This Week in Startups - Optimizing fund structure, GP market fit, & more with Screendoor’s Jamie Rhode | Episode 1917

Starting point is 00:00:00 the Coinbases, the Airbnbs, the Uber's, they created brand new sectors. They created brand new areas of the market. So for us, we need to be willing to roll up our sleeves and find venture managers that have been overlooked in the ecosystem because there's such untapped potential by the networks or the ideas or the founders that they can fund. And that can allow, you know, us to break this virtuous cycle and get more capital out to a lot of what I you as the edges or the tails or truly the untapped potential in the ecosystem. This week in startups is brought to you by Mero. Working remotely doesn't mean you need to feel disconnected from your team.

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Starting point is 00:01:20 And GELT. It's time to take control over your taxes. Discover how Gelt can help you to manage and optimize your personal and business taxes. Visit joingilt.com slash twist now. All right, everybody. Welcome back to this week and startups. Excited to have Jamie rode on today.

Starting point is 00:01:39 Jamie recently joined Screen Door. For those who you don't know, Screen Door is a fund of funds. What's a fund of funds? As you know, if you've listened to this pod before, it's a vehicle in which LPs give a bunch of money to a group of partners who then invested in venture funds. Why would they do this?

Starting point is 00:01:56 well, they may not have the acumen, the time or the want to go evaluate hundreds and hundreds of general partners at venture firms to pick a range of them. And so it's sort of like outsourcing to somebody who could do a better job for you. Screen Door has a mission to support underrepresented voices in the venture capital space. Managers often deemed uninvestable by conventional standards. We'll get into that. and they do so by backing these investors on their first rounds of investment. Satya Patel, who was recently on this week in startups, episode 715 and Hunter Walk. Man, he was on the show years ago.

Starting point is 00:02:35 I can't remember the episode. And they founded the firm back in 2021. And before joining Screen Door, Jamie spent eight years plus as an institutional alligator with a data-driven approach, hoarding her skills at Bloomberg and then Verdes Investment Management. Welcome to the show, Jamie. Thank you. Thank you so much for having me excited to be here, especially a couple weeks into being at Screen Door. Yeah.

Starting point is 00:03:01 So you had done some research. I want to start with this on early stage fund managers and getting enough surface area to hit unicorns. You and I traded some emails and DMs about it because I was like, hey, wait a second, I came to the same conclusion at the same time. But when I talk to potential LPs, unlike yourself, they're very, very. very confused about what in our industry is derogatorily referred to as spray and prey. In other words, some GP, a general partner, a venture capitalist, out of venture firm, making a large number of investments and hoping for the best. In our first fund, we did 109 names, I believe.

Starting point is 00:03:43 Don't quote me on it, but I think it was 109, and we hit four unicorns. And so that was one every 25, and you came to some conclusions about this, you know, large surface area of investing, and then we can get into fund structure optimization, which is, you know, fund architecture, my current obsession. But what did you learn about sort of surface area investing, getting a wide surface area at the seed stage specifically and pre-seed stage? Absolutely. And I think it all comes down to understanding that early stage venture is parallel driven. And it's the tails or the edges that really drive those returns. And so first off, you have to gain exposure to those edges, those tails. And so from my

Starting point is 00:04:33 perspective, you need to be investing in the new. Many of the big winners that created brand new sectors came from those edges or from the tails. And so how do you go about building a portfolio that properly covers those edges, but also understanding that only 2% of startups become the big winners. So it comes down to really portfolio construction for the LP at a high level. Do enough fund managers that give you that proper sampling of the edges, of the tails, of those first institutional check in while recognizing that 98% of those investments aren't going to be a venture like return. and I could go buy the S&P 500 and get 10% Kager.

Starting point is 00:05:18 I could go and invest in buyout and get a 14% Kager over 12 years. And so to really capture that early stage venture portfolio construction to maximize the alpha, it's investing in GPs that cover the first institutional check that cover the tails and doing enough managers at an LP or allocator level that you have that broad swath of diversification. So mathematically, 98% of startups don't give you a venture like return. 2% of them do. So 2% times 50 deals. One outlier.

Starting point is 00:05:54 50 deals is my sweet spot. Yeah. You know, it's so interesting when I wrote my book, I asked a lot of people, what do you think the number of investment in angel investor needs to have in order to have a chance, no guarantees, of hitting an outlier? And I asked this to a bunch of angel investors. and the lowest number I heard was 10, but most often numbers quoted were 20 and 30. And some people said 40 or 50.

