9, 2024

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today. Everyone's a GP. Everyone raised a fund in the past or they're still trying to raise a fund. And they all, a lot of them seem somewhat similar and it's hard for us to separate signal from the noise right as LPs, especially when you're a smaller fund of funds and everyone's coming at you to try to raise capital, much less the bigger guys that we kind of know that we don't have access to today. But it's trying to find the ones that speak like you guys do. Like, oh, here's what I'm trying to grow. Here's where I came from. Here's where the industry is today. Like, you don't have to have been in it the last 20 years to understand what has happened or where you. you kind of want to position yourself for the future.

But if you can't go through that story and you can't talk about it as a general partner, then those are really tough ones to get behind. And I do think we'll see this weeding out of probably most of them in the near future. But these 45% we'd expect to continue to, they need to continue to do well, right, for this industry. This week in startups is brought to you by Open Phone brings your team's business calls, texts, and contacts into one delightful app that works anywhere. Get 20% off your first six months at openphone.com slash twist. Lemon.io.

Need to speed up your product development without draining your budget? Hire vetted engineers from Europe at lemon.io. Go to lemon.com slash twist to get 15% off the first four weeks. And Northwest Registered Agent will form your company fast, Give you the documents you'd need to open a business bank account and more. Visit northwest registered agent.com slash twist to get a 60% discount on your next LLC. Welcome back to this week's liquidity podcast. This week we are bringing you the Midwest edition of the podcast.

With me today, I have Grady Buchanan, formerly of the Wisconsin Alumni Research Foundation, Wharf, where he managed the venture book for the $3 billion institution. Today, he is the co-founder of NVNG, a fund-of-fund, focus on investing in the very top VCs. Next, we have Victor Gutwine, managing partner of M25 in Chicago, one of the most active investors in the Midwest, backing 140 startups at the Seed and Priest's stage, including companies such as Kin Insurance, Astronomer, and Loop Returns. And of course, with us, we have Jason Calcanus, J-Cal, world's greatest moderator and seed investor into some of the top companies in the world, including Uber, Robin Hood, Thumbt, and many others. And I'm your host, David Weisburt, co-founder of 10x Capital. Today, we have four topics on the docket, dry powder in VC, VCs rating other VCs, a study on whether it returns persistent venture capital, and the rise of the mass affluent in VC.

We'll finish off with examining the last three investments made by Jason and Victor and the last three fund investments made by Grady. Let's jump right in. The FT reported that VCs are sitting on a record cash pile and startup funding. In 2023, VC. Dry Powder reached a record $300 billion. Grady, how do you look at GPs that are conserving cash in this market, given that most are still getting management fees off these funds? Well, first of all, thanks guys for having me on. And it's a good question. It's when we think about very often, as you guys can probably imagine, managing a fund of funds. Our focus, I mean, NV&G started investing a couple years ago. So this isn't really come to a head for us. Most of our managers in the way that we pick managers,

we like managers that can fully raise their capital and we do not pay them to sit on the sidelines, right? If they are, and we do have a couple and we had a couple back in the day, right? Just learning the why's and why not, establishing the regular cadence with our managers, we'll speak with them at least quarterly, as Victor could probably tell you, understanding why they sit on the sidelines and the why is nuts. And then importantly, so where are you spending that time and that effort. This is a management fee that is a loan to the venture firm from the LPs, right? It's a zero interest loan. How is that going to come back to us? And that might not mean in returns today. It might not mean in deal flow today. But if you are a fund

manager and you're sitting on 50 percent reserves right now and your investment term is kind of ending, what are your options? I mean, are your goals to hit reserve marks very quickly? Are your goals to push those to later stage managers? Or what are you going to do with this management fee that we continue to pay you. And there are ways to generate value to LPs that are outside of just investing in the right companies on time. But it has become an interesting world where a lot of funds raised a lot of money. And now they've made good investments or bad and they're still sitting on half. So like I said, at the end of the day, that's not what we pay our managers to do to sit and watch them. But maybe these fundraising cycles start to elongate. Maybe they go back to what we've seen

10 plus years ago, and you start to see maybe some of that capital come back to LPs. Do you expect Grady at some point, GPs, to return that capital? I mean, we've seen this happen at some of the big ones already, right? And some of the endowments we speak to, I mean, we're a $50 million fund. So speaking specifically to NVNG, no, I would not expect that. It's not what we're hoping for. But in terms of some of these larger, more established managers and the market in general, Yes, I hope that they make the prudent decisions to return capital, open up some allocations for some of these bigger ones so they can start hunting again and making investments.

But should they be at or near the end of their investment term, these are conversations that we at NVNG would start to have. Again, we're only a couple years into this. But going back to our old portfolio, absolutely, it would be conversations that we're having with them right now. What are the deals they can get for possibly that capital, right? what are we going to do with our allocation when they're not delivering it back? So fortunately for us, not today. Victor, when you look at your opportunity set of the startups that you can invest in, are you always determining that this year versus next year?

Are you just looking at the current market condition? I think that the actual dry powder stats are kind of pad up a little bit. It looks like there's more than there actually are because I think, first of all, we have firms that were going back to the well every two years of the new fund, and now they belong to that to every five years. So they're going from as fast as they could raise warning to now they're going to as slow as they can raise money because they get acquitted and they need to show results. And so that, you know, if you take that number, you divided by five and divide a percent of divided by two, that's a lot less money deployed per year. You also have in those stats, I think you have things included like Tiger, like OpenView, like firms that there may not be even yet. publicly announced that they're not really active.

And then there's also first and second time funds that were raised entirely off high net worth individuals that don't have any semblance of the BPI, that they don't have any money coming back to their LPs. So they're looking to stretch that capital as long as possible because they need to be active and need to show up being to finally have some MNA or some IPOs in their portfolio before they can go back at this time to raise another fund. So that dry powder is a very, it's kind of a false sense of a shirt. insurance was actually happening in the market. And so I look at that. I'm the first investor in a

company almost always. So we need our company is almost always to raise future rounds of capital. I'm not going to most companies won't be profitable after we invest. And I need to then understand like, hey, what does that, what does that mean for the types of deals I can do for how they need to spend their money, for how much capital they need to raise? And also for their valuations that I'm are required to get in at because there's more risk now. There's less likely that we can raise it as a premium competitive barkup. And so even if you have an active fund, so we have, we have like three more years of capital with our fund that we recently raised.

We are still steady. We're steady deployers. And so if you have recently raised money in the past year or two, I think you're deploying, but it's steady. Our 2023 was the slowest pace we've ever had as far as. of the point capital. And that matches with what I hear from like years. I think probably Grady and Jason probably can kind of assess that from their

networks too. But it feels like, you know, there's not a ton of pressure to figure the piece, but that people are more comfortable employing. But it's, you know, it's, it's not that for everybody. For a lot of these funds, they only have a few bullets left before they have to go back to the market and they don't want it. So that's, that's kind of how I see. And that's why we have adapted our investments because of that.

And Jason, how do you look at your capital deployment schedule? Yeah, I've always been slow and steady. And you have to play the game on the field. During Pigsirp, we didn't see a lot of deals we liked. We thought they were overpriced. And so I'll just give an example there to your question. You know, if we have a company come to us and they say, we want a $20 million valuation.

And I say, okay, what's the revenue? And they say, oh, we're pre-launch. And I say, okay, pre-launch, no revenue. So, you know, infinity times revenue is your valuation. I tell you what, why don't we talk in a year, or we'll talk six months after you launch the product, we'll have some data there to talk about. So if the valuation is sky high, it's not a former founder I've worked with. We're probably not going to make that jump.

And we were a little bit quiet during those two years, I'd say 2020, 2020, 2021. We did do some secondary sales during that time. We were able to clear some positions, and we were able to help companies raise money. So the managers and LPs understand this have many different job functions. One of them is meeting with companies and then placing bets. Another one is helping existing portfolio companies raise more money for a rainy day, which is exactly what happened. And we feel pretty savvy right now that we sold some shares during that period,

got some DPI to our LPs, and we were able to help companies raise what were to me, mind-blowing amounts of money compared to the valuations, compared to the actual traction of the companies. Today, and we'll just look at a non-ZERP environment when the market slow down, we're seeing a lot of companies that are three developers,

two developers, a designer, working on a product, and they're raising a $5 million, and they only want to raise $250. And we say, oh, how about $500K, we'll buy 10%. And they say, no, we just want $250, we don't want to dilute. We don't need it. And so the whole mind shift has changed.

So what got us to this massive amount of dry powder is like a really interesting question. Well, people wanted to put money to work and there was plenty of money around. So founders and GPs raised a ton of money. Now the market slowed down. Actually, the wise thing to do is to slowly deploy capital in great companies and be patient. And so we wish a couple of our companies that were burning capital too fast had done what VCs are doing here, which is going slower. And you're seeing like the laggards, even in the public markets at the time we're taping this like snap and DocuSign are cutting like 9 and 10% little tiny cuts, you know, in terms of how bloated those companies probably are. And so put it all together, I think net, net, net, you have to play the game on the field.

