E38: Turpentine Fund Brainstorm with Alex Edelson of Slipstream

0:00Today on Turpentine VC, we have a slightly different format. I sit down with Alex Edelson from Slipstream Investors and pitch the creation of a new fund to get his reaction and insights. We cover portfolio construction, strategy, and how to prove out the concept, all based on Turpentine's master plan. You can find a link to it in the description. Alex, the founder and general partner at Slipstream, specializes in investing in top early stage venture capital funds that are difficult to find. Prior to that, he was at QED. Here's our conversation. First off, thanks for jamming with me and giving me some early feedback as I think about where to take this.

0:38Yeah, thanks for having me on. So Punchline is wondering about the future of Turpentine and how it could be used as a potential fund asset for quick background. you know, helped start Village Global and spent seven years there and made a bunch of investments, also helped start OnDeck and was the first employee at Product Hunt. So have operating experience, have investing experience, have a strong track record. And now, you know, the Turpetine learning is actually built on the OnDeck learning a little bit, which is OnDeck built these vertical, first OnDeck was an investing asset in that we were, you know, we were seeing founders before they started companies.

1:18And that was helpful. Product Hunt was also an investing asset in that we could provide startups with distribution. And so people wanted us to be on the cap table, basically. And so in terms of sourcing and winning, both of those were helpful because we were seeing things early and there was some advantage, whether it was distribution with Product Hunt or recruiting with OnDeck, recruiting early talent or co-founders. So I like that idea of building assets that are helpful to investing that kind of work in your sleep. Otherwise, I'm just a guy, just like anyone else is a guy. And so that's the one thing that inspires me at term time.

1:59Another thing that's inspired on the learning of OnDeck, OnDeck was these vertical communities. But as vertical communities get bigger, sometimes the network effects, they're actually negative network effects. Communities can get diluted as they grow. And since we raised venture, we had to sort of scale them. And it wasn't the right incentive mechanism. So Turp Town has not raised any venture and not planning to raise any venture. But also, I was looking at Lenny Ritschitsky's business. He's got this product management newsletter and podcast that does a few million dollars a year. It's very successful.

2:34And I was comparing that to our product management community. And I was like, huh, his business can get bigger and there are no negative network effects. He doesn't have to worry about the person reading his newsletter, the incremental. He's got 600 ,000 subscribers now. If anything, maybe it gets better because he's now sucking up data from them and sharing that data back in surveys and stuff like that. So I was like, huh, instead of vertical communities, I want to build vertical media properties, like what Harry Stebbings has done in VC or Lenny has done for product managers and do them for every sort of enterprise buyer position.

3:07Basically, I could own these unique audiences of hundreds or thousands of HR people or CFOs or sort of positions that people would want to sell to. And then also I could do it among different sectors as well to develop sort of expertise there. And it would serve one as a distribution platform. So for companies looking to sell to certain positions or even just get in front of the tech founders or tech audience, that would be helpful for investing. But then also, since part of the media is doing diligence. Maybe we could build this army of researchers that do diligence as a service, basically. And we should trade on that or invest on that diligence.

3:55And we don't have to have a big fund to do it. So we could have a$50 million fund or$100 million fund, or I'm just naming random numbers. We could have a smaller fund, but have the resources of a billion dollar fund, at least in terms of diligence. So I'm curious to get your perspective. If Turpentine succeeds in its media goals and we're off to a decent start, goals of providing distribution, owning niche audiences of enterprise buyers, creating this diligence arm that we're at the very beginning stages of that specific part, what type of investment property, if at all, a vehicle should we create on that.

4:36We have some examples of media to invest in. Obviously, Harry Stebbings, obviously, Paki McCormick. Lenny himself has a very active investing practice. And so you've seen these in the market. And Dreesen, of course, talks about being a media company that monetizes through venture. Anyways, I'll pause here. I just wanted to set the scene of it. Yeah, it's great. I mean, super interesting. I have a lot of thoughts. And in fairness, I didn't come into this knowing a lot about the strategy here. You're hearing it for the first time. I'm kind of riffing here. But no, I think it's really compelling.