Starting point is 00:06:18 And so I think angel investors maybe who I asked were the successful ones. So maybe they had a bias to their own experience and they thought, yeah, 30 is the right number. But you're saying 50 based on a little more data-driven approach to this. And that speaks well to me. That first fund I did is a 5X fund on paperish. And it hit 4 unicorn. So, okay, yeah, that means I was done. double or quadruple the industry average, whatever it is, you know, 3X, who knows exactly

Starting point is 00:06:46 what the industry is here. You did mention that you need to have startups that don't fit the mold. I'm not sure the word you used for that, but that were edge cases. Yeah, it comes down to if we look at that emerging manager ecosystem, or if we look at the true funds that are investing in that precede seed or first institutional check, they tend to be emerging managers. I mean, there's still some brand name investors, established firms that absolutely play in that first check-in. But more often than not, they tend to be emerging managers.

Starting point is 00:07:20 And if you look at the data, there have been over 4,000 emerging managers since 2015. And so for me, when I'm parsing through that, I'm looking for GPs that are bringing new perspectives, new networks, new ideas, new strategies that are really going to, capture, you know, the edges or the tails of the distribution, you know, the big wins. And when you think about the companies that have been driving the big wins, it's really around the ones that have created brand new sectors. So finding GPs that can play in the tails, the edges, the new is really, really important to harnessing the parallel. Yeah. And so if you were to think of names like that, Uber, Airbnb, Coinbase, come to mind.

Starting point is 00:08:12 When Coinbase, when people made that investment, Fred Wilson over flat-iron partners, I think Gary Tan did it, Y Combinator did that. That was like a really weird idea, like a, you know, Mount Gox type situation. How is that ever going to make money? How is that even legal? Sure, it did have those issues. How is it even legal came up? Then you look at Airbnb.

Starting point is 00:08:32 How's that even legal? Uber, how's that even legal? So, you know, if you just look at those three, they all face legal issues. So maybe that is actually a little bit of a tell-tale. is people are trying to stop them legally. Maybe they're doing something truly disruptive. And I think I would put them into the disruptor category. And, you know, if you think about the wave before that, it probably would have been Tesla, SpaceX.

Starting point is 00:08:54 Facebook meta would have been that cohort before it. And yes, Tesla did get sued for the dealer network, right? Trying to go direct. That got them sued. I don't know about Facebook getting sued. They didn't get sued. But, yeah, tons of contrary. around that company as well.

Starting point is 00:09:11 So is that what you mean by the tail and the edges? And is there a different between those two terms? You're just using them, you know, as interchangeably. Interchangeably. Yeah. And I think it really is when you look at a parallel distribution, you know, it's the small percentage. It's the 2% of the startups that really drive the return.

Starting point is 00:09:32 So when thinking about how to build an emerging manager portfolio to access those tails or the edge of the distribution, in the big winners, it's important when you're looking at a GP to really kind of understand what their network is, what their access is, you know, the GP market fit. Is it, is their fund, you know, one plus one equals five or is it one plus one equals two? Because I'm really looking to build a portfolio that's giving me access, you know, to those tales, to the disruptive technologies that are going to drive the power law return. Founders always ask me for pitch deck punchups while I have some great news.

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Starting point is 00:11:10 free Mero account at Miro.com.com slash startups. That's Mero.com slash startups, MIRO.com slash startups to sign up for free. So when you say one plus one equals five, you're referring to leverage. So let's maybe talk a little bit about what can give a general partner at a venture firm and what can give a venture firm leverage. You mentioned a couple of items there. You mentioned deal flow. I think you've sort of talked a little bit about decision making or unique access through networks, when evaluating a firm that you think has that kind of leverage, that one plus one equals five, give me the top three things you're looking for in order. Yeah, and I would say a simplistic word that we use at Screen Door is GP Market Fit.

Starting point is 00:11:57 I mean, we all talk about founder market fit when you're not talking to venture capitalists, but it's Green Door, it's all about GP Market Fit. So does their expertise align with their go forward strategy? Is there a path to building an enduring firm? And by that, I mean long-term vision, moat competitive advantage. And then is there a clear understanding and self-awareness of what it takes to go from an investor to a fund manager? Because those are two totally different things. And then I know you said three, but it's.