And really LPs to your original question to Grady. And I'm an LP in 24 funds. We're looking at for myself two numbers, cash and cash. out. That's all I care about. You can charge me whatever fees you want. You can charge me whatever carry you want. I'm going to judge you. I put in a dollar. You gave me, did you give me back two, three, four, five, ten, or twenty? And I've had funds. What I just described is a bunch of different funds I've been in. And when you give a dollar and get back 20, 10 years later, you feel pretty good about it. When you get back one and you feel good about it. And you figure,

give one and you get back two, you're like, ah. And when you give one and you don't get back one, you're like, ah, maybe, yeah, we've got to take a deeper dive here and click on it. So, yeah, I wouldn't sweat the management fees because, as I think Grady was saying, it's a loan. It is a no interest loan. I could see it becoming annoying if somebody had a lot of funds and they stacked them and you're like, wow, you guys are taking down, you know, let's just take the case of injuries and Horowitz or something. You know, whatever, 10 billion under management, they have 20 billion under management, whatever it is now. Two and a half percent or three percent of that is a lot of money to be paying $300 million a year or $600 million a year. Who knows where those waterfalls are at with those.

Man, that could be infuriating to some folks if they weren't seeing performance. But if there's performance, nobody cares. That's what I've learned. If you win, who cares? Oh, you were skiing for 12 weeks in Aspen. Yeah, there was this negative story about you in the press. Oh, you're spicy on Twitter and you're talking about wars and, you know, politics and alienating people. Who cares?

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Grady, how do you look at that? Do you want your managers to be deploying? systematically. Do you want them to be playing macro investor? I think Jason said it very well. And if you boil it all down, it's like, it's like the Charlie Munger thing, right? Like tell me the incentive is up, tell you the outcome, right? It's like as, as long as they are performing and they've done really well, he's right. It's hard to argue with management fees. But that's why when we look at GPs and some of them are new, some of them don't necessarily have the DPI or that track record to come behind or they have it at a previous

firm, that can be challenging. And as long as they're thinking through this and it's like, oh, this is what it could look like. Here's our scenario planning because we are launching in a COVID world and it is different. But to Jason's point, it's like some of these funds charge ridiculously high fees. Some are not justified in any way, right? Like some of these newer funds, but they're playing the game that's on the field. It is what it is. And then some of these larger managers can charge because, again, I don't know what they're doing.

They could be like Jason said, it could be doing whatever they're doing. If they're delivering cash on cash, great. And that's the MOIC that people, that you can't. coming back for. So for us, it's a little different with NVNG because we are probably hunting in the more defined emerging manager space if we're looking at Roman numerals three's or earlier. But I, I, it's hard to disagree with what Jason said. I'm curious. How do you pick when somebody's on fund one, two or three? What do you look for? There are like two or three things that when you're making your decision around a table, you really double click on?

Yeah, I could go through kind of putting the NVNG head on. Um, and what makes sense for our strategy in our LPs, right? Like we are a fund of funds backed by corporates and some larger institutions, but me personally and the way we look at funds, I don't, and we said this earlier, the way my partner and I look at this, what emerging managers, what boxes aren't they checking, Jason, that we're okay with them not checking, right? We fully understand that they're not going to be exactly where they need to be. We fully understand they're not going to look like Sequoia. They do not have this machine made of people yet, right? But are they building a firm, not one fund, do they have aspirations, right? Do they have a differentiator that's better than

outline what's in their pitch deck? Do they think differently? And have we seen that in action either in their past careers or through the partnerships that they've started to form? Me personally, though, and I think Victor will tell you this and you look at our portfolio, it's I liked really well-networked funds, especially at the earliest stages. I like funds that have put in the work and have put in their time. I started an endowment fund and I didn't know anything about, I knew how to pronounce limited partner, right? But I didn't really know anything other than that called every endowment fund, called every venture fund. Victor, I've known for 10 years now. It's like, all right, how do you guys do this? What is so attractive about this industry? Put all that

together. And now we have a decent network at NBNG and we're sitting in Milwaukee and Madison, right? And so for us, it's who are those funds that are like-minded and they're thinking, who are building, like I said, firms, not just one fund. We're not looking to just invest and then get out, right? We want to build this up with you. But those people are often, often real outliers. They come out of other funds. Like we categorize them as operators, investors are kind of outliers. But it's hard.

It's a lot of qualitative assessment. And specific to our portfolio, we can get into the industry conversations and kind of how we align certain funds with corporations. But yeah, overall, it's, it's who can we talk to that knows who you are. Network is important because network equals deal flow, yeah? So. Yeah. Moving on, speaking of network, VCs are now.

rating VCs. According to a newcomer newsletter, in a recent survey, four firms beat out other GPs when it came to being the most desirable venture capital firm. The four VCs with the highest ratings were Sequoia, Founders Fund, Union Square, and Elod Gill, who is a solo GP. Jason, you've worked with all these top investors. Why are these investors so highly regarded? Well, I mean, if you look at them, Sequoia is the goat, so of course they're going to be and benchmark are kind of like goat status, so you would think they would be up there. Founders funds had a heck of a run

and is incredibly high profile because of the SpaceX and the Airbnb and the Palantir investments. Also, it's by an iconoclastic founder in Peter Thiel and Sean Parker. Fred Wilson, the goat from, you know, when you see his returns, they are pretty great and his DPI is pretty amazing.

So he probably gets up there because of the DPI stats. So we're looking at this like basketball players. You know, you got Michael Jordan and Kobe. you know, in the comparisons or LeBron and Kobe and Michael Jordan the comparisons for Sequoia and Founders Fund and Benchmark. Those are just legendary companies. But Fred, you know, he's got that DPI where he just sells everything with the day it goes public is my understanding. He just distributes and he always sells some early. And so he's been like the king of DPI which makes them like, you know, like a Clay Thompson in his prime or a Steph Curry in their prime where you just

didn't expect the New York fund to just change the game. And, you know, there's something I knew Fred and have a close relationship with him and his wife for 30 years. Fred got burned really hard in Flatiron Partners, which is the precursor unit square ventures. He was partners with Jerry Colonna there. And they were in, you know, like 10 of the dot-com top top-top con companies. And they didn't sell in a number of them.

And they got their asses handed to them. And then they sold in a couple of them, like a GeoCities, et cetera. and then they just hit massive home runs. And, you know, at that time, you know, there were very few people who realized trees don't grow to the moon, but that was something Mark Cuban had said to me. And he collared his stock very famously, his Yahoo stock, and he got out on top.

So I think he's the king of that. Eli is very popular amongst founders, and I think this came from Eric Newcomer's newsletter. And so I could see Elad Gil going up very high there because there's a lot of founders. So this looks like founder perception. But did he say that was, only to VCs, you let vote in it?

VCs ranking VCs. Ah, okay. So, I mean, also VCs understand DPI, and some of those folks have had just really great outcome. So I would say that's an outcome-based chart and not a popularity-based chart. And I feel good that I mean two of those is OPs. That's excellent. Victor, you get to hand off your investments as a pre-CNC investor into top GPs. What are you looking for?

What is the number one or two value ads that you look for in a GP as a follow-on investor? Yeah. Well, I think it's interesting because it's almost every year. there's some sort of rating that comes out on the C site. I wish it was a consistent one. Every year it's a different survey, a different metric. I wish it was consistent so we could see actually the movement and actually compare another the actual kind of methodology.

But we actually do this internally as well as well in our firm. We kind of say, A, who are the top firms we want to work with with our companies? We like rate the top 100 hype firms that we, you know, do in terms. internally, we all score them and then compare results. So it is important. As a pre-seat investor, we're going to be marked up the C, the A, the B, like it's kind of go all the way down the line. And the first thing is probably like reputation is the most important. And discover whether that that can come into play. I think we asked a question like, is, are you the best investor for this company? So I remember when we had our company, Luke returns, there were a returns.

e-commerce infrastructure platform for Shopify. They're entirely on Shopify. They have huge platform risk because they're just on Shopify. But for the Series A, we were really excited that Amish Johnny from First Mark led that round because he also led around Series A and Shopify back in the day. And he was close with them. And so for us, you know, he's the first market isn't on the top four. I do think it's a quality, a really strong quality firm.

but it might not be a top four or the top partner for every deal, but for that specific deal, it probably was unrivaled to have the lead in a series A given that type of access. So we do try to think about that and try to really have that reputation and experience that meets that reputation with the every deal. The other thing for us, we're a small pricey fund. So having deep pockets and ability to follow on and to trick those follow-on, follow-ons well, they're thick and thin, is important to us.

