20VC: Why Fund Sizes Should Be Smaller, Should Founders Also Have Their Own Funds, Is Emerging Markets Investing Gone, Is Fintech Investing Dead & Who Will Be The Winners and Losers in VC in the Next 10 Years with Sheel Mohnot, Co-Founder @ BTV

23:27So like, double digit millions because they knew us and I get where they're coming from. They know us by reputation. They've spoken to other managers who sit on boards with us or whatever. What more do you need? How did you use to the sense of urgency in the fundraise where it was a case of really committing to a closed -aid and getting LPs to move in unison? So in fun one, we tried to do it and frankly it didn't work. Hard, it's hard. Yeah, it was really, it was really, it was really cool because you don't want to force them to know You said I want to say a month where it looks like you've got too much time and then they didn't move to it Yeah, so there's no easy way I think you give them a date and then odds are they're gonna be okay Like I know that date doesn't matter because if I want to invest I'm gonna be able to invest and so that's what happened in Funwara took a while so it took us about a year from start to finish and Fund two was very different.

24:13There really was much more demand than we had space We told our existing LPs fund one LPs commit to us by this date all of them came back and committed by that date We were actually kind of surprised by that besides the year. Yeah We didn't know that that was gonna happen and it actually caught us by surprise and screwed us up a little bit in some ways We had intended on running a process and we'd spoken to a bunch of LPs and actually told these LPs like you have Funny of time and here for some LPs like university endowments It just takes time. It takes a few months like they have a different I .C.

24:46process and we told them like, Yeah, we're meeting now, but don't worry. We're gonna raise in Q1 and you can commit to us by March. What ended up happening was we closed everything in December and we did it all pretty quickly. Part of it was December 2021 was a good time to raise them. Yeah, so we ended up closing pretty quickly. Some of these folks that we actually would really like to have in our fun. Some like university endowments that we have a great relationship with and We told them that they had more time that they did so that didn't really work out. How would you advise managers on capital concentration on a power out P basis?

25:16All of our LPs are 10 % or less of our fund. It makes us feel good now in a market where if anyone LP doesn't come into our next fund because circumstances changed, it's fine for us. We have other folks who want to fill those gaps. We actually pushed folks down to the 10%. So some folks had wanted to do larger checks and we pushed them down. Do you have an LPAC? We do, yeah. It's only the LPAC. Five of our biggest investors, one family office, and then the others of Fund of Funds. I would say we don't use it that much. We use it for conflicts or we launched this accelerator recently. When we launched the accelerator, we said, hey, we should get their approval.

25:52And so we talked to them. Why did you launch the accelerator? This seems like the worst time to do the accelerator respectfully. I think it's the best time to do an accelerator. Number one, so I ran an accelerator from 2016 to 2018. And that fund has incredible performance. More important than that, Fathers that we backed back then, and the accelerator said, Hey, my friends are starting a company. What's the closest thing to what we had? Which was in person, super hands -on. So we had experts in growth, marketing, recruiting, available to them. The answer was there's nothing like it. YC's a totally different beast, but it's really built for scale.

26:23Some of our portfolio companies that went through YC said they didn't really get the support and fintech that they needed. They have like a generalist mentor who doesn't know anything about fintech. And so they would be asking these questions and they had no idea what to do. So we felt like, oh, there's an opportunity here. Once again, people are asking for a FinTech solution and we can give them that. In 2016 to 2018, I did it five cohorts. I was investing in a two and a half million dollar evaluation then. And we have five companies that are more than 70X. So we did five cohorts of six to 10 companies out of all those.

26:50So say it's like 40 companies in total. We have five companies that are delivering more than 70X return. We have DPI. We have returned the full fund. Can I learn how do you think about DPI? Again, I've spent some time with them, different LPs of the LLC days. Isn't there any manager who had the chance to return DPI and didn't over the last years? You're in trouble. I think that's right. You had to see the market and say we should sell here. So we did in some cases. Now of course, we didn't sell nearly enough. You should have sold more and we had opportunities to do it. But you did sell. We did sell.

27:21How do you advise on selling in terms of take it 30 % off the table and you know, just protect your initial position but ride the upside, take your jars off, take all off? I generally think in one case we sold our entire position to a later stage investor, but that's unusual for us. I think generally speaking, we'd like to just ease our position and if you can return an entire fund, there's something about having one XTPI that's quite nice. If you can get to a point where you can return one XTPI and still have upside in the company, that's great. Ideally, if you're still excited about the company, you want to keep half of your capital or half of your equity still in the company.

