This Week in Startups - Monique Woodard, Fund of Funds Panel & The Pro-Rata Yacht! | E2018

Starting point is 00:00:00 I've heard that there's some angel investors or syndicate leads here who have been in companies like Uber, Thumbtack, and Robin Hood. We modeled out a little simulation and said, Jason, if you just had an extra 250K to go into the series B of each of those. This is my talk to Mars. What would that have translated to? And you can see the name of the yacht, which is pro rata. Yeah. Thank you. Wow.

Starting point is 00:00:28 You know, the wound's still open. If you could put a little more salt in it, that'll be great. This week in startups is brought to you by Squarespace. Turn your idea into a new website. Go to Squarespace.com slash twist for a free trial. When you're ready to launch, use offer code twist to save 10% off your first purchase of a website or domain. Gusto. Gusto is easy online payroll, benefits, and HR built for modern small businesses.

Starting point is 00:00:56 Get three months free when you run your first payroll at gusto.com slash twist and runway. Looking to level up your financial planning, runway is the modern and intuitive way to model, plan, and align your business for everyone on your team. Sign up at runway.com slash twist to get your first three months free. Hey, everybody, Alex here. I have a couple of absolute treats for you today. We have two more talks from our liquidity summit. So up first we have our Fund of Funds panel.

Starting point is 00:01:29 That means you're going to hear from Ben Joy from Next Legacy Ventures, Michael Downey from MDSV, and Sayon Kang from the well-known Stepstone Group. You're going to hear about how everyone thinks they're an above-average driver and what that means for venture capital returns, the power of prorata and what you might be leaving on the table, and then, of course, how fund size impacts returns. If you care about the internal mechanics of how Venture works, this is a talk that you really need to hear. This is some Venture chat, more than Founder Chat, but I think it's good education for everyone out there in the world of startups and venture.

Starting point is 00:02:05 Then, after that, we're going to have Monique Woodard from Cake Ventures. She's fantastic. I've known Monique for a long time. She talks about how to raise a fund and how, when you raise that first fund, you're actually raising your next two to three funds as well. Monique's fantastic. The panel is fantastic. Let's start with our friends from the world of LPs, and then we'll hear from Monique. Enjoy. Okay. One of the things we wanted to address during this year's liquidity was Fund to Funds. We heard before for Monique, hey, these play a critical part in our ecosystem for helping sovereigns, family offices, high-net with our individuals, and they act as a bridge between those individuals

Starting point is 00:02:46 and fund managers. And we're going to do the same format we just did, with family offices, which is asked them each to give a position and then have a group discussion. First up is Ben Troy. Thanks for having us up here especially after flying cars. Not a great panel to be right after, but I thought I'd take it back

Starting point is 00:03:03 down to cars that are on the road. Every year, AAA does a survey of drivers, and it finds consistently that most drivers, 73% in the last survey of U.S. drivers consider themselves better than average drivers. If you cut the data a little more, perhaps to

Starting point is 00:03:19 a surprise in this room. Eight and ten men think that they are better than average drivers. I think drivers are a lot of investors, where most investors assume that they are better than average. I looked around for data in venture, and there isn't great data, but from our own anecdotal experience, it's certainly true. We've invested in about over 100 VC firms over the last 25 years my partners and I, and every year we look at around 200-plus VC firms. And you get different levels of self-promotion, but most VCs will tell you that they're above average, or they will be. I thought what I bring today is that, which is just human nature, I think, but bring it to what it means in venture specifically. So this chart shows, based on some historical data, the dispersion

Starting point is 00:04:07 of performance, that should be comparing global equities, just public equities, compared to venture capital. So global equity is on the left-hand side there in the blue. The dot is a median. The bar is the top and bottom quartile, 75th percentile, and then the very lines go up to something like 95 percent and 5 percent, maybe a little higher. I think drivers are like public equity investors, where, you know, if you're above average as a driver or an average driver, like the difference is not that much. For venture, it's like a 20-year time frame for equities. I'm not sure actually it matters that much. The difference between a great public investor and an average one, not that big of a deal. And same thing. Turns out that if you drive down the road, most drivers

Starting point is 00:04:48 are average and people don't crash. But in venture, it's a lot different. The difference between a great adventure investor and a terrible one is huge. And that's where this very natural human behavior of, well, I'm above average. Most of us think we're above average. It's pretty harmless in driving. It's relatively harmless in public equities also. But it turns out in venture, it actually has a pretty big significant impact. So what? Well, one of my favorite all-in podcast episodes. So who here is a fan of the pod, Alan? Not surprising, but awesome. I think my favorite episode actually is, I can't remember how long ago, but there was an episode where you all talked about about, I think Chamoth presented some of his performance data. And it talked about how hard it is

Starting point is 00:05:32 to actually deliver performance and particularly liquidity in venture. And it takes time, you know, you go through this for enough decades and you can see the cycles and realize that, you know, There's, you get ups and downs, um, but delivering two to three X over a long period of time, over a lot of dollars is hard to do. Um, and a lot of, a lot of people who are new to venture see this and sort of just see the top of the slide and to see and hear the headlines of the amazing outcomes, um, without really appreciating the risks that we take on the bottom, on the downside. Um, so, for me, the so what, and I'll leave you with, uh, the thought I'll leave you with is whether you're an angel investor or a GP investing in founders or an LP, or an LP.

