E86: Inside Mischief VC's Evolution with Zach Perret and Lauren Farleigh

0:03Welcome back to Turpentine VC, the podcast where we discuss the art and science of building successful venture firms, VC to VC. In today's episode, I speak with Mischief VC's Lauren Farley and Zach Paré, who discuss how they've leveraged their founder experiences to build a differentiated VC firm. Zach is the co-founder and current CEO of Plaid, and Lauren was the founder of Dote Shopping. Up ahead, you'll hear their approach to sourcing deals, supporting founders, and unique firm infrastructure. Please enjoy. Before we get to today's episode, please note, this information is for general educational purposes only and is not a recommendation to buy, hold, or sell any investment or financial product.

0:41Turpentine is an acquisition of A16Z Holdings, LLC, and is not a bank, investment advisor, or broker dealer. This podcast includes paid promotional advertisements, and individuals and companies featured or advertised during this podcast are not endorsing AH Capital or any of its affiliates, including but not limited to A16Z Perennial Management LP. Similarly, Turpentine is not endorsing affiliates, individuals, or any entities featured on this podcast. All investments involve risk, including the possible loss of capital. Past performance is no guarantee of future results, and the opinions presented cannot be viewed as an indicator of future performance.

1:18Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Turpentine does not guarantee its accuracy. Now let's get started. Lauren, Zach, welcome to Turpentine VC. Thanks for coming on. Thanks for having us. Thanks for having us. So, Lauren, let's start with you. For those who are unfamiliar with Mischief, why don't you give a brief background? You have a$30 million fund one. You're now on an$80 million fund two. Why don't you tell the story of how Mischief came together?

1:50Yeah, for sure. Well, Zach and I had known each other for a very long time. We worked together right out of college. I went and started a company. Obviously, Zach started Plaid. I think while I started my company, I realized that the best people on the cap table were really other founders, folks who had done that zero to one journey. And I think I wanted to pay that forward, started angel investing in 2017, really enjoyed it. I think Zach started angel investing around the same time. We worked on a lot of deals together. And I think, you know, pretty quickly realized that more than just paying it forward, there was really a market opportunity to sort of institutionalize what we were doing.

2:26Still a relative rarity, I would say in venture and particularly, I think at the earliest stages to find investors who, you know, have that zero to one, like true finding product market fit experience. And so that was really the spirit with which we sort of launched fund one in 2021. and now, yeah, have scaled it to fund two, have added two more partners, both of who embodied that sort of ethos that really drove us to start it in the first place. The story I like to tell about the early days of Plaid is I started the company, I think it was 23 when I started the company. I had an amazing co-founder, also equally inexperienced as me.

3:03I'd worked a year at Bain. I thought I knew everything about the world. It turns out I knew basically nothing about the world. And we were fortunate to have these two really early angel investors who had founded big companies and were also just like, they were in it for the grind. They loved the building of companies and were willing to take our call on pretty much anything. They worked at a completely different industry than us. They had no idea about financial services, but I could call them to say like, hey, I'm struggling with this hire decision or I need to fire this person or I have this crazy situation with a partner.

3:34And just the level of input that they gave was transformational to the company. and the inspiration for Mischief is we wanted to build the same thing. It takes, oftentimes it's just one call at a critical inflection point with someone that's been there before or they can lend the right ear or they can give you the right advice to meaningfully change the trajectory of the company. And it's not to say we're only there for those moments, but really having someone that has been in the room where it happens to actually call when you find yourself in a very similar room, that was the inspiration for starting the firm.

4:07Lauren, why don't you share more about what you guys invest in or how founders should think about mischief in the market? Yeah, I mean, I think, you know, what we invest in at a high level, we're generalist funds. So we'll do anything that's software. We don't do anything that's capital intensive or holds inventory, but sort of within that bucket, we'll look at everything. We're really more founder driven and talent driven than we are sort of thesis or sector focused. We do pre-seed, seed, leading round. So check size is generally between one and four million. And yeah, I think like the unique advantage is exactly what Zach said, our building experience.

4:39And I think that manifests in one sort of the way that we're able to help companies post investment and, you know, be the bat phone is as we call it internally when something, you know, comes up and hopefully be able to, you know, ask the right questions and, you know, offer advice if it's helpful. And I think second to just the founder empathy that we're able to have allows us to have a relationship that, you know, I think if you asked our founders, hopefully feels really different than other VCs. I think we all know that like, even in the best case scenario, it's a rocky, bumpy ride. It's not going to be perfect all the time.

