Why Fast-Growing Startups Can Be Dangerous ft. Manica Blain

23:24Manica Blain:Wow. So what I mean by that is the way that the structure works currently under the European waterfall means that even if you're a really skilled investor and you have an early win and it's year three or four or five and you've returned back all of the capital, you're not really benefiting in any profit that you've generated for your LPs yet because you might have 10 other portfolio companies that haven't yet generated a profit. And so I think that delay in the win for the GP creates this other somewhat hazard to me, which is that typically they end up going to raise larger funds to be able to win financially through stacked management fees, right?

24:07Which means that, okay, you've got one fund that's returning, you know, not returning, but paying you a certain level of management fees. You raise another fund. You're now getting management fees on that fund. you're producing more income, but you're producing income by way of management fees and not from the wins that you're generating.

24:23Manica Blain:Yeah, but on that note, and maybe it's a typical, and I know it's fund dependent and all of this is maybe fund dependent in some capacity, but on the management fee side, doesn't that typically get more like front loaded in a fund? And that's the reason why it gets front loaded where you get like two, two and a half percent, for example, for the first, maybe call it three to five years. And then if it's a 10-year fund, and then it might go to zero or like 0.5, the rest. Yeah, because we're in the technical now, but typically there's a commitment period and there's an investment term, right? So typically a 10-year fund life, but a five-year commitment term means that you would get 2 % or 2.5 % or whatever the management fee structure is on committed capital.

25:06And then in years like 6 through 10, you still get paid management fees, but it's now on invested capital. Do you know what I mean? And so in a weird way, too, I want to be really careful as I say this, but, you know, there are some businesses that should end up as zeros. But if it turns into zero, it's no longer invested capital. It's still capital that's invested. And so that GP would still get paid a management fee on invested capital.

25:36Manica Blain:Oh, interesting. Yeah. I mean, at least I don't think there's a bunch of bad guys out there. That's not what I'm saying at all. I'm just saying that I think at the very least, if GPs were able to win early on their wins, I think some of these potential misalignments of interest might dissipate. So are you maybe pro, are you pro, not that you're pro anything, you're just kind of pointing out, you know, some of the. I know, and to be honest, I don't have the answers. I feel like I wish rather than just sharing solutions that I don't come equipped with that yet. But open the brainstorm. Yeah, no, no, no.

26:25Manica Blain:I'm just I'm just kind of wondering, do you think, for example, the SPV model for early stage, does that make a lot more sense if you are raising capital that isn't your own capital? Right. Like you actually still have LPs per se. Does that actually make more sense? And is there is there more alignment there? I guess that the hard part with the SPV model is, of course, your salary or the management fee, which usually that's not existent. But do you find that like that feels a bit more aligned? Because then as a GP, I'd imagine you can actually, once you get that win, you actually see that win yourself.

27:03Totally, totally. I see a whole bunch of other problems with SPVs, but maybe we can leave that for another podcast. But for this specific point, absolutely. I think it makes a ton of sense because you do all win together when something turns profit. And so there is, I mean, an SPV is essentially just that. It's an American waterfall done 10 times or however many times you choose to invest or bring a deal to the table. Um, I think, you know, I think it's a smart route for somebody that is really passionate about investing that finds a great deal. um you know i think there are certain flaws with it as well i get pitched spvs all the time and um and and i get pitched spvs by by folks where i'm just like do you actually really believe in this or who's just excited for me to invest and you can collect a management fee and take a bit of carry off me if this does win and like how much are you also putting in so there's still there's there's still issues with it i think i think um but i get it i get it and it makes it make sense to me from from the gp's perspective why they would want to do spbs and i think from the lp's perspective um it does more balance that that that issue it seems like part of your

28:25Manica Blain:frustration i guess back with spb which is similar to you which is similar to your first point is do you actually have skin in the game you know are you raising an spb just because hey it's a deal and and i'm gonna be able to raise this and then hey if it works out i'll get 20 percent um of the carry. And I don't know. I don't even know if there's, I haven't come across SPVs where they actually have had management fees, but I'm sure there are. But it's like typically like fees and expenses, which is totally fair, but there's typically like a fee and there's carried interest on it as well. But I guess it goes back to your first point of, okay, great.