Starting point is 00:06:14 looking to allocate into this asset class. I'd encourage you to work with a professional. If you're going to do yourself, do it professionally, do it full-time, do it seriously, and be safe out there. Thanks. Okay, well done. All right. Next up is Michael Downing from MDSV Capital.

Starting point is 00:06:31 Great. Thanks, Jason. So just quickly, at MDSV, we are a fund of funds, but we focus on an area that we believe is the greatest, single opportunity in venture these days, which is also the most overlooked, ignored and underrated category of venture, which is small sub-60 million dollar emerging manager funds. And we focus on this category specifically. And of course, as many of you know, there's a lot of GPs. There's some LPDs, but this is a category that has outperformed the market over the last

Starting point is 00:07:09 15 years. But there's some other data points that we look at specifically. that I think not everybody's aware of that really kind of back and inform what we do and the reason why we focus on this part of the market. If you look back across the last 15 years and you identify all those unicorn companies, those high value outlier companies that generated so much return, 92% of those companies had an emerging manager or a syndicate lead who was an angel investor on their cap table at the earliest moment. That becomes important as you think about what the access point that's represented by these emerging managers is for LPs. Less than 5% of those same small emerging managers, less than 5% of the time, did they invest beyond the seed round in those

Starting point is 00:08:03 companies? And so if you take a look at that and do some kind of complex math, across that pool of unicorns over a 15-year period, you know, there's basically 150 plus billion dollars in unharvested or untapped value that could have been created by those managers. Now, I describe all that because part of what we do and how we work with GPs, like many of you out there, is we allocate 25% of our capital to backing small emerging manager funds, and then 75% of our capital is reserved for what we characterize as an opportunity fund to enable small managers to double down on their outliers and continue to invest in those companies.

Starting point is 00:08:53 And it's exactly because of these figures that we have that strategy. And just sometimes these numbers and statistics are a little bit confusing and don't make sense. So I'll try to kind of put it in a more human context. here. I've heard that there's some angel investors or syndicate leads here who have been in companies like Uber, Thumbtack, and Robin Hood.

Starting point is 00:09:17 We modeled out a little simulation and said, Jason, if you just had an extra 250K to go into the Series B of each of those. This is my talk to Mars. What would that have translated to?

Starting point is 00:09:33 And you can see the name of the yacht, which is pro rata. Yeah. I Thank you. Wow. I mean, I really appreciate you coming and... I guess I'm not getting invited back next time. No, no, I just, you know, the wound's still open. So if you could put a little more salt in it, that'll be granted. Founders, I know you're building the next big thing in tech and you probably got some groundbreaking AI solution or a consumer app that's going to take the world by storm. Or maybe you're listening to this week in startups and you're doing a CPJ business or maybe you're an investor in a restaurant. Well, first impressions matter. You need to have a gorgeous business website and you want to do that for

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Starting point is 00:11:12 twist and get that 10% off your first website or domain purchase, swearspace.com slash twist. No, it is literally my talk tomorrow is going to be a little bit about our portfolio strategy and how it's, and you know it, and how we've adjusted it because of this really profound insight, which is only 5% of these winning investments are followed on. So the question becomes, Why? Right. I mean, I can tell you from our experience, we have great managers. I think Martin Tobias is in the audience here incisive.

Starting point is 00:11:44 This is a guy who's made 60 investments, has six unicorns. You know, they're writing 200K checks at day zero at the earliest point. It's going on a safe or convertible note. Then all of a sudden the company grows like crazy and is doing a round with A16 or whoever. They don't have any capital to continue to invest in those winners. They have to allocate every dime they have. to just placing bets to see which company is actually going to make it. There's no such thing as keeping reserves.

Starting point is 00:12:12 Sorry for those of you who have reserves in your deck. But at a precede stage for an emerging manager fund, you shouldn't be keeping reserves. You need to optimize for the hardest challenge, which is just finding those outliers. And so more often than not, they just don't have capital. And this idea of you can pass the hat amongst LPs and raise $4 million in a week is usually not so smooth.