5:13And so, you know, you can really treat us as a thought partner. And one thing we were saying offline is that you guys are not doing a ton of capital intensive businesses. You know, we're in an era where companies are raising a ton of money for AI companies or American dynamism companies. Why don't you talk about how you think about capital discipline or what kinds of businesses might not be perfect fits for MISCHO? We are very disciplined and aware of how dilution will impact our returns, especially just given our strategy and fund size and everything else. And so, you know, just try to be really thoughtful about that, number one.

5:46And I think number two, you know, we, as we're more talent driven and more founder driven than sector driven, I think we're pretty uniquely not afraid of, you know, sort of going our own way and investing in companies that are a little bit outside of the hype. You know, we certainly invest in a lot of AI companies, a lot of LLM companies, but, you know, we try to just be first principle and invest in kind of solid fundamentals outside of, you know, what everybody's talking about and what prices are getting really high and kind of all of that, which I think sort of leads to the strategy that works for us.

6:19There's so many strategies that can work in venture, though. Yeah. Zach, we were talking offline about how people-driven your investing is and what sourcing looks like for you guys. Why don't you share more about that? If you think about sourcing, I don't know, in what I think is a somewhat differentiated way. When you look at funds, they have all sorts of sourcing models. They have people that are doing outbound. They have all sorts of stuff. Ours is hyper people-driven. We're fortunate that each of the four GPs at Mischief has been in Silicon Valley working for 15, sometimes more years. And that's generated a pretty massive network.

6:54And our thesis is we want to identify the best people that we know and follow them around when they're ready to start a company. And sometimes with our encouragement, sometimes on their own volition, we want to lead the round. We want to be a part of it. And then, you know, we want to ask all of the amazing people that we know to introduce us to more and more amazing people. And so, you know, we have a couple tools for this, but we do things like, yeah, like if I do say so myself, we host epic dinners. And we do these, we do, it's a group of call it 10, 12 people. It's a structured conversation.

7:23like we're really good on like the timing, get people in, get people out. And you can go really deep in that period of time. And, you know, we do a ton of these. And then we ask the people that we invited to one to tell us who to invite to the next. And you end up building the network through this process. And we do a couple of other odd things. Like, you know, companies send us monthly updates or quarterly updates. We thought we should send companies quarterly updates about what we do. So you can see like a mischief, like Q1 update, Q2 update, Q3 update. We send that out to our companies and tell them, hey, this is what we're thinking about.

7:54These are the resources we're thinking about providing to you. This is the way that we can help. And by the way, if you have any amazing founders, send them our way. And so kind of this very people-driven approach. It's netted us a really lovely sourcing funnel. And frankly, it's way more fun for us. Yeah. Sending updates of your firm to your companies is pretty clever. I'm surprised more firms don't do that. It's a great way to be top of mind and sort of keep them in on the action. We tend to think of operating the fund like we operate a company. So we came into this thinking about like, oh, we'll take a lot of the best elements of being a founder and apply it to the way that we actually run the fund.

8:31This was one that just really seemed obvious, like giving people an update on your progress, inviting them to be a part of it, asking for help when you need help. I don't know, it just felt natural. Lauren, why don't you talk about the evolution from fund one to fund two? Because going from 30 million to 80 million is a big jump in a bunch of different ways. obviously, you know, it's, it's much more to fundraise for, but also it's, it's a different strategy. You went from participating to, to lead. So talk about what that transition was like and how you guys decided to make it because some like box group, you know, stays as, as a firm that participates in perpetuity.

9:05Did you guys know you were going to transition eventually to leading or what did that look like? Yeah. I think when we started the fund, you know, we always had kind of big ambitions. But I think, like good founders, we've thought about it as an evolution and, you know, seeking validation sort of along the way. And I think even that fund one at a$30 million fund, our average check size was 200k, which was significantly higher than any of our angel checks. So I think that fund was really about proving that, you know, we clearly had great access to founders, we were able to, you know, wedge a 20k angel check in, but that's not that hard, right.

9:38And I think with FundOne, it was like, okay, well, can we get a 200K check in? Can we deploy 30 million and not have to sacrifice at all in terms of quality of founder, quality of company, quality of deal, all of that? And I think pretty quickly, halfway at least through fund one, we realized that that was going really well. We were able to get those checks in. We were really sort of transitioning from being known as angels in the ecosystem to being an actual fund and started thinking about what that fund two could look like. And I think, of course, when you're growing your fund, you don't want to change your return profile.