29:03Manica Blain:You're, you're helping to put this deal together, which is great. But do you actually believe in this deal and what, and how kind of involved are you? How deep are you on this deal instead of just writing up like a deal memo and just blast it out to your network? Yeah, yeah, for sure, for sure. I think when it comes from somebody that's deeply close to the business, you know, as a real hands-on advisor too, I think that helps a lot too because it affirms that person's conviction around the business and commitment to really lean in and supporting the business. But yeah, there's, to be honest, the reason why I've often, I've never done the SPV and I don't think I ever will.

29:46And part of the reason why I don't want to do it and I don't think I ever will is that I do have a really deep network of investors that I'm close with, that I share opportunities with. But I want those investors coming into something that I'm coming into because like they know I'm not sharing this with them because they just need to like fill around and get a close and get paid. Do you know what I mean? Like it's like I want somebody coming into this and writing a check because I think it's.

30:12Manica Blain:You want that. You want all that money. You want them to realize the gains themselves like 100 percent. You don't want you to be you feel like there's some type of misalignment if just because you happen to bring them the deal. Right. Which I'm not saying like it's still work to put together SPD. I'm not saying it's not. But just because, but essentially it's sourcing, right? Kind of essentially in terms of it. I'm all about everyone getting their bang, getting paid, like what they do and the work that they do. It just, it's never felt great to me. And so it's why I steer away from it. I mean, if I share an opportunity with the family office I'm closed with, I want them to know that I'm getting absolutely nothing from them from again.

30:54But for the I'm writing a check, I think it's a great opportunity. And maybe I am doing other advisory work with that business. I often am. Not often, but I am sometimes. And I'm getting paid from the company through other works that I'm creating with them and other work strings that I'm helping them lead. But I just don't feel great about, you know what I mean, making that call and being like, well, if you write this check in, I get 2 % of it. You know, it's like, it feels like it doesn't feel right to me.

31:21Manica Blain:Yeah, it makes a lot of sense. It makes a lot of sense in terms of from from that perspective, from an SPV. You know, well, I understand from from your perspective, too, just because of how wide your network is. I understand it if, you know, you do if you're a person at the middle of an SPV or printing on an SPV and maybe you're it's people that you know that maybe don't have access or don't know about a particular space. and you can, you're kind of the go-to person. Now, that doesn't mean you're taking advantage of anybody or anything like that. But the purpose is, is that you're kind of like serve as a bit more of like the education partner for the Florida space.

32:01Manica Blain:And like that's, yeah. I think there are reasons why it does work. And I know some people that do it and I think very highly of them. And I think part of it too, you know, well, first there's two advantages. One, from the boundaries perspective, they're not collecting like 20 checks. They get to collect one check from one person. Yeah, yeah. It's like, okay, you want to go raise by round? Go raise by round. That's fine. Totally. But, and I also get the perspective from the underlying investor that, you know, gets to go to one person for questions and get answers to those questions. And, you know, this person hopefully is doing a great job of like keeping that investor group up to date with quarterly reporting or annual tax slips, whatever.

32:50I think there's merit in it for sure. It's just not something I'm doing.

32:55Manica Blain:Got it. That makes sense. And then, so that was two reasons in terms of why the GPLP structure is finally broken. Do you have any other reasons why you think that it's broken? Yeah. So the third reason I spoke about in the piece I wrote about was, you know and i've heard this from so many other gps as as when you're in the work in early stage consumer companies that you're investing in call it like one to five million one to ten million i mean they're so young there's so much to do and so many ways in which you can be helpful but after a while it does feel like when you have third-party investors like they're your customers you're reporting to them, you're raising from them, you're maybe thinking about raising your next fund.

33:42So you're out there building relationships with prospective LPs. The entire structure isn't as amenable to being as hands-on as I think you probably would like to be if you're really trying to help these founders and these teams early on move the needle. And so it just takes you away from what I think is the real work in super early stage consumer, which again is like you've got five people around a table. So when you come in as an investor able to help with something, like you've just increased their capacity like by a ton, you know what I mean? By being able to be like, I can help you take that on.

34:18Like, like, let me help with that. And, and, and, and you can't do that as much when you're a GP and you've got these LPs to manage and you have quarterly reports to get out and an annual meeting to host. And, and then you're, like I said, you're thinking about your next fund. So you're going to conferences, you're meeting with family offices and groups that you're trying to build a relationship with. So if they invest in your next fund, it's just taking you away from the real work. So it's, I think you and I have talked about this before. It's just that the customer ends up becoming your LP, which totally makes sense, right?