Starting point is 00:12:35 Yeah, it seems to me there are a multitude of reasons. One is bad portfolio construction. You're advising don't do it, but not having reserves would be won. Also, I think you do know your winners. That is, so one might think it's that the managers don't know the winners. I actually knew the winners in all of these cases. And when we did our analysis of previous big wins, there was only one that I was actually sure. was unsure of. So like three out of four in that first fund that hit unicorn status were we unsure of. So we would have made the bets on three of the four. So then it becomes, well, what's the other reason? And I think a lot of it is, you know, the management fees on small funds are so low that you don't have a team. If you don't have a big enough team, it's hard to stay on top of and build the relationships with a large number of investments. And so I think a lot of times they just don't have the bandwidth. We had Monique talking today about her first fund. She's talking about LP relations. finding founders and then giving to make the primary investment and then doing the support.

Starting point is 00:13:40 I mean, it's a lot to put on your plate. So I agree. Yeah, this is one of the reasons why we position this as an opportunity fund for the emerging managers where they get economics in that whole proposition. What do you do? Just split 50-50? We split at 50-50. So we'll put the capital forward. We put it into an SPV that co-manage the SPV with us. And now you can have a $15 million fund and invest like you have a $50 million fine. Yeah.

Starting point is 00:14:03 So you could put in a two or three million dollar check size on average? Two million dollar on average. Check size on average. Yeah. That's a clever idea that you came up with. How'd you come up with it? Lots of, uh, you know, experimentation and trial and error over the years.

Starting point is 00:14:16 And is it work? How long have you been doing this, deploying this strategy? It's worked. We've done about six direct deals since Q4 of last year. We're in nine funds. We're going to be in 25 funds by Q2 of next year. And for this, for this fund, 25 will be the number of funds that we're in. But we're offering that program, that kind of capital extension program, to a broader set of managers to the whole community.

Starting point is 00:14:39 Okay. So you don't have to be an LP to get access to that. No, it's not just for our portfolio. Is it codified or is like a handshake deal? It's a handshake deal. What we learned a long time ago is, you know, you don't want to go to managers and get some kind of written agreement like, hey, I'm going to get your pro rata. There's been all kinds of cautionary stories about that backfiring. And so it's like, look, we're here. We hope we're your first phone call, but we might not be. All right, Ceyone, Kang is from Green Spring, which got bought by Stepstone. So now you're at Stepstone officially, and we'll bring your deck up and get your perspective here and then maybe take a couple questions from the audience as well. Great. Hi, everybody. Thanks for having me. I will talk a lot about the same kinds of things just from a different angle, which is great,

Starting point is 00:15:21 because we did not confer in advance. This slide is just to level set, just the growth or the explosion in venture that you've seen. Since 2008, the venture share of private capital allocations for institutions has gone from 14 to 25%. You've seen about a 10x increase in the assets under management in this asset class and almost a quadrupling of the number of managers. I think, you know, some LP friends at different annual meetings this season have said, we've been joking at some of the platform brands, AGMs, like, I don't recognize anybody here. Who are all these people? because you're seeing a lot of the OG LPs moving down market, if you will, looking for

Starting point is 00:16:07 emerging managers. And a lot of the platforms now have a bigger set of LPs, including sovereign funds, you know, etc., large U.S. public pension plans, et cetera. With that, though, you know, I think some of the reason why you're seeing this move towards emerging managers is not just because the $25 million LP check that the ENFs or the funds of funds write are kind of meaningless to some of the platforms today, but also because of this slide, you can see the performance of smaller funds is just better. It's a law of small numbers. I think we all anecdotally have awareness of this, but I just put some numbers to it for folks'

Starting point is 00:16:52 benefit. This is a slide that we've created, this is a little bit of a newer one, that LPs really like and most GPs at smaller funds don't like. So if you look, the leftmost column is the economics per partner, assuming a 2% management fee and a 25% carry for a billion and a half dollar fund size with 10 partners. The middle bubble is a $400 million fund with five partners, same fees. And then the right most is a $150 million fund with three partners. And to get, $67.5 million per partner. For a larger fund, you need a 2x net. For the mid-sized fund, you need a 3-6, and then for the smaller fund, a 5-6. So the alignment for LPs with GPs at the smaller funds is unmistakable. So is that economics adding both financial fees and carry? Correct. Fees and carry. Is there a distinction between what looks like the differential they have? Assuming the smaller funds, it's much more based on carry than management fees and larger funds, it's probably more

Starting point is 00:17:59 manager fees. That's right. And another way of saying this is you don't have to perform as well at a big fund, and you have to really perform at smaller funds, which then would LPs when they're speaking privately say, this group, you know, just can phone it in in a way, and then this group has to hunt and fight at a much higher level. So there has to be a level of aggression with one group and a passivity or, you know, you know, whatever, they can just rest and invest. It's like the difference between working at a