27:55What would you say is you'll single biggest investing mistake? For me, it was not taking enough cash out. I had the opportunity. I could have returned multiples on the fund, and I didn't. I mean, why did you not? There's one company I'm thinking of that could have returned multiples on the fund. And in between when I had started to discuss taking money off the table, and when we had finally like the documents, it took like a few months, and during that time this company grew so much, and they were like, you know what, I wouldn't sell at that price. They told me, we'll get this through for you, but I wouldn't sell at that price given how much we've increased in value.

28:29And they were like, we'll probably do another route in the next couple months. You might want to wait. I talked to the founders and they were like, you might want to make, wait, we might be worth double what you're selling at. And so I did that. And then of course they never were able to the market. This is, you know, beginning of 2022. The market started tanking and they were never able to get that round done that they thought would be a double. Do you find it difficult? It's quite a tough conversation. Hey, I love you. I love you. I love you. I want to sell my whole position in your company.

28:54Yeah, we haven't found it difficult in the selling. And we said, we're at a point where we've invested for so many years in this company. We want to start reducing our position. And founders get it. It's not a big deal. Especially back then, when there was way too much demand for every round of the company. Okay, so as you will mistake, when you look back at the last 24 months, what's the biggest mistake you've seen other investors making the industry? People can get too excited about an idea and invest behind the wrong founder, just in that idea. In our case, banking as a service, we talked about Units.

29:22units of banking and service company, a lot of folks looked at that company and said, we love this company, but they couldn't invest. They ended up investing in another company in the same space. And that was just a mistake. Invest in the best company, not in never two or number three. And a lot of those haven't have shaken out to not look out that well. Founder, product, market, how do you weigh them up? So we invest at super early stages. It's all about the founder. Three of my top five companies were Pimits. I had a guest on the show the other day and they said there's an inverse correlation between a found disability to sell, the salvation, sell to customers, whatever.

29:56And their ability to operate and build. I don't think that's exactly true. I think their founders who can do build. But many of our top ones, they had a competitor that was raising more and more money than they were. And then in the end, that competitor tanked our like, build guy who like never was a great fundraiser, ended up doing well. One thing about this like, founder versus market, there's a Warren Buffett quote that everybody likes to reference, which is when a great founder meets a bad market, the market wins. So he says that, but one of my favorite stories is Rose Blumkin. So there was this woman who came over from Belarus.

30:32She starts a furniture store in Nebraska, Omaha. Originally in their basement, then they grows and grows and grows. She didn't even go to school. She never even went to kindergarten, but she's just cut such a mind for business. She continues to grow this thing incredibly. He eventually buys it 90 % of it for like 60 million bucks or something. It was actually the largest acquisition that Berkshire had made at that point. Her kids end up kind of pushing her out of the business. She's 95 years old at this point. I'm fat. And actually what's really funny is they pushed her out of the business in part because they were fighting over the control of the carpet department.

31:02She said, I never want to let go of the carpet department. That's going to be my thing still. And they were like, no, you should get out of here. They pushed her out. Her kids. And then what she does is six months later, she opens a place across the street from them. Literally a furniture store competing with them across the street. It's called Mrs. B's furniture clearance market or something like that across the street from the Nebraska furniture market and then eventually Warren Buffett has to buy that one And then he he puts a non -compete clause in there that she whatever 96 years old He's not gonna compete with him again until your point is hard and what he said about her was he said I would back her in anything she did any business.

31:39She wanted to go into she would be successful And so it is actually a counter like it's a great founder. She would be successful at anything she did Have you ever had a really not good found a wind? Yes, but it was an interim win. It was like a two early win. I've seen in my age of portfolio a founder that I thought was just okay I ended up getting to an exit and I think if they'd continued on the business It wouldn't have been that successful and that happens all the time like you have companies that are successful up to a certain point The worst company gets an acquisition the better company sticks around and then they go public and then totally tank It's happened many times in the past few years One of the biggest reasons for you why great found his fail First of all, you can fail to find product market fit even if you're a great founder and you can get stuck behind your idea Not pivot early enough.

32:23I think you have to come to a point and this is actually where feces I think actually can be very value -ad is say we should think about a different business and like make a plan So actually add this going on with one of my portfolio companies now We have a plan and if we don't get to that plan in the next two months We're gonna think about a different company. We're gonna pivot we have years of runway but the current thing, it's working a little bit. There's signs that it's working, but we worry that even if it's working, it's not gonna get to a huge business. We're gonna test this out for a few months and we're staying close on it as investors.