34:51They are effectively paying you. And I think it takes you out of the real work.

34:55Manica Blain:Yeah. And what's interesting is we talked a lot about it. We talked a lot on this show before about how once you raise from venture capital as a founder, you're kind of on a hamster wheel. And maybe that means that you're going to raise and raise next. It's kind of the same things for VC funds, right? It's the same exact thing. How are you going to raise the next round? I mean, with the next fund, and that fund has to be bigger, right? And everything. That's why I'm so impressed with the funds and firms that actually stay their size, or even say, you know, we invest in Series A and C, but we actually see a lot of opportunity in pre-seed, for example.

35:32Manica Blain:Let's go actually a little lower and let's go earlier. Like that's so impressive in my opinion, because as you say, you know, if you raise at a smaller fund, your management fees are not really going to be as big. And there's a lot more, I would say, risk that comes with your job. Right. And that's really hard. It is. It is. It is. And yeah, I mean, listen, all I can share and I, you know, and I'm happy to share more publicly here with you, and I plan to do so with my sub stack as well, is that I think the GPLP structure, while I think it absolutely belongs in this ecosystem, I need it in this ecosystem, so do founders.

36:10I think there's room for other structures. And I think how I've kind of accidentally structured Topknot Ventures is that not only can I write checks and that same GP commit that I would use for a fund, I now use to write direct checks into companies. And in terms of like how I earn a living and my salary, it doesn't come from management fees, but it comes from me putting it in my hand and actually doing real work with actual companies in my portfolio. And it's never, ever a pay to play. I never invest in a company and say, hey, I'm going to invest in your business, but you've got to hire me to do like A, B and C and D.

36:50That's never how it works. That's never going to be how works. I will write a check into a company and kind of put my own little sandwich board of like, here are the things that I know how to do really, really well and that I'd love to be able to help with if and when the time arises that you need that come at me sort of thing. And that's how I earn what would otherwise be my salary as a GP, you know? And look, in comparing notes with other GPs and knowing what I got paid as a GP, given the fund size that I had, I'm actually doing quite a bit better this way financially.

37:24Manica Blain:That's really interesting. That's really cool. And like I said, I really don't mind sharing this because this isn't, I'm not the kind of person that wants to hoard. I feel like I found something where there's space to play there. I would love to have more top-knot ventures out there that I could refer people to. I could say, Hey, like I'm at capacity right now. And actually right now I truly am. I, there, and part of the, one of the reasons why I wanted to do the substack too is, is this just a way that I can share more and be more additive to the overall ecosystem without taking every single call that comes into my LinkedIn or direct messages me?

37:58Like it's, it's tough. Right. And, and again, what I've learned is that there are enough top-knop ventures out there. And I, I want to encourage other people to take that route if they can. Um, because to my, like to my clients can be far more lucrative. You get to really feel your wins and you're way more aligned with the founder and you're in the work. You're actually in the work. You know, my calendar is no longer filled with, you know, I got to get that quarterly report out to, you know, my investors. I got to plan my annual meeting. I got to produce this templated one pager that this institutional investor needs me to do every year.

38:38Like it's none of that anymore. And so it just keeps me in the work that I love.

38:43Manica Blain:How do you think, that's fascinating. How do you think about, because sometimes you talk to companies, I talk to companies and said, hey, you know, would love to bring you on or have you be part of this company and help on the operating side in terms of your skillset. We can give you advisor shares or we can give you some type of equity to do it, but we can't actually pay you. How do you think about, how do you reconcile that yourself in terms of when it makes sense to maybe take advisor shares where you're actually doing work versus actually a salary or some type of competition. It's taken me a while to get to this place.

39:19When I first started, I didn't really have a view and I didn't really care.

39:23Manica Blain:And I was sort of like, well, if you can pay me, you can pay me. If you can pay me an advisory shares, you can pay me an advisory. It was sort of just like... Yeah. How do you think about structuring it now? Totally. I think actually my very first advisory agreement that I went into was sort of like, well, here's all the things that I can do for you, but you just tell me what you want to do. Like whatever, you know, I mean, it really was. And I'm not saying that's the way that you should go about selling yourself. I think I had my own confidence issues to work through in my early days of getting this set up.