Starting point is 00:18:30 startup versus at Google. And that's part of why smaller funds are more attracted. We ran some data because we had felt like there has been, along with the explosion of capital coming into venture, there's just, there's more funds, et cetera. And we wanted to see how many of those were at the lower end of the market. So there were 2,991 funds that were raised in the United States since 2018. In terms of unique manager count, it's about 1650. You can see here the breakdown by fund size. And then in terms of this may be a little bit self-serving, but really, a lot of these funds are starting to look very similar in terms of background. So we ran and we went through GP by GP, education, work experience, demographics. 60% had attended an Ivy Plus school,

Starting point is 00:19:20 defined as the IVs plus Cal, MIT, or Stanford, 55% of them were former founders. About 17% had worked at a large tech company, whether a private unicorn or a publicly traded tech company. And then about 15-ish percent were sort of classically trained in financial services, whether PE or investment banking or whatnot. So if you look at the green bar across the top, about 90% of the managers hit one or more of those buckets. So on the one hand, you definitely want exposure to the emerging manager landscape because the returns are better. But on the other hand, it's getting harder to differentiate. And to Ben's point about, most people think they're above average, I would actually say that in Silicon Valley and in venture, everybody is above average, extremely above average in life, yes.

Starting point is 00:20:11 And so, you know, we just feel like folks need to be very selective because, again, in a vacuum, it's kind of like looking at a startup business plan. In a vacuum, it sounds like a great idea unless you can see the context. You didn't start a company to run payroll, did you? Of course not. And that's okay, because Gusto is here to help. Gusto will help you run payroll and handle your benefits onboarding in HR all in one place. Don't just take my word for it.

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Starting point is 00:21:02 Gusto's got it. Need to get your compliance sorted out? Well, three out of four employees say Gusto helps them be government and compliant. Even better, Gusto is simple, easy-to-use software, so you can focus on what matters, building your company. So here's a simple call to action. Want all that Gusto has to offer with no hidden fees? And to discount to boot? Try Gusto and get three months free at gusto.com slash twist. That's gusto.com slash twist. So I want to end on this slide. I'm sorry, the Y-axis is super compressed, but it shows that in venture, if you are with the top

Starting point is 00:21:38 companies and by extension, you know, we assume with the top funds. And Ben showed a variation of this in the equities versus venture returns. You can see here the black line on the top is the 95th percentile of deal returns for venture. Buyout is the orange and then growth equity is the gray. You see that there's actually very little in the way of market cycles. And we have a view that a lot of investing in ventures driven by innovation, not by economic cycles. And so I wanted to kind of leave on a high note in that if you believe, as everyone says, that we are entering this fourth or fifth, however you want to call it, in terms of wave of, you know, extremely impactful value-creating innovation with AI, with new companies, with reimagined companies, then, you know, you could

Starting point is 00:22:29 expect that this will extend and be the case going forward as well. The bottom half, is the kind of what, to your point about the median returns. But again, that the identification and the selection is extremely critical. Let's talk about which managers in the emerging class you'd think are the archetype that wins today, maybe portfolio structure, their background, et cetera. And we'll just go right down the line. Sure. I think we've been investing in emerging managers for the last 17 or so years. We're always looking for a manager that has an edge. And it's across three dimensions. It's deal sourcing, investment, selection. It's a deal sourcing, investment, selection or value ad, one of those three things. And you just have to have an edge. We were

Starting point is 00:23:09 investors in Andrewson Fund One, and every fund since then, Andrewston today looks very different than what they were then. Their edge today is very different from their edge then. What is their edge today? Just the scale? The scale, they continue to operate with 500 employees on the value ad side at a scale larger than all their peers. Got it. So deal flow, decision-making. and where we should there? Value add. Value add. So support of the company.

Starting point is 00:23:39 You can slice it more times, but yeah, that's the rough three. Yeah. On the emerging measures, I mean, we have some very kind of hardline quantitative, quantitative concepts that we look at, making sure they understand just how much of our portfolios required. For us, it's at least 30 companies per fund to even be able to find an outlier. That's a hard concept, some kind of unique sourcing methodology. And then there's this kind of soft concept that we look at,

Starting point is 00:24:03 which is in many ways what we've experienced with emerging managers is a lot like what we experienced investing in startups throughout the 2000s and 90s where sometimes the best CEO, the best founder is also kind of an awkward, difficult, obstinate, maybe even stubborn person. I'm sitting right here, bro. I didn't want to bring it up. And, you know, it's not necessarily somebody you want to hang out with all the time, but for whatever reason, they're so driven. None of you guys are like this, by the way.

Starting point is 00:24:32 none of you guys are like this. It's some other person I'm referencing. But, you know, they're difficult people. Totally. Disagreable. Absolutely. Chippy. And they're driven.