So, like, for example, we're investing and we, you know, we get a great series A, but then the company, it doesn't hit it off that, you know, doesn't do amazing right at the gate. And so they're going to need a bridge. And so I would love to see my, you know, my Series A investor, my Series B investor, not punish that company too much because that's going to hurt me in the comment, lot. And so I do monitor that. What is their reputation for how they treat the syndicate and when when the company needs an inside lead round where it needs deep pocket systemic through it? And of course, we'll probably participate as well, like in as much as we can, but we're not going to be

able to be the one. Do they crush the early investors or not? Try to take away the rights, take away their prerata. And, you know, this is something I fought very hard for over the years and wrote about in my book, but we really fight hard and we just tell folks, listen, we're the point guards going into second decade of a little bit more influence, perhaps, in dealing with these situations, but I'll just tell them straight up. I'm not happy about how you're treating us here in terms of rounds or that. I'm sorry, Jake, I'll fix that. You may have seen me ask a question about, hey, has anybody worked with this firm? I would say the name here on Twitter. I'd love some feedback. And just the nature of me putting that tweet up, you know, put that firm,

you know, and they were like where, because this is this same firm had misbehaved with me twice and two different partners. And I said, listen, I've now asked my portfolio and I've asked publicly, I have all the receipts of your behavior like this. Let's not have this happen again. And so that's not, you know, like if you're the small guy and you got this giant firm with billions of dollars in assets under management and they're trying to screw our LPs and us and our partnership, we're going to stand up for ourselves. And, you know, we may have non-traditional ways of doing that, which is, I'll just tell somebody, I don't recommend that firm. And they'll say, why? And I say, I've had a bad experience.

And other founders have had a bad experience. And what influence do you think that has on a young founder? Well, I just want to ask, Jason, so you know, there's this top list that, you know, and you may recommend to, you know, your companies. You also have a blacklist. And we have a list now, you know, with our, we only have nine years of experience. But, you know, you've got 20. Very similar to ours. Yeah, we're just a couple years ahead of you.

actually. Yeah. So, do you like, like there's firms that don't actively say don't work with these firms. The founders who are in our portfolio do talk to each other on a Slack channel, just like the Y Combinator folks have Bookface where they'll, you know, review VCs or whatever. So there's a back channel and, you know, there are some firms, I'll say probably here, like Karetsu, which is a forum for like angel investors supposedly, but they charge to pitch. So like the word is out like yeah you probably don't want to go to a kretsu forum they're going to try to charge you 10 grant to pitch investors but it's important that relationship from the handoff from C to series A is critically important because I know I just had an LP meeting and they were like hey we benchmarked you versus your contemporaries based on this database and based on this series of investments and you know you're they have more follow-ons these people have more follow-ons from firms and I said huh can I see that data and they're like sure and they gave me the data and then I went to the database and there were 30 names where they didn't have the follow-on investments for our investments.

And I was like, holy cow, I really have to then pay somebody on my team to make sure that all these different disparate databases are correct. And so it is very important to not only as you scale here and I'm on our fourth fund now and you have more sophisticated LPs and, you know, I don't know, Brady if you do this. But for early signal, you can be just like, hey, what did Jason invest in in fund one? That Sequoia, that benchmark, that whoever invested in. Okay, fun too. You know, who invested in it? And, you know, we had to go clean up some data. And people were making decisions based on that data.

And luckily, it was a friend of mine who was like, hey, your data is not great here. And I said, how, that's weird because our returns are great. Or we think our returns are great. And we fix it. But, yeah. Great, do you look at that for early fund managers? We definitely do. And I mean, I just like, everything you guys are talking about, and you sit back as an LP and kind of talk to all of these funds,

everything you guys are saying, it's like information. is very readily available. It's very available. Like, you pulled up a Financial Times article. How many articles in the Financial Times are about venture capital if you go back how many years, right? So, you have this industry that's very transparent. You have very influential figures, this podcast, having a couple of them, right? And it's very transparent. Like, and this is specific to founders. We go, we go hard on the founders less than, and as Victor could probably tell you, haven't done diligence on his fund. I go much harder with the founders and the references than I do with Victor and his team. Like, that story needs to hang together. They're

on their fourth fund, how that strategy hangs together. Great. And that's easy to see, right? And they've been at it for a while. But if founders are, oh, they pulled a term sheet on me, I don't like them. Or if they're talking to other founders and we have a fund of funds, right? So we have some that overlap and we can talk to certain funds that, how are you dealing with this portfolio company?

What do they say candidly about this fund? I will send fund managers to people like Victor in our portfolio, other venture funds and say, would you work with these guys? What have you seen about that? Have you heard anything? from your founders. And that becomes very important because, again, we're not investing or only our own money. We have LPs of our own. We're trying to protect them, do what's right for them. And founders at the end of the day are the reason why we're all here, right? And so if they're not

speaking very nicely about certain firms, and we do have firms with very sharp elbows, right? And they're very honest about that. But if there are founders out there that don't like this firm, where's that reputation going to go? Right. So transparency is. is huge now, and it's actually made it helpful, right? Right now, startups have to do more with less. We all know that. It's rough out there, folks. So if you need great tech talent, but you don't have the time to interview dozens and dozens of candidates, you need to check out lemon.io.

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Hey, how was Jake, how was, you know, this. person when your company came apart. And I always do a call. Hey, it's got to be a really tough weekend for you. You want to get sushi? Or if you need to talk, here's my mobile number. And let me know when your next company is happening. It's been interesting too, Jason, when you do the diligence on the funds. It's like, all right, tell me the founders that said no or the founders you couldn't win the deals. And if they're not transparent about that, we'll get there on our own, right? And we'll make sure that we go find them through their later stage funds. It's like, oh, you miss this one. But why did they miss them? It's like, oh, it wasn't the right fit for us. I wanted a

brand name firm. I wanted to be in the TechCrunch article in Series A, and it made a lot more sense than going with my local group. But if it's anything else, and it becomes very negative, and they have this kind of connotation about them, then we dive in a little bit deeper. But it is, talk to the losers. Talk to the ones that didn't let them in. Because oftentimes, if you find these good fund managers, it's like, I should have went with them. I didn't. Here's why. And they get very open and very candid as to the mistakes that they've made because we as LPs do the same thing. It's like, oh, I shouldn't have done that fund. But yeah, I think the transparency and in speaking with everybody that everybody knows, it's easy to find who you guys are connected to now.

LinkedIn, it's pretty prolific, right? It's all out there. It's very interesting you say that because it is surprising to me how transparent the industry is we're sitting here at the first segment. I don't know if I trust that data. It's like there's data. At least there's data. I mean, and you know some of what's going on here. You can in fact make informed decisions now based on the information that's available. Like it is it is tough and not to get like all the information that's out there. You still have to be intelligent, make the right decision. But talk to enough people. Listen to the listen to your podcast, Jason and you, David. It's like, all right. You might not agree with everything that they say, but at least they're telling you what they see at much higher levels.

They talk to a lot of people. Now I can make an informed decision sitting in Milwaukee and working with Victor and Chicago. Right. And so I, I think the way I've grown in this industry is like, I just listen to everyone. I try to talk to everyone. It just seems to be the prerequisite for venture is to have that network and to learn from it, right? Yeah, absolutely. I had one firm due diligence on us recently while we're raising this fourth fund. And we had a bunch of people from Founder University, which is like a little pre-accelerator.

That's doing phenomenally well. And some people had put Founder University on their LinkedIn. and this third party started calling anybody with Founder University and we just, you know, all of a sudden, ding, ding, ding, ding, ding, you know, our Slack slide up, hey, is it okay if I talk to this person? And it was like, I don't remember the name of the firm, but it was like Acme Diligence Services, you know, I'm just making up a name. And somebody hired Acme Diligent Services to go find 30 companies,

to just email every company that had a Founder University on it and just asked them, hey, can I talk to you on the phone for 10 minutes? And I think we know who it is. And it's going well with them. so awesome. But yeah, there are these third parties who do it too. So you don't even have to. You can abstract yourself. And I remember somebody, and this is a crazy story, and this is over 10 years ago, somebody wanted intelligence on a competitor. They popped up a recruiting service, something to do with recruiting. You know, let's say it was a fintech company. It wasn't.

But, you know, FinTech, you know, elite recruiting. They put up a fake website, put up a couple job postings at incredible salaries, and then started pinging the employees of their competitor and interviewing them and then asking them questions and say, well, I can't say who we're hiring for, but, you know, it's a pretty incredible amazing thing and you can work from home and it's a quarter million dollars. And yeah, so what did you work on there? And employees are not trained to not spill the beans. And they just sit there and, you know, oh, so,

Oh, okay. And what servers do you use? Oh, great. What's your stack? Yeah. Okay. Yeah. And how, yeah. Oh, you worked on growth? What were the growth projects you worked on? And all of a sudden, somebody who worked on growth. I'm just making this up. This is not the company. But imagine you did this to like, and like their competitor or something. And, you know, somebody did this for Robin Hood employees. All of a sudden, you get the roadmap. You get the playbook. I mean, there's some sinister business intelligence going on. Is that illegal or is that just highly unethical? It's unethical. ethical. It's certainly unethical. I would say that. Yeah, it's, I tell you who it's probably, it's definitely illegal for the employee who's probably breaking their agreement. So there's some, there's an employee training tip for you, David. Crazy story. I guess I, I'm waiting for the company to set up their own counterintelligent figure out which, which employees are leaking. Actually, wow, yeah, you could do that. Yeah, I think that actually exists. There's a startup idea, yeah. No, that exists as a, I think that exists, like in the three-letter agencies, FBI, CIA. They try to do honeypots, etc., to try to catch people in their organizations before the Russians catch them or the Chinese catch them. Good, good pull. Great.

