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

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29:20Go to lemon.io slash twist and find your perfect developer or even a tech team in 48 hours or less. And twist listeners get 15 % off their first four weeks. What a deal. Stop burning money, hire developers smarter, visit lemon.io slash twist. This is why I tell everybody on our team, we're going to be judged by the companies and the deals that we don't do in the companies we invest in that fail because in all that failures, a lot a bad feeling sometimes uh regrets etc and then people will talk hey how was jake how how was you know this person when your company came apart and i always do a call hey it's got to be a really tough weekend for you you want to get sushi or if you need to talk here's my mobile number uh and let me know when your next company is happening you know it's been interesting too jason when you do the diligence on the phones it's like all right tell me the founders that said no or the founders you couldn't couldn't win the deals um and if they're not transparent about that we'll get they're on our own, right?

30:11And we'll make sure that we go find them through their later stage funds. It's like, oh, you missed this one. But why did they miss them? It's like, oh, that wasn't the right fit for us. I wanted a brand name firm. I wanted to be in the Tech Crunch article in Series A. And it made a lot more sense than going with my local group. But if it's anything else and it becomes very negative and they have this kind of connotation about them, then we dive in a little bit deeper. But it is, talk to the losers. Talk to the ones that didn't let them in. Because oftentimes, if you find these good fund managers, It's like, I should have went with them.

30:39I didn't. Here's why. And they get very open and very candid as to the mistakes that they've made. Because we as LPs do the same thing. It's like, oh, I shouldn't have done that fund. But yeah, I think the transparency and speaking with everybody that everybody knows, it's easy to find who you guys are connected to now. LinkedIn, Twitter. It's pretty prolific, right? It's all out there. It's very interesting you say that because it is surprising to me how transparent the industry is. We're sitting here at the first segment. I don't know if I trust that data. It's like, there's data. at least there's data i mean and you you know some of what's going on here you can in fact make informed decisions now based on the information that's available like it is it is tough and not to get like all the information that's out there you still have to be intelligent make the right decision but talk to enough people listen to the listen to your podcast jason and you david it's like all right i'm you might not agree with everything that they say but at least they're telling you what they see at much higher levels they talk to a lot of people now i can make an informed decision sitting in milwaukee and working with victor in chicago right so i i think the way i've grown in this industry is like i just listen to everyone i try to talk to everyone it just seems to be the prerequisite for venture is to have that network and to learn from it right but yeah absolutely i had one firm due diligence on us recently while we're raising this fourth fund and um we had a bunch of people from founding university which is like a little pre accelerator um that's doing phenomenally well and um some people had put founder university on their linkedin and this third party started calling anybody with founder university and we just you know all of a sudden ding ding ding ding ding you know our slacks light up hey is it okay if i talk to this person and it was like i don't remember the name of the firm but it was like acme diligence services you know i'm just making up a name and somebody hired acme diligence services to go find 30 companies to just email every company that had a founder university on it and just ask them hey can i talk to you on the phone for 10 minutes um and i think we know who it is um and it's going well with them so awesome but yeah there are these third parties who do it too so you don't even have to you can abstract yourself and i remember somebody and this is a crazy story and this is over 10 years ago somebody wanted intelligence on a competitor they popped up a recruiting service something to the recruiting you know let's say it was a fintech company it wasn't but you know fintech you know elite recruiting they put up a fake website put up a couple job postings at incredible salaries and then started pinging the employees of their competitor and interviewing them and then asking them questions and say well i can't say who we're hiring for but you know it's a pretty amazing thing and you can work from home and it's a quarter million dollars and yeah so what did you work on there and employees are not trained to not spill the beans and they would just sit there and you know oh so oh okay and what servers do you use oh great what's your stack yeah okay yeah and how yeah oh you worked on growth what what were the growth projects you worked on and all of a sudden somebody who worked on growth i'm just making this up this is not the company but imagine you were you did this to like and it was you know robin hood and like their competitor or something and uh you know somebody did this for robin employees all of a sudden you get the roadmap you get the playbook i mean there's some sinister business intelligence going on is that illegal or is that just highly unethical it's unethical it's certainly unethical uh i would say that yeah it's i tell you it's probably it's definitely illegal for the employee who's probably breaking their agreement so there's some there's an employee training tip for you david crazy story i guess i i'm waiting for the company to set up their own counterintelligence figure out which which employees are leaking uh actually wow yeah you could do that yeah i think that actually exists idea for you guys there's a startup idea yeah no that exists as a i think that exists like in the three-letter agencies fbi cia they try to do honey pots etc to try to catch people in their organizations before the russians catch them or the Chinese catch them.

34:43Good, good, Paul. Great. Well, moving on, Stepstone, a top fund of fund, just released their report on the venture industry. In their report, Stepstone highlighted the University of Chicago study on the persistence of venture capital funds, which empirically shows why LPs are so focused on getting into the very top venture capital funds. According to the findings, 69 % of funds that previously achieved top quartile continue to perform over the median and future funds with a stunning 45 % of funds that achieved top quartile returns continuing to return in top quartile. Grady, given that 45 % of funds that previously achieved top quartile returned to top quartile, how much of being an LP is an access game versus a stock picking game?

35:27I think the data would show it's an access class still is kind of what we've always called it. And while we were at the endowment, we could throw some weight around. The book was over 300 million, right? We could write the checks we wanted to, and we could sell Wisconsin, right? And what's on campus, and we could kind of wiggle our way into some of these, what I would call heavier hitter firms that are in that 45 % that you mentioned, right? But at the end, NB &G, we're looking a little bit differently. It doesn't mean we'll ever forego returns. We just have to look elsewhere for them. But at the end of the day, I think we're in the pattern recognition business.

36:00A lot of these great firms that live out on the West Coast or on the East Coast, they've turned themselves into these kind of brand engines, right? Where founders are coming to them. Founders are speaking highly of them on everything we just talked about. And it's very transparent and you see these returns. And as more and more people start to see that, and I say people, and I'm sure we'll get to the retail side of things. It's people invest with what they see and what they know. And founders are the same way. And we've seen a lot of founders grow up over the last 20 years. I mean, 50 % of managers in 2001 were emerging that are still around today, right?