32:53And if it doesn't work, we're gonna have to have it. Do you worry about the length of runway sum from piece -out? I have some companies in their life, maybe about 60 months. Yeah, and it's like, yeah, honest urgency is, but do you worry about that? And what happens? I think bad founders raise a ton of money and spend it. Great founders raise a ton of money and still have the same sense of urgency, still are on the same road map as if they'd raised a much smaller. So I say always on Twitter on this, it's so much hate and it's probably why Andrews didn't hate me. But like, you know, 5 on 25, I think has destroyed much of the season.

33:22Totally. But everyone goes, if you get great founders, I'll raise 5 on 25 and spend like they have two. And I'm like, it's so lovely idea. I love it. Yeah, you're right. And if you do that, then I promise you you're right. Yeah. It's actually almost impossible. Because what happens is if you raise five, the expectations people have for salaries are different than if you raised two. It's basically impossible to have the same mentality as if you raised two I'm so glad I agree with you completely like raising big rounds makes people cushy You end up attracting people with salaries that like they could have gone into a big company And actually they they belong at a big company.

33:55Yeah, they do know what belonging you know He's not so long at a hard scrap hard working scrappy startup. I completely agree with you Do we see them continue or do they go about you know? We could with the multi stage come in and out of seed Are they here to stay a lot of the multi stage stuff is quite dumb a lot of these folks have invested like a million dollar checks kind of a lot of folks and letting their junior team invest a million dollar checks at anyone Is a learning check. It's a learning check. But what happens is My portfolio company that is working is raising a series A or series B They don't want to talk to that investor because that investor invested a million dollars in their competitor That competitor is all those dead anyway, but they're like fuck them.

34:31I'm not gonna talk to that guy They invested a million dollars in my competitor And so they missed the opportunity to invest $100 million in a great company that is winning the category because they invested a million dollars in their competitor. So I just don't think it makes sense for a multi -stage fund to do it, especially in a category where like there are multiple competitors. Why would you invest what you know that like you might have invested in the wrong one and that prevent you from investing in the good one? When you think about the multi -stage strategies coming in seed, he do you think it's done at the best?

34:59I can't think of any multi -stage fund that I feel like has done a great job at seed. I always think founders fund a pretty good seed actually. They do a lot of seeds and then they have had good success My friends at Excel have done a pretty good job I think the folks that have done the spray and pray approach is very bad and people go in and out of it So like and recent did a lot of it early on in and recent Horowitz's 10 year and then they stopped doing it And they started doing it again, and I would guess they stopped doing it now We've seen also like large large seed funds. I think true branches of the seed one was 700 million Yeah, maybe spill across some but it's I think it's half and half I think it's like 400 500 the initialized is 500.

35:34Yeah, I think they're too big. There are any shade on it Are they too big? I think they're too big. They're both doing what I would call series A's as well Like they are writing 10 million dollar checks and I don't think about as a seed round But I think it's too big and I think as you get bigger You're more open to doing these 5 on 25 deals that actually aren't good for the founders either You're like, oh, yeah, it doesn't matter to me as your fun size increases I'm actually I need to put the dollars out the door yeah exactly one of the biggest sources of tension between VCs and founders. I've seen it in some of our portfolio companies, like a lot of VCs are very prescriptive on how to do things.

36:05We try to not be that. We try to be supportive, but not too prescriptive. I think you can get into a mistake being prescriptive. Telling founders what to do rather than like recommending what to do. And I've seen that even from good investors that I've been alongside on the board. I've had founders like call me after board meeting saying like, hey, what the fuck was that? I'm doing everything I was supposed to do. Why is this B .C. telling me what to do. Do you have any boards for you, helpful? No. I want to be supportive to a founder and there when they need me. And that can happen in a board relationship, but usually that's not what happens in the board.

36:38And so I'm meeting with the founder every week or every couple of weeks anyway. And the board is a totally different beast that's like structured. A board can be helpful for the founders to sit back and reflect on their business once a quarter. And it's very effective for that. Who's the single best bullman be used to handle the bull with? I have a board with Jeff Horeing, the founder, insight. He doesn't speak that much, but when he does, it's like, oh, he's absolutely right. And like, I can look back a couple times about what he said. He was like, absolutely right. One of my other companies we had, David Lowy, who was CMO of Google.

37:10Same thing. Didn't speak that much, but when he did, he was absolutely right. He had a story. In fact, Google, and it was really good. Their experience is right. And I think a lot of younger guys can discount that experience, but like, it's really valuable. and the same should happen time and time again. And you realize that like them having seen it over the past 20 years is incredibly valuable. What about tension between LPs and GPs? Oh yeah, a lot of GPs went a little crazy in 2021. LPs were probably unhappy about that. I think if you do what you say you're going to do, LPs are happy. So I think the GPs commence actually an error of misalignment.