10:15And so, you know, certainly thinking about, OK, can we start leading rounds? And most importantly, can we do that without having to change the bar in terms of the company that we're investing in? And I think there was one moment where one of our best performing fund one companies came to our holiday party. And after a few drinks, he was like, I wish you guys had led my round. And we all went home that night. We were like, because especially this company, we wish we had led that round. Wow. Like we have to make the transition to leading. But it is a really different deal motion. Like I think the types of deals we do now in Fund2 where we're leading, same quality, same type of company, but a really different deal motion that we've had to kind of refine and get really sort of up the curb on.

11:00I mean, especially just when you meet those companies or when you meet those founders. And we do a lot, as Zach said, to sort of be top of mind and be sort of in front of those founders before they even know that they're a potential founder in some cases. So that's been really fun, honestly. It's been, you know, definitely a new motion, but it's been a blast. And how do you do that? Is it that you're getting introductions to people who may start companies in the future? Is it that you're sort of, you know, because you guys worked at great companies, you're just tracking who's good, who's likely to maybe start something or what does that look like?

11:34Do we reveal our secrets, Zach? Or no, the answer, the answer is all the above. Like it's, I don't, I don't think there's a, there's not a, there's not a specific secret on this. like, you know, being genuinely like interested in people, spending time with people, being in the network, you know, doing the things that we do. So like the emails, the updates, the dinners, the WhatsApp groups that we create with people. Like, you know, putting this all together, like, you know, we do spend a lot of time with people before they founded companies. And we do spend a lot of time in kind of like odd company situations.

12:10So actually like two of our investments were spin outs of another company. Both of them, like we were extremely operationally involved in actually generating the spin out. So, you know, we, we, we known in, in, in one case, we'd known the entrepreneur before in another case, we'd actually known the parent company before. And you know, the spin outs were messy and they were hard and they were strange. And I frankly don't think unless we'd done a pretty meaningful amount of operating work before, unless we'd done M &A in the past, we would have known how to do this. I think it's odd for a seed fund of our size to be willing to step in on those situations.

12:46And then both of these companies, by the way, are going to be amazing outcomes. And so I think it's, yes, the people-driven portion of it, but it's also willing to get in and do work well before you make the investment to help the company exist. And frankly, it's really fun for us to get into those weeds. Yeah, I mean, obviously, the best marketing you can do for your next deal is delivering on your promise to founders. And I think, you know, especially how we like to engage, we often are meeting the team around, you know, the founder that we backed. And that's where the next generation of founders comes from, as everybody knows.

13:22And we really try to take kind of that long term view. And, you know, we're probably not, we're definitely not the loudest on Twitter in terms of, you know, VC voices out there. Do we even have a Twitter account? We do, but it's pretty silent. But I think because of the sourcing funnel of almost all of our deals come from other mischief founders or people that we've worked with in the past, really, it can work for us. So yeah. To that point, it's like if you were a user, not perfect metaphors, but maybe you guys are playing more of a ground game than like an air game if you're not sort of big on social media.

13:57Obviously, you guys are doing some great press coming on the show and others. But how do you think about, like, does a firm need to have a strong air game as well? Or is a great ground game getting great returns, great results for founders and being in great deals? Kind of what really matters? How do you think about that to the marketing of a firm? I think it's hard to say in general. I mean, there are so many incredibly successful venture firms. I mean, and each has totally different strategies. You think of Benchmark where they have a website which doesn't say anything. And then you think of another firm that has a website that says everything.

14:32And, you know, so it's clear that a lot of strategies can be successful. We do appreciate studying other venture firms. But when we think about what works for us, we try to take a first principles mindset. Like, what is the thing that we're the best at? What are the places that we can have, you know, hugely positive impacts? You know, leveraging the networks that we have, leveraging the operating experience that we have, being really true to that, and then ensuring that the people that need to know about it do know about it. But the joke that we make sometimes is, call your VC at 4 p.m. on a Friday in the summer.

15:01And are they going to answer you? Are they going to get a call with you that night? Are they going to be talking to you at 11 p.m. that night? And then you look at our operating experience. That's when problems happen, right? Problems don't happen 9 to 5, Monday through Thursday. Entrepreneurs are up late at night thinking about the things that are driving them insane. And oftentimes, that 11 p.m. call, that's actually what makes all the difference. And so for us, that's what we're doing. That's how we're thinking. That's when we're awake. That's when we're talking to people. And so if we just continue to be true to that, I think that that builds the right style of reputation and relationship with the people that need to know about us.

15:37My take is like, I mean, it's great to have both a good air game and a good ground game, but you have to have a good ground game, right? Like over time, if you don't have a good ground game, it's going to be hard to have a good air game in the end. So I think to the first principles point, that's definitely the most important thing. Yeah, you have to have a great product. If you don't have a great product, you can't market it. And if you have a great product, sometimes it can market itself if it's that great. Hey, we'll continue our interview in a moment after a word from our sponsors. There's a growing expense eating into your company's profits.