36:34And so if we look at that, it's like, okay, a lot of them have grown up. A lot of them have scaled. The founders know that. And the founders might be on their second or third company, right? Like how many have you guys done, right? Where it's like, oh, which firms do we want to work with? Which investors are great at this? And now I think you're seeing that come back where founders are like, oh, let's go right back to what we know, who we know. This worked for us. Maybe the early days, early cap tables look a

37:02it's it's it seems obvious to me um and to answer your question specifically david access is very important it always was when we were at the endowment um hit the spend your requirements and everything else that we need to do but nvng it's a little bit different i'd argue that picking is much more important for us these days um and could be for smaller lps that look like us that are just entering the market that don't have it i mean we're 50 million dollar fund what are we your coastal minimums 20, right? So it's not, this isn't the pool that we're hunting in, right? So for us, it does look different.

37:37Kicking would be what I would say. And, uh, or if you were managing$3 billion, you were obviously managing the private equity pocket. What did you see? What was your intuition around why there's such high persistence of returns in the venture capital asset class? To me, my partner, Kerry, will say it all the time. If the story hangs together, um, and that's very qualitative and quantitative, the quantitative stuff is relatively to assess, right? The DPI, the money, everything we've talked about, right? Can they do that time and time again? Can we speak with the founders as to why it happened? Can we speak to the downstream partners as, well, are you going to continue to invest with this fund?

38:11And when they say yes, you can kind of see that quantitatively. Qualitatively, it's, and I think you're seeing this come to a head today. It's how are you building your team? How are you working on your internal operations to make sure that this, and I say it a lot, that you're building this firm, not just one fund at a time, because that's how we're trying to do things. But yeah, at the end of the day, emerging managers should be following the same patterns that some of these bigger ones are following in terms of how they're setting things up behind the scenes and how they're constructing teams, making sure that they're not all top heavy, more of a egalitarian approach.

38:48We've seen some of the top performers focus on that with their internal teams and they've just kind of grown really great practices and what i love about these charts is that you know that when they say previous performance is not indicative of future performance this is the opposite previous performance is indicative of future performance in our business so you have to just ask yourself why that is and i think it's the network and the brand and it becomes a flywheel and so if you were the investor in google and youtube like sequoia was, well, the next Google, and the next YouTube, which might be Instagram, you know, or it might be Airbnb, they're gonna say, Oh, well, I, you know, I'm the founders of Airbnb, who did Google, who did YouTube, I want to work with them.

39:32And so you do get that flywheel going, and success breeds success, and then it builds a brand. And then that's part of the fun part of being an emerging fund manager, I still consider us on our fourth fund. Now, an emerging fund, because the first couple of funds was just me, you know, as a gunslinger doing instinctual network based investments. I've got 21 people, I got a database, I got a process, I got systems in place, I have methodologies, we've got like a really deep process. And I think that's where, you know, if you learn how to play poker, you might go play poker, have some early success, you win a tournament, you make some money, you make a terrible bet, but it pays off, right?

40:15You have like two cards that could win you the hand. And you know, you're on the river and you hit it. And now you think you're a genius park player. Everybody at the table screams and yells, Oh, my God, you made the wrong play, but you got rewarded. And then what happens is you become bolder and you get more interested in poker, just like they found with kids, you know, some kid hits a random three point shot to win a game, everybody goes crazy. The kids in the gym the next day doing three point shots saying how can I do them better? And they look up online and watch some YouTube videos. So sometimes like just random success can then manifest itself in the individuals wanting to be more successful.

40:46And I know that happened with me. I hit three unicorns in the first seven or eight investments when I was a Sequoia scout. And I was and they were like, wow, you're great at this. And I was like, Okay, I'm great at this. Thanks. I'll do it some more, I guess. And you know, but then that can carry you so far. And then at some point, you have to stop and go, how did I get that success? And then I looked at and I was like, ah, that was like, the beginning of the super cycle. And there weren't any angel investors at that time. And, you know, I was networked, like a lunatic. So, okay, so then what carries into the second decade, and what carries us into the second day is having programs that really deliver value to founders that make them tell their friends about it that make them put it on their LinkedIn page, and they're proud to be a founder university graduate, and they're proud to have gone to YC and then the self perpetuating thing happens and then having a decision making process and all that.

41:39so yeah what got you i always tell founders what got you here won't get you there so what got you to product market fit is not necessarily what's going to get you to from a million to a hundred million in revenue you may need a different group of people you you may need to evolve and learn some new skills and i think it's the same for fund managers what got you here it may not get you there starting a business used to be a pain you needed a lawyer there were hidden fees it was a mess. Now with Northwest Registered Agent, it only takes 10 clicks and 10 minutes. Northwest provides everything you need to start and maintain your business.

42:16Every LLC, corporation, or nonprofit at Northwest Forms comes equipped with registered agent service, a business address, a website, and hosting email, a phone number, and this is all covered by Northwest's privacy by default. Again, your full business identity will be live in 10 minutes and in 10 clicks. So here's your call to action. For$39 plus state fees, they'll form your LLC, corporation, or nonprofit, and launch your business in just minutes. Visit NorthwestRegisteredAgent.com slash twist today. That's NorthwestRegisteredAgent.com slash twist today. Well, Jason, I was just going to say that what got a lot of those top funds that were formed in 2010, 2012, 2014, what got then great returns was investing at$5 million and exiting a billion.

43:06And then when they quadruple or 10 times their AUN, now they can't have a billion dollar exit, which are much more common. They have to have a$10 billion exit in order to get the same results. So I also think like, there's probably going to be some issues with persistence with the strategy shift and the AUN growth with some of those top firms, because there's just no way to continue to hit up, you know, 10X spas when it's$3 billion. You know? Which is why Fred Wilson said, we're going to keep the funds, I don't know if he said$300 million or$400 million. And Benchmark had that same discipline.

43:39I think Sequoia had that same discipline with their Series A fund. So, yeah. So, those are the ones that have the most persistence. And those are the ones that are incredibly access constrained. And they're the ones that haven't bloated their fund sizes. Yeah. Are the ones that have the most access constrained. And if I was going to bet on what's going to be the one that's in that 45 % of the state's top profile, it's going to be the one that is doing the same strategy and hasn't had to completely shift their strategy. Yeah. Good point. You were going to say something, Grady? Yeah, I was just going to say, you guys are obviously right.

