LP investment strategies, IRR focus, and more with Berkocorp's Joshua Berkowitz | E1882

0:00So if you have cap table problems, like low founder equity at the seed stage, and they've given away 60 % of the company, you're like, well, when they do their series A, that's going to be another 20 % gone. a series b another 20 gone these founders are gonna have very little equity and then what happens when you have very little equity well then you have to recap the company or give huge grants to new people or the founders leave to start a new company because they they screwed up this cap table so that you see a lot you see a lot of that in canada and in boston actually just really broken cap tables at early at early rounds and do you know why that is i have some theories but i'm curious if you figured it out you have all these angel groups that are just kind of predatory and catch these founders.

0:41Yeah, you nailed it before. They really know any better. This Week in Startups is brought to you by Squarespace. Turn your idea into a new website. Go to squarespace.com slash twist for a free trial. When you're ready to launch, use offer code twist to save 10 % off your first purchase of a website or domain. Northwest Registered Agent will form your company fast, give you the documents you need to open a business bank account and more. visit northwestregisteredagent.com slash twist to get a 60 discount on your next llc and linkedin ads to redeem a 100 linkedin ad credit and launch your first campaign go to linkedin.com slash angel pod all right everybody welcome back this is the angel series on this week in startups but a little bit of an announcement here we're not killing this podcast but I'm rebranding Angel to liquidity.

1:37Why am I branding it as liquidity? Well, I'm not an angel investor anymore. I have funds. And a lot of what we do as a fund is talk to LPs. And we are working with public market participants now because, hey, a lot of our companies in the last 10 years have gone public, whether it's Robinhood or Desktop Metal or, of course, Uber. So this podcast will be called Liquidity after this season. and you know it's going to be a weekly roundtable and interviews with general partners emerging a legendary public market investors still some angels and LPs and this season I want to focus on LPs so if you don't know what a limited partner is and you're a startup and you're wondering you've learned over time that a venture capital firm has general partners that's in the industry referred to as a GP we have another term of art in the industry an LP that's a limited partner that includes a wide group of individuals pension funds right so you retire and your money goes into a pension fund they earmark a certain amount of that uh to go into venture private equity and of course public markets bonds all kinds of different things you have university endowments you've heard about harvard or yale having these giant endowments those are also lps family offices sovereign wealth funds and of course the category of fund of funds this is where people put a pool of capital together and they fund other funds.

3:00High net worth individuals are also or ultra high net worth individuals are also LPs in funds. So when a venture capitalist puts money in a startup, they're the GP at the venture fund, the general partner, the venture fund, they go and they pass the hat, they pitch LPs who want to deploy capital in order to get market beating returns and have some diversification. And we'll talk about all that today. The LPs are generally a quiet class, They don't talk too much. They tend to be under the radar and you might not have heard of them. But it's changed a bit over time as the dialogue between GPs, founders, venture capital firms, and these endowments, etc.

3:43People have started to cross over and there's overlap. And like anything else in the modern day of podcasting and blogging, more and more information is getting shared so everybody can be better at their games and empathize with the other people on the other side of the table so uh today our first guest on the season of angel we have josh berkowitz he is from berko corp uh and it's a canadian family office one of those types of lps uh and that's the vancouver berkowitz family josh is the managing principal over there josh welcome to the program thanks for having me all right so you heard my sort of uh preamble there uh you are an lp in venture funds so we thought this would be a great place to start is to talk to you a little bit about you have this family office my understanding is real estate is uh how the family made their money but then you wanted to add the asset class of venture so so why does a family office uh start to uh diversify and get into venture why do they pick that asset class why did you pick that asset class yeah so i think it's first going back just one step and be like, how do most family offices get created?

4:52Usually the most common way is you sold a company. The other common way is, especially in the real estate business, is you've been in real estate for a while and it's compounded and now you've got a big pool of capital to work with. You make a lot of money by being very concentrated, but you keep your money by being very diversified. And so most family offices, once they have that big liquidity event or they get to a certain size where they say, okay, I'm happy with what we've got. We want to dial down the risk a little bit, then they want to diversify. And at that point, you go, okay, well, what I want to diversify into, the common asset classes you hear people diversify into are public equities, private equity, traditionally, that's buyout, though there's more flavors of that now, venture capital, we're going to talk about, there's many other things, you can do bonds, you can do private credit, you can do commodities, there's many other esoteric asset classes out there.

5:42But for the biggest, most diversified family offices, usually they have some allocation to all of those why i think venture and i think venture is interesting oh so many reasons i think it's the most fascinating of those asset classes by far start from the top so if you sort of line up all of all of those asset classes i mentioned historically at least the last probably decade or so venture is the highest returning one on an like on average if you look at purchase data or pitch book data i think that's problems with the data but on on on average it is so first one you have the opportunity to make a lot of money or make higher returns.