Well, moving on, Stepstone, a top fund of fund just released their report on the venture industry. In their report, Stepstone highlighted the University of Chicago study on the persistence of venture capital funds, which empirically shows why LPs are so focused on getting into the very top venture capital funds. According to the findings, 69% of funds that previously achieved top quartile continue to perform over the median and future funds with a stunning 45% of funds that cheap top quartal returns continuing to return in top quartile. Grady, given that 45% of funds that previously achieved top quartile return to top quartile, how much of being an LP is an access game versus a stock picking game? I think the data would show it's an access class still is kind of what we've always called it.

And while we were at the endowment, you know, we could throw some weight around. The book was over $300 million, right? We could write the checks we wanted to and we could sell Wisconsin, right? And what's on campus and we could kind of wiggle our way into some of these, what I would call heavier hitter firms that are in that 45% that you mentioned, right? So, but at the end, NVNG, we're looking a little bit differently. It doesn't mean we'll ever forego returns or just have to look elsewhere for them. But at the end of the day, I think we're in the pattern recognition.

business, a lot of these great firms that live out on the West Coast or on the East Coast, they've turned themselves into these kind of brand engines, right, where founders are coming to them. Founders are speaking highly of them on everything we just talked about. And it's very transparent and you see these returns. And as more and more people start to see that, and I say people, and I'm sure we'll get to the retail side of things, it's people invests with what they see and what they know, and founders are the same way. And we've seen a lot of founders grow up over the last 20 years.

I mean, 50% of managers in 2001 were emerging that are still around today, right? And so if we look at that, it's like, okay, a lot of them have grown up, a lot of them is skilled. The founders know that. And the founders might be on their second or third company, right? Like, how many have you guys done? Right? Where it's like, oh, which firms we want to work with, which investors are great at this? And now I think, and now I think you're seeing that come back where founders are like, oh, let's go right back to what we know, who we know. This worked for us. Maybe the early days, early cap tables look a little bit different with everyone being a GP now.

But it seems obvious to me. And to answer your question specifically, David, access is very important. It always was when we were at the endowment, hit the spender requirements and everything else that we need to do. But NV&G, it's a little bit different. I'd argue that picking is much more important for us these days and could be for smaller LPs that look like us

that are just entering the market that don't have it. I mean, we're $50 million dollar fund. what are we here? Coastal's minimums 20, right? So it's not, this isn't the pool that we're hunting in, right? So for us, it does look different picking would be what I would say. And if you were managing $3 billion, you were obviously managing the private equity pocket. What did you see? What was your intuition around why there's such high persistence of returns in the venture capital asset class? To me, my partner, Kerry, will say it all the time. If the story hangs together, and that's very qualitative and quantitative. The quantitative

stuff is relatively easy to assess, right? The DPI, the money, the cat, everything we've talked about, right? That's, can they do that time and time again? Can we speak with the founders as to why it happened? Can we speak to the downstream partners as, oh, are you going to continue to invest with this fund? And when they say yes, you can kind of see that quantitatively. Qualitatively, it's, it's, and I think you're seeing this come to a head today, it's how are you building your team? How are you working on your internal operations to make sure that this, and I say it a lot, that you're building this firm, not just one, fund at a time because that's how we're trying to do things. But yeah, at the end of the day, they should, emerging managers should be following the same patterns that some of these bigger ones are following in terms of how they're setting things up behind the scenes and how they're constructing teams, making sure that they're not all top heavy, more of a egalitarian approach. We've seen some of the top performers focus on that with their internal teams and they've just kind of grown really great practices.

What I love about these charts is that. you know that when they say previous performance is not indicative of future performance. This is the opposite. Previous performance is indicative of future performance in our business. So you have to just ask yourself why that is. And I think it's the network and the brand and it becomes a flywheel. And so if you were the investor in Google and YouTube like Sequoia was, well, the next Google and the next YouTube, which might be Instagram, you know,

or it might be Airbnb, they're going to say, oh, well, I'm the founders of Airbnb. Who did Google? Who did YouTube? I want to work with them.

And so you do get that flywheel going and success breeds success. And then it builds a brand. And that's part of the fun part of being an emerging fund manager. I still consider us on our fourth fund now, an emerging fund because the first couple of funds was just me, you know, as a gunslinger doing instinctual network-based investments. Now,

I've got 21 people. I got a database, I got a process, I got systems in place, I have methodologies. We've got like a really deep process. And I think that's where, you know, if you learn how to play poker, you might go play poker, have some early success. You win a tournament, you make some money. You make a terrible bet, but it pays off, right? You have like two cards that could win you the hand and, you know, you're on the river and you hit it.

And now you think you're a genius parker player. Everybody at the table screams and yells, oh my God, you made the wrong play. but you got rewarded. And then what happens is you become bolder and you get more interested in poker. Just like they found with kids, you know, some kid hits a random three-point shot to win a game.

Everybody goes crazy. The kids in the gym the next day doing three-point shots saying, how can I do them better? And they look up online and watch some YouTube videos. So sometimes like just random success can then manifest itself

in the individuals wanting to be more successful. And I know that happened with me. I hit three unicorns in the first seven or eight investments when I was a Sequea Scout. And they were like, wow, you're great at that. this. And I was like, okay, I'm great at this. Thanks. I'll do it some more, I guess. And,

you know, but then that can carry you so far. And then at some point, you have to stop and go, how did I get that success? And then I looked at it and I was like, ah, that was like the beginning of the super cycle. And there weren't any angel investors at that time. And, you know, I was networked like a lunatic. So, okay, so then what carries you into the second decade? And what carries to the second day of date is having programs that really deliver value to founders that make them tell their friends about it, that make them put it on their LinkedIn page, and they're proud to be a founder university graduate, and they're proud to have gone to YC,

and then the self-perpetuating thing happens, and then having a decision-making process and all that. So, you know, what got you, I always tell founders, what got you here won't get you there. So what got you to product market fit is not necessarily what's going to get you from a million to 100 million of revenue. You may need a different group of people. you may need to evolve and learn some new skills.

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But Jason, I was just going to say that what got a lot of those top funds that were formed in 2010, 2012, 2014, what got been for returns was investing in $5 million and exiting a billion. And then when they quadruple or 10 times their AUN, now they can't have a billion dollar exit, which are much more common. They have to have a $10 billion exit in order that at the same result. So I also think like there's probably going to be some issues with persistence with the strategy, as you shift in the Ahe wind growth with some of those top firms because there's just no way to continue to hit up, you know, 10x buzz in your, it's $3 billion, you know.

Which is why Fred Wilson said, we're going to keep the funds. I don't know if he said $300 million or $400. And benchmark had that same discipline. I think Sequoia had that same discipline with the Series A fund. So, yeah, it's really good. So those are the ones that have the most persistence, and those are the ones that are incredibly access constrained them and are the ones that haven't bloated their fund sizes. are the ones that the most access to training in the world.

But like, if I was going to bet on what, what's going to be the one that's in that, you know, 45% of the state's top profile, it's going to be the one that is doing the same strategy, hasn't had to completely shift their strategy. They got it. Yeah. Good point. You're going to say something, Brady. Yeah, I was just going to say it's, it's, you guys are obviously right.

And I agree with you. It's the intellectual honesty that you just provided, Jason. I mean, you're on Fund 4. I wouldn't call it an emerging manager, but it's, we also have one manager that. that's like, there are no good VCs because every five years, the world changes and you have to become a new VC. And so, and she might be right too. But it is finding those GPs, because especially in today, everyone's a GP, everyone raised a fund in the past or they're still trying to raise a fund. And they all, a lot of them seem somewhat similar and it's hard for us to separate signal from the noise right as LPs, especially when you're a smaller fund of funds and everyone's coming at you to try to raise capital, much less the bigger guys that we kind of know that we don't have access to today.

but it's trying to find the ones that speak like you guys do. Like, oh, here's what I'm trying to grow. Here's where I came from. Here's where the industry is today. Like, you don't have to have been in it the last 20 years to understand what has happened or where you kind of want to position yourself for the future. But if you can't go through that story and you can't talk about it as a general partner, then those are really tough ones to get behind.

And I do think we'll see this weeding out of probably most of them in the near future. But these 45% we'd expect to continue to, they need to. continue to do well, right, for this industry. There's something about being able to really about this industry when you get to your 10-year mark and you're working with LPs and you're investing other people's money, all of a sudden, you know, you have this data set to look at what you did, and then you have your emails and your Slack, and you have like your deal memos and your decision makings. And so the thing I've tried to do with our firm is we have ones to watch list in our database.

So when we pass on a company, but we have that feeling, we just say, once to watch list. And we just look at that once to watch list every three month, every six months. We check in with those companies. And then we ask them to send us our updates. It's like one of our secret weapons, updates at launch.com. We just say, hey, can you just send us your updates? You send to investors if we don't mind. And we just hang out on that thread and try to find the companies we missed because, you know, the founders figure it out. And that's the, that, when you see a founder figure it out and then you re-engage them, they love it. They love it. And we, you know, as a writer, I come up with the language for our firm. So I tell my team, you know, hey, we couldn't get there as a

team, you know, in terms of your decision for this round, but we'd like to stay in touch, you know, would you keep us on your updates? And then when they send the updates, I train my team to respond to them, even make short and brief. Congratulations. I noticed this point and this point. If you ever want to get back on the phone, we'd love to, you know, talk again. Or I'll just tell them, just ask them, hey, can we meet and catch up? We think we were really impressed with the progress you made. Sounds like we made a mistake.