44:14And I agree with you. It's the intellectual honesty that you just provided, Jason. I mean, you're on fund four. I wouldn't call it an emerging manager. but it's, it's, we also have one manager that's like, there are no good VCs because every five years the world changes and you have to become a new VC. And so, and she might be right too. But it is finding those, those GPs, because especially in today, everyone's a GP, everyone raised a fund in the past, or they're still trying to raise a fund. And they all, a lot of them seem somewhat similar. And it's hard for us to separate signal from the noise, right?

44:43As LPs, especially when you're a smaller fund of funds and every, everyone's coming at you to try to raise capital, much less the bigger guys that we kind of know that we don't have access to today but it's trying to find the ones that speak like you guys do like oh here's what i'm trying to grow here's where i came from here's where the industry is today like you don't have to have been in it the last 20 years to understand what has happened or where you kind of want to position yourself for the future but if you can't go through that story and you can't talk about it as a general partner then those are really tough ones to get behind and i do think we'll see this weeding out of probably most of them um in the near future but these 45 we'd expect to continue to they need to continue to do well right for this industry um there's something about being able to really um about this industry when you get to your 10 year mark and you're working with lps and you're investing other people's money all of a sudden you know you have this data set to look at what you did.

45:41And then you have your emails and your slack. And you have like your your deal memos and your decision makings. And so the thing I've tried to do with our firm is we have ones to watch list in our database. So when we pass on a company, but we have that feeling, we just say once the watch list, and we just look at that one still watch list every three month, every six months, we check in with those companies. And then we ask them to send us our updates. It's like one of our secret weapons updates at launch.co. We just say, Hey, can you just send us your updates, to send to investors if you don't mind and we just we just hang out on that thread and try to find the companies we missed because you know the founders figure it out and that's the that when you see a founder figure it out and then you re-engage them they love it they love it and we you know as a writer i come up with the language for our firm so i tell my team you know hey we couldn't get there as a team you know in terms of the you know decision for this round but we'd like to stay in touch, you know, would you keep us on your updates?

46:39And then when they send the updates, I've trained my team to respond to them, even make sure and brief, congratulations. I noticed this point in this point, if you ever want to get back on the phone, we'd love to, you know, talk again. Or I'll just tell them, just ask them, hey, can we meet and catch up? We think we were really impressed with the progress you made. Sounds like we made a mistake. Or maybe we made a mistake and a smiley face and then a link to a Calendly. If you diffuse it like that, and you come up with that language, you know, you might be able to get yourself back in a deal and this industry is uh not a not a it's not about sins of uh commission it's about sins of omission it's what you missed not what you hit that is exactly true right and so to the gps that would be listening here it's like we just heard like a very and i keep it in the back of my head when i talk to gps it's a process around those intangibles they may be very real things right and lp should be asking about them but everything you do with the firm behind the scenes jason growing the team so they can be jasons of the future right and just kind of building into that strategy uh we don't see those in day-to-day numbers right like but that brand starts to proliferate itself out everything victor does with midwest summits bringing in firms to chicago like people on the coast know who m25 is and that's very helpful for people like me that have them in the portfolio that need to grow our own network um or we can bring them into chicago to meet with victor uh but it's that process around the intangibles a lot of that goes into david to your original question what makes a gp a gp that i would look at is are they what are they doing behind the scenes like how are they spending their time and energy because this world is very transparent now everybody wants to be in it right um too many people want to be in it i mean that's got to be the hardest part of your job i mean i don't envy your job as a fund of funds because it's self-selecting for people who are incredibly successful charismatic powerful you know who are starting these funds and then to determine are you going to be a good you know gambler are you going to be good at placing bets and working with people man it's a hard job you have and then you don't know if you made the right bet for and what's the soonest you would know three four five years into a fund yeah yeah we've been fortunately maybe maybe less fortunately some of these funds we've been last every party and so some of these portfolios were pretty well baked so we've seen some of their successes but you're right it's tough and i and i favor the funds that are 80 million or smaller kind of thing, the ones that we can kind of weasel our way into.

48:55And given relationships we built steadily at Wharf, we could get in some of these bigger funds and help balance out the back half of the portfolio for timing. But yeah, you're right. Everyone's a new manager. Everyone's early stage. Everyone has a little niche and they all sound impressive, right? I don't want to knock any of them, but we're not investing in 800 funds. We are investing in 20, maybe 25, right? And so to pick those specific ones, it's like, and you're right, I look at it as like a 10-year relationship, us two, same as them, building the firm, not just this one fund. Who are we going to be comfortable with for a very long time, right?

49:30And I don't expect to churn these managers very often, right? So, it is tough to get the conviction. Certainty will kill you, right? Conviction's critical. We kind of get as far as we can on that conviction side, which is why we feel comfortable with people like Victor, people that we've known for how many years have seen grow into their fourth fund. fund now right and it's been doing it well it's there's a lot of comfort there right yeah and great yeah i was because what's going to put you on the spot why did you invest in victor um well he's got something against me but no uh the i've i've known victor i actually like when i first joined wharf um our portfolio was very well built venture book was very well built into the flagships the verse and some of those big biotech ones that you guys would know right And we had some coastal firms, but we didn't really have ties to the Midwest.

50:23It wasn't something we were using our portfolio very strategically for. That was what was attractive to me. It's like, okay, we have all these managers. I'm not firing them. We're not going to get back into the flagships of the world, right? And they're doing great things on campus and we like their firm. What about some of these smaller ones? 10 years ago, Victor was kind of launching. I think they were through fund one, maybe onto fund two, almost kind of when I was watching them. It's like, all right, true emerging. but this guy spends his management fee on his team like all these conferences that he does like i don't know how he's doing all of this and these managers are very high capacity people but he's investing only in the midwest he's one of the few that that can you know pronounce milwaukee right and understand that there's something going on in madison wisconsin right so how do we get him here um and he has all of this data and facts about the midwest this one was a no-brainer for us in terms of our portfolio like how do we cover the midwest early stage generalist kind of market victor's an easy one we have one up in minnesota that does something similar we have another one in chicago that i'll talk about later that does similar things but uh for us specifically it was watching him over how many years seeing how the funds have performed and then just really understanding that all right he's got 130 portfolio companies across funds they're all midwest based that's aligned with our strategy.