6:15It also is the asset class that has the highest dispersion of returns. So if you let's like compare and contrast it to public equities, if you invest in public equities, in other words, stocks and S &P 500 or globally or whatever index you pick, the best managers over a long period of time perform like a few percentage points better than the average manager. So let's suppose you're like, I'm going to go try to play that game and go find the best public equities investor in the world, on average, if you're good at it, you're going to beat the market by a few percent. We can have an argument over whether or not that's actually a worthwhile thing to do in index investing versus active investing.

6:56But even if you're good at it and you take the active investment hat, you're only going to beat the market by a few percent. Venture capital is like the other extreme. If you're in the top venture funds, they crush it, right? They hit returns 20, 30, 40 % funds that return 5, 10, 20 extra money. And your opportunity for outsized returns and success is just much higher if you're good at it. So if you sort of think as a family office, where do I want to diversify into? Well, an asset class that is historically high returning, that rewards patient capital, because you're locking your money up for sometimes 10 plus years, and where if you put a lot of effort in to find the best GPs and get access to the best funds, you can make a lot of money well it seems like a good place to allocate capital too um so that's that's sort of like the financial reason to do it and and a lot of family offices are entrepreneurial they made their money because some matriarch patriarch or sons daughters multi-generation i just got back from the middle east where you know we saw these incredible family offices that have now you know three four generations into wealth creation it turns out they're entrepreneurial they have some person who you know came to their country or america or in their country found some great opportunity and slowly compounded it over decades and then you know the the kids participated and it's entrepreneurial and and that's part of the exciting fun part about it i think as well as opposed to just buying the index and and you know just accepting whatever the average is so there's a there's a little bit of that I think I'll step further too and say it's both entrepreneurial and it's a bet on the future to bet on making the world better, not just rolling up vet clinics.

8:40Yeah. And again, to people who've made their money starting businesses, that like sort of optimism that's baked into the industry and the desire to change things for the better, I think is also baked into the reason to do it. yeah this is a really great point you get to when you have a family office or you've accumulated some amount of wealth you get to build the world you want to live in you get to optimize for things that you find personally enjoyable or rewarding and people forget that it's why i've chosen to be a gp and an lp i like hanging out with founders because they're world positive and they want to change the world and do interesting things it also makes you feel young to hang out with young people who are you know uh trying to change the world and send super smart people that are interested in the weirdest that, you know, are experts at super strange industries you didn't know existed that have divergent points of view.

9:28And it's exactly what I want to spend my day, my day working with. If your landing page looks terrible, customers are just going to leave, they're going to bounce. It's 2024. There are no excuses for having an ugly website. So stop settling for okay or good enough and have an excellent, a beautiful and extraordinary website using Squarespace. It's out of the box. Beautiful website designs that will engage your audience, allow you to sell anything, whether it's content or an actual physical product. And you know all these amazing Squarespace features. You've heard me talk about it before, but they have the most amazing, gorgeous templates to get you off to the races instantly.

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10:44It's the simplest, most effective and best looking way to start a business online. So here's your call to action. Check out squarespace.com slash twist for a free trial. And when you're ready to launch, go to squarespace.com slash twist for 10 % off your first purchase of a website or a domain. So then of course, the question becomes are too many people interested in venture capital? Were there too many venture capital funds over the last couple years, it does feel like there was a little bit of saturation. And the industry is kind of boutique. it is unlike some other industries where yeah a lot of people can own apple stock i mean you do also have issues of too many people wanting to own apple stock perhaps uh and it becoming getting ahead of its skis let's say but let's talk about the the selection process i'm i'm a lp and i think 24 funds my four and 20 others i'm curious how do you uh evaluate funds and do you have a preference for seed stage series a growth stage later stage um and so two-part question there the stages and then what you look for in terms of managers etc big question um yeah so why don't i start from the top i'm a family office we write meaningful checks to the gps we back from a few hundred k to a few million but we're much smaller than the big endowments and institutions and so that will color the kinds of funds I look at and will color how I think about what funds to invest in.

12:11I say that because like, let's suppose, you know, the other end of the spectrum is let's suppose your calipers and you manage a few hundred billion dollars, the Canadian pension funds, the smallest check you can write is maybe$100 million. Well, that means you can only invest in massive venture funds. That's a totally different game than the one I play where we're investing much less than that. And as a result, I can look at much smaller funds and bigger funds. Um, but it, it, it sort of opens the aperture on the kinds of funds I can invest in. And the reason I say that is because, well, the way I'm going to diligence, um, you know, Jason of 10 years ago, you know, raising a small, a small angel fund or a small, you know, a small first seed fund relative to the diligence in a Sequoia or Andreessen is just wildly different.