Or maybe we made a mistake in a smiley face and then a link to a Caliantly. If you diffuse it like that and you come up with that language, you know, you might be able to get yourself back in a deal. And this industry is not a, not a, it's not about sins of commission. It's about sins of omission. It's what you missed. That is exactly true, right? And so to the GPs that would be listening here, it's like, we just heard like a very, and I keep it in the back of my head when I talk to GPs, it's a process around those intangibles.

They may be very real things, right? And LPs should be asking about them. But everything you do with the firm behind the scenes, Jason, growing the team so they can be Jason's of the future, right? And just kind of building into that strategy, we don't see those in day-to-day numbers, right? But that brand starts to proliferate itself out. Everything Victor does with Midwest Summets, bringing in firms. to Chicago, like, people on the coasts know who I'm 25 is, and that's very helpful for people like me

that have them in the portfolio that need to grow our own network, or we can bring them into Chicago to meet with Victor. But it's that process around the intangibles. A lot of that goes into David, to your original question, what makes a GP a GP that I would look at is are they doing behind the scenes? Like, how are they spending their time and energy? Because this world is very transparent now. Everybody wants to be in it, right? Too many people want to be in it. I mean, that's got to be the hardest, part of your job. I mean, I don't envy your job as a fund of funds because it's self-selecting for people who are incredibly successful, charismatic, powerful, you know, who are starting these funds?

And then to determine, are you going to be a good, you know, gambler? Are you going to be good at placing bets and working with people? Man, it's a hard job you have. And then you don't know if you made the right bet for, what's the soon as you would know, three, four, five years into a fund? Yeah, yeah, we've been fortunately, maybe less fortunately, some of these funds, we've been last every party. And so some of these portfolios were pretty well big. So we've seen some of their successes, but you're right. It's tough. And I favor the funds that are 80 million or smaller kind thing, the ones that we can kind of weasel our way into. And given relationships we've built steadily at war, if we could get in some of these bigger funds and help balance out the back half of the

portfolio for timing. But yeah, you're right. Everyone's a new manager. Everyone's early stage. Everyone has a little niche. And they all sound impressive, right? I don't want to knock any of them. But Yeah. We're not investing in 800 funds. Like we are investing in 20, maybe 25, right? And so to pick those specific ones, it's like, and you're right, I look at it as like a 10 year relationship, us too, same as them, building the firm, not just this one fund. Who are we going to be comfortable with for a very long time, right? And so, and I don't expect to turn these managers very often, right? So it's, it's, it's, it is tough to get the conviction. Certainty O'Kelia, right? Convictions critical. We kind of get as far as we can on that conviction side, which is why we feel comfortable with people like Victor, people that we've known for how many years have seen grow into their fourth fund now, right? And it's been doing it well. There's a lot of comfort there, right? Yeah, and Grady. I was going to put you on the spot. Why did you invest in Victor? Well, he's got something against me. But no, the, I've known Victor. I actually, like,

when I first joined Wharf, our portfolio was very, very well built. Venture book was very well built into the flagships, the versin, some of those big biotech ones that you guys would know, right? And we had some coastal firms, but we didn't really have ties to the Midwest. It wasn't something we were using our portfolio very strategically for. That was what it was attractive to me. It's like, okay, we have all these managers. I'm not firing on. We're not going to get back into the flagships of the world, right? And they're doing great things on campus and we like their firm. What about some of these smaller ones? 10 years ago, Victor was kind of launching.

I think they were through Fund 1, maybe on to Fund 2, almost kind of when I was watching him. It's like, all right, true emerging. But this guy spends his management fee on his team, like all these conferences that he does. Like, I don't know how he's doing all of this and these managers are very high capacity people, but he's investing only in the Midwest. He's one of the few that can, you know, pronounce Milwaukee, right, and understand that there's something going on in Madison, Wisconsin, right?

So how do we get him here? and he has all of this data and facts about the Midwest. This one was a no-brainer for us in terms of our portfolio. Like how do we cover the Midwest early stage generalist kind of market? Victor is an easy one. We have one up in Minnesota that does something similar. We have another one in Chicago that I'll talk about later that does similar things. But for us specifically, it was watching him over how many years, seeing how the funds have performed,

and then just really understanding that, all right, he's got 130 portfolio companies across funds. they're all Midwest-based. That's aligned with our strategy. Awesome. You know, we should do our top threes. We should do our top three. Everybody loves this part on the show. Excellent.

Well, let's get into the last segment, last three investments. This week, we have two GPs and one LP. So we'll start with one last investment from each. Let's start with Victor. What was your last investment? The last investment is actually, it's a pretty unique one. It's a classic Midwest deal. This is a company called Corral.

It sells two ranchers that have cowcalf pair operations out and, you know, in ranges. And so this is something that goes. It's a hardware with a software, current software element. It goes on their necks of the cows. And it stimulates them to move in certain directions when it's attached via, like, you know, it's solar power, it's cell or satellite connected. So you can be a cowboy in your house or across the world. You can say, I want these cows to move over here and now start to graze this pasture.

You can start to do cross fencing virtually and subdivide your pasture, which allows you. This is insane. This is insane. And it's a round open. I may not just slide a quick hundy into this. That was only one we told them about Victor in the Midwest. Yeah, we can hook them. Like, you let's do it.

I like it. Jason. I think I've got your number. You know what I like about this? I call this category HASS, not hot S. Like, you know when you get into the car and you turn on the seed heaters, we call that HASS in our family, you put on the house. But in business, we call it hardware as a service.

I have a great company called Density.I.O. And they do little things you put on the roof like devices. And then they count people in a space. It was originally going to count the people like in Phills, like coffee shop. But instead, they were like, hey, well, this could do this campus where there's, you know, corporate campus, where there's five million, feet around the world. And then we can tell them, you know, what's the utilization of each floor,

each conference room, et cetera, so they can do space planning and, you know, get rid of leases. It's the same thing with this because they, they don't charge for the hardware, I bet. They charge a subscription fee, right? And they, do they put the hardware into the subscription fee or they charge per hardware? They charge per device. They may margin on that, but there's a recurring yearly SaaS that they also have, you know, modules you can add on.

So if you want to do... Is it for people with one cow or thousands of cows? Yeah, it's got to be hurts. So, like, you're the recurring. Yeah, so it's kind of a B-to-B sale, but these ranchers, they're very slow to adopt tech, and that's what kind of got me is I've never done an ag tech deal, ironically, be in the Midwest, but they were flying off the shell. I mean, like, the back orders, the pre-orders.

This is incredible. So it's, this is really for corporate. Corral is for corporate. Yeah, I mean, it could be anywhere from like, I mean, maybe 50 head at the minimum and then, but like thousands are, you know, they're talking about groups of thousands. And, you know, like, this is, like, so it's much more carbon efficient. for the land to do rotational grazing and you can increase your herd size. With the same amount of land, you can increase your earth size 20 to 100%.

So I bet you're getting ranch hands is hard. Ranch hands are impossible. Everybody's old, retired, you know, there's. And then there's also a capital cost of putting up fences if you want to cross fence. So there's this guy Jack. He's a generational rancher out in Atkins, Nebraska is where he grew up, which is up between nowhere. And then he went to school at the University of Nebraska And you know

The mechanical engineering started playing with dog collars on his family's ranch To do this For steer, I love it. It's genius. J-Cal, you're up. So this one is called howie.ai, h-w-I-e-e-E-D-A-I. And it's an AI powered scheduling tool. It's pre-launch, but it's coming shortly.

And what it does is it lets you through a conversational interface if like the three of us wanted to go do something. The four of us decided we're going to have a follow-up or plan a trip. It would handle our schedules. It's automagical. You know, Callan Lee became like a really interesting thing. So you can think like maybe what comes after that, but with AI. I'll tell you just a little bit about this company that I liked. This is a previous launch founder. So this person had done Capish, another company for ours, and it was a great performer. And he said, I got a new idea. He said I had two new ideas. which would you do?

And so I'm in this discussion with him. And we have a rule. If somebody has like builder founders, product velocity, and they did a great job on their else company, it doesn't care if it worked or not. That person goes right to the front of the list in terms of our consideration. And we really, really love to make the first bet on a second time launch founder. The name of our firm is launch.

So when we looked at this one, it was pre-product and pre-revenue, but it was a SaaS company. It was AI. it had builder founders. This founder had previously raised venture capital, previously had an exit. And so those are all part of our 13 tiles, we call them, of things we look for in companies. And so this had like five or six of them just out of the gate, including the most important one, which is a previous launch founder.

Because we had this previous launch founder, Raul, who had done reportive. And then he came to me with his new idea, which was superhuman. We gave him 500K. We were the first check-in along with Dormesh from HubSpot. And so in this case, we just gave the founder 500K. It's a big conviction bet for us. And we're really excited about making those kind of bets. And we think these small companies providing really affordable AI tools to just solve problems quicker, better, faster, and delighting customers.