51:40Yeah. Awesome. You know, we should do our top threes. We should do our top threes. Everybody loves this part of the show. Excellent. Well, let's get into the last segment, last three investments. We have, this week, we have two GPs and one LP. So we'll start with one last investment from each. Let's start with Victor. What was your last investment? My last investment is actually, it's a pretty neat one. It's a classic Midwest deal. This is a company called Corral. It sells to ranchers that have cow-calf pair operations out in ranges. And so this is something that goes, it's a hardware with a current software element.

52:19It goes on their necks of the cows and it stimulates them to move in certain directions when it's attached via solar power, it's cell or satellite connected. so you can be a cowboy in your house or across the world you can say i want these cows to move over here and now start to raise this pasture you could start to do cross fencing virtually and subdivide your pasture which allows you sick this is insane this is insane and it's a round open like it i mean i just slide a quick hundy into this you gave that was only one we told them about victor in the midwest yeah we can hook them like let's i like it jason i've got i think i've got your number you know what i like about this i call this category has not hot s like you know when you get into the car and you turn on the seat heaters we call that has in our family you put on the house but in business we call it hardware as a service i have a great company called density.io and they do little things you put on the roof like devices and then they count people in a space it was originally going to count the people like in phil's like coffee shop but instead, they were like, hey, well, this could do this campus where there's, you know, corporate campus where there's 5 million square feet around the world.

53:33And then we could tell them, you know, what's the utilization of each floor, each conference room, etc. So they can do space planning and, you know, get rid of leases. It's the same thing with us because they they don't charge for the hardware, I bet they charge a subscription fee, right? And they do they put the hardware into the subscription fee or they charge per hardware? They charge per device, they may margin on that, but there's a recurring yearly SaaS that they also have, you know, modules you can add on. So if you want to for people with one cow or thousands of cows or it's yeah it's gonna be herds so like yeah so it's kind of a b2b sale but these ranchers they're very slow to adopt tech and that's what kind of got me is i've never done an ag tech deal ironically being in the midwest but they were flying off the shelf i mean like the back orders the pre-orders this is incredible so it's this is really for corporate corral is for corporate well yeah i mean it could be anywhere from like i mean maybe 50 head at the minimum and then but like thousands are you know they're talking about groups of thousands and um you know like this is like so it's much more um carbon efficient for the for the land to do rotational grazing and you can increase your earth size with the same amount of land you can increase your size 20 to 100 percent so i bet you it's hard to get getting ranch hands is hard ranch hands are impossible everybody's you know old retired you know there's and then there's also capital cost of putting up fences if you want to cross fence so there's this guy jack he's a generational rancher out in atkinson nebraska is where he grew up which is between nowhere you know it's just it's it's uh and then he went to school at the university nebraska and uh you know uh the mechanical engineering started playing with dog collars on his family's ranch to do this and steer i love it it's genius jay cal you're you're up so So this one is called Howie.ai, H-O-W-I-E.ai.

55:21And it's an AI-powered scheduling tool. It's pre-launch, but it's coming shortly. And what it does is it lets you through a conversational interface. If, like, the three of us wanted to go do something, the four of us decided we're going to have a follow-up or plan a trip, it would handle our schedules. It's auto-magical. You know, Calendly became, like, a really interesting thing. So you can think, like, maybe what comes after that, but with AI. I'll tell you just a little bit about this company that I liked. This is a previous launch founder. So this person had done capiche, another company for ours, and it was a great performer.

55:53And he said, I got a new idea. He said, I had two new ideas, which would you do? And so I'm in this discussion with him. And we have a rule. If somebody has like, builder founders product velocity, and they did a great job on their company doesn't care if it worked or not. where that person goes right to the front of the list in terms of our consideration and we really really love to make the first bet on a second time launch founder the name of our firm is launch so when we looked at this one it was pre-product and pre-revenue but it was a sas company it was ai it had builder founders this founder had previously raised venture capital previously had an exit and so those are all part of our 13 tiles we call them of things we look for in companies.

56:36And so this had like five or six of them just out of the gate, including the most important one, which is a previous launch founder, because we had this previous launch founder, Raul, who had done reportive. And then he came to me with this new idea, which was superhuman, we gave him 500k, we were the first check in along with Dormesh from HubSpot. And so in this case, we just gave the founder 500k. It's a big conviction bet for us. And, you know, we're really excited about making those kind of bets. And we think these small companies providing really affordable AI tools to just solve problems quicker, better, faster, and delighting customers.

57:11It's just like the same way SaaS or cloud, and apps. And before that internet companies all had a chance to disintermediate the people before them. AI, if you just start from a blank sheet of paper and say, how would I build this company with AI? How would I build Google Calendar, Calendly, Gmail, but just using AI? That gives you like a really great starting point in my mind, because you don't have the baggage of the legacy business. You don't have to maintain the existing base of customers and please them. You can just start with a whole new concept, a whole new mindset, right? Which is what Hotel Tonight did or Uber did.

57:46Jason, how often are you doing pre-product, let alone pre-revenue type investments? Are we doing some, but not balancing it, I think? Yeah, great question. So we get 20 ,000 applications for funding a year. this is largely because it used to be four or five thousand then all in got very popular and then it quadrupled so i've been the beneficiary of being i think second only to y combinator and the number of people who ask us for funding at launch.co slash apply so we just have a url fill that out and you'll get a meeting with us if it's a reasonable idea and about half of those companies about half of them were pre-product they weren't incorporated yet and so we realized like ah they're too early to come to our accelerator where we like the product and maybe one to$10 ,000 in revenue.

58:33So we started founding university made a 12 week course, we said, go here, it's 500 bucks, if you come for the 12 weeks, we'll give you the 500 bucks back at the end. And we started getting all these companies to join that, or just finishing their product, and they needed somebody to like help them believe in them. And we just said, Hey, what if we give you a 25k check for 2.5 % of the company a$1 million valuation to incorporate. And every week, when they come to the program, 70 % of people ask for the 25k check. My internal team thought it was the stupidest, insane idea wasn't worth the paperwork.