Starting point is 00:12:34 me, so I have to say portfolio construction. That's like a number one for me. Yeah, and I too am obsessed with portfolio construction. And so let's double click on that, since we're both into it. There has been one philosophy concentration in winners. I just had Brian Singerman on the program. You probably saw the episode where he talked a bit about backing up, you know, 10, 15% of a funds, dollars into one just outlier bet. they did Airbnb, Palantir, and SpaceX as their three in the history of the firm. And then there's spray and prey. Ron Conway, you know, hit 200, you know, 100, 200 names in a fund, which was the model we were taught when I was coming up. And then, you know, those are the two main models.

Starting point is 00:13:22 And there's always the classic four or five partners putting three or four hundred million to work in 30 companies and then hoping for one outlier, maybe a second if they get lucky. So maybe talk about what you see in terms of construction and what you think optimal construction is in 2024. Yeah, I think that there's a lot of different ways to slice the venture pie and make money. But at the end of the day, going back to what I said earlier, if you want to level set it, industry averages, 2% of startups become an outlier. 98% don't become an outlier.

Starting point is 00:14:01 So when you're an emerging manager and you have limited track record, I always lean more towards the 50 deals. You want to deploy as much of that capitalist as you can into that first institutional check-in. It's the cheapest entry point possible. Any dollars that you use for follow-on capital into series A, B, and C, you were dollar cost averaging down your multiple. So it comes down to simplistically the math piece and your fund size. Because I really think, and you've had other guests talk about this, your fund size is your strategy.

Starting point is 00:14:39 And so I think it's really important to make sure, based off your own network, your own experience, your own track record that you're doing enough deals in a fund to have a high probability of capturing a winner. because you can own 20% of a company, but if it's not a venture like exit, I don't care. I can go as an allocator consider other opportunities that can get me that 14% type return that you can see in buyout. We're here for venture capital. And so it's really important for GPs to do enough deals in a fund to have a high probability of capturing a winner and then deploy enough capital in that first check-in to make sure they're grabbing as much ownership as possible in that cheapest entry point before we go back and talk about reserves and follow one strategy

Starting point is 00:15:34 and doubling down into the winners. Yeah, and that really is why I think people have become attracted to seed stage. The seed stage, just historically versus Series A and Series B, maybe you just educate the audience as to the return profile multiple on cash that people see in those different verticals or different stages rather. Definitely. And it's so interesting because in this type of market environment, I think as a venture fund manager, if you're investing in a serial entrepreneur or repeat successful founder or anything that touches AI, the first entry point price is way higher.

Starting point is 00:16:16 I mean like 30 million post money valuation versus first time entrepreneur that's doing probably some boring company. That entry point might be $10 million post. But when I think about the return profiles of early stage venture versus late stage venture, late stage venture returns look a lot like buyout and growth equity. It's why I mention the private equity returns of around a 14% of return. but when you're at the early stage, I looked at some Cambridge data from about a year or so ago that talked about venture capital producing around a 28% Kager over the past 25 years. So if we want to level set that into multiples, you know, if you can compound your money at 28% for 12 years,

Starting point is 00:17:08 that's a 19x. Now, most allocators, endowments, family offices, they have, have the capital in the ground for long periods of time. So if we can compound a 28% for 25 years, that's almost a 500x versus 14% compounding at 25 years. That's a 26x. So if you can get the average seed stage, just anything average, it's a pretty amazing business. But the issue is, and the reason more people don't go into it is why. Why do more people not, operate on the C stage? Why don't more GPs choose to do that? Why do they drift to series A, series B, series C, doing less deals, larger deals? What is the dynamic if you've identified one, you may not have, of what is the GP psychology? I think it's really hard to stay

Starting point is 00:18:04 grounded in seed stage investing because you have to keep your fund size small. So when I look at the managers that I've backed historically and at Screen Door, the average fund size is around 40 million. The average fund size of emerging managers today is 43 million. You're playing purely off carry, which when I look at historical data, it takes about eight to nine years in early stage venture to get to a DPI of one. So you can have great paper markups, but that Carrie's not kicking in until probably somewhere around year 10 plus. So it's a marshmallow test is what you're saying. Probably.