5:13I think the question is, one, is it a unique edge that founders of companies in some sector and at some stage would be compelled by? Would they be motivated to work with you because of what you've built or what you are building? Like at some point in the evolution of what you're building, will this appeal to them and make them want you to be involved in their companies financially? And like, will they want you to invest? And so, yeah, the questions on my mind are like, okay, there are a lot of different types of founders and types of companies. I could imagine it's being helpful too. And so then like your first question is like, okay, it's like, well, where, with whom do we have an advantage that's like unique to us?

6:01and like when is when when does that advantage kick in like is it pre-seed stage is it like you know early in indications of product market fit is it like post product market fit and scaling like when um when is the right time in a company's evolution to take advantage of you know what you're offering um and then and then it's like you know from just a strategic investment standpoint, once you kind of figure out like, hey, what stage are we playing at? It's like, okay, so like, let's just assume for a minute that we can, you can source, because like at some point, like this becomes a well-known brand, like people are going to know you exist.

6:43And if you're showing that you can add a lot of value and founders are excited about your involvement, like that will also help deal flow. And so, and you should, then the question's like, all right, well, like, let's talk a little portfolio construction. Like, should you be the ones leading any of the rounds that you're investing? Like, does that make sense here? Or is it more like, no, it always makes sense to let them in as like a collaborative participating check in a round. You know, they're not taking a ton of the capacity in the round, and they're adding disproportionate value. You know, of course, like no brainer, we'd want them in.

7:22So it's like, hey, would you want, would you do, let's say you think the right stage is like seed or a you're like hey we just write 250 250 000 checks it's like sure no brainer if you're adding a ton of value like why not let them in for 250. but then you have to like get the portfolio construction right like how many shots on goal and what's your check size and what kind of how you think about ownership and does it make sense to follow on and um those are the things that come to mind like the answer is like of course it seems like you could be very valuable to founders and and that you have a unique edge.

7:53It's built around primarily the value to founders. But other things too, I mean, you end up having a lot of interesting information about what's going on in the market. And one thing that comes to mind, and then I'll stop talking, is like sometimes VCs are talking to lots of companies who are competitors, and they are trusted to not share information about the companies because it would be like inappropriate and potentially competitively sensitive. And so you would hope that they wouldn't share. And I think often they don't share. And so then the question is like, no, but your whole business model is like kind of sharing.

8:40And so, you know, does that create some chilling effect where people are like, actually, like, I don't want to go through this process because if I do, their diligence may reveal that we're not actually one of the best products in the market right now. And then how will we overcome that? And there might be an answer like, well, that was the break. I guess maybe you shouldn't win. But would that create a chilling effect? I don't know. Anyway, I should stop talking. No, no. These are great points. Yeah, we'd have to have some church and state between the media and the investing. That would be a thing to navigate for sure.

9:24I mean, we're definitely in sort of the pro-tech media thing. And if a company's – if we're going to be doing like, hey, these are the best note-taking lists of best products, whether a company is on our cap table or not, they're going to be rated somewhere – or ranked somewhere. and us being on the cap table is going to worsen your chance, the chances of, of being listed. But yeah, that would, it would affect our credibility to the extent that, you know, Paki McCormick or Harry Stebbings credibility is affected when they're on the cap table of something, which I think people are just like, we're, you know, we're not claiming to be journalists.

9:58I think people are sympathetic to just like, Hey, there are people who create media and they invest in startups and they, they disclose when they, when they invest and they're, you know, more likely to say good things about startups they're invested in. And that causality works both ways like because they believe that the startup is good they invested and that and also because they're invested they're likely to just you know largely champion um this kind of thing um but yeah it's definitely something for us to figure out um let me let me start by a thought experiment if if harry stebring is on the call with us um just because his media property has been going for longer though i think we're up there in terms of you know in parallel in terms of overall numbers what do you think like what type of portfolio construction or strategy makes most sense for someone like him um in your mind just other side we've seen paki actually evolve his portfolio construction over time in the beginning he was doing smaller checks in i think like 100 or 200 companies per fund almost like the village global model which i I think is 200 companies.

11:02I think it's like 200 companies. I'll take this out of the podcast. But 200, if we release one, no pressure. Summing 200 plus 5 % ownership. 5 % ownership average. Sometimes it's 10. Sometimes a little bit less if they can't get it. But that's what they try to do. And they try to be the second biggest check. And Paki was doing even smaller than that. Smaller ownership, but a lot of checks. And now I think he's like 30 checks. like you know much more consolidated position i don't know if he's leading or co-leading um but and then harry i think is writing big checks i'm not i mean he's a big fond um and it was i'll pause there for any reactions yeah well i've yeah i don't know i don't know that i know enough about harry's business i mean i'm a fan of the podcast but i don't know enough to opine on what's the right strategy for him but um but i guess i'd like turn the table for like a little more information before I weigh in here.