It's just like the same way SaaS or cloud and apps and before that internet companies all had a chance to disintermediate the people before them. AI, if you just start from a blank sheet of paper and say, how would I build this company with AI? How would I build Google Calendar, Cali, Gmail, but just using AI. That gives you like a really great starting point in my mind because you don't have the baggage of the legacy business. You don't have to maintain the existing base of customers and please them. You can just start, you know, with a whole new concept, a whole new mindset, right, which is what Hotel Tonight did or Uber did. Jason, how often are you doing pre-product, let alone pre-revenue type investments? We do some, but not like, you know, balancing the net.

Yeah, great question. So we get 20,000 applications for funding a year. This is largely because it used to be four or five thousand, then all in got very popular and then it quadrupled. So I've been the beneficiary of being, I think, second only to Y Combinator and the number of people who ask us for funding at launch.co slash apply. So we just have a URL, fill that out, and you'll get a meeting with us if it's a reasonable idea. and about half of those companies,

about half of them were pre-product. They weren't incorporated yet. And so we realized, like, they're too early to come to our accelerator where we like the product and maybe one to $10,000 in revenue. So we started founding university, made here a 12-week course.

We said, go here. It's 500 bucks. If you come for the 12 weeks, we'll give you the 500 bucks back at the end. And we started getting all these companies to join that. We're just finishing their product, and they needed somebody

to, like, help them, believe in them and we just said, hey, what if we give you a 25K check for 2.5% of the company, a $1 million valuation to incorporate? And every week, when they come to the program, 70% of people ask for the 25K check. My internal team thought it was the stupidest, insane idea, it wasn't worth the paperwork. Why are we doing this? We did 80 of them in the last year. 80, 25K pre-launch bets.

Jason, if I can ask, how, and you've seen the data because you just went through it, how do you wait, and I know the answer is that it probably depends, but how do you wait against this serial entrepreneur, the ones that are coming back to you or the ones that are coming back into this application? They obviously maybe move them to the front, but I'm curious just on the data set alone. Like, are you seeing a lot more serial entrepreneurs come back, successful exits come back, trying to get back to where you are. It kind of goes to Victor's question, how early are they going to be? Yeah, we, one of the great things is a lot of the people who I've forge friendships with who've had incredible success.

I had one founder. It's not announced it. So I wouldn't say it. I was the first investor when I was a Sequoia Scout in their company, not the third or four. And they came to me and said, hey, we're launching a new company. We want you to be the first investor. And I said, oh, tell me about the companies. Oh, we're doing $8 million in revenue.

We funded ourselves. I'm like, all right. You guys built a billion dollar company. And I said, can I ask you like, you have your choice of companies. You fund it yourself. Why do you need me? And I said, you're all good luck, Sean. you were the first person to believe in us for the last company and we want to be able to tell

everybody that you invested in us again the second time. And I said, okay, deal, but you have to announce it on my podcast. And they're like, yes, that's what we were going to ask you. Can we come on the pod and announce it on the pod? So, you know, you want to talk about intangibles, right? Like, that's just like warm your heart, make you want to come to work everyday moment that you're in it for when you're a GP and you just love doing this. But yeah, we really like anybody who's a launch co-founder or even on a launch

team. So you were the, you know, you were a hired gun, you were employee number 10 at Uber. You know, I'll get people who worked at Uber, thumbtack, Robin Hood. They're like, hey, I worked at Robin Hood. We never met. And I'm like, here's my phone number. Here's a, I have a Cali link called 15 minutes with Jake Al and I'll just, boom. I just, I don't even write the text. If that's somebody, I literally will be in line at Starbucks or like with my kids in the park and I just boom, quick key, paste in the link. And the person's like,

I put myself on your calendar. Is that okay? Is that what you wanted me to do? I'm like, yes, that's what I wanted you to do. I want to spend 15 minutes. So right to the front of the list is the answer to your question for obvious reasons. If you've raised capital, if you've had an exit, even if the exit was like for a dollar or just saved everybody's job or whatever, or you shut down, man, do you think about what you learned? That's like, oh, did you make a movie? Have you ever made a movie? It was like, yeah, I made a movie. It was terrible. It's like, great. So you know how to set up a set and you know how to find a cinema. photographer and you know how to make a movie poster. It's like, yeah, I did all that. It was terrible. But I really like our movie poster. Here's what I would do different. That's why, like, even a fund manager who screwed up their fund, it's like, what would you do different?

I was just on a call with somebody and they're like, I noticed this and your fund. Like, and I was like, yeah, that was a mistake. That's not me. They're like, oh, I was going to ask you if that was some mistake. I'm like, dude, getting into CPG was the biggest mistake of my career. Like, we have like two hits and, you know, 18 things that just went sideways. I'm not touching CPG again. It's not, doesn't have the margins.

It was like a phenomenon. I don't think it's coming back. There's private equity people who are better at it. You know, I'm just not doing CPG anymore. They're like, oh, that's what we wanted to hear. It's like playing, you know, 10 Jack when you're under the gun in poker. It's like, why are you playing that? You know, like, what if you get two people who raise?

Or, Ace 5. You're playing Ace 7. You're playing Ace 7 and you get two people raised and you call. And like, you don't think anybody's got ACE's, Ace King, Ace Jack, Ace Queen. Like, if you do hit your ace, what happens? You lose your staff. So you kind of learn these things over time, you know, these positions. that you're in.

Yeah. That's a good question. So speaking about positions, Grady, what are some of the latest GPs? Nice segue. What are some of the latest GPs that you've invested in? Yeah.

So publicly that we're out there on our website, we invested in, I'll do Hyde Park Venture Capital, or Hyde Park Venture Partners first. Victor and I know them well. So NB and G we're trying to look at across the stage. We're trying to grow across that spectrum when we grow fund one, right?

We are a first time fund ourselves, right? So we're trying to bring these venture capital funds and their attentions to Wisconsin. It doesn't necessarily mean they're ever going to make a deal, find a deal, find a team in Wisconsin, but they should have portfolio companies that are either aligned with the Midwest or can work with Midwest corporations, ideally Wisconsin's and RLPs. If you look at this firm, they've been around for quite a while. They started as an angel group and now they have a venture. fund and they've grown through the Chicago ecosystem and the broader Midwest ecosystem very,

very well. They sit almost exactly kind of in line with Victor and M25, but a little bit on top. They have a little bit larger of a fund. And they kind of go late seed into the A rounds, but they are a little bit more focused on. It's funny, Jason, when you talk about Fund 4 being immersion, they're on their fourth fund and they've grown into their own themes, they've grown into their own strategies, and now they're really playing hard into what the Midwest is kind of known for. They like the, I don't want to call it.

We do like kind of like you guys said. I like the software wrapped in hardware. You see a lot of that in the Midwest. These guys are not that. These are more software-based companies, but big winners that they've had ship bob, four kites. These are large companies with big enterprise contracts that are scattered throughout the Midwest. Like big, big entity, legacy corporations.

Those are the types of funds that we're looking at. Hyde Park being one of them to move to the next one. we did Descians venture capital. They are a very, so I'm kind of going from the kind of more broad, almost generalist fund that has some insights in a bigger team. Descians knows one language and it's fintech. Dan, their founding partner, he, he standard treasury sold to Silicon Valley Bank, his first company. And then he worked at like tech crunch on the event side of things, which was interesting. That wasn't really for him.

And now he's focused on growing his own firm. but this guy is He's been doing this for about 12 years, just by himself. And he's trying to institutionalize. And we found this team. We had an event this October and they came to Milwaukee. They took the time and the effort. And I might not know what Dan's talking about more than half the time when it comes to

like when he starts to nerd out about this stuff that I have to listen to the podcast for, frankly, to just understand. But Dan, Vashal, Ashan, these guys are scattered throughout the time zones across the U.S., which I do like. Dan's kind of home base is Chicago and Albuquerque, but Chicago. And so he likes the Midwest. But this is a heavily concentrated portfolio. Won't do that many companies. And a fund of funds like ours, we like a few of those funds. So we'll either go heavy industry, speak one language kind of things. Think the 5 AMs are in our portfolio right. Or we like the more generalist ones that know the Midwest, like the victors, the M25s and the Hyde Parks. But Desians is one that we look at in filling a gap within our portfolio. that can speak to corporate language and they know fintech and they know that industry and what's happening around it. I remember Dan from the early TechCrunch 50 days.