Starting point is 00:18:48 Would you like three marshmallows in nine years or would you like a marshmallow right now? And that's, you know, and I, it's so interesting that you frame it the way you did because that's exactly what I've experienced. And I had the opportunity to join a later state, two different later stage funds, wanted to absorb our firm into theirs because we have good. deal flow, et cetera. And, you know, the pitch to me was, hey, listen, dummy, you could put, you know, $25 million into a Series D. And in five years, 10 exit or five exit, who knows, and, you know, hey, you could start getting paid quicker.

Starting point is 00:19:24 I've already made some money already, so I didn't need to. I can go for the long game. But it is hard because you don't have the management fees of those larger funds. So you don't get to live the cushy lifestyle that you thought you would. So you're taking a vow of Jedi monk deferment of rewards being in the seed stage, aren't you? Exactly. You're playing the long compounding game. And that compounding, it doesn't really show up in the multiple until the very end of your fun life. So it's a long game. And that can be hard. And it's why I've seen a lot of fun managers have their fun one and two be more pre-seed seed, a little more. diversified and then around fund three, they start to shift and go bigger and build greater firms and raise the management fee. And it's an evolution. And it's really, really why one of the key questions

Starting point is 00:20:19 we ask us, screen door is, you know, can you build an enduring firm and are you focused on precedency? You know, what is that long-term firm vision brand? Because as LPs, we're not just backing you ideally for one fund. We want to back you for multiple funds. Yeah, our first fund was 10, second 11. So basically the same. And then the third was 44 million, the average you, almost the exact average. You said 43, I think. And then this fund, you know, I planned for between 50 and 100, and I think we'll land somewhere right there. And I specifically had some LPs who were like, hey, if you were going 150, you know, our minimum check size is 25. So this is the other pernicious thing about trying to stay small is the big LPs don't want you to stay small.

Starting point is 00:21:06 They want you to put more money to work. And it's, you know, I've had to say, you know, sorry, no, because I'm $5 million of this fourth fund, essentially, you know, my money. So, like, I'm all in on this. Like, and I can't make it that big. If you make it bigger, then I've got to up the average check size. And we're writing 25K, 125K, and 500K checks. You can't drown a $5 million company in $3 million.

Starting point is 00:21:34 They just, the founders won't take it. yeah, it's conflicting market dynamics, and you really need to be disciplined if you want to make the seed stage work. You also have to want to work with those style of companies. And I think my observation, I can say this, you can't, is, you know, a lot of my peers are lazy. And they just look at how hard I work. And they're like, you're dumb. You work too hard. Just do one investment every, you know, six months as opposed to we do two a week.

Starting point is 00:22:04 we do 100 a year. When you have an incubator, it's slightly different, obviously. Right. But, you know, it's a lot more work. It is. It is. And I think that can be really challenging as an LP or an allocator when you're underwriting a GP to kind of truly understand what their value at is and kind of what their

Starting point is 00:22:25 key strategy is in the market. It's also helpful now I have the resources in this GP. advisor network at Screen Door to underwrite emerging managers not only as an LP, but I tap into my GP advisor network and ask HomeBrew or ask Precursor or Ask Cowboy Ventures to come and help me underwrite this GP to kind of truly understand what their vision is. Do they have the capabilities to build an enduring firm, stay true to the strategy that they're looking to deploy and have the actual expertise to be the best manager possible for the type of strategy that they're looking to invest. All right. Listen, I am addicted to productivity and efficiency because time, that's the most

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Starting point is 00:24:28 How many managers are you going to invest in as part of this process? And then how do you get from $4,000 to that number? Yeah, I think that the market is taking care of the $4,000 down to a small number for me. I mean, I think that there was some pitch book stack that came out that of the 667 first-time venture managers that close between 2019 and 2021, over 247 of them won't be able to raise a second fund. Sounds great, about half. Yeah. Exactly.

Starting point is 00:25:05 And I think the mark is taken care of it for us. So I really think it's important to be looking for venture managers that are really bringing the new perspectives, the new strategies that have been overlooked in the ecosystem and then just invest in the best athlete possible to get my broad diversification. of those edges or those tails. And so for us, with me joining and my partner, Lane, joining, it's really expanding the mandate to invest in the best emerging managers that we see in the ecosystem. And it started as more of a DEI fund of funds, if I understand correctly and remember correctly, but I hear you communicating very clearly, you're going after the best athletes.