12:00First would be like, at what stage do you think it would make sense for you to invest? Yeah. Okay. So there's me and then there's Terpitan. I think for me as a GP, I think pre-seed and seed makes the most sense, maybe a little bit of A, but like, that's what I've done my whole career. That's where my track think yeah a lot of alpha is there for me personally um for the media property it's not clear yeah i'm curious if you have a reaction like uh if there would be like if we're really getting diligence on companies and getting insights from employees and stuff like that like i could make an argument as to later state like maybe we just have better data and if if we're getting better data, you know, data matters later stage because earlier stage is a lot about, you know, people and sort of direction of the market and sort of, um, inability, uh, but like, so I could make an argument more holistically, but if it's, if it's just personnel of me, barring me getting some partner though, you know, we do see like Harry is probably doing early stage and some growth and he's probably going to get a growth guy.

13:16Like, you know, like the most ambitious people do build franchises and you know bring in the relevant talent um but i think the media could be helpful across the stack though it's possible that's a cope and i should or that's not like maybe that's not the best answer and i should get more specific what do you think well no i mean like yeah it depends in part on like what you think is most fruitful for the core business and then like you build this around that and so so like if if what's most interesting to folks is to like see cutting edge new technology that may resonate with them you know then you're like potentially initial customer intros design partners like you can make an argument this is like a pre-seed seed stage fund where like we sort of test it in the open we test interest we're kind of like doing some early customer research even though these folks like you can kind of call it like almost pre-testing for product market fit.

14:16And then, you know, you know, when you make an investment that potential buyers seem excited about a product like this, right. And as, as far along as you can get into sort of pre qualifying for product market fit, the better. So it's probably not like totally deck in a dream stage. So it's probably not like precede. I don't know how you define pre-send. I don't mean to be silly about the distinction between pre-seed and seed, but it's probably where there's something that if you could put it in front of someone, they could say, yeah, like that resonates. We would be interested in buying something like that.

14:57But, and so that, that is, if that's where this ends up going, like, Hey, we talk about new and innovative things that CF that should be on a CFOs or Or like a head of HR or someone's list of potential tech to learn about and maybe buy. Then I think this is more like, this feels like a seed, maybe an A fund. And then there are challenges there, right? Like higher loss rates. You'd have a smaller fund. So like, is the juice worth the squeeze on a smaller fund for you? when you've got like a successful media business that may be generating, you know, much more meaningful like economic outcomes than a small fund could create for you.

15:49And then, so like, so a lot of these things are related, right? So like you might be more comfortable being less concentrated, but smaller fund, which may be less compelling to you, doing an earlier stage strategy. If you think that's where the edge is, where founders will feel like they really want to work with you is at that stage in their evolution. Then you can make an argument like, no, we're post-product market. We are finding companies that they are just hitting it. Let's say it's like, I don't know, A or early B, and they're like really starting to take off. We can help those companies go from like meaningful revenue, like growing, doing well, to like escape velocity in terms of sales.

16:35I think that's really compelling too. I think that's probably a more concentrated portfolio where you're really playing for like category winners. And a lot of folks may at that point kind of know who are the most likely winners. And so you're fighting for an allocation and you have a unique edge to win one. and you have larger rounds so you can put more money to work and you can have a bigger fund, which might be more meaningful to you and might justify the effort and just brain damage that comes with standing up a whole venture firm. So yeah, I'm not sure I have an answer to the question. I'm kind of just talking out loud about how I might think about it.

17:21Hey, we'll continue our interview in a moment after a word from our sponsors. My sense is that, you know, the sort of LPs want to back managers who, you know, have more concentrated portfolios with higher ownership is my sense having done the village thing. and like, you know, village fundraising didn't get easy until fund three when they already had markups from the strategy, but people weren't thrilled at the high volume sort of, you know, even at 5 % ownership, like it's just not what they're used to or not what, not what folks like is, is that, is that fair to say that fewer companies, higher ownership, you know, um, is what is more palatable for folks like yourself?