Starting point is 00:24:41 Like, they're going to make it work no matter what. Kind of like those CEOs that we know that were a little difficult. Yeah. I met a couple. Sam? What do you think in terms of emerging managers and, like, your own signaling? And then maybe, you know, a question I had for you, since you get to see so much from Stepzones, data, et cetera.

Starting point is 00:25:00 Is this, were there too many managers and maybe not enough work ethic? You and I have had conversations about just how big this got for a peak ZERP era. Like just maybe you'd talk about how big this got and then what you don't look for and what you do look for. You know, like both of those. So I'll add something to what Ben said in terms of if you kind of break the venture job down into its component pieces, there's sourcing, there's investment judgment, there's winning the deal that you want to do, and then there's the value at after the fact. And I think some of the data that we laid out,

Starting point is 00:25:37 part of why we asked our team to run it was because it's starting to get more and more difficult to differentiate on the sourcing or the value at. Like the sourcing, a lot of folks, again, you can see it can tell a good story about the network where I worked. And then on the value ad side, whether you ran a team at Meta or you were a founder yourself,

Starting point is 00:25:59 you have some primary experience or advice that you can offer to somebody that is valuable to a founder. And so I think the picking and the winning, the problem with it and the thing that makes it so hard is the picking, it takes so long to see whether you're good at this job and, you know, seven years, maybe minimally. And I'll come back to your second question on that point. And the winning is actually a little bit easier to see in real time. The picking piece, I think, you know, up until 2021, there was, I think it's very, this is a great job. I mean, investing in companies being pitched, who wouldn't like that? And it's very empowering. Technology is really fun to dream about and think about what could go right. There's so many, you know, jobs that you can have where you're paid to think about what can go wrong in other asset classes in particular. And you're getting markups every six weeks.

Starting point is 00:26:59 And so a lot of people thought they were really good at it. And what we're seeing now in the last couple of years is just these markdowns have been significant. That people, I think there was an element in life with luck and timing. I think folks who raised their first funds in 2020, 2021 are going to have a pretty hard time. Yeah, I think they're done. Well, no, I mean, I attribute a lot of my success was the timing. I started in 2009, 10, 11, and it wasn't as crowded, and it was after the great financial crisis, and companies were four, five, six million dollars to invest in.

Starting point is 00:27:37 The same companies with weaker founders, let's be candid, were getting 16 or 60 million for some period of time. And I think the entry price kind of matters. The one other thing I'll add and then stop talking was, I've had a couple of sort of early stage or seed stage GPs who've been in the business a while, just in the last few weeks say, you know, the days of getting 20% ownership for a $4 million check or whatever the check numbers, but the days of getting that ownership are over. And so in terms of that slide, in terms of the portfolio construction math and how much ownership you can get, you know, to assume that you're going to get, you know, 55 billion

Starting point is 00:28:18 of market cap and own 10% of a company. at exit, it's a pretty big assumption to own the 10% at exit. So I think all of that, we're seeing something, we're seeing the reckoning of it now because those days are kind of. Yeah. One thing I always found peculiar was people sending me their LP updates when things got marked up of funds on wasn't in. And there was one fund in particular, who I knew the founder. They were up like 7x or something year over year. And they just started. And I was like, Is there any secondary opportunity in this company that's 50X, that's major entire, you know, whatever, $10 million fund, be worth 70? You're kind of obligated to just get some DPI here.

Starting point is 00:29:01 And they're like, are you crazy? This crypto project's going to the moon. And I was like, and there were like three crypto wins out of seven. And I was like, bruh, I'm just giving you one piece of advice. 10%. Every time these go 1020X sell 10%. 1020X sell 10%. Just cover your, you know, basis.

Starting point is 00:29:20 and then some, you can't go wrong. So when you are evaluating founders and this discussion of secondary has become a bit more acute or like, I get the sense some LPs are a little pissed off about this like dreamy, it's only going to ever go up

Starting point is 00:29:38 and not taking advantage of secondaries, especially for emerging managers. Yeah, I think DPI seems like not that difficult to spell, but it's a foreign concept, like to a lot of new, new investors. So it's challenge. We, I was going to say on your earlier point where they're done, I actually don't think that in some ways it'll be hard to raise the next fund, but you can make,

Starting point is 00:30:01 a GP can make the last drags of their fund lasts a long time. And so I think there's going to be noise in the market for a lot longer than the fundraising environment might, might indicate. I started a venture about 20 years ago and I felt like I was late to the game. I'm like I graduated right into the bubble. So I missed like the venture part of the dot-com bubble. And all these big brand names, they're clearly all done. They all lost lost money. And it felt like it took another five years before some of these stayed firms that were so famous, like finally started to just didn't hear from that as much.