59:05Why are we doing this? We did 80 of them last year. 80 25k pre launch bets. Jason, if I can ask how and you've seen the data because you just you just went through it. How do you wait? And I know the answer is that it probably depends. But how do you wait against this serial entrepreneur the ones that are coming back to you or the ones that are coming back into this application they obviously maybe move them to the front but i'm curious just on the data set alone like are you seeing a lot more serial entrepreneurs come back successful exits come back trying to get back to where you are it kind of goes to victor's question how early are they going to be uh yeah we one of the great things is um a lot of the people who i've forged friendships with who've had incredible success i had one founder it's not announced it so i won't saying i was the first investor when i was a sequoia scout in their company not the third or fourth and uh they came to me and said um hey we're launching a new company we want you to be the first investor i said oh tell me about the companies oh we're doing eight million dollars in revenue we funded it ourselves but i'm like oh right you guys built a billion dollar company um and i said can i ask you like you have your choice of companies you fund it yourself why do you need me and i said you're all good luck sean you were the first person to believe in us for last company and we want to be able to tell everybody that you invested in us again the second time and i said okay deal but you have to announce it on my podcast and they're like yes that's what we're going to ask you can we come on the pod and announce it on the pod so you know you want to talk about intangibles right like that's just like warm your heart make you want to come to work everyday moment uh that you're in it for when you're when you're a gp and you just love doing this but yeah we we really like anybody who's a launch co-founder a co-founder or even on a launch team so you were the you know you were hired gun you were employee number 10 at uber you know i'll get people who worked at uber thumbtack robin hood they're like hey i worked at robin hood we never met and i'm like here's my phone number here's a i have a cali link called 15 minutes with jacal and i'll just boom i just i don't even write the text if that's somebody i literally will be in line at starbucks or like with my kids in the park and i just boom quick key paste in the link and the person's like uh i put myself on your calendar is that okay is that what you wanted me to do and i'm like yes that's what i wanted you to do i wanted to spend 15 minutes so right to the front of the list is the answer to your question for obvious reasons if you've raised capital if you've had an exit even if the exit was like for a dollar or just saved everybody's job or whatever uh or you shut down and you think about what you learned that's like oh did you make a have you ever made a movie it's like yeah i made a movie it was terrible it's like great so you know how to set up a set and you know how to find a cinematographer and you know how to make a movie poster it's like yeah i did all that it was terrible but i really like our movie poster here's what i would do different that's why like even a fund manager who screwed up their fund it's like ah what would you do different i was just on a call with somebody and they're like i noticed this in your fund like and i was like yeah that was a mistake that's not me they're like oh i was gonna ask you if that was a mistake i'm like dude getting into cpg was the biggest mistake of my career like we have like two hits and you know 18 things that just went sideways i'm not touching cpg again it's not doesn't have the margins it was like a phenomenon i don't think it's coming back there's private equity people who are better at it you know i'm just not doing cpg anymore they're like oh that's what we wanted to hear it's like playing you know 10 jack when you're under the gun in poker it's like why are you playing that you know like what if you get two people who raise or playing like ace five you're playing or a seven you're playing a seven and you get two people raise and you call and like you don't think anybody's got aces ace king ace jack is green like you're gonna if you do hit your ace what happens you lose your stack so you kind of learn these things over time you know these positions that you're in yeah that's a good question speaking about positions uh grady uh what what are some of the latest nice segue what are some of the latest gps that you've uh invested in yeah so publicly um that we're out there on our website we invested in i'll do i'll do hyde park venture capital or hyde park venture partners first um victor and i know know them well so nbng we're trying to look at across the the the stage um we're trying to grow across that spectrum when we grow fund one right we are a first time fund ourselves right so we're trying to bring these venture capital funds and their attentions to wisconsin it doesn't necessarily mean they're ever going to make a deal find a deal find a team in wisconsin but they should have portfolio companies that are either aligned with the midwest or can work with midwest corporations ideally wisconsin's and rlps um if you look at this firm they've been around for quite a while they kind of they started as a as an angel group and now they have a venture fund and they've grown through the chicago ecosystem and the broader midwest ecosystem very very well They sit almost exactly kind of in line with Victor and M25, but a little bit on top.

1:03:54They have a little bit larger of a fund and they kind of go late seed into the A rounds, but they are a little bit more focused on. It's funny, Jason, when you talk about fund four being emerging, they're on their fourth fund and they've grown into their own themes. They've grown into their own strategies. And now they're really playing hard into what the Midwest is kind of known for. They like the, I don't want to call it, we do like kind of like you guys said, I like the software wrapped in hardware. You see a lot of that in the Midwest. These guys are not that. These are more software-based companies, but big winners that they've had, ShipBob, Four Kites.

1:04:27Like these are large companies with big enterprise contracts that are scattered throughout the Midwest. Like big, big entity, legacy corporations. Those are the types of funds that we're looking at, Hyde Park being one of them. to move to the next one. We did Decian's Venture Capital. They are a very, so I'm kind of going from the kind of more broad, almost generalist fund that has some insights in a bigger team. Decian's knows one language and it's FinTech. Dan, their founding partner, he, he standard treasury sold to Silicon Valley bank, his first company. And then he worked at like tech crunch on the event side of things, which was interesting.

1:05:06That wasn't really for him and now he's focused on growing his own firm but this guy is he's great doing he's been doing this for about 12 years just by himself and he's trying to institutionalize and we found this team we had an event this october and they came to milwaukee they they took the time and the effort and i might not know what dan's talking about more than half the time um when it comes to like when he starts to nerd out about this stuff that that i have to listen to podcasts for frankly to just understand but dan vishal ishan these guys are scattered throughout the time zones across the the us which i do like dan's kind of home base is chicago and albuquerque but chicago and so he likes the midwest but this this is a heavily concentrated portfolio won't do that many companies um and a fund of funds like ours we we like a few of those funds so we'll either go heavy industry speak one language kind of things think the 5 ams are in our portfolio right um or we like the more generalist ones that know the midwest like the victors the m25s and the hyde parks but decions is one that we look at and filling a gap within our portfolio that can speak the corporate language and they know fintech and they know that industry and what's happening around it i remember dan from the early tech crunch 50 days uh tech crunch and i partnered on a conference series which i named and i ran and dan was working at tech crunch and we the original idea was 20 companies and then there wasn't enough so then we went to tech crunch 40 and then the next year we made it 50 uh and we had 50 companies launch on stage but this almost was 18 years ago i think he's taken all those learnings he's digested them really well and now hopefully he's built this is a fun three right but i would consider this one emerging the first real institutional he's tried to build out the track records make sure his themes are appropriate and just like we look at every gp does he have a right to win in this space right does and and i and we believe he does um And so, yeah, that's that's the answer.