39:50But what I've learned, my own notes that I'm happy to share with you and the world clearly, is that the best structure for me is a combination of cash and equity. And I think you should be really clear when you take on those roles of be very explicit about how exactly you're going to be helpful. And I think in order to maintain ultimate founder friendliness, which is sort of my motto in life, founders should have the ability to kick you to the curb if you're not doing what you said you were going to do. I've seen so many advisors on cap tables where I'm sort of like, what do they do? How do they help?

40:27And it's sort of this, well, you know, like they introduced me to a contract manufacturer that no one works with, but I guess it was helpful. And it breaks my heart. It truly breaks my heart. And I just don't think that's fair. And so any advisory agreement that I structure that has equity within it will always have a one-year cliff. You know, they will always have the ability, you know, to like if we're in month two, month three, month four, month 11 and 28 days of our relationship and you feel like I haven't done what I said I was going to be able to do in terms of helping you. I haven't landed the things that we said that we were going to land together.

41:07Like, I want you to be able to part ways with me where I get no equity in your business. I just think that's fair. You know, you're taking a leap of faith in bringing me in to help with, you know, whether it be business development or helping you, you know, put together materials and think through fundraising strategies, like run your financial model and act as your fractional CFO. I mean, I do many things. I do many things. But if you feel like I haven't done what I said I was going to do, I just don't feel like it's fair for you as a founder to part ways with your equity, you know, and in terms of the pay thing.

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42:23Manica Blain:And here's the best part. David Drexler, the founder, is offering his service free forever to anyone in the Conservative VC community who mentions the show. So if you're thinking about hiring an agency, talk to the hidden gems first. It's free service, biggest bang for your buck, you simply can't lose. Link in the show notes. I think that, I think of it almost like a utility. If you're not paying for something, you don't use it. And so what I learned early on as I got started in Topknot and started to do consulting advisory assignments is there was a period of time where I was like, sure, I'll do this for equity only and no cash.

42:58I understand. Times were tight and this and that. But what I realized is I wasn't being leveraged in the right way because the founder felt like they were paying me in a way. It felt like when you're not paying for something, you just don't use it as well. You don't consider it the same type of resource. And also because my model is so founder friendly in terms of not really earning that equity until you feel like, you know, I've actually delivered. I do need to get paid. Right. So that's kind of where I've landed. And I'm really flexible. At the end of the day, like it's a long game for me. You know, I've tried to be really flexible with founders.

43:40And it's gotten to the point where like I'm only really working with portfolio companies. like in my own portfolio. When I first started, I was doing advisory and consulting with companies that I didn't invest in. And I get a lot of interest. I'm getting a lot of inbounds for stuff like that. But I've decided I just, there's only so much of me to give. And I'm only going to be doing that with companies I'm actually investing in, in terms of like providing that level of support.

44:09Manica Blain:I know, unfortunately to say this, but not every company that you invest in is going to make it, right? How do you think about time spent overall? And especially if you are working for the company and have you ever gotten a feeling, for example, when you're actually working for a company and you thought, you know what, I actually, what I thought that maybe this is the perfect founder, perfect timing, everything was kind of going their way that maybe now they have some headwinds that I don't think they're going to recover from. And I don't think that this is going to be quite the outcome that we all expect.

44:38Manica Blain:Because I know that, you know, when I talk to investors that, you know, once they, once a company, not to speak for all investors, but some investors, once, once a company, they have, they obviously have a fiduciary duty. I'm talking about the GPLP investors that, that do, that do have LPs that, that have venture funds that if you have had a fiduciary responsibility to their LPs to, you know, try to spend their time on, you know, the companies that obviously are going to be returning the fund and try to maximize their time in terms of trying to return the fund. When you do have a company that won't be in an outcome, typically the response is, all right, we're not going to be maybe spending as much time with that company.

45:18Manica Blain:How do you think about that with your own business? Because this is quite a different model in that you actually sometimes at times do get paid and you're actually part of the operating team. But when things are maybe not going as you planned and maybe you no longer had that belief, how do you think about your own time spent and if you should still kind of keep working for that company or even what to do? Totally. Yeah. I mean, it's such a good question. And I mean, I typically structure my advisory assignments as like six to 12 months, right? So it's not like I'm getting paid a retainer forever.