TechCrunch and I partnered on a conference series which I named and I ran and Dan was working at TechCrunch and the original idea was 20 companies and then that wasn't enough so then we went to TechCrunch 40 and then the next year we made it 50 and we had 50 companies launched on stage but it was almost

18 years ago. I think he's taken all those learnings. He's digested him really well and now hopefully he's built this is a fun three right but I would consider this one emerging it's the first real institutional he's tried to build out the track records make sure his themes are appropriate and just like we look at every GP does he have a right to win in this space right and I and we believe he does and so yeah that's that's Descians love it J-Calh number two oh I got to give a number two okay here we go yes I'll I'll

talk to you about P-E-R-M-A-R-M-R dot XYZ you know tools that startups use. We look at what tools startups get a lot of value from. And we saw, you know, these folks wanting to create better landing pages using AI. And I thought, hmm, once again, taking AI and putting it against the landing page business makes a lot of sense to me. And if you're building that from the ground up, yeah, there could be something there. They, again, went to our founder university program.

and it's a SaaS business, but we look for those builder followers, we look for builder founders who have product velocity. So a builder founder to us is one of three types. A growth hacker, not like a marketing PR person, no offense to them, that's fine, but like a growth hacker, a designer, UX person, and a developer who actively writes code. Not somebody who was a developer in the 90s or 2000s,

but hasn't written code. So somebody who's actively writing code for this startup. And when we see those as founders, we kind of like it. And they had this, right? And so, and they had a lot of interest from other accelerators. And so we, you know, it just made a small bet and we love the company. And, you know, when we look at these, even if it just has a little bit of MR,

a couple of customers, that's another one of those signals for us in that precede stage, builder founders, product velocity, and then a couple of customers. As David Sacks said, at one point on All In, going from zero to one customer is the zero to one that he looks at. Not zero to one product market fit, but zero to one like one customer. It's much different when a customer touches a product. Also like on diligence,

you know, people don't talk to customers and we do. And that's been a big part of our success, I think, in avoiding talkers. And that's the thing I learned in my first decade. You can get snowed. And it really was different 12 years ago.

I can tell you, like people hadn't unpacked how to get venture money. They didn't have like a playbook for that. after blogs and podcasts and medium posts and substacks and TikToks. Everybody knows how to pitch and be convincing and, you know, it's been a good story, right? Is that your new book, Jason, how to get venture money? It would be a good one to write down. No, the farm is like people have unpacked the secret to it.

So what I realized over time was like, I was getting snowed by people and I was teaching our team at the accelerator how to snow people. I was teaching them like, this is how you present your company. This is how you present your TAM. And I was like, wait a second, people are getting more performance that, you know, they're doing more performance art than they are doing product, building, and touching customers. And we had to like internally have a discussion like, how do we spot when we're getting snowed? And it was like, we really refine our questions. Just this past month, we had this thing where I was like, okay, so they had builder founders. You checked off the button, builder founders.

And I guess, build the founders. How do you know that? they told me that they're builders. I said, that's not the question. You have to go look at their LinkedIn and you have to ask them very specific questions. Okay, you're a UX designer. Who's doing the UX for this product, though?

Did you hire somebody or you're doing? Oh, no, we outsourced it to a firm in Manila. Oh, okay, and you're a developer. Yeah, yeah, I'm a developer. You know, is at Google. Okay, who's writing the code for this? Oh, I got a team in Paraguay, Uruguay. And you're like, ah, you know, okay,

they shouldn't get that checkbox, right? We've got to take that checkbox away. It doesn't mean we're not going to invest, but, you know, we see the companies where the founders are actually building the product and talking to the customers are much different than all the other customers. The person with that, with that, you know, the steers, you know, like, I don't think that person has not, it's the first time they've ever met a steer. I think they've been in cow country before. Well, that's the thing, Jason, is like, we work with a lot of these, like, Diamond and the Rough founders that already have the product market fit, but they don't know how to pitch. Like, they don't know even synonymous of what?

a startup should look like or how a venture capital. We're kind of, which is, it makes it easy for us to be the experts and kind of bring them like, hey, like, here's those, let's set this up. Let's do this type of structure, this structure. Here's what to expect for future raises. Maybe we do a few practice board meeting. Like, we can get them ready. We can help them hire them first.

Like, if you heard of customer success before, I mean, like, here's retention staffs that you need to care about. You know, like these types of basics. It's a lot, like, so it's kind of funny because we do have the founders that are coming out of the uniform and have a track record, you know how to pitch, but then are trying to find part of your fit. But we also have a lot of people that it's almost sometimes more refreshing to work with the ones that have already

found product market fit, but then like have a horrible pitch where you're like, well, hey, I can, I can work with this. Like, you've got a company. I mean, if you had to pick, they know how to build a kick-ass product and talk to customers, but they don't know how to talk to VCs or they're really good at talking to VCs, but they don't build product or talk to customers. I mean, it's a pretty easy decision. You can teach one in a short period of time.

The other one takes a lifetime. So I think you're making the exact right decision. Here's my last one. Very curious, Jason, on this one, sorry. How do you assess competition at these early levels with these new kind of AI built tools? And it is exactly what you said. How do you separate what's theatrical from what is real? And do you do the competitive analysis with your team?

Because there's going to be some winners in this space like there are. But it feels like everyone could be doing what some of these companies are doing, right? Yeah, we will tag this is a crowded space. So, you know, when you're the first, when you're the third or fourth investor in Uber, everybody comes to you with the Uber killer. And like the Uber killer is like, we use EVs. Or people would come to me and be like, yeah, but we take dogs.

Like literally, there's a great pitch. I love dogs. I have dogs. They're like, we're Uber for, you know, people with pets. And I'm like, yeah, okay, good luck with it, you know. And that I know Travis has that on the roadmap. Like, that's not enough of a differentiator. So you want to really understand.

if they're a copycat product or if they have a unique spin on it, right? And how are they coming to the problem? So that's how you figure it out. If you, at the early stage, pull out any competitive landscape, you will never invest in a company again. Almost, like 99 companies out of 100, the competitive landscape is going to be really scary. I don't mind when people make a competitive matrix, you know, but they always make the matrix, like, here's an obscure feature we have.

And then here's another obscure feature we have. CS on the top right, the two obscure features, we're the only one doing obscure shit on the top right. We check all these boxes. Yeah, right, yeah. Everybody else here is doing the normal mundane that people love. We're doing these things that nobody needs.

That's super esoteric. And I'm like, huh, is that a good thing or a bad thing? Shouldn't you be where everybody's going? That's like being like, I don't surf at that beach because everybody goes there because there's great waves. And you're like, but you want to serve great way. Anyway, competition in the seed stage is almost not the thing you're optimizing for it. When you get to Series A and stuff like that, it can become really acute

because you can use capital as a weapon, right, as we've seen. And when you have capital as a weapon come into play, man, that could be really problematic. But like, if somebody wants to do something that displaces Gmail, that pitch was absurd. It was ludicrous Rahul's pitch on face value. I'm going to take on Gmail with a billion users, and I'm going to beat Google by being faster. And I'm going to charge a dollar a day. I was like, Raoul, let me repeat the pitch back to you. You're going to, with your 10-person team, be faster than Google with the largest global

data centers in the world. You're going to get people to pay a dollar for something that's free. He's like, yep, there's a group of people who want luxury software who, if I can save them an hour a day, a week or a month, they'll pay it. And I was like, great, I'm in. So, you got to be careful with the, it's a great question. Competitive analysis. I don't know.

What do you think, Victor, I see your. Well, I'm just thinking, well, I just have like this opinion that, you know, that any unsophisticated angel investors always like, well, couldn't Google do this or couldn't X, Y, Z, B, I'm going to do this. It's always that, like, and I think those are like some of the least intelligent questions you can ask as, you know, assessing a startup. I think it's more like, well, you know, there's a really, ways to kill a deal, how is this going out of being winning or not? You know, and then is

their competitive advantage insignificant and irrelevant? Like you said, or is it actually something that's like, you know, like, like, we're all to say, like, you know, there's a luxury all in an in-you-d wouldn't actually pay 30 bucks a month for this software. You know, like, that's what you have to assess. And it's, and it's, I think it's a very easy out for like, couldn't X, Y, Z do this. And somebody else are you doing this? So we try to, try to be able to think. That being said, we do care about competition. Like, what is all, I, actually, I, can go under one of our investments here. So there's a company that we invested in Madison, Wisconsin.

It's a serial founder who's a successful founder, a book called Health Finch. And this is a company that's going into a very crowded healthcare insurance space, trying to get into self-funded healthcare plans. It's actually called self-fund health. It's basically saying, hey, self-funded healthcare plans are the future. Lots of companies trying to get in and do stuff, even maybe with ICros or with other types of opportunities. So there have been a lot of funding. has been a lot of activity here.

They're saying, hey, there's a niche audience. It's actually really big. And it's, you know, anywhere from 50 to maybe like a couple thousand employees. They're starting just in Wisconsin. Even that, Sam alone is up for a building dollars just throughout one state for that, for their one offering. And they can, you know, prove it out there in the lab, Minnesota. They're out of Illinois next and we'll grow up in there's kind of like legacy health

insurance companies do. It's a very experienced team. He already had a handful of customers at when invested. And it was something that, you know, for us, us, you know, his experience combined with the customers, combined with, yeah, we know it's better because everybody's heading this direction. So we kind of thought it was more of like it's a market wave that we want to ride to shift away from, you know, these group plans that are seeing more expensive every year. So that was one. And I will give Brady and an NNG team

a shout for helping us to get around this deal and you got to do some references and diligence and share another co-investor on that one too. And the third company I'll call out is another one of these founders that had product Margaret Fit. So this is a Fargo, North Dakota company called AIS. So there's a lot of software in vertical construction buildings and companies that are working with vertical construction. There's a lot of money there.