Starting point is 00:25:52 So is that a little bit of a change in strategy or just very precise language here? because DEI has gotten a really bad name or, you know, a lot of negativity around DEI right now in the marketplace. How do you go about the original mandate versus the reality of the game on the field today when it comes to DEI and the contentiousness about it? Yeah, I think it's such a challenging part of the market to navigate, but Screen Door was started in 2021. by leading early stage venture capitalists. You mentioned earlier, you had Satya and Hunter on. And it really was started in more of this experimental idea of, you know, there's a lot of overlooked managers in the ecosystem that needed backing.

Starting point is 00:26:43 And from my prior experience being very, very data driven, and that helped remove a lot of the behavioral biases of investing, especially on the private market side, it had led to a highly diverse portfolio. I do think in venture, you can't be so restrictive and selective. That tends to lead to missing out on the big winners. It's expanding the mandate to really look for managers that have been overlooked in the ecosystem, managers that bring that new perspective, new network, new ideas, new strategies. And it's up to the GP to come to us as screen door and tell us why you have been overlooked and what new edge you're bringing to the market. So I could be like, hey, I'm a white guy from Brooklyn, didn't go to Stanford, I'm

Starting point is 00:27:31 overlooked. You could be a white guy from Brooklyn and you could tell me that you've had one tough upbringing, living in the Bronx and I'm willing to listen. Absolutely. Yeah, it's an interesting world we live in right now. You know, it's, I do agree with the premise and I had this talk with Arlen Hamilton a couple of times on this podcast, where, you know, she had a very specific mandate. She wanted a female underrepresented founders. Awesome. And I said, well, what if you meet, you know, like an amazing, you know, I don't know, the founders of Airbnb or Coinbase, both happened to be white males, like the CEOs. Would you not invest them? You said, yeah, no, I wouldn't invest in him. I'm like, that's a mistake. Because if you're meeting with all these

Starting point is 00:28:14 founders anyway and you happen to find a diamond in the rough, you should grab it. You said, oh, there's plenty of diamonds in the rough of the other ones. And I was like, yeah, that's not how this works. You might happen to stumble upon a giant diamond, and it may not fill the specific narrow mandate that you set for yourself. And then you're doing yourself and your LPs a disservice because you're not going to be able to raise the next fund because you missed out on a 5,000 X or a 1,000 X once in a career opportunity.

Starting point is 00:28:43 Yeah. I think just the key piece, too, is that a lot of those companies, the coinbases, the Airbnbs, the Uber's, they created brand new sectors. They created brand new areas of the market. So for us, we need to be willing to roll up our sleeves and find venture managers that have been overlooked in the ecosystem because there's such untapped potential by the networks or the ideas or the founders that they can fund. and that can allow, you know, us to break this virtuous cycle and get more capital out to a lot of what I view as the edges or the tails or truly the untapped potential in the ecosystem. Yeah. And this is where the gross margins of the business and the nature of the businesses matter, you know, one of the things we saw over and over again was some of the businesses that communities that weren't as funded were aligning with. were lower gross margin businesses,

Starting point is 00:29:47 CPG services type businesses, non-traditional VC businesses. And so we need software businesses, marketplaces, those have high gross margin. And this was a lot of the tension in the marketplace, you know, over the past decade.

Starting point is 00:30:00 I think it's changed actually over time where we're seeing more, you know, underrepresented founders as a broad catch-all, pursuing software marketplace, FinTech, high-tech, high-margin, gross- margin businesses. and that was one of the problems 10 years ago is, you know, if you were talking to female founders,

Starting point is 00:30:19 maybe half of them were pursuing something like CPG, and that just was a non-starter for a while there. Did you see that in the, and how do you think about the sectors that the GPs are going after? Yeah, you know, I attended up front a couple years ago, and I can't remember who spoke, but it was a founder of a highly successful company, and he recognized that only 20, of his customer base, let's call it, was a typical white male. And the other 80% who had a lot more of a diverse background. And he recognized that his C-suite needed to match that of the customer base to truly serve that customer. And so that really resonated with me where I think for me, it's up to the GP to decide based off their networks where they should be

Starting point is 00:31:11 deploying the capital. But overall, I think to build a highly diversified and a highly successful portfolio, it's on me as an allocator or other LPs listening to this to really build out a portfolio that covers all the sectors that exist today, but all the sectors that exist tomorrow. So going back to 2012, there was no blockchain focused funds. So if you only did sector-focused funds and you made very specific sector bets, you likely missed out on. Coinbase because there really was no coinbase before then. Yeah. Or you could miss out on Tesla and SpaceX because they were doing hardware intensive things.