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17:56While it may cost more than the freelancer on Upwork billing you for 40 hours but working only two, Squad offers premium quality at a fraction of the typical cost, without the headache of assessing for skills and culture fit. Squad takes care of sourcing, legal compliance, and local HR for global talent. increase your velocity without amping up burn visit choosequad.com and mention turpentine to skip the wait list um say more about the transition from a fundraising perspective what was it like going from from 30 to 80 i mean lauren you can tell the story about the second fundraise i will just briefly say the first fundraise it was too easy it was bananas simple i think we called i think we called four funds I think we took three checks.

18:42I think that took us three weeks to get to terms. No deck. No deck. Yeah, it's just super fast. It was just on the back of an angel track record, and we were effectively writing angel++ size checks. And so it was very straightforward. Fun2 was less straightforward. Lauren, you should talk about that. You did all the legwork there. I think the ease of the Fun1 fundraise ended up being a weakness because we hadn't developed that muscle, that motion. And then when fund two came, the market was obviously completely different. We were more than doubling fund size. So it was certainly something that we had to work a little bit harder at.

19:24Yeah, I mean, I think it's been really interesting learning what that motion is like, especially compared to raising money for a company. There's things that are really similar, right? Like you make a deck, in the second case, we made a deck. You think about your value proposition, what your unique advantage is, sort of all of that. But for a fund, the process is so much more elongated. It's a landscape of potential capital providers that is infinitely more complex. You know, I think when I raised, for example, my Series A, it was like I went to kind of the eight usual suspects on Sand Hill Road who did consumer deals and it was all done in four weeks.

20:02So, yeah, I think this was very different in that way and more opaque and kind of harder to figure out. But we ended up in a really good spot. And I think more importantly, developed sort of that motion and understand, you know, sort of how to do a fund fundraise. And that'll really help us going forward. And was your pitch something to the effect of, hey, we're proven entrepreneurs. We have a proven track record. We're in great companies. They say great things about us, back us. Yeah, yeah. Do you want to come fundraise with us? Like, you've got it down. It's pretty straightforward. Yeah, for sure.

20:42Yeah. I mean, I think, you know, none of us have professional investing backgrounds. And I think that at first, in our first sort of few meetings, we sort of took for granted, I would say, that LPs would understand sort of the unique access and unique, I think, ability to win with founders sort of in competitive situations or just really high quality sort of deals. And I think we really had to learn how to tell that story in a way that LPs could really, you know, understand, wrap their mind around why this was special. And now I'm like, of course, that makes sense. They're not on the ground the way that we're all on the ground and kind of understand the difference between, you know, somebody who, you know, like Zach, having Zach on the cap table.

21:26This is how we really think about being fund managers, which wasn't, you know, something that, especially in fund one, we had really given a lot of sort of reps to, and is obviously a very important part of institutional investing. To that point, I think you guys have figured out something that others could figure out too, in the sense of like, if you're an iconic founder or a founder of an iconic company, like, like Zach is with Plaid, you could probably raise a bunch of money to invest as well. You And, you know, because founders want you on their cap table and you can probably raise a bunch.

22:02And, you know, founders like Angel Investing and, but often they're, they're busy. And so they could also find an amazing, one, they could raise money too. They could find an amazing team or find amazing partners who would recognize, one, just want to work with them, recognize that they have an arbitrage in terms of, you know, getting on the cap table as Lauren was describing, but also an arbitrage in raising capital. And so I feel like there should be more types of duos or teams that involve sort of, you know, founders who are busy running these iconic companies who could get leverage from a team that's full time investing.

22:36Yeah, perhaps. I think, you know, we're really fortunate in the way that the model has worked out. And it's been something where it's been a huge win-win for kind of all of us in a lot of senses. Like speaking personally, spending time with companies at the earliest stage keeps me fresh. It keeps me learning. I get to spend time with companies that are just thinking about like the newest, craziest ideas, be it in fintech maybe or oftentimes in, you know, in fields that are adjacent or have good mental models or, you know, AI, for example, like keeps me on the cutting edge of what should I be doing with AI.

23:10So staying really close to the early stage, I think is really helpful for me. But I also don't have time to, you know, I certainly don't have time to lead a deal. I don't have time to even do the level of angel investing that I had been doing before. So in kind of like 2017, 2018, 2019, they've been doing a ton of angel investing. And the upside of angel investing is you get to, yes, talk to a lot of companies. The downside of angel investing is that those founders then call you when they're in their worst possible situation. And they don't always have other people to call. And you don't have a lot of infrastructure that you've built around it.