18:14I mean, yeah, so I'll speak for myself, but I can speak generally too. I don't think there's one answer there in terms of what LPs prefer. I have my own preference about what I'm looking for and what I've seen work over, like across many vintages and in my, from what I can tell, kind of like the evolution of venture over the last 15 or 20 years. But I don't think there's necessarily one answer. So like there are certainly family offices and other folks who like very low concentration strategies. They want to take a lot of shots on goal. They want to get the chance of getting a big outlier and even low ownership relative to fund size in a big win is great for them.

18:54And I think there are successful examples of funds who are lower concentration and get lower ownership relative to fund size that have done really well over many vintages. Yeah, like I'm personally drawn to funds that are getting higher ownership relative to fund size. That often is correlated with, you know, a little more concentration. but like, you know, I guess the challenge is like, you know, figuring out what the right level of concentration is. I'd say like, I'm thinking about this in a few different ways. One is enough ownership relative to your fund size. So it's not just like high ownership.

19:40It's high ownership relative to fund size. Like three or 4 % ownership on like a 10 to$15 million fund is very high ownership relative to that fund size. but you might not think about that as a high ownership fund. Whereas like, you know, 10 to 15 % ownership is what people are typically thinking when they talk about high ownership funds. But if it's 10 or 15 % in like a$300 million fund, I'd be like, that's not, ownership is not like that high relative to the fund size. If you were doing that on a 50 to$75 million fund, let's say, yeah, 10 to 15 % ownership is very high relative to fund size.

20:17so um i don't think there's like one answer i think about ownership relative to fund size and i think about shots on goal as unique to like the opportunity set like if you said like we're playing in a space where there aren't that many winners every year i'd be like well you might want to be more like be careful like then you may not have many winners um or uh and i also think about like when i'm thinking about ownership amount i'm thinking about like what is a reasonable set of outcomes we could expect here. And then relative to the fund size, you're thinking, okay, so like, if we're being conservative about the outcomes we're underwriting to here, in terms of like, companies exit valuation, can the more modest outcomes be meaningful to fund level returns because you have enough ownership relative to the size of your fund, such that even if you don't get the big outlier winners that you think are possible but are pretty unlikely.

21:15It'll still be a good fund. And then if you do get those big winners, then it's an amazing fund. That's the level of ownership I'm typically looking for is the more modest outcomes that are still successful can have a meaningful impact on fund level returns. And I think that's what many LPs would be thinking when they're thinking about ownership and fund size, although I should speak for myself on this. but um yeah like there's a bandwidth issue too it's like but like how many companies can you get to conviction on and how many can you like how many can you source diligence get to conviction on and to the extent you want to work with them after they invest like there is it seems like as part of the strategy a significant component is like working with them and helping them get to customers.

22:06And so how many can you work with and add value at a level that would meet their expectations and keep those founders excited and saying good things about you to other founders? So I think I basically just took your question and didn't answer it. I think I just talked about the question. So I'm not sure how useful that is. But I don't think there's one answer here. I think it depends on, I guess, I think about it in the way I just described. That makes sense. And to bring in another example, Product Hunt, which I helped get off the ground, this guy, Josh Buckley, who's a good friend and a great guy and a great investor, he took that asset and created an accelerator on top of that.

22:51he didn't you know that was sort of the people were more gung-ho about accelerators they ended up not continuing it because he was having more success with his later stage investing but you could imagine they also could have just like you know jack altman's most recent fund what's it 150 million pretty pretty standard i think portfolio construction pretty concentrated I think. And you can imagine products on trying to do something like that, too. So it's, it's, I think these things are assets that you could sort of like, justify, as long as the team is strong. And there is a clear narrative, but you could use the narrative a few different ways, you could spin a couple different narratives that might be pretty strong.

23:43My sense is, to your point, I'd want to do this if this is worth a while, like the media company, I think is going to do very well. And you definitely want to be investing, but if it's, if it's a small fund, I could just do it, you know, just angel invest. Um, so we'd want to take capital if it's, if it's worth the, you know, worth the brain damage, uh, as, as, as you might have alluded to. Um, and so my sense is we do want to be leading or getting, getting, you know, know, high ownership is a percentage of fund size. And, and that's probably 10 % in some series of some set of companies. And we use the, the pitch of, hey, we'll help you get, we'll help you validate if it's early, we'll help you get customers.