Starting point is 00:30:35 I think it's going to happen again. Yeah, I think it's a really good point about DPI, though, and how, I mean, it's just not even a topic most small managers talk about. It's just like everything's going to keep moving. And then, you know, year eight, year nine, year 10 turns into year 12. And I think likely what we're going to see is that ecosystem of how you even execute, let's say, on secondary sales or getting early liquidity. It's been so limited.

Starting point is 00:31:01 I don't know if you saw Michael Kim at Sundana put together, I think, a $100 million fund. It was purely for buying out LP interests and small funds. And I think you're going to see a lot more of that. The benefits, I think, everybody, the small fund managers, the LPs, everybody. and it just gets the capital recycling quicker, which I think would be healthy for the ecosystem. Awesome. You had something you wanted to add.

Starting point is 00:31:26 Oh, I was just going to say, that question keeps coming up about funds shutting down, and people are kind of surprised that you haven't heard more about it. But I agree with you. I think it's going to be of very slow burn. Right, because they have management fees. Exactly.

Starting point is 00:31:41 And so they have to burn off the management fees, and what if something hits in that dormant portfolio? Yeah. You could, like, all of a sudden, have something pop, and then all of a sudden you're back in the game. It's literally it's like chipping a chair in a poker tournament. You see crypto recently? Crypto's back.

Starting point is 00:31:55 I think Bitcoin's back. I don't know if anybody's aides are up. Apes are back? Oh, Eith is back? How are your apes doing, folks? Man, that was a weird moment in time. We had like a year or two here where they got a lot of crypto going. All right, let's give it up for our fund of funds.

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Starting point is 00:33:14 on the back of a napkin. Come on. If you want a personalized demo, Very simple. And you're just going to blow your mind, by the way. Runway.com slash twist and sign up to get three months free right now. That's kind of a special offer. So let's take advantage of it. Runway.com slash twist. So how many people here are raising a first fund or thinking about raising their first fund? Raise your hands. Okay. Okay. How many people have already raised their first fund or are in our already investing out of it? All right. A few. So this talk isn't really about telling you how to do it. It's telling you how I did it. If you're spinning out of, you know, a well-known firm like Sequoia, Andresen, this probably isn't for you. You've probably got institutional investors who want to pile into your fund already. But, you know,

Starting point is 00:34:08 even with my experience, raising a first fund that was what I call institutional adjacent, you know, can be challenging. I'm Monique Woodard. I'm the founder. partner at Cake Ventures. Cake Ventures is a pre-seed and seed stage fund, Generalist Fund, and we investing companies that will accelerate at the intersection of technology and demographic changes, like aging and longevity, the increased spending power of women, the rise of deskless work. Everyone gets a little bit of privilege. So I think, you know, my big privilege as I was starting to fundraise was that I was an investor at 500 startups. I was a scout. at light speed and I had worked, uh, advised SoftBank on standing up there emerge program within

Starting point is 00:34:54 the Vision Fund. But even with, with all of those things, there was no magic bullet. LPs were certainly more willing to take meetings because I was a known entity. They wanted to know what I was going to do next. But it wasn't the magic bullet to like getting an actual investment. I'm a solo GP and I raised a $17 million debut fund. Cake Ventures is a pandemic baby. So I started the fundraise at the end of 2019, and then the pandemic happened in March of 2020, which threw everything for a loop. I went from an LP pitch to trying to figure out how to get toilet paper and washing all my groceries. But by the summer of 2020, things were kind of back in swing, and I was back to fundraising, and we did our first close. I did my first close in March of 2021, and I did my final close in November

Starting point is 00:35:49 of 2022. So all told, that was 20 months from first close to final close. So that was really more than two years of work, actual work. Forty-nine percent of my investors are what I would call institutional or institutional adjacent via fund of funds. And only nine percent of my investors are individual investors, which is really different for most first-time funds. As a lot of you may already know, a lot of first-time funds are primarily made up by individual investors, high net worth investors, and most first-time fund managers have very little sort of institutional or institutional-adjacent capital in their LP base. There are a lot of myths about raising fund one. The first myth that I hear a lot of GPs say is that, oh, my God, I have to find an anchor LP to get

Starting point is 00:36:46 this fund off the ground. If I don't find an anchor LP, I cannot raise this fund. And people search and search for this mythical anchor LP who's going to invest a significant part of the fund and sort of put them in business. I didn't have a single anchor LP per se, but what I did is I had a handful of what I talked about as small anchors. Sendana and Mitch and Frida Kapoor put me in business. My first club was $5 million. And I did three more closes after that for a total of four closes before the fund was fully closed.