12:54And the things you're going to look for, the way you're going to evaluate them are different. So let's, let's maybe start with the small guys. Sure. Um, or small, small girls, um, small teams. Um, emerging managers. I think is kind of where people are now putting this umbrella. And I would guess emerging managers means, you know, three or four funds or less, right? Something in that range. I think that's right. I think the challenge with that definition is, is there sometimes there's a first fund and it's a$400 million first fund. Yeah, you do have that weirdness. Yeah. Right. Like it's sort of a size thing too.

13:25And then you have the person who's raised seven funds and they're all sub$50 million because they've stayed, you know, in a certain size range. So putting that aside, so let's just say small funds, almost always there's a few people involved. There's a few key partners, right? One to three people, let's say. So the diligence work is getting to know them, getting to know what's super special about that group of people. To your point earlier, venture capital is like a really cool thing to do right now. There's probably too many people doing it. The people that do it, though, tend to be a super exceptional group of people.

13:58So pretty much every VC you make that's out there doing this is going to be a really, really impressive person. So what you're trying to do is separate out the really impressive people and try to say, are they so damn good? Are they so perfectly set up to execute their strategy that you think they're going to beat everybody else? When I look for talented GPs, I'm just trying to find people that have absolutely exceptional unique strategies and that they're uniquely the perfect person in the world to go execute it. Ah, see, this is important. So is it a unique strategy? And is it that is that person able to execute that strategy?

14:34People come up with all kinds of really interesting ideas. I get pitched on a ton of funds because people have found out now that I LP funds and I add one a year or so. And I'm not quite in the family office, you know, portion of my career. Maybe my daughters will be that I'm still in the GP sort of phase of my career. But yeah, you do have to not just have a great idea, but the ability to execute. So maybe we could talk a little bit about strategies you've seen at the early stage. And maybe you can talk about the background that people have. Some people think you got to be an operator, have run businesses.

15:08Other people think you have to be a strategist, a Bill Gurley type, an analyst, somebody who's super analytical. So take me through interesting strategies that you've seen in the market and then interesting backgrounds for emerging managers. Sure. So I think in the early stage, the most easy to wrap your head around strategies are the geographic focus strategies or the sector specific strategies. So you can have a backup group that's based up in Seattle. And they have an amazing ground game in Seattle. They know everyone there. Their LPs are Hughes who have been to work up there. They're sort of in front of all of the right people.

15:46And there's a handful of institutions in the Pacific Northwest, like the Allen Institute and a handful of others, that if you can build a great network within those nodes that shoot off a lot of startups, you have a built-in advantage to see all of the best companies in the area and also to win the deals because you can use your network to win and reference you and all of that stuff. Then you have the sector specialists, people who can be super technical, could be supply chain experts, space experts, hardware experts. pick your vertical if you can become known as a global expert in that unique niche infrastructure pick whatever it is you can differentiate yourself and if your background is the right person to do it then I think you're gonna be really successful with that strategy then you have another class of people I think that have just worked for their entire careers in and around startups it could be that maybe you are a former partner YC and you've seen hundreds of businesses.

16:42Maybe you've started a bunch of businesses yourself and then you began angel investing for a long time. And as a result, you know hundreds of founders and you're in the exact right networks. And you live in the heart of San Francisco and you see everyone and you're known as a super sharp person. I think everyone in their own personal lives can sort of think about different people like that. In the early stage world, there's all sorts of sort of nodes of people like that. And many of the best investors are sort of that person that's on an island that everyone looks up to and it's like that's you know that's the person you want as your early stage backer because they're going to help you um and just it just had a lot of value so i think all all of those those things can work right the first two are sort of more specialist strategies they have tons of super talented generalists that have been successful in this business as well um i just think that the most important thing is like they really need to be incredible people like absolutely incredible one-of-a-kind people and i i mean that like in the in the in the sense of if you leave a conversation and you sort of forget about it afterwards that it's not good enough like it needs to be a spiky individual that just really knocks your socks off and also has a network and career path that shows that and that probably correlates with the experience that a founder would have meeting them is this founder going to feel that this person is sharp accretive uh they're gonna they're well networked they've got good insights maybe they've been down a lot of paths and know where some of the the potholes are and some of the sharp turns are to help you out.

18:09But they can also be... I always get really impressed too when a GP closes me, the way they'll try to close a founder. Because like lots of the VC businesses, I got to win a deal, especially if it's a hot one, it's oversubscribed or there's capacity constrained. How are you going to close that? You're probably going to add a lot of value, probably going to get your friends to maybe add some value and reference you in and do whatever you can to work and win the deal. I get very impressed when GPs do that with me too. And I find out that billionaire founders are willing to reference them to me in five seconds because they care so much about that GP and what they've done for each other.