24:27And we'll help you, you know, we're, we're like a reputation, you know, definer in the industry. And so we're trying to king make, and we want to, the people we can make, we want to have investments taken. Yeah. And for some of those companies, we'll be able to ride that up. And for other, you know, we ride it over time. And for other companies, we'll probably be late into, but they'd want, you know, maybe they'd let us on the cap table if we can help solidify their position as, you know, the best late stage, whatever, HR company or whatever it is. Okay. I mean, that resonates. And like, that to me feels like a seed and maybe a fund.

25:05And like opportunistically going a little later, probably not going much earlier. And I think like if you're taking 10%, let's just throw that out there. Let's say this is a, you know, 75 to$150 million fund. And there's enough room in terms of like how much ownership you're taking in a round for another meaningful investor or other smaller investors to play. and yeah like in a perfect world to me i i mean this is just me but like the early stage funds you want to be like slightly lower concentration if you were to say like oh this is like a series b c d i'd be like see if you i don't know 20 names that would be interesting i mean that's not really where i play so i shouldn't uh i'm like talking a little out of turn here but um but that would be more that would resonate more with me because it's like you're really playing for the category winners.

26:00Whereas here, it's like you don't necessarily know yet who's the category winner. And maybe you want 25 to 35 investments. I mean, I think it would be hard to do much more. I'd be surprised if you did a lot more than 35. But I don't know. Maybe you could. And I think, yeah, I think this is – I think you'd want – If you did much less than like 15 or 20, I'd be like, oh, that seems pretty concentrated. But you're right that when you say that LPs are intrigued or like excited about more concentrated funds, I mean, I guess like if we just step back like to like the theoretical level, it's like, well, yeah, if you can put like all your money into like your one winner, like I guess that would be best.

26:46And so people who have like the courage to be concentrated, if you can get to conviction on their ability to source deals that are good enough and be good pickers, then yeah, there's like – you can get comfort with more concentration. And then it's like high – it can be high ownership relative to like uncommonly high ownership relative to fund size. So I wouldn't call like 30 or 35 companies like very concentrated. I'd call that like kind of in the middle. Yes. But I think it would be appealing. So then the question for you in terms of concentration would be like, do you think that the model that you have built, like the business that you have built, that you are wrapping this venture fund around essentially, does that help you become like a significantly better picker?

27:41And I think the answer is probably, yeah, it should help your picking. And so if you feel like it makes you a much better picker than like, or like a top decile picker at like the C and A stage, then there's an argument that like, yeah, trending a little more concentrated may make sense. yeah yeah yeah i think it's it's interesting because it makes us a better picker in theory you know being able to have more customer references you know more uh more more data on the on the company um should make us a better picker that said also it should make us the media company should make if it's successful should make us a better sourcer too so we'll be able to see um you know more of the landscape um and then also be able to to help more in theory if we build out this sort of platform as a service type thing.

28:33And so that would be an argument in favor of maybe more companies if you're seeing more and you're not as constrained as a normal two-person shop on the ability to help. So I could see the argument going both ways a little bit. Yeah, I think that's right. And then part of the answer depends on sectors you're playing in and how broad of a focus do you have. Like it feels like what you're describing is kind of B2B SaaS, but it could feel like fintech or healthcare or, you know, it's probably not like hardware or there's certain sectors it's probably not. Yeah. But it could be a lot of sectors. So I guess the broader it is from a sector focus.

29:20Yeah. Then that also weighs in favor of maybe being slightly broader. Because then when you get sector focused, to some extent you have to make some bets. It's like, okay, you're a fintech focused fund. How many neobanks can you invest in? They're going to start not wanting you to invest in other neobanks. I think we're going to want to be broadly generalist. I think the way we do that is we create these shows or media properties across a bunch of different sectors so that we have expertise or insights across a bunch and are not constrained and can double down where we notice opportunities and stuff like that.

30:04But the zooming out a little bit, if we wanted to say, hey, let's say we want to start fundraising in six months, we want to take most of this year to really flush out this media empire, where what would we, you know, working backwards, what would make a really strong deck? So part of it is just, I'm just riffing, then I'll get your insights, your reactions. Part of it is, you know, really fleshing out the media story. So having this company diligence machine, having this customer reference diligence machine, you know, right now we're just in chief people officers and chief financial CFOs, but we want to have something for CTOs.