Starting point is 00:37:26 And I anchored each of those closes around an institutional or institutional-adjacent LP. So my first close, that institutional-adjacent LP, is Sindana. For the second close, that was Foundry. For the third close, that was pivotal, which is Melinda French Gates's family office. And for the final close, that's kind of the one where everyone piled in and it was Bank of America and

Starting point is 00:37:51 Fairview and so on and so forth. The second big myth is that you shouldn't spend any time with institutional investors who don't invest in fund wants. I actually think this is a huge mistake that a lot of fund managers do because they rightly want to spend the most of their time with people who will invest in this current fund. But institutional investors are an interesting lot. You know, have to spend time with them often for many years before they will actually invest in your fund. And so I really wanted to start the clock ticking on that relationship in Fund One, even if they were, I knew they were not going to convert to an actual investor in Fund One. Now, a lot of those investors are interested in my Fund 2.

Starting point is 00:38:39 Some might convert. Some might convert in Fund 3. We'll see. But I think it's a huge mistake to not spend any time with institutional investors who aren't fund one investors. And then the third is that you need to sort of soft circle 40 to 50% of the fund before you do a first close. I think that keeps a lot of fund managers out of business and out of making actual investments. Venture capital is by its very nature a blind pool. And so if you are waiting that long to do your first close, the pool remains. is blind for way too long. Put yourself in business. Find those institutional adjacent investors who will put you in business so that you're able to start doing investments and so that the pool is not as blind as it would be otherwise. And honestly, post-first close conversations just hit different.

Starting point is 00:39:39 It almost doesn't matter how big the clothes is. It has to be big enough to be viable, but it doesn't need to be massive, but post-first-closed conversations are far in a way different from anything that that happens before that, because then people know that this train is moving and it's rolling with or without you. Like I said, most fun ones are heavily weighted towards individual investors. High net worth individuals put a lot of funds in business, and we love them for that. But heavily weighting your fund toward the individual investors can be really challenging for building a firm that has a lot of longevity. Most venture funds do not deliver liquidity to their fund one investors

Starting point is 00:40:24 before they need to go back to market for fund two and often fund three. So there are not enough returns to deliver to your early investors to reinvest in those funds. So if your fund one is heavily weighted on individual investors, that just means that you have to completely reset your LP base on the next fundraise. And that level of LP turnover can be really challenging and difficult to manage. And then, you know, the question of institutions versus individuals is a little bit too binary. As you all saw, there are, you know, four different categories of LPs that I have in my fund.

Starting point is 00:41:03 Fund of funds, some corporate dollars, foundation dollars, which are institutional. But there are lots of ways to sort of thread the needle between institutions, in individual investors, but speed to close is the trade-off. And so I didn't have a ton of high net worth individuals in my network. Frankly, most of the individual investors who invested in my fund are GPs at other funds like Jason Calcanus. But speed to close is the trade-off. You're signing up for a slightly longer sales cycle, but I believe that is valuable. If you ask any GP how they raised their fund, everyone will have a very different story. Some people will say, oh, you know, this corporate LP anchored my fund and then I was, they put me in business. Or I went out and raised

Starting point is 00:41:57 from all the people who invested in my startup and they put me in business. There are so many different ways to raise a fund. You just have to find the right way that works for you and your story and your network and your background. So you are not. just raising fund one. You're actually raising the next two or three funds, sometimes the next four funds. And that is why you should be talking to institutional investors early and often so that you are, you know, you are kind of setting them up for the next two or three funds that you raise. And fundraising is so difficult and often onerous. It's not our favorite things to do, thing to do even as, even as fund managers.

Starting point is 00:42:42 And so everyone wants to get through it really quickly and move on to the good part, which is deploying the capital, working with founders, all the stuff that we actually sign up for. But you have to spend enough time doing the fundraise so that you are actually able to set yourself up

Starting point is 00:42:58 to build a legacy firm. And there are lots of different types of LPs in the world. And you need to find your ideal LP persona as quickly as possible. I discovered that my ideal LP persona was fund of funds, sometimes emerging manager fund of funds, but not always. And these fund of funds, sort of, they take money from larger institutions like endowments and pension funds, and then they deploy it into fund managers. And I knew that my fund was going to be too small to go

Starting point is 00:43:35 directly to those sort of pension, that level of pension funds and endowments. But I knew that could get adjacent to them by going after the fund of funds. So once I was able to close, I closed Sundana first, the first fund of fund. And once that became the persona, I just went deep and closed, started closing every fund of fund I could. And there are roughly, I don't know, five, six fund of funds in the Cake Ventures LP base. And your persona may be corporates. You may find that, you know, if you're building something in, if you're building the AI fund, that corporates really want to get close to what's happening in the AI and, you know, they're willing to put some dollars behind that. But you just have to figure out which persona is the one that clicks for you. So,