18:48Yeah, that is significant if you can list somebody on your references or even activate them. And yeah, I've been lucky enough to have some high caliber people in my network be able to act as references for me and just the even the ability to say like oh well if you wanted to call travis from uber or you wanted to call jonathan from thumbtack or vlad from i've done that before i remember like emailing paul graham and getting an answer and a few hours later being like this person is awesome you should absolutely do it right i talked to so to say this i talked to jamie simonoff the other day who who in two hours called me back then the founder of ring to to reference someone it's like that that matters it shows how much they value the the person's investment in mentorship.

19:32Yeah, the fact that they would actually take the time to respond to the email when they don't have to. And when people don't respond to an email, that kind of tells you a lot. You know, if you've ever had a difficult relationship, it's not that you're going to give a bad reference so you don't respond. I always tell people to be very cognizant of that. You know, you're not going to get a bad reputation, a bad reference. You're just going to get no reference. And no references, that's tough. so when you when you look at what a gp has to do in their job i've been giving this a lot of thought both introspectively yeah running my own firms um and also when i pick firms what do you think a gp does and a fund does at its core at its essence joshua what what does a vc fund have to do to be successful so like the simplest mental model is you got a source you got to pick you got to win you got to support maybe you can say exit afterwards um of those certainly the most important thing is is picking at least i think it is um that said if you if you're not in front of good startups picking doesn't matter um but you really you got to do all of them well uh and you got to have a good answer for what your system is for doing all of those well um so sourcing are you are you a podcast host that knows everyone are you super well networked are you a big twitter personality are you really well known uh for your technical chops in a certain certain area are you really well known in a certain industry vertical that that is important to you are you really well on a geography are you you know that that's all really really important because if you're not in the right rooms with the best founders and best startups it doesn't matter how well the rest how well you you do the rest of your job you're not gonna be successful um so that's step one then And you got to pick well.

21:18I tend to think picking is a game of first, you got to be talented enough to do it. But you also got to do it a lot. You got to see a lot. You got to get reps in. I think it's really tough to just come out of the womb and be good at picking which startups are going to be successful. So when I pick GPs, I tend to bias towards people who have seen a lot of startups from the earliest stages be successful. If I met Travis when he was raising, I would have no idea if he was good. Because I don't have the reps. I have no idea. The vast majority of people have no idea what good looks like when a future$10 billion business founder is working out of a garage.

21:52You got to have a lot of reps. You got to know what good looks like. Sometimes the only way you can do that is by getting the experience, working at a venture fund, working at an accelerator, being around the valley for much of your life to see what that looks like. people really um who come out of accelerators i find um have really had a great experience because you have to sort through so many companies and the average gp i find they do like a meeting a day you know so they're doing five meetings a week on our team you know i watch my researchers and analysts which are the sort of entry level or like the starting part of point of people's careers when we hire them out of school essentially as a researcher and then they become analysts and we train them up you know they're doing six meetings a day it's i'm writing coverage you know and you start to think about now these are introductory meetings so they take they should take 20 30 minutes over zoom which is an also a new thing you know as opposed to coming to an office and it taking two hours because you got to have coffee with the person and do all this performative stuff you know things have gotten pretty efficient in in uh introductory meetings at least founders just want to get on and off the phone and men when you get to 500 meetings something magical happens like in terms of signaling and just being able to understand very quickly uh you know where this founder is coming from let alone when you get to thousands of meetings and i track this now this is a key metric for me internally is how many meetings people are doing and i've actually now coordinated uh raises and um you know advancement in terms of job title with the number of meetings uh because there's just no substitute for it and if somebody wants to go faster i'm just like yeah take more meetings uh so i think that's an important step one i think i think the other thing is it if you do that you probably get really good at separating out the bottom probably 90 of startups yes but in a game where most of your money is made from the top 0.01 of startups yes it's that experience that's actually so damn hard to get right because you know if you're one of your your research analysts and they've met say 500 people in a year more they still don't know what are the one or two that would return the fund they haven't seen what vlad did with you know robin hood they haven't seen what alex and michael did with com they actually haven't seen the full arc of a company right yeah so i think that's actually and they haven't seen the difference between a top one percent founder and a top 0.01 founder yeah i could have a better way to say it literally had this on our investment team meeting this week and i was like you know people were uh lamenting you know sort of how difficult uh somebody was being and i was like yeah uh by the way extreme competency and agreeableness these are not it's inverse like extreme competency can make you a very cantankerous person because when people say stupid things or they do stupid things or they don't perform at a high level you know like a michael jordan of the ceos like you know you watch that uh michael jordan documentary and you just see how profoundly critical he was of himself and everybody around him in the details and uh yeah you're not gonna make money with agreeable people to vc gps as well right like the the number of characters i know in this industry is is too many to count um and i think it's the same the same effect right great people are to your point agreeableness and and competence skill at the job competence are not correlated at all yeah it's it's inverse at least in my mind now you could have somebody who is supremely incompetent and also disagreeable but i just haven't seen it all that often i don't that quadrant in the box in the four you get kicked out of the industry right if you're an if you're an idiot and no one likes you you don't last very long so i think the reason they're anti-correlated is if you can make it in the industry and be grumpy and whatever.