1:06:57Love it. J. Cal, number two. Oh, I got to give a number two. OK, here we go. Yes. I'll talk to you about per bar P.E.R. M.A.R. dot X.Y.Z. You know, tools that startups use. We look at what tools startups get a lot of value from. And we saw, you know, these folks wanting to create better landing pages using AI. and i thought hmm once again taking ai and putting it against the landing page business makes a lot of sense to me and if you're building that from the ground up yeah there could be something there they again went to our founder university program um and it's a sass business um but we look for those builder follow we look for builder founders who have product velocity so a builder founder to us is one of three types a growth hacker not like a marketing pr person no offense to them that's fine like a growth hacker a designer ux person and a developer who actively writes code that's somebody who was a developer in the 90s or 2000s but hasn't written code so somebody's actively writing code for this startup and when we see those as founders we kind of like it and uh they have this right and so and they had a lot of interest from other accelerators and so we you know we just made a small bet and we love the company and you know when we look at these even if it just has a little bit of MRR, a couple of customers, that's another one of those signals for us in that pre-seed stage, builder founders, product velocity, and then a couple of customers.

1:08:29As David Sachs said, at one point on All In, going from zero to one customer is the zero to one that he looks at, not zero to one product market fit, but zero to one, like one customer. It's much different when a customer touches a product. Also, like on diligence, you know, people don't talk to customers and we do and that's been a big part of our success i think in avoiding talkers and that's the thing i learned in my first decade you can get snowed and it really was different 12 years ago i can tell you like people didn't hadn't unpacked how to get venture money they didn't have like a playbook for that but after blogs and podcasts and medium posts and sub stacks and tiktoks like everybody knows how to pitch and be convincing and can you know it's been a good story right is that is that your new book jason how to get venture money it would be a good one to write yeah um no the problem is like people have unpacked the secret to it so what i realized over time was like i was getting snowed by people and i was teaching our team at the accelerator how to snow people i was teaching them like this is how you present your company this is how you present your tam and i was like wait a second people are getting more performance that you know they're doing more performance art than they are doing product building and touching customers and we had to like internally have a discussion like how do we spot when we're getting snowed and it was like we really refine our questions uh just this past month we had this thing where i was like okay so they had builder founders you checked off the button builder founders no i guess builder founders how do you know that um they told me that they're builders i said that's not the question you have to go look at their linkedin and you have to ask them very specific questions.

1:10:08Okay, you're a UX designer. Who's doing the UX for this product? Did you hire somebody or you're doing? Oh, no, we outsourced it to a firm in Manila. Oh, okay. And you're a developer. Yeah, I'm a developer. You know, it's at Google. Okay, who's writing the code for this? Oh, I got a I got a team in Paraguay, Uruguay. And like, you know, okay, they don't, they shouldn't get that checkbox, right? We gotta take that checkbox away. Doesn't mean we're not going to invest. But, you know, we see the companies where the founders are actually building the product and talking to the customers are much different than all the other customers the person with that with that uh you know the steers you know like i don't think that person has not it's the first time they've ever met a steer i think they've been in cow country before well that's the thing jason is like we work with a lot of these like diamond of the rough founders that already have the product market fit but they don't know how to pitch like they they don't know even so what a startup should look like or how a venture capital like we're kind of which is it makes it easy for us to be the experts and kind of bring them like hey like here's let's let's set this up let's do this type of structure this type of structure um here's what to expect for future raises maybe do a few practice board media like we can get them ready we can help them hire their first like like have you heard of customer success before i mean like here's retention stats that you need to care about you know like these types of basics um it's a lot like so it's kind of funny because we do have the founders that are coming out of the uniform and have a track record, know how to pitch, but then are trying to find product where you're going to fit.

1:11:36But we also have a lot of people that it's almost sometimes more refreshing to work with the ones that have already found product where you're going to fit, but then have a horrible pitch where you're like, well, hey, I can work with this. You've got a company. If you had to pick, they know how to build a kick-ass product and talk to customers, but they don't know how to talk to VCs or they're really good at talking to VCs, but they don't build product or talk to customers. I mean, it's a pretty easy decision. You can teach one in a short period of time. The other one takes a lifetime. So I think you're making the exact right decision.

1:12:07Here's my last one. Very curious, Jason, on this one, sorry. How do you assess competition at these early levels with these new kind of AI built tools? And it is exactly what you said. How do you separate what's theatrical from what is real? And do you do the competitive analysis with your team? Because there's going to be some winners in this space like there are, but it feels like everyone could be doing what some of these companies are doing, right? yeah we we will tag this is a crowded space um so you know when you're the first and when you're the third or fourth investor in uber everybody comes to you with the uber killer and like the uber killer is like we use evs uh or people would come to me and be like um yeah but but we take dogs like literally there's a great pitch i love dogs i have dogs they're like we're uber for you know people with pets and i'm like yeah okay good luck with it you know um and that i know travis has that on the roadmap like that's not enough of a differentiator so you want to really understand if they're a copycat product, or if they have a unique spin on it, right?

1:13:03And how are they coming to the problem? So that's how you figure it out. If you at the early stage, pull out any competitive landscape, you will never invest in a company again, almost like 99 companies out of 100, the competitive landscape is going to be really scary. I don't mind when people make a competitive matrix, you know, but they always make the matrix like, here's an obscure feature we have. and then here's another obscure feature we have see us on the top right the two obscure features we're the only one doing obscure on the top right everybody else all these boxes yeah right yeah everybody else here is doing the normal mundane that people love we're doing these things that nobody needs that's super esoteric and i'm like huh is that a good thing or a bad thing shouldn't you be where everybody's going that's like being like i don't surf at that beach because everybody goes there because there's great waves and you're like but you want to surf great way you know Anyway, competition in the seed stage is almost not the thing you're optimizing for.