There's a lot less when it comes to horizontal construction roads, pipelines, infrastructure, etc. This is a guy. He was an asphalt scientist, which is a solid scientist, which is something apparently you can be in North Dakota. He came out and he had this base of understanding 40 years and years in the industry of contract as construction companies, and he had productized his offering for planning around the pavement

with the gaming process. All the subs, all of the weather conditions, all the projects that are happening, submitting invoices in all of the different paperwork to get the payments from these often slow pay, hint factorable opportunities within the governments that pay. And so he created this company paywise that was a SaaS product. And we source this and he's actually remarkably relatively competitive,

their number three or four term sheets. And we were lucky to not pay the highest price to get the access to the legal deal, put together a national syndicate on it with a lot of strategic investors. and now we's you know even though he's relatively agreeing to running the adventure back startup that's what we're bringing to bear on this one so um another he had already a couple hundred K of AAR I believe when we were he was he was there but you know how to set up and start hiring you know what an option pool was maybe not you know so that's where uh this is this is extraordinarily boring and it's going to print money yeah sorry I mean it's just like it's a whole

category. It's huge. No, it's like, I love these companies like SaaS companies that are absurdly boring that give massive leverage to the, you know, industry. Like, just think about, they just make paving roads 10% more efficient, which seems well within their mandate to be able to do. I mean, how much money is spent paving roads, how much time, how much budget, how much pain and suffering. And then we're also having this shortage of people. So, you know, what I love about both your startups there, two of the startups that are industrial stuff, they're just going to save headcount.

And it's not that you don't want to see people have jobs. It's just that there's nobody to take the jobs. People don't want to do them. Jason, the interesting is we're taking a little bit of risk because all the customers we talked to in both of those examples, they don't have any software that's specific to them. They maybe use text, Gmail, a G-sheet. You know, something like that. They're not, so they're running their whole business.

The brokerer sending invoices via fax machines. I mean, it's like trucking. We've had maybe two or three trucking, drayage kind of people come through our accelerators, incubators. And when they show us what truckers do, I'm like, really? And they're like, yeah, we made an app. You take a picture of this form. It digitizes it and sends it to the home office. And they still fax it to the home office.

But at least we have it and we digitize it. and we digitize it, and then they print it out at the home office. But we're now getting them to understand that this could exist digitally, and they don't have to fill it out 27 times and go find a fax machine and wait in line for a fax machine. Like, truckers are at truck stops waiting for fax machines? Really? Is that what's happening in 2024? They're like, yeah. Wow.

A lot of it. Victor, some of your startups seems like they've de-risse a lot more than see it, precede it on the coast on, you know, San Francisco and New York. Do you find that some of your startups are more de-risked? I think they're de-risk. We're coming in at lower valuation. We don't invest above a 10 million post money. Our average, but most money is five or six million. And, you know, they're coming in with customers. And they're coming in with a lot of the industry experience. It's not as competitive. They're not, you know, they're not, they're not as capitalized. So there is some, there's often less capital around the table, which can be an asset, I think,

Sometimes it's also, you know, sometimes it's a risk. But I do think that they just have like they're running with lower bird rates. They're running with, you know, the same ability to go to market. They're close to that. They're close to that question with. They're close to that question with any other customers. But it's, you know, like it's definitely to me, to me, I feel like it's, it's, it's de-risk because we know that they have demand already there for their product. Not all the time, but most of them.

J-Cal, close us out. Oh, right, I have one more to give a plug for. This one is called deep trust AI.com. And when we made a small bet here on this company that hasn't launched this product yet, we knew that people would start doing bad things with other people's voices. And since we made this investment,

we had that robocall of Biden calling people and all kinds of other ones. And so we know that there needs to be an API out there that verifies when you hear my voice calling you, it's actually me. Or are you here on a social media site or a podcast, me saying something? And so this ability for whether it's a call center or a consumer app or a podcasting app or anything in between to know that this is an audio deep fake has got a chance of being an important API to exist in the world. love when people want to build an API and they have developers who want the API. And

these companies tend to if they can catch developers, you know, they can grow very quickly. You think like a Twilio or something like that. So this is just Twilio and their first product is finding deep fakes, you know, for

audio. Jason, did you use this to confirm wire instructions verbally? That's the thing I'm thinking of. We literally had a situation here in Silicon Valley where somebody's voice, a very prominent person, and this was back channel to me, you know, two or three phone calls, two or three different people at an organization to have the wire instructions changed or the instructions to ship LP money to a bank account kind of situation.

And it happened in the venture industry. And they caught it. But yeah, there's going to need to be all kinds of new tools and protocols to stop the stuff. And so, you know, we like to make these smaller. bets. So when you see us making these bets and it seems very frisky, we like to make this 25K bet, 125K bet. Then we're in it with the founder for six months or a year. We see a big attraction. If they get the next round, we just ask ourselves a very simple question, is this a likely winner? And this is the framework I've been working on the last six months. Likely winner,

definitive winners. Likely winner, definitive winner. What's a likely winner coming out of seed? What's a definitive winner coming out of seed? I'll save it for another show because I'm not finished with my new methodology, but I'm trying to train my 21 people, or 20 people plus me. Likely winner, uh, definitive winner. What happens first, Jason, deep, deep fakes on the all-in podcast, which I've just been waiting for to hear what those two hours will be like. Um, or does deep trust sponsor all-in today, right? Like, what's, what's going to happen for sure? A lot of people on it on all-in already think there's some, yeah, I guess, going on. Yeah. When we had Tucker Carlson come on, that was actually

AI Tucker. It was AI Tucker. He's actually in a jail cell. He's in a jail cell in Russia right now. So they just use Tucker AI to do the Tucker Paulson show. All right, take us out of here, David. This is a long show. Two great guests. Nice job, boys.

I like these two guys. Thank you, Jake Allen. Well, it's been another great episode of Liquidity Podcast for Grady Buchanan, Victor Gutwine. Jason Calicanus. This is your host, David Weisford. Thanks for listening. Hey, everybody. I talk to a lot of founders here on this.

week in startups and as an investor. And they tell me the same thing over and over again. They want two things from me, more FaceTime and money. They want me to invest in their companies and they want to spend time together. So we've been working here on a new meetup program. We call it Founder Fridays. And Founder Fridays are an event by founders for founders. This is an event that is hosted in cities by people like you. If you're listening to This Week in Startups, you're a founder. So what are you going to do at Founder Fridays. You're going to get together with other founders in your community. It could be four or five of you. It could be maybe up to 30 of you in a location. Pick a cafe, pick a co-working space. I like to go to a great Mexican joint or maybe a dim sum restaurant. You know, you can do

shared food, have a couple of cocktails maybe. You do it on a Friday. You get together and you host it. Now, why is it important for founders to get together? Shouldn't you be at home just focusing? Shouldn't you be in the office just focusing on your startup? Well, if you get together with other founders, true founders who are in the arena building like you are, you're going to get a lot of value from that because you can trade notes with that other founder about what's working at your startup and what's not working. The truth is, if you're facing a problem, there are hundreds of founders out there who have probably solved it already. And instead of you, banging your head against the wall, when you sit there and you talk to three or four founders, you're having

some dim sum, you're splitting a cassidia, some prajitas, somebody's say, oh, you know what, I had that same human resources problem. Oh, I had that same technical problem. Oh, I had that same marketing problem. And they might tell you about a tool or a service that'll solve that problem for you. This happens over and over and over again when I do Founder Fridays with our portfolio companies. Now we're going to give you that same experience. But here's what I need you to do. I need you to host this in your city. So you're going to go to this week in startups.com slash meetups. That's it. And you'll see a landing page where you can sign up and you can say, I want to host in my city. Now, your city may already be hosting so you can just join that person.

And what if you go to this event and you learn some go-to market strategy that 10x is your growth? That might unlock funding. Or you might be talking to somebody and they say, hey, I'm a marketplace too. I'm not a competitive marketplace. Your marketplace is for used cars. My marketplace is for hairstylists, whatever your jam is, whatever you're working on. But they give you some technique that you didn't know about to increase your supply side or get more demand in your marketplace and you 10x your business.

I see this happen all the time. And founders are like mutants, right? And I'm like Professor X here. I'm trying to put on Cerebro and find all the founder mutants in the world and then have you get together and do your own little meetup. And here's what you're not going to have to deal with. You're not going to have to deal with a bunch of service providers trying to sell you software or services. And you're not going to have to sit through a bunch of passive speakers. You can listen to this week and start off and get the greatest speakers in the world on your own time.

And you're not going to have to pay for a ticket to a conference or get on a plane or fly somewhere. No, this is about having an intimate experience with five, ten, maybe two dozen other founders in your city. Please go to this week in startups.com slash meetups if you are a founder. This is four founders by founders only. If you are not a founder, this event is not for you. You can start your own meetup for lawyers, accountants, recruiters. This is four founders by founders. We vet everybody to make sure you're a founder. And if you host it, it's a non-commercial event. Our first Founder Friday will start on February 2nd. So please mark your calendars and we're going to do these on a rolling basis.

You can join an existing meetup if it's already occurring in your city or you and one or two other founders can start your own. We're using a wonderful piece of software that we've invested in called River. You can sign up for a River account just by going to this week in startups.com slash meetups. We've already got hosts and attendees lined up in San Francisco, New York City, Toronto, Los Angeles, Las Vegas, London, and even in India. So this is your chance to connect. And if you didn't hear your city named, you can start your city.

Go to this week in startups.com slash meetups.