Starting point is 00:31:50 Deep Tech that was like, how is that possible to do a car company, right? Like people had lobbied Elon to make it a software company and just a technology company that sold components to Ford and Mercedes. And in fact, if you go back and you look, Mercedes and Toyota did make an investment in Tesla, I think it was a series B or C. and it was under the concept of sharing technology, etc. and the early model S's had, I think the drive train and the stick shift looked oddly familiar to the Mercedes. And it was because they used the Mercedes drive shift or whatever. Are you grinding hard to grow your business? I bet you are.

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Starting point is 00:33:44 They might get, instead of 2.20, they may get 2.5 and 25. Maybe they get ratcheted up to 30, 35. And then when you're a fund of funds, you're taking 1 and 10% most typically, so you have to add those two things together. I've heard some fund of funds say, hey, their mandate doesn't let them,

Starting point is 00:33:59 you know, invest with people with 25, 30% carry. Other people say, you get what you pay for. All we care about is the net returns at the end of the day after the fees and everything's baked in. So how do you think about it? I think every GP that we're looking at, we're underwriting back a 3X net net is what we're really looking for. And so when it comes to raising your first institutional fund, I think asking for premium carry personally is aggressive. Unless you have a track record where I've been seeing.

Starting point is 00:34:34 a lot of people looking to spin out from established firms. And so if you have a track record to prove out the premium carry can get comfortable with that, especially if the premium carry shows up around a 5x. If there's a hurdle involved in there, the discussion around that becomes a lot easier. But I think around the space where you have to prove that you can pick well and you can prove that you're a successful investor, it's really challenging to add. you know, hefty fees or hefty carry. In terms of management fees, I look at what the management fee is over the life of the fund.

Starting point is 00:35:11 So maybe if it starts at two and a half or three, but it drops down and turns into an average of 1.75 over fund life. Totally comfortable with that. But when people throw up this premium carry based off of some short track record, I'm not exactly sure that they recognize that for early stage venture, It can take seven to nine years before a fund settles in their ultimate quartile ranking. And most of the time, I think the stats around 90% of the funds shift three or four quartiles through their fund life. So when you're adding that premium carry to the fund, think about the track record and if that track record really has settled out because it takes such a long time.

Starting point is 00:36:04 So let's talk about the percentage of a fund that you're willing for targeting. So somebody said 43 million was like the average. I'll just say $40 million fund. How much would you ideally want to be? And what's the minimum and the max that you would feel comfortable with being an LP in a $40 million emerging managers fund? Yeah. So it's Green Door Warrior minimum 10% of a fund size. We want to be a cataclyistic check.

Starting point is 00:36:33 So we want to go in early and really sit there and underwrite you and help you build your LP base. We also have 14 GP advisors. And so every GP that we back gets paired with a GP advisor. And I would say for me, this is a huge value add. So those two pieces are really, really crucial to the underwriting process and even post-investment process. Also, we partner up with endowments and foundations, even family offices, and they view us as an extension to their team. So we are not only minimum 10% of your fund, but we also have the network and the access with LPs that are looking to double down on some of our fund managers or back you when you move up and out of the core emergent manager space. Have you announced how large your fund to fund is and which fund to fund you're on and, you know, how many names you'll have in it on average?

Starting point is 00:37:38 Yeah, I would say you're asking me this question three weeks into the new job. Love it. Just ballpark. Yeah. Totally. Yeah. Yeah. So we would say that we're expanding the mandate to not only back first institutional funds, which is what we've done historically, expanding that mandate to invest beyond just for. first institutional check, especially with the addition of Johnson and I, you know, all of us are all hands on deck. Lane has the experience of understanding truly what established successful fund looks like. She also comes from the world of Texas teachers and Goldman and constantly reminds me about what it's like to write large checks where I came from family office world and having more entrepreneurial spirit to writing the smaller checks. And so for us, we're really looking to build out a portfolio that can cover a significant

Starting point is 00:38:34 portion of emerging managers. Amazing. And so qualitatively, GPs are unique individuals in the world, in my experience. What do you think are the qualities that make them perform at a high level consistently? What do you think are the qualities that maybe lead to hubris and poor, returns in your experience. Yeah. I would say starting with the red flags, it's capitalizing on the theme of the moment going

Starting point is 00:39:04 from Web 3 to AI to whatever's hot. And I would also say this, this one kind of flows into the good and the bad. As an LP, I underwrite people who underwrite people. So this is really a relationship game here. And when GPs become very transactional, it's a huge red flag for me because we're entering a marriage. One fund will likely be 15 years. And if we back you again and again, this starts to extend out. So that's a really important piece for me is the relationship-centric part of the underwriting process.