1:13:59When you get to Series A and stuff like that, it can become really acute because you can use capital as a weapon, right, as we've seen. And when you have capital as a weapon come into play, man, that could be really problematic. But like, if somebody wants to do something that displaces Gmail, that pitch was absurd. It was ludicrous, Rahul's pitch on face value. I'm going to take on Gmail with a billion users and I'm going to beat Google by being faster. And I'm going to charge a dollar a day. I was like, Raul, let me repeat the pitch back to you. You're going to with your 10 person team be faster than Google with the largest global data centers in the world.

1:14:43You're going to get people to pay a dollar for something that's free. He's like, yep, there's a group of people who want luxury software who if I can save them an hour a day, a week or a month, they'll pay it. And I was like, great, I'm in. So you got to be careful with the great question. Competitive analysis. I don't know. What do you think? Victor, I see you're. Well, I just have like this opinion that, you know, that any unsophisticated angel investors always like, well, couldn't Google do this or couldn't XYZ do this? is always that like, and I think those are like some of the least intelligent questions you can ask as assessing a startup.

1:15:25I think it's more like, well, you know, there's a million ways to kill a deal. How is this going to be winning or not? You know, and then is their competitive advantage insignificant and irrelevant, like you said, or is it actually something that's like, you know, like we're all just said, like, you know, there's a luxury element and you're actually paying 30 bucks a month for this software. You know, like that's, that's what you have to assess. and it's, I think it's a very easy out for like putting XYZ to do this and somebody else are already doing this. So we try to be able to think. That being said, we do care about competition.

1:15:56Like, so I can go under one of our investments here. So there's a company that we invested in Madison, Wisconsin. It's a serial founder. He was a successful founder of a company called HealthFinch. And this is a company that's going into the very crowded healthcare insurance space, trying to get into self-funded healthcare plans. It's actually called self-funded health. It's basically saying, hey, self-funded healthcare plans are the future. Lots of companies trying to get in and do stuff, even maybe with ICROS or with other types of opportunities. So there's been a lot of funding. There's been a lot of activity here.

1:16:30They're saying, hey, there's a niche audience that's actually really big. And it's anywhere from 50 to maybe a couple thousand employees. They're starting just in Wisconsin. Even that, Sam alone is up for a billion dollars, just throughout one state for their one offering. And they can prove it out there in the lab, Minnesota, or out of Illinois next. And we'll grow from this kind of like legacy health insurance companies too. It's a very experienced team. We already had a handful of customers at the time we invested. And it was something that for us, his experience combined with the customers, combined with, yeah, we know it's better because everybody's heading in this direction.

1:17:05So we kind of thought it was more of like, it's a market wave that we want to ride to shift away from these group plans that are more expensive every year. So that was one. And I will give a gradient and an NG team a shout out for helping us get around this deal and do some references and diligence and share another co-investor on that one too. And the third company I'll call out is another one of these founders that had product market fit. So this is a Fargo, North Dakota company called AWS. So there's a lot of software in vertical construction buildings and companies that are working with vertical, there's a lot of money there.

1:17:47There's a lot less when it comes to horizontal construction, roads, pipelines, infrastructure, etc. This is a guy, he was an asphalt scientist, which is something apparently you can be in North Dakota. he came out and he had this base of understanding for years and years in the industry to contract as construction companies and he had productized his offering for planning around the pavement the gaming process all the subs all of the weather conditions all the projects that are happening submitting invoices and all the different paperwork to get the payments from these like often slow pay, hint factorable opportunities within the governments that pay.

1:18:29And so he created this company, PayWise, that was a SaaS product. And we sourced it as saying, and he's actually, I'm not a relatively competitive, they're now three or four term sheets. And we were lucky to not pay the highest price to get the access to Alivia Steel, put together a national syndicate on it with a lot of strategic investors. And, you know, even though he's relatively green to running an adventure-backed startup, that's what we're bringing bear on this one. So, another, he had already a couple hundred K of ARR, I believe, when we invested. So, he was there. But, you know, how to set up and start hiring, you know, what an option pool was, maybe not, you know.

1:19:12So, that's where. This is extraordinarily boring and it's going to print money. Yeah, sorry to drag down the podcast. It's a whole category. it's huge no it's like i love these companies like sass companies that are absurdly boring that give massive leverage to the you know industry like just think about they just make paving roads 10 more efficient which seems well within their mandate to be able to do i mean how much money is spent paving roads how much time how much budget how much pain and suffering and then we're also having this shortage of people so you know what i love about both your both your startups there two of the startups that are industrial stuff they're just going to save headcount and it's not that you don't want to see people have jobs it's just that there's nobody to take the jobs people don't want to do them jason the interest me is we're taking a little bit of risk because all the customers we talked to in both of those examples they don't have any software that's specific to them they maybe use text gmail a g sheet you know something like that they're not so they're running their whole business if the contractors are running it sending invoices via fax machines you know i mean it's like trucking we have one we've had maybe two or three trucking dredge kind of people come through our accelerators incubators and when they show us what truckers do i'm like really and they're like yeah we made an app you take a picture of this form it digitizes it and sends it to the home office and they still fax it to the home office but at least we have it and we digitize it and then they print it out at the home office but we're now getting them to understand that this could exist digitally and they you know don't have to fill it out 27 times and go find a fax machine and wait in line for a fax machine like truckers are at truck stops waiting for fax machines really is that what's happening in 2024?

1:21:07They're like, yeah. Wow. Interesting. A lot of it. Victor, some of your startups seems like they've de-risked a lot more than pre-seed and seed on the coast on San Francisco and New York. Do you find that some of your startups are more de-risked? I think they're de-risked. We're coming in at lower valuation. We don't invest above a 10 million post money. Our average post money is 5 or 6 million. And they're coming in with customers and they're coming in with a lot of the industry experience. It's not as competitive. They're not as capitalized. So there's often less capital around the table, which can be an asset.

1:21:44I think sometimes it's also a risk. But I do think that they're running with lower bird rates. They're running with the same ability to go to market. They're close to their customers. They're close to their customers. and other customers, but it's, you know, like it's, it's definitely to me, to me, I feel like it's, it's, it's the risk, because we know that they have demand already there for the product, not all the time, but most of the time. J. Cal, close us out. Oh, right. I have one more to give a plug for. This one is called deep trust AI.com. And when we made a, you know, small bet here on this company that hasn't launched this product yet.