37:45Not alignment. In the way that a lot of them will be like, hey, we need 3%. Yeah, I knew like, we'll shit my funds 140 million. and totally I have not been working for years in this. This is like four million plus. Yeah, I'm gonna have to borrow and bag and steal to not literally, but do you know what I mean? Totally. And I'll tell you what can happen if the GB commit is too high. You can be financially strapped and you can say, oh, I'm gonna sell my position in this company in the Series B because I need to return that capital to myself. And that can be a misalignment. But you say you get out of fees which then is not investments the firm might should be.

38:18Totally. And then also just bunny. I we won't diversity and you know amazing ecosystem. I think that's true But I think the way things are like a couple percent one to two percent like if you can't do it It's probably fine, but I actually don't think we need like a hundred new managers or thousands of new managers every year I think we see way less. Yeah, it's just so hard to raise a fund now and you have wonderful I'm still seeing a lot raster. I'm seeing it to well not we're not raised But trying to be telling me that right. It's the same. I haven't seen much of a slowdown I am a tool a lot of operators that didn't three to five minute from which I'm not like I was a tool I think for the show really hard business yeah running a tiny fund It's really hard many of these folks are gonna continue hard like they're fun two fun three's are gonna be really tough What do you think of what founders you have funds on the side their founders are funds on the side who like lead deals And that is crazy to me if you think about like especially now when we have a bunch of companies that are struggling We had the SVB crisis like you need to be there for your founders and if you're there for your founders, you're not there for your company.

39:18And that is a problem. So founders would like investing checks on the side occasionally as fine or if a strategic it's fine, but there are founders who are like leading rounds. And I think that's bonkers. We have a company going through some shit right now. I'm there for them 80 time at the day or night. And if I was running my own company and this wasn't all I was doing, like I wouldn't be able to do that. I don't know how you square that. How can you be operating a fund and running a company? What do you think? I think the biggest challenge that I just struggled to get over and I'm not really sure if I struggled to get over it.

39:47Which is like, when you take external capital, that is an incredible responsibility. And when you take external capital for a second thing on top of something that you've already raised, significant millions of... Totally. ...for the first one. I'm in the first one and that is disrespectful to my money. I gave you money to do this and that's like, I'm thrilled to do it. But like, do what you said you were going to do. Totally. And so I don't have a problem with found this Asian investing, but I'll be management. Yeah, so I need you have 50 LPs and you're like, You think about how I am doing this job, like, round the clock.

40:16I just can't imagine having another full -time job. For real for no one. Your wedding was like, it was in the Metaverse. Yeah. So how do you get that? Okay, so it was in the Taco Bell Metaverse. It was an Indian wedding Taco Bell in the Metaverse. And you're like, why the fuck would you do that? And credit to my wife, I'm with that, because she went along with all this crazy shit. You know me, I say yes to a lot of stupid stuff, and this was just another one in a long line of those examples. In this case, Taco Bell had a contest about getting married in the Taco Bell Metaverse. And I'm a fan of Taco Bell, people on my Twitter know that.

40:52So when they came out with this, a lot of folks tagged me. They were like, she'll, this is for you. They saw that I just got engaged. And they were like, this is perfect for you. You should do it. I was with my wife driving on a road trip. And I mentioned to her, I was like, can you look at this casually, like, hey, look at this, wouldn't it be fun? And to my surprise, she said, yeah, all right, Let's make the video it would be fun. It'd be like a fun exercise. So we we took 20 minutes and thought about what we'd say and we stopped and recorded it We really recorded it twice We didn't think that much about it because we just thought it's a fun thing to do But we're probably not gonna actually submit it and if we submit it we're not gonna win if we win We're not gonna do it.

41:23So you know what happens we get back from the trip But I'm just like let me just submit it whatever and then we get notified by talk about it We've won and then we kind of push back and said hey like I don't know if this is for us We don't want to get married in this talk about metaverse and then they were like hey Just gonna zoom call with us So we get on a Zoom call with them. They convince us. They say it's going to be your wedding. We're going to do whatever you want. It can be Indian. We'll design it for you. You're going to be part of the Taco Bell family. They said you're going to be part of the Taco Bell family.