Starting point is 00:44:26 you've raised your first fund and you're ready to, you're deploying. What, what happens next? well, you've got to continue to be institutional. So you've got to build the muscle that helps you move up the institutional stat. And that's all about the fun stuff of operations. It's reporting. It's making sure your audit is done well and on time and with an audit firm that people trust. And you don't really get that muscle unless you go pretty institutional pretty early. And it's hard to then build the muscle later when you want to go institutional

Starting point is 00:45:10 because you just haven't had enough practice at it. So I would say build that muscle early and then you'll be able to have an easier move up the institutional staff. And then every fund, like every person has a little bit of privilege, every fund has a little bit of privilege, right? So I think you have to find the thing that you're good at and then build your firm's reputation on that. And it's not always completely obvious. The thing that Cake Ventures is really good at is understanding demographic changes, understanding how that impacts technology, and then helping our founders harness those things for their growth.

Starting point is 00:45:47 But we actually discovered that we were good at something else. And one of our superpowers is that I'm able to distill a lot of information and show people how that turns up in the portfolio. So Amber Illig, who is a general partner at a fund called the Council, actually called this out for me. We are both investors in a company called Aster. And after Aster announced their fundraise, I gave a quote to the press. And I also did, I wrote a bit about why Aster is important. And so many investors just kind of give the off-the-cuff quote of,

Starting point is 00:46:25 we are so excited to be investors in this new company. we can't wait to see what they do. And that is very boring and not helpful at all to founders. What is helpful is having an investor contextualize their investment in your company so that other people get equally excited about the thing that you are building. And so we harness content and attention for the value of our portfolio and the value of our founders. and, you know, we try to go a level or two deeper and actually give them something that is useful for the future. And then you must, especially if you are raising or want to be

Starting point is 00:47:09 institutional, do the thing that you said you were going to do. If you raise a fund and you tell people that you're a seed fund and then three years from now, I look back and 50% of your deals are in Series A companies, that does not engender confidence. And that is not the way that institutional investors want to invest. If you say I run a fund and I invest in AI and data, and then 50% of your deals are in consumer companies that have no AI and data. That does not engender confidence. That's not what an institutional investor wants to invest in. Now, you do earn the right to go off script, but you have to earn that right. You have to show that you can do the thing that you sold them. You have to. You have to show that you can do the thing that you sold them. You have to to show that you can do and execute on the thing that you told them you were going to do. So the biggest, one of the biggest things when you have institutional investors is do the thing that you said you were going to do and they will continue to invest with you because hopefully you're good at it.

Starting point is 00:48:12 A few final thoughts before we open it up to some questions. Raising a fund is permissionless. So many GPs start off their fundraise by asking other people what they think of what they're doing. it's great to get other people's opinions, but you can't spend too much time asking other GPs and other people who are not building this business with you, what they think and how they think you should build this firm. You have to just go out and do it. One LP does not stop or start the show. So many GPs and fund managers feel as though if I just get this one LP to invest in my

Starting point is 00:48:54 fund, everything will be great. I can't do it unless they invest in the fund. That is a very, very, very dangerous place to put yourself in. You have to be in the mindset of this train is rolling. People are going to get on it. I hope it's these people. But if it's not, then there will be other people on the train because the train's got to go. There were some LPs who I thought these LPs are going to love what I do. It's going to be a slam dung. They're going to be super into it, they didn't end up in the fund. And that's okay. They might be in fund too. They might not. But the train rolled on. And then finally, I think if you're holding on to, you know, if this fundraise doesn't work, I can go get that job at Google. Or if this fundraise doesn't work,

Starting point is 00:49:45 I can go be a partner at some firm. Or if this fundraise doesn't work, I can go do XYZ. you almost have to burn the boats in order for the fundraise to be successful. I burned the boats. I cashed in every 401k that I had. I put all of the money at it. I didn't have another job. I had nothing else to go back to. And so I moved forward into Cake Ventures and closed the fund.

Starting point is 00:50:17 If I had something else back there that, you know, was hanging around the poop that I could easily say, if this doesn't work out, I can go do that. We might not be standing here with me as a founding partner of Cake Ventures. We'd be standing here with me as, you know, partner at some fund, some other fund that I don't run. So if you go out there with the mindset that you've burned all the boats and there's nothing else for you to go back to, that is how you get to an institutional fund. It takes a little bit of work to get these talks approved to be shared with you, but we've gotten such good feedback from everybody about this series that I think we're going to do it every year. So if you can't make it to the Liquidity Summit next year, expect some of the talks to come out later on.

Starting point is 00:51:07 We may have one or two more for you. But in the meantime, there will be lots more live news. There will be interviews, both from Jason and myself. We had so much twist plan for you. Stay in that seat. Keep those headphones on and I'll talk to you very soon. Bye.

This Week in Startups - Monique Woodard, Fund of Funds Panel & The Pro-Rata Yacht! | E2018

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