1:22:30You know, we knew that people would start doing bad things with other people's voices. And since we, you know, made this investment, we had that robocall of Biden calling people, and all kinds of other ones. And so we know that there needs to be an API out there that verifies, when you hear my voice calling you, it's actually me, or you hear, you know, on a social media site or a podcast, me saying something. And so this ability for whether it's a call center, or a consumer app or podcasting app or anything in between, to know that this is an audio deep fake has got a chance of being an important API to exist in the world.

1:23:13We'd love when people want to build an API. And they have developers who want the API. And these companies tend to, if they can catch developers, you know, they can grow very quickly. You'd think like a Twilio or something like that. So this is just Twilio and their first product is finding deep fakes, you know, for audio. And so - Jason, did you use this to confirm wire instructions verbally? That's the thing I'm thinking of. We literally had a situation here in Silicon Valley where somebody's voice, a very prominent person, this was backchannel to me, you know, two or three phone calls, two or three different people at an organization to have the the wire instructions changed or the instructions to ship LP money to a bank account kind of situation and it happened in the venture industry and they caught it.

1:24:05But yeah, there's going to need to be all kinds of new tools and protocols to stop this stuff. And so you know, we like to make these smaller bets. So when you see us making these bets, and it seems very frisky, we like to make this 25k bet 125k bet then we're in it with the founder for six months or a year we see if they get traction if they get the next round we just ask ourselves a very simple question is this a likely winner and this is the framework i've been working on the last six months likely winner definitive winners likely winner definitive winner what's a likely winner coming out of seed what's a definitive winner coming out of seed i'll save it for another show because i'm not finished with my my new methodology but i'm trying to train my 21 people or 20 people plus me likely winner uh definitive winner what happens first jason deep deep fakes on the all in podcast which i've just been waiting for to hear what those two hours will be like um or does deep trust sponsor all in today right like what's what's going on yes a lot of people on it on all in already think there's some AI guests going on.

1:25:09Yeah, when we had Tucker Carlson come on, that was actually AI Tucker. It was AI Tucker. Yeah, he's actually, he's in a jail cell. He's in a jail cell in Russia right now. So they just use Tucker AI to do the Tucker Carlson show. All right, take us out of here, David. This is a long show. Two great guests. Nice job, boys. I like these two guys. Thank you, Jake Allen. Well, it's been another great episode of Liquidity Podcast for Grady Buchanan, Victor Gutwein, Jason Calacanis. This is your host, David Weisberg. Thanks for listening. Hey, everybody, I talked to a lot of founders here on this week in startups and as an investor, and they tell me the same thing over and over again, they want two things from me more FaceTime and money.

1:25:49They want me to invest in their companies, and they want to spend time together. So we've been working here on a new meetup program, we call it founder Fridays and founder Fridays are an event by founders for founders. This is an event that is hosted in cities by people like you. If you're listening to This Week in Startups, you're a founder. So what are you going to do at Founder Fridays? You're going to get together with other founders in your community. It could be four or five of you. It could be maybe up to 30 of you in a location. Pick a cafe, pick a co-working space. I like to go to a great Mexican joint or maybe a dim sum restaurant, you know, where you can do shared food, have a couple of cocktails, maybe.

1:26:27You do it on a Friday, you get together and you host it. Now, why is it important for founders to get together? Shouldn't you be at home just focusing? Shouldn't you be in the office just focusing on your startup? Well, if you get together with other founders, true founders who are in the arena building like you are, you're going to get a lot of value from that because you can trade notes with that other founder about what's working at your startup and what's not working. The truth is, if you're facing a problem, there are hundreds of founders out there who have probably solved it already. And instead of you banging your head against the wall, when you sit there and you talk to three or four founders, you're having some dim sum, you're, you're splitting the quesadillas and fajitas.

1:27:04Somebody say, Oh, you know what, I had that same human resources problem. Oh, I had that same technical problem. Oh, I had that same marketing problem. And they might tell you about a tool or a service that'll solve that problem for you. This happens over and over and over again. When I do founder Fridays with our portfolio companies, now we're going to give you that same experience. But here's what I need you to do. I need you to host this in your city. So you're going to go to this week in startups.com slash meetups. That's it. And you'll see a landing page where you can sign up and you can say I want to host in my city.

1:27:33Now your city may already be hosting. So you can just join that person. And what if you go to this event, and you learn some go to market strategy, that 10 x is your growth that might unlock funding, or you might be talking to somebody and they say, Hey, I'm a marketplace to I'm not a competitive marketplace, your marketplace is for used cars, my marketplace is for hairstylists, whatever your jam is, whatever you're working on, but they give you some technique that you didn't know about to increase your supply side or get more demand in your marketplace. And you 10x your business. I see this happen all the time.

1:28:02And founders are like mutants, right? And I'm like Professor X here, I'm trying to put on Cerebro and find all the founder mutants in the world, and then have you get together and do your own little meetup. And here's what you're not going to have to deal with. You're not going to have to deal with a bunch of service providers trying to sell you software or services. And you're not going to have to sit through a bunch of passive speakers. You can listen to This Week in Startups and get the greatest speakers in the world on your own time. And you're not going to have to pay for a ticket to a conference or get on a plane or fly somewhere.

1:28:33No, this is about having an intimate experience with five, 10, maybe two dozen other founders in your city. Please go to thisweekinstartups.com slash meetups if you are a founder. This is for founders by founders only. If you are not a founder, this event is not for you. You can start your own meetup for lawyers, accountants, recruiters. This is for founders by founders. We vet everybody to make sure you're a founder. And if you host it, it's a non commercial event. Our first founder Friday will start on February 2. So please mark your calendars. And we're going to do these on a rolling basis.

1:29:08You can join an existing meetup if it's already occurring in your city or you and one or two other founders can start your own. We're using a wonderful piece of software that we've invested in called River. You can sign up for a River account just by going to this week in startups.com slash meetups. We've already got hosts and attendees lined up in San Francisco, New York City, Toronto, Los Angeles, Las Vegas, London, and even in India. So this is your chance to connect. And if you didn't hear your city name, you can start your city go to thisweekinstartups.com slash meetups.