Starting point is 00:39:44 Because at the end of the day, at pre-seed and seed, you're really talking to people, underwriting people. and then the other piece is not understanding portfolio construction. I mean, that's a huge part of setting yourself up for success at the early stage. And if you just say, well, I looked at some of the best firms and I saw they did it this way. So I figured I would just do it this way. Sometimes I just want to say, did you look at all the firms that failed? And did your portfolio construction mass? Now you tell me, Jamie.

Starting point is 00:40:17 Now, where were you 12 years ago? I'm going to use your health 10 years ago. No, I mean, when I came into the business, it was like set up a $10 million fund, make $100 investments, $100K each, and hope for the best. Which is what we did. Then we look back on it. And this was the weakest part of my game.

Starting point is 00:40:31 You nailed it. We had four unicorns in that first. Superhuman, which was the second time I'd invested in Raoul. We knew it was a rocket ship. Calm. We knew it was a rocket ship. The stats showed it very clearly. Robin Hood.

Starting point is 00:40:44 We knew it was a rocket ship. Again, the stats showed it clearly. And then density. Density was unclear because they were building a hardware density. Atio, they're building a hardware product that allowed you do people counting, and it was taking a long time to build this hardware like hardware companies, you know, sometimes do. So three out of the four, it was definitively clear that they were going on to unicorn,

Starting point is 00:41:04 deco-corn status, something in that range. We would have easily put a second bet into any of, all three of them. And we have the emails where I passed on doing it because we were one and done, constructing my fourth file. And then we didn't, so we didn't have the ownership percentage. We owned, I think, 2% of superhuman. It was like 4% went down to 2. We didn't take our prorata.

Starting point is 00:41:26 We could have, or we took minimal. Yeah. And then Robin Hood, well under 1% ownership, density 5% ownership. And Com 5% ownership with our syndicate. So we started to realize ownership percentage mattered. Now we regularly get to 10% to 15% ownership in our winners. And we have a definitive strategy like a, because you, need to build process. That's what I've learned about a firm. You need to have a process,

Starting point is 00:41:51 and then you need to look at your decision-making process, and you have to constantly refine it. So every year at our off-site, we look at our anti-portfolio, pro-ratas we passed on that we shouldn't have, you know, and then we came up with an architecture this year, or late last year, early this year, on when we double down and when we double down a second time. So we try to do two double-downs, likely winners, definitive winners. We made that architecture, we implemented it, man, it's been working well and getting that ownership percentage up. But when I architected this fund, I said

Starting point is 00:42:22 50% of the dollars into the top 5% of the fund and then 50% into the accelerator companies, the programs, and the directs, which roughly will translate into maybe 200 names and then 10 names. So if it winds up being a $70 million fund, let's say 35 million into the first 200, 35 million into 10 names.

Starting point is 00:42:45 15 names, maybe 20. Who knows? We'll see, you know, and we think that this is the first time any fund has ever, any seed stage fund has done that aggressive of a reserves. And so, yeah, this is the architecture, I think, could crack the code on early stage.

Starting point is 00:43:04 I don't, we'll see. You know, because it's taken primarily from my experience being an LP in the WhatsApp fund that did four investments and then watching Brian Singerman. I think this will be the new strategy. that I think a lot of people are going to copy is can you get, I don't know, 10% of your fund into the best name,

Starting point is 00:43:22 5% into the second best name, and then 35% into the other, you know, 10 best names and then have the first half of the fund going to it. And what do you think of that strategy? You and I talked about it offline, but I think we did at some point. What do you think of that strategy?

Starting point is 00:43:39 Two aggressive percent for reserves? You can be permission to be candid, you know, so I'm going to close the fund either. Yeah, be candid. You think it's too aggressive. You think I'm crazy. You think it's crazy like a fox. You think it's an experiment worth watching?