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26:23So 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 northwest registered agent.com slash twist today this leads me to a question when you're evaluating folks there is this now um when i came into the industry 20 years ago you know and i went from a journalist into you know founder and then eventually started investing vcs were very quiet then blogging came along fred wilson started blogging brett feld started blogging jerry colonna started blogging i started blogging a lot of people blogging then i started a podcast some other people started podcasts and then social media and now you're on social media and it's there's almost like a meme of like you know what oh there's a war in the world or there's some conflict or there's some political thing going on i guess we have to get some venture capitalist opinions on this and it's like do you need a venture capitalist on world affairs and um you know you'll have uh bill ackman out there as a fund manager you know talking about dei talking about harvard you've got paul graham on another side of the you know spectrum talking about um you know the palestinian conflict and this is a new thing so how do you think about that as an lp and then you've got people really chiming in on the world's most intense cantankerous you know charged issues is that something where you're like does it matter performance or you know that's just to be expected you know these people are going to be out there talking about all kinds of topics yeah how do you process all that probably say it's to be expected when you're backing one of a kind people like i'm a family office we don't have a you know if if a gp we backed says something inflammatory or stupid in public i'm not getting in trouble from my board from it yes yeah i can't i bet it's a bit more problematic for the big institutions that um have a big investment committee and then a board of governors who is not just financially motivated um you know who may actually make allocation decisions based on that kind of thing um for me it's just part and parcel when being in a world full of you know one of a kind disagreeable people who often have you money at this point and have earned their right to you know be themselves in public uh do i like it all the time no does it have it has it ever really impacted an investment decision i've made not yet at least um could it if they say something i strongly disagree with probably uh but then they probably wouldn't want to work with me either if i disagreed so strongly with something they said and there's enough people in the industry that yeah i think you if those conflicts do occur you could basically route around them you're not everybody in this industry you're not working with everybody by definition it's just too fragmented of an industry uh for that to happen i did have it happen one time when trump first became president i was on cnbc and for whatever reason it happened to be the day after it was either inauguration or the thing they just asked me what do you think and i said well you know it's not my guy um i hope he can you know i'm rooting for him i hope he the the gravity of the office makes him you know rise to the occasion but quite unpresidential to make fun of um you know john mccain um for his injuries that he suffered as a pow and um somebody who i just pitched as an lp was on fire that i called him unpresidential and i was like but was he unpresidential making fun of john mccain felt a little unpresidential that doesn't sound like you you uh you said something too too too off the ball too could have been a much much more inflammatory way of saying what you just said it almost seems benign by today's standards of where we're at um but look i think the nature of raising money though from from family offices is they also are often dominated by one of a kind weird eccentric crazy people and so as a result you're gonna piss them off because people are people uh yeah people like to to debate things um how do you think about so deal flow is super important how do you get deal flow you know i'm got lucky because i have podcasts i get too much deal flow and the biggest the biggest issue i've had is managing and having to build a very large staff of team members to sort through deal flow most people are trying to fight to get deal flow and trying to build a brand.

31:04So I think we understand deal flow there, but when you start, it's pretty apparent, right? So decision-making, I think, becomes the next part of this. How do you figure out and what have you learned about decision-making as you're placing bets on GPs and how they, what's their process for coming to a decision? Consensus versus non-consensus and individuals at founder funds just, you know, they make their own decisions. And then you saw Keith Raboy went, from founders fund back to coastline because he wanted to be in a meeting he said you know an investment team meeting i'm sure you saw it he was like i want to be in an investment team meeting that's long and contanguous and people are arguing and you know he wanted that kind of spirit as opposed to founders fund which he said you know people are kind of off doing their own thing making their own decisions so so so first on the deal flow side i think for for me at least there's three sources of deal flow there's founders there's gps and there's lps um all of them know great GPs, right?

32:01Founders know great GPs because they're their best investors. GPs know that no other great GPs because they're their favorite co-investors or their favorite follow-on investors. LPs know other great GPs because they're their best performing funds. So every time I meet with any of those groups, I tend to keep my eyes peeled for any groups they mention or I'll ask explicitly for ideas. I try very hard to do more outbound than inbound, right like there's a class of lp that's just like gonna wait for a fundraising process to happen and then when if when a gp is pitching then i'll get in front of the gp i try to be more proactive if i if there's a if there's a gp or invest investment fund i want to get into i'd much rather meet them when they're not fundraising so that when they are fundraising one i actually have a chance to get in because sometimes those processes take a month if it's a small fund that's really oversubscribed um and also so i can do my work before uh you know beforehand so so that i'm not rushed under the gun um so that's sort of the sourcing side the picking side is like to your point about like decision making internally every venture fund does it differently and there's been every kind of success right like if you like look at benchmark and sequoia benchmarks like partners only they're all equal um you know there's almost no staff uh obviously an insane track record and you look at sequoia and you've got a massive platform massive fund tons of partners tons of stages, also massive success.