45:53You know, it's like I'm very specific in what I'm doing. So as long as I'm still doing that and additive and helpful to the company, I mean, I'm here for it, is the truth. That being said, I can't think of any companies in my portfolio that I have advisory in that I feel that way about if I'm being truthful. I mean, candidly, of the 15 companies in my portfolio right now, I hold advisory positions with four or five of them. So it's not an every company sort of thing at all. And those four, five companies, those are the companies in my portfolio that I feel strongest about. And that's the truth.

46:32So I haven't gotten there yet. I'm sure I will one day. I'm sure I'm going to go down an advisory path with one of my portfolio companies where I'm playing an active, really hands-on role. And I don't end up feeling so great about it.

46:46Manica Blain:But while there are companies in my portfolio that I don't feel great about, they're not ones that I had advisory. So it's a tough one to end. But I think, I mean, one thing I've learned just from investing is, you know. It's also at a badge, by the way. We see the whole thing sometimes. So even though sometimes it may even look like things aren't trending the way, you don't always have the whole picture as an investor, you know. And it's not a good thing. That's not a bad thing. But it's just, it's tough to say, right? So what I encourage investors to do when they're in something that, oh, it's not really going the way I thought, well, it's something that you detach completely.

47:25You know, of course, focus on things that are going well. But as best as you can, I think it is really important to continue to be a resource for those founders without completely sucking up all of your time, of course. But, you know, that's where that's that's where that's what I've learned anyway.

47:42Manica Blain:Yeah. No, that makes sense. And I imagine that's also maybe one of the heartbreaking parts of the job where. It is. It's sort of like this quiet conviction that you need to maintain and and you want to be really supportive. But, you know, you also need to focus on the things within the portfolio that are ultimately driving, you know, value and making sure that your time spent the best way. Yeah. I also even just to your point about you may not know the bigger picture. One of the one of the points that you made that stood out to me when you first came on the show was how you actually prefer companies that are actually very much slower to get to a million dollars than ones that kind of get there super quick.

48:24Manica Blain:You actually are a bit nervous about that. I still feel that way. Yeah. Can you elaborate? I know that you talked about a little bit on what you're previously on, but can you talk about why? Yeah, I think that, you know, if you grow really quickly, you've nailed something in the mousetrap, right? You've nailed something in terms of capturing attention, whether it's a viral moment, whether it's a partnership, like, of course, like something's hit really quickly, but it doesn't yet mean that you've built an enduring brand or that you're building a community that is loyal. and retention, as you know, is just like, it's what everyone is finally talking about, you know, coming into 2025 and now 2026.

49:10I feel like it's something I've been saying for a really long time and I've been laser focused on, but I'm so glad to see the rest of the market catching up because when you speak to strategics and you speak to what they're looking for in their portfolios, and I mean, ultimately many of us consumer VCs want, we wish and dream that we can exit Our portfolio companies, two strategics, a lot of them are looking to fill gaps in their portfolio and they're looking for brands with enduring qualities, with really loyal, sticky customer bases. And you don't see that within the first year. And you definitely don't see that really quickly when a brand skyrockets so quickly.

49:48You know, it could just be a moment in time. It could just be this one trick, this one mousetrap that really worked. And, you know, the brand doesn't actually really resonate with the community. It doesn't, you don't, you don't yet know. And so I, to be clear, where I invest is like one to five million dollars. So I do come in later. I don't come in day one of a business starting and be like, listen, take all the time you

50:18Manica Blain:want to get to a million dollars. I don't invest, you know, sub, sub, sub a million. And I've kind of put that guardrail on. But I really love to see a business that has taken a little bit of time to figure it out. And now they're really starting to scale and an unlock is happening. And there's proof of just a really loyal, sticky community of people that support this brand, that love this brand, that can't live without this brand. I think I gave the example of Sahajan when I was last on the podcast. And I mean, we just refreshed your cohorts like a little while ago and they've gotten stronger.

50:57Even when the company is my forexed since my investment a couple of years ago, what's so great to see is even with that scale, the cohorts, the stickiness of that consumer, it has gotten stickier. They're coming back. They're coming back still. You know, I think when she first raised her first round in the summer of 2023, which is when I got involved and I invested. And at that point, I think it was like 11, 12, 13 % of her lifetime value net sales came from customers that purchased 10 times or more. That is now closer to 20%. Can you imagine 20 % of your lifetime value net sales coming from customers that have purchased 10 times or more and you're growing?