Starting point is 00:43:53 I totally think it's an experiment worth watching because I think for me, you check the box of you're doing enough deals up front that you have a high probability of being in the winner. I think ownership absolutely matters, but it only matters if you're in a winner. And I think the challenges, and this can also come from experience as an investor, but the challenges is when you have to make that follow-on decision is running the probability math to understand the opportunity cost of the dollar. Is the dollar being deployed in that follow-on going to be as just a good of return as if that dollar is deployed in another startup in the portfolio? and it is the GP's responsibility to do the math and do that decision process exercise and make the choice and make the investment. If you tell me that you ran an analysis and said it's better to make the follow on here, I have insider information, I have a great idea that this company is going to be huge.

Starting point is 00:44:58 Go for it. But that's a choice that you're going to have to live with. And then when you run your anti-portfolio and you passed on one extra deal, was that one extra dear Airbnb? or was that follow-on dollar Airbnb? Yeah, and this is the absolute terra that GPs have to live with. If you think about our accelerator, 125K, just like Y Combinator or Texars for 7%. Okay, let's say we decide we're going to put $1.25 million into a company at a $25 million post. We think it's one of our breakouts and we want to own another 2.5% of it, right?

Starting point is 00:45:32 Or no, 5% of it, 1.25, right? 2.5 would be 10, 1.25, roughly. 5%. Okay, we want to make that 5% bet. Well, we could have made 10 more accelerator bets. So is which is the better use of the capital? And I can tell you one of the leaks in the game too was when we were starting out and we had a small team, we would have people come and say, hey, we're raising our round. We got a bridge. We're doing a bridge. Can you just put 50K into this 500K bridge? So we have your signaling. And, you know, founders are very convincing. We've got a great relationship.

Starting point is 00:46:08 We want to be supportive of the founder. It's like, okay, you know what? It's only 50K of a $10 million fund. It's only 50K of a $44 million fund. And what I've had to reprogram the team and myself is explaining to the founders, we only have reserved capital for the top 5% of our portfolio. We've defined the top 5% of the portfolio. Here's where you are.

Starting point is 00:46:28 So here's, you know, 10 buckets of, you know, not court, well, I could give you the quartiles, but here's the quartiles. You're in the second, third, fourth quartile in terms of performance. Not only are you not in the top 5%, you're not even the first quartile. So we can't even have the discussion

Starting point is 00:46:45 of us doing follow-on funding. We're a seed fund. You have to go make your way in the world. And so we stopped doing those 25, 50, 100K, feel good, support the founder bets because they were screwing up exactly what you're saying. Oh, man, we could have, you know,

Starting point is 00:47:02 I look back on funds one, two, and three, and if there were 10 of those bets, that's 30 more bets, maybe I get another superhuman in there. And statistically, I would have. So, God damn it, you know, like, and this is what being a great fund managers is admitting when you made mistakes and then changing your game. And I can tell you, man, I talk to a lot of other GPs. They do a lot of these feel good 50K, 150K,000, 250K,000, just be supportive. And you got to be, I hate to say it. I don't want to say cutthroat, but you have to be disciplined. And the problem is communicating it to founders. That's the hard part.

Starting point is 00:47:38 Absolutely. And I think that's something that at Green Door, we have the capability to do meeting these GPs so early on in the process that we can just be like, listen, this is your fun. This is what you're thinking. But let's level set it from the beginning and say, when you make these follow-on decisions, this is my strategy, this is how I'm going to execute it.

Starting point is 00:47:59 Don't be afraid to be using your words, cut through, be clear and communicative from day one. And then you choosing not to follow on with 100K is not actually not a negative signal in the market. It's just your strategy. And they took your capital day one and they know that. Yeah. Then you just have to communicate it to them from the get-go. All right, listen, this has been amazing.

Starting point is 00:48:22 Continue your success. If people want to reach out and they want to get evaluated, potentially for being part of your fund of funds, what's the best process? Do they have to jump through hoops and find somebody who knows you and get a warm referral? Can they go to a web page and upload their deal memo? What's the best way? Can they email you? Find me on LinkedIn GPs and LPs here to be collaborative.

Starting point is 00:48:44 But on the screen door website, we do have a GP submission form. We love chatting with all GPs here to educate the community on the GP and the LP side and work with as many people as we can. Okay. Amazing. continued success and we'll be watching and I wish you all the best. We'll see you all next time.

Starting point is 00:49:05 Bye bye.

This Week in Startups - Optimizing fund structure, GP market fit, & more with Screendoor’s Jamie Rhode | Episode 1917

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