33:26Every part of what they do is different. All of them can be successful. The most important thing to me is that like the strategy is internally consistent, that every way they've structured their firm works together in concert to deliver returns. And so if I have a black and white rule, which is like, I like consensus only firms, or I like, you know, individual decision maker only firms, both can be successful. The most important thing is if it's a consensus-driven firm, do you have the right people at the firm that can work well together and solve those decisions well? Is it a collaborative environment?

33:58Do they still flush things out? Can you still pursue the idiosyncratic deals? And then vice versa, if it's everyone's sort of a free agent style founders fund structure, do you have the right people there? Do you have the right incentive structure that fits that? Is the culture set up to make that successful? Well, so you really just need to make sure each of these is internally all lined up to create the firm that they want to create, which makes the picking job harder because now you actually have to understand how the firm works inside. It's actually part of the reason why I tend to like smaller funds and like one, two, three partner firms rather than the big platforms.

34:35Because the big platforms are so difficult to diligence. You often have no idea what's going on inside. it takes a long time to get straight answers from everybody and you probably won't ever get straight answers because there's all this politics of diligence whereas if it's like a solo gp fund or you know there's one or two people that are really the important decision makers it's a lot easier to understand what's happening understand how they think and understand how the process is along with that all right listen b2b marketing is hard we all know that why is it hard because buying cycles can be long and b2b decision makers are hard to find and they're really hard to target So here's the best solution for B2B marketers, you know, LinkedIn ads, everybody knows LinkedIn, because it has over a billion members.

35:16We're all there every day hanging out looking for a new executive sharing our wins, and just generally staying informed. But did you know out of those billion users, 18 % 180 million are senior level executives, and there are 10 million C level executives. Those are the CEOs, CTOs, CFOs, COOs, chief strategy officers, you know, these folks, If you want to close big deals, you got to get in front of decision makers. And these are the decision makers you need to target. And according to LinkedIn's data, when B2B tech companies use LinkedIn ads, they generate two to five times higher return on ad spend than other social media platforms.

35:51LinkedIn ads is a no brainer for B2B companies. You'll build relationships with these decision makers. You'll drive results for your business. And you'll do all of this on a platform that respects the world you operate in. So here's a call to action. make b2b marketing everything it can be and get a hundred dollar credit on your next campaign go to linkedin.com slash angel pod to claim your credit that's linkedin.com slash angel pod for a 100 credit terms and conditions do apply yeah this is something i'm obsessed with right now is decision making and picking uh because we now are making a lot more investments per fund we have a lot more surface area because of the programs foundry universities like a pre-accelerator we do and then we have the accelerator launch accelerate which is you know kind of like yc and so and we have 20 000 people applying for funding we have 21 000 startups now in our database and we have a database approach to this now like you said you know getting rid of the bottom you mentioned 90 getting rid of the bottom 50 super easy okay this person's doing a d2c business this person's in another language in another country they're better off having a local investor who understands the culture etc so you can really start to you know narrow it down pretty quick but the top 20 you got to be really thoughtful and you kind of made that point so we really started looking at um the qualifications of companies that we saw succeed in seed and what succeeds in seed and what succeeds in the series a and series b it's actually kind of really different because when you get to that series b you might have 36 months of revenue data you know and cohort data when you're a seed stage investor you have no cohort data you have six months of revenue right and so you start looking for things that may be more qualitative because you don't have the quantitative and obviously public market investors do that and so we we've literally have made a playbook here are the 13 qualities of why we should invest and then this really interesting thing happened we started making we started making a list of things that killed companies and you know previously and that list grew to 25 very quickly now those reasons you can't block uh an investment but you can also try to solve them and they're also problems what are some of the first examples of those that come to mind in which which group in the ones that killed kill companies cap table concerns are a major one so if you have cap table problems like low founder equity at the seed stage and they've given away 60 of the company you're like well when they do their series a that's going to be another 20 gone a series b another 20 gone these founders are going to have very little equity and then what happens when you have very little equity well then you have to recap the company or give huge grants to new people or the founders leave to start a new company because they they screwed up this cap table so that you see a lot of that in canada and in boston actually just really broken cap tables at early at early rounds and do you know why that is i have some theories but i'm curious if you figured it out you have all these angel groups that are just kind of predatory and and catch these founders um you nailed it before they really know any better they catch the founders before they know any better they put 250k in for 40 of the company or 30 of the company now the founder is not in silicon valley they're like wait a second i can go to jason's accelerator and get 100k for 6 why am i giving 20 away for you know 100k or they've got like some massive liquidation preference and they put protective provisions in the documents that out here in the valley we're like why are you bothering with all that downside protection this is about the power law and the outliers and in boston in in canady maybe you haven't seen as many so the angel groups etc maybe aren't as predatory um but it's really short-term thinking so that that one the broken cap table is is challenging i we had one company we loved um i'll i'll make this a bit of an amalgamation of uh multiple ones but we see this often they they had some dev shop build version 1.0 of their app which they've since like moved on from and rebuilt or whatever but they gave them you know they they paid them 10k and then they gave them 250k in stock in their two million dollar run now that company owns 15 of the company or 14 of the company instead and we go wait a second this is dead money on the cap table if this thing becomes google that you know or uber they don't deserve 14 billion dollars worth of equity so we just say to that dev shop hey you can keep two points of equity we want to pay you for the dev work you did yeah and you know what we can't be probably happy about that right because they're probably like actually i wanted cash anyways well and also if the choice is high profile investor comes in you get cash and you still have some idiot insurance on the equity or the company goes out of business and we'll coach company on how to present this hey we're going to shut the company down we can't raise money your equity is worth nothing or door number two you could get a little bit of equity right accounting nightmares that can be problematic where people don't understand their gross margin their accounting is problematic uh we've seen um um i think meandering is an interesting one uh we sometimes call it lost in the wilderness or meandering we'll say when was the startup incorporated and you know i see they're telling us like about two years of the company this new product they've done but then the company's nine years old and we're like what happened here oh they you know four pivots the same cap table and then you have cap table problems accounting problems so that you know there's a capital inefficient businesses a slow sale cycle you know people are going after um you know education uh health care defense yeah super slow sales cycle now if you've got an extraordinary product great outsource tech i find that one solo founders is another one um most of the great founders even if you see them today they were not solo founders on their companies they had many co-founders at paypal many co-founders uh you know at facebook even you know you just only remember zuck you don't remember wardo and everybody else who was involved so you know they're just it's just a framework for decision making but i like your kind of concept there that it has to be you know it has to match the overall architecture of the strategy of the, uh, fun.