41:47And I was like, that's what I've always wanted. So we eventually did it. It was really fun. It was in February. What does it mean? So you sit in a room? Yeah. So you're sitting in a room with some of our friends we're there too. And we're on camera. And there's this metaverse. It's in Decentral Land. It was actually really cool. For a while, I was pretty skeptical about it. I've never spent any time in the metaverse. But it was actually really really cool. I wrote it on an elephant people from around the world were there My family in India was attending they have their avatars. It was actually really cool It sounds really stupid actually the day of I was thinking this is cool And you say you're vows turt set our vows through it did everything it was illegal wedding We would legally marry this matter.

42:25It was quite emotional. It was very emotional. Yeah, yeah Did you do wife like him? Yeah, she loved it. Do you get like talking about credits? We do we do we have a lot of talk about her I don't know, they gave me 500 bucks for my birthday. They didn't talk about credits. Which actually talk about it gets you pretty far. They also paid for a honeymoon, 25k. It's pretty nice. And they've been great. I mean, that is amazing. I saw this and I was like, what the fuck is he going? It's pretty easy. Listen, I wanted to quit the firearms. I say a short statement and you give me your immediate thoughts, okay?

42:52What one seed from other than BTV, which you're investing? I think the best ones have now retired and early, they're investing their own money. So that's homebrew and I. You found a collective as well, I'm very, very good. Oh yeah, super good. Yeah. What series A firm would you most invest in? We've invested a lot with Excel. I think they do a really good job. In the spirit of keeping fun size small, it's hard to beat benchmark. Yeah. You can do a multi stage firm now. We're getting kind of grotesque slash multi stage. Who would you go for? Because founders fund trunk their fun size, I'm gonna go with founders fund.

43:20Greeners are really like, yeah, I'm really like addition. I'll get really like ribbit. They're all good. What have you changed your mind on in the last 12 months? We talked about secondary a bunch. I think I'm much more likely to do to take some chips off the table earlier than I was before. What do you advise founders on taking secondary? My rule that I like to live by is at the series being beyond you can take as much secondary as you have an error Just think about it. It makes sense, right? Like if you're building a real business I don't mind if you take chips off the table But like you've got to be building a real business But do you blame the founders?

43:49He took off a lot of money. No a lot of times it was like VCs Prussia do it and they're getting so much hate now from the media and it's a day I don't hate the founders at all for doing it Yeah, but if you did an index of companies where founders took a lot more than that, what I described, like 1x ARR off the table, you have a very negative returning fund. Yeah. What would you most like to change about the world adventure? If you were douchebags who like think they know it all, I think there's a lot of like insecure folks who just like put down other people. We don't eat that. What do you see that you don't eat enough people spending time in?

44:21Tough question. I think there's this overhang of valuations and we haven't yet seen the drop that is going to come and it's going to be so severe. all these growth -throwned investors that had companies go pipe IPO and then fall, they haven't made any investments. What we're not seeing in some of these companies that have raised more money is just the immense amount of structure that's going into them. What happens to tie again, 12th -large? They recently led a series A of one of our portfolio companies and they actually in contrast to their investments in 2021, which John Cardius and others were writing a lot of checks and sometimes very quickly.

44:53This one, they led a series A. They did a ton of work and they've actually been super helpful to the company, it's a very different tiger than the one of 2021. They're doing a really good job now. I think it's going to be a much smaller fund. And like you said, it's going to be a ton of their own GP money. I think they're, they're good actors. Is there a ton for soft bank? Self bank, I think is just really tough. Like they made just a ton of incredibly poor decisions, hoard a ton of money into bad companies. And we talked about five on 25 for them. It's more like 500 on 2 .5 for a company that was nowhere near ready to accept that kind of money.

45:24unfair. I thought Wang was a brilliant dog on the moon. What about zoom the pizza company? Oh, I was surprised. Of course, he didn't do that for himself. He didn't do that. And you're like, wasn't the surprise? Oh, that there. No, like literally from day one. So, okay, on that company, I met a guy who invested in that company. Relatively early, it was a data -driven VC. I was like, what data do you have for this company? He was like, we have all this data on like number of shares on Facebook of this video about them. And I was like, why the fuck would you invest off of a shares on Facebook shares out of pizza company?

45:56Like people are sharing this video about this pizza company on Zoom because it's like a robotic pizza company, and they used as input to invest. And I was like, that's crazy. Final one, my friend. B -T -V in five years' time. Where do you want to be then? I think we want to be cemented our reputation as the first choice of founders building a Fintech company. Globally. My friend, I've loved it. It's so much nice to do it in person. It's so great. It's so much for coming. And I've loved it. So fun. Loved it. either man. My word, that was so much fun to do in person with Sheila. I hope you enjoyed the fly on the wool nature of that discussion.

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49:18As always I so appreciate all your supporting stay tuned for an amazing episode with the CTO plaid on Monday.