51:41Like that's incredible. So honestly, it's just, it's something that, and that business has been around for over 10 years. You know, Lisa started Sahajan in 2015. So it's really cool to see. And it just reaffirms the kinds of businesses that I'm really attracted to and consumer.

52:01Manica Blain:Totally. That's such an amazing story. That's so cool. That's so cool. Why have you stopped investing in food and beverage? You know, it's so funny because I had somebody reach out the other day. I was a founder and really interested in food and beverage business. And I was almost like, you don't want me on your cat table. I have no track record of investing in food and beverage and it working out. So I mean, there comes to a point as an investor where, you know, maybe you just have to be really honest about what you're not good at or what you can't see and what you can't, you know, really be helpful with.

52:39They're not even helpful with what you just maybe don't have the intuition for. And I haven't had success in food and beverage yet, yet. You know, and maybe I will one day. But it's been a hard category for me as an investor. And so I've taken a pause on food and beverage. Not to say that it's not a great category. It's one that needs to exist. We all eat every day. We all drink every day. You know, it's a category I love as a consumer. I love the trend fund. I love all of it, but it's just not one in which I've seen success yet. And so I think it's made me pause on the category.

53:19Manica Blain:That makes sense. That makes sense. Especially in early stage. I think it's different, right? Different strokes at different stages. But I think if I'm really specific in this one to five million dollar, like that's my sweet spot. That's me acknowledging where I can be the most helpful and where, you know, I'd like to get involved initially. I think that might just not jive with food and beverage. But I could be wrong. Again, like somebody else out there can have this amazing track record of success and that's where they invest in, but it's not me. One of my favorite reactions from you when we spoke must have been like a couple of years ago or maybe or maybe a year ago was what do you think about all of these all of these kind of food and beverage VC firms also expanding their portfolio to include beauty personal care, which I know that's kind of your your bread and butter.

54:07Manica Blain:and I was like, you know, the margins look great. And you said, well, the margins look great, but have they seen the marketing spend? Because the marketing spend is always a lot higher in beauty and personal care. What do you think about today's landscape in terms of investing in beauty and personal care from the investor perspective? Because it seems like it's become a pretty hot place in the early stage side to invest. Well, I think it encompasses wellness now, Which I can't remember if we talked about that in the last pod that we did. And I think you and I talked about this, or maybe it was on another podcast, but it's interesting how everyone's definition of wellness has changed.

54:47Wellness to me, a decade ago, honestly felt like a candle company maybe. Like you light a candle and you feel kind of good. I'm being super honest, right? Yeah. This is just me as a consumer, not me as a consumer. But I mean, it's interesting now, and I totally get it, that wellness looks like supplements. Wellness looks like, you know, this overlap with health and sexual health and fertility and all kinds of things. It has these really interesting overlaps in beauty as well. And I think that I think it's a good thing overall that the definition of beauty now very much includes wellness. But I think it's made beauty in general as a category, like wider too, if that makes sense.

55:34You know, beauty isn't just now a makeup brand or a skincare brand or haircare brand because it now overlaps with wellness. I think the definition is much more far reaching. And it's a big market. It's a huge market. And so it makes a lot of sense for me that consumer generalist investors are starting to play more into what is a very big category, which has a strong track record of success from an exit perspective, where the landscape of strategic acquirers is so large. And so, listen, I think I welcome it, especially from the perspective of founders. I mean, I'm not against consumer funds. I think they're necessary for the ecosystem, you know, and so I think that it's overall a great thing.

56:23I'm hopeful, though, that with the resetting of the market in the last couple of years, like valuations went bananas at one point. And I can see that now has really come down. And I think we've now reached a point where it's no longer the cockamamie state that it was several years ago. and arguably many people think, me included, that one of the reasons why it got so overheated was because of the supply of capital and the sheer number of non-beauty investors, if you will, coming into beauty and really raising prices. So it's good to see that that's sort of come down.

56:59Manica Blain:Yeah, no, for sure. I agree with you that some of the beauty prices have been, or just in general, really in consumer, how it's come down over the past few years. Across the board, for sure. for sure manika this has been such an amazing conversation