42:06So maybe I could probably play the same game with venture funds. So if you think of like things that are quick disqualifications, people that have never invested before, um, people that have never worked together before, um, people that have invested at totally different stages than the way they're trying to invest. Now people that are trying to lead rounds that have never led around before, um, people that are trying to invest in areas that probably shouldn't, have traditional venture capital in it media consumer packaged goods yeah exactly investing in in areas that are having a tracker that shows you invested in areas that like you i don't know like crypto investors investing in ai um these are not analogous yeah like i can quickly say no um also the reality is like if you sort of look at the gp ecosystem there's there's now thousands of venture capitalists but most of those are small first-time funds like in terms of the count.

43:04Like a venture capital LP commitment is like a 12 to 14 year commitment. It's pretty hard to justify making that to someone who's doing a job they've never done before. Like even the best CEOs aren't that good at hiring executives. There's just tons of misfires. And so when you're an LP and a GP that has never done the job before, and you're making a 12, 14, 15 year commitment, it's just likely not going to work for for so many different reasons they don't said they're not they don't like it they're not good at it it's not what they want to do that one is like a big one they're trying on vc as a concept you know right that i see a lot of adventure a lot of gp tourism um and people getting out of it actually my bestie free because it was so it was so cool for a while right it was like the thing to do well yeah and freeberg you know ran the production board and he said he just now that he is at ohana he feels like he's so much more engaged and it's his natural position he's was on a couple of podcasts and he's and he's talked about it on our podcast just how frustrated he was working with ceos who you know didn't move quick enough or didn't make right decisions and how he felt powerless it's like you should be ceo you're a ceo bro yeah if you can't handle you know somebody else flying the plane you need to be the ceo yourself i think it's a super um a critical and if you're lucky you know like like you have a gp that gracefully exits that finds a good person to take care of the portfolio and manage it out if you're unlucky and it's a smaller fund with someone who's less experienced doesn't have a platform then like that portfolio is kind of orphaned um yeah have you seen that have you experienced that or talk to people who've had that happen because i've talked to people who've had that happen oh yeah well what if because yeah i've i got approached once where somebody was like hey this yeah i gotta be careful here because if i tell you any more details it would be obvious anyway something blew up in this program space where i am and they said like hey you do programs uh would you take this dumpster fire and try to manage it for us and i'm like so all of my cycles is going to be every day turning over what disaster happened here in this crime scene of a insane you know implosion no thank you um and then how are you going to get paid for that They're just going to give me management fees on it or the carry or whatever.

45:30And they're probably not going to be carry, right? Because otherwise they'd probably still be involved somewhat. And fund administration is not zero work, right? Like there's a lot of back office BS that it takes to run a venture fund. And I actually think a ton of GPs, this is especially a problem with the spin outs. Like, you know, if you're spinning out of a major platform, you're like, I'm a great investor. I want to have a shop that has my name on it. I want to do things my way. Great. you spin out and previously nearly 100 % of your time was investing in startups or supporting the startups you invested in and now half of your time is fundraising, fund administration, hiring other investors and staff and you're like, this is not what I signed up for.

46:13Plus you also lack now the power of a brand, right? Maybe you are at Andreessen or Sequoia or whatever and when you sent someone an email you had that at A16Z in your email address and so everyone responded to you and now you have nothing and so now you're spending half your time fundraising and and dealing with administration and you don't have um a brand that helps you get in front of founders like you used to suddenly you're not suddenly your your tracker is not so good suddenly this isn't the job you want to do and then you shut it down a few years later um that also happens that is a major yeah challenge and people who should start a fund like you're saying hey you've been at another platform, and you have an idea that you feel uniquely qualified to do.

46:59Hey, you were at Founders Fund or Sequoia, and you want to go into defense tech. And there's a clear lane and nobody's got it as their mandate, you're going to be the defense tech firm of the future and fund those things. And you did a couple of select investments, or you were the crypto person at Andreessen Har, which had great success. Now you're going to have your own crypto fund, whatever it is. Yeah, that's a great reason to go do it. So for people who are wondering who gets to start a venture firm might be helpful if you worked at a venture firm before you know if you want to open a restaurant you might have want to have been a chef at a restaurant before a front of house or back of house i don't know why this seems so revolutionary to some people like the vc industry is you know really easy to break into i know everybody thinks it's so hard all you have to do is make 10 angel investments or be an advisor to 10 companies or have worked at a venture firm or have worked at startups and done a great job in some capacity i mean there are like five or six different lanes even journalists are getting gigs right we had a whole series including myself if you can't pass that bar and do one of those things you certainly have no business starting a venture fund because starting the fund is like a thousand times harder than getting a job at a venture fund um so you better be able to clear that first hurdle uh before you move on to doing your own thing all right so we did deal flow we did decision making my third is doubling down because i i know you have to compete for deals i'm going to take that off the table not to be conceded in any way but i haven't had to compete heavily to get on cap tables because people i'm one i'm at the seed stage and most deals 90 % of deals are passing the hat there's allocations available so that's one thing at seed stage you don't have to compete as hard as like series a where or series b where it is very very competitive uh and usually one person wins i think it's harder if you're writing lead checks right if you're a if you're a seed firm that wants to write two three million dollars into the seed round very different game than writing the two hundred thousand dollar support check absolutely um i actually think one of the challenges right now is there's too many lead seed investors um i don't know if you're seeing that but i think what happened was there's a whole bunch of new lead seed funds that were started over the last few years and then you have the mega funds that because they're slowing down suddenly have the time and resources to go down and so you have a lot of capital competing for that like lead spot early rounds it is interesting to see venture firms say you know what i need to get some c deals going here because i'm overpaying from series b and i'm overpaying for series a and i'm losing series a so let me get down there and then what happens is they're like okay we put 5 million in i'm like you're talking about a series a now this is a company that wants to raise 2 million and they only want to dilute 10 or 15 how do you slam 5 million into a 14 or 12 million dollar valuation company you can't and so there's like unnatural acts like they yeah it kind of happens absolutely i mean the good news too for founders i find um with that situation is they got multiple seed funds and if they're coming out of our accelerator and they do have that i say well if you like two of them just do what larry and sergey did with kleiner and sequoia just say here's the deal you're working together we want to put both of you on the board we want both of you to work hard and then oh you shouldn't have that many board members at the beginning whatever no put them both to work they want to do four million great you got two each or you're each getting 1.5 and i'm saving 1 million for my angels um and if you're a hot company you actually can dictate to the gps and i think sometimes founders forget that you know because somebody wants to hit some ownership target if you tell them like no you don't get to hit that ownership target it right now you could compete in the future for it but you can own five percent now people are going to take the five percent trust trust me the one i am curious that you think about is doubling down dry powder and those strategies this is a thing the two things i've been obsessed with internally with our funds and when i invest in other ones decision making process and doubling down and the process of doubling down why is that important pretty obvious if you hit a winner you tend to know it's a winner and you want to get as much money in possible so how do you think about doubling down in the strategies you hear from gps about increasing their ownership percentage and their winners so i think i'm i probably have a different point of view on this than than maybe is is the most common um first i don't think everybody should be doubling down or even have any reserves i think if you are a early stage firm that's running small checks into most of these companies and then the only information you have afterwards is that you're reading the same quarterly update as every other investor i don't actually know if you have any extra information to make you think you should double down at the a or b you're you're not on the board you might not you're probably not getting direct information from the founder you have no new information on like market size necessarily or any of the other information that typical a or b investor would look at to make a series a or b investment decision i don't know why you're wasting your time with a doubling down decision because like you're not a good you're not a good late stage investor and you have no special information.