Doing a successful GP led secondary in Venture Capital, Why seed funds can scale, and what a good VC platform team looks like

0:00Welcome back to another episode of Venture Unlocked, the podcast that takes you behind the scenes of the business of venture capital. I'm your host, Samir Khaji, and today we're thrilled to be joined by Ben Sun, co-founder of Primary Ventures, a seed stage fund out of New York. During the episode, Ben shared his journey from investment banking to becoming a startup founder to co-founding Primary Ventures, which has now become a premier early stage fund, having backed companies such as Coupang and Jet. I really enjoyed my time with Ben as we got really deep on venture math, as well as going through the inside baseball of completing a GP-led secondary.

0:33He had so many great nuggets. So without further ado, let's get into the episode right now. Samir Kaji is the CEO and co-founder of Allocate. Allocate and Venture Unlocked are independent of each other. Any statements or references made by Samir or his guests regarding third parties, investments, or securities are solely their views and opinions and are not intended as investment advice or an endorsement of such parties or securities by Samir, his guests, or allocate. Allocate or its clients may maintain relationships with or investment positions in guests, third parties, or securities mentioned in this podcast.

1:07This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Ben, thanks for being on. It's great to see you, man. Same here, Same here. Thanks for having me. There's a lot of things that we talked right before the show that we're going to unpack in a lot of detail. But the first thing I want to do, Ben, is just go through your background and maybe what inspired you to start primary in 2015? Thanks, Amir. Yeah, the background of me, I was born and raised in New York City, started my career in investment banking. I was focused on tech. This was back in the mid to late 90s, so quite a while ago, and then soon realized I didn't really like banking, but I loved tech.

1:42And so I was done after my two-year analyst program, became a founder. I bootstrapped a startup out of my apartment for the first two years here in Manhattan, And finally then raised some angel money and some venture money. So raised about$20 million, most of that during the peak of the dot-com boom. But then when the dot-com crash happened, fortunately, we were one of the few companies that survived. So I had this early social networking company called Community Connect. It was predates even Facebook. Got the business to be profitable. Had about 130 employees here. And I ran the company as CEO for 12 years until we sold it.

2:16Sold the company in early 2008. I had Bear Stearns as my bankers while we were in merger docs. bear goes bankrupt uh so it was definitely not easy uh but the deal got done we were officially the last deal that bear got uh bear did uh i did pay gp morgan their fees uh who is who acquired the asset as you remember i transitioned out by the end of 08 and then uh took some time off during the height of the financial crisis and then came back and started personally investing in incubating companies with my own capital. I did that for four years where I invested or incubated about 10 companies altogether.

2:54So I wasn't like an angel that was writing small angel checks around. I was often writing more meaningful checks and taking board seats or at least being a strategic advisor. And fortunately, in those 10 companies, I built a really great portfolio. I was one of the first investors. I'm still on the board of a company called Coupang. It's a$40 billion market cap, publicly traded in New York Stock Exchange. It was one of the first checks at thejet.com, which exited to Walmart for$3.3 billion and invested in other companies like Noom and Yippa Data. So I started building this really great track record.

3:25Then basically the New York scene started hitting this major inflection point. And I said, oh, wow, this is as good of any time to start a venture fund, especially a seed fund focused on New York because there just weren't many guys here. I co-founded Primary at the end of 2014 with my partner, Brad Svluga. I started investing out of our first fund in 2015. And so, yeah, we're nine years in. We now manage about a billion dollars, a team of 50 people here in New York, and kind of really loving what's happening in the ecosystem in New York City. Yeah, we'll get into the fact that you have 50 people, which is a lot of people for a steep fund that has roughly a billion dollars in assets.

4:04A question I often like to ask people that were consumers of venture capital, then over time started their own venture capital firms. What did you identify as things that you didn't get as a consumer venture capital that you wanted to make sure that was going to be part of the core thesis of the firm that you started? You know, when I went through and reflected by my journey, I was always puzzled because like my VCs, my investors, especially my VCs, were actually really never that hands on. I never really wanted them to run my business, but I wanted them to better understand my business. And I often felt like every board meeting, it was like we were constantly misaligned because I was trying to get them aligned.

4:44And it was just hard because they didn't really kind of understand really the business well enough. And it was always some kind of like, shouldn't you be doing this? Or shouldn't we be doing that? Or it was just it's off and it's almost a state of chaos to some degree. I often find like the best boards are those that are completely aligned with the priorities of the companies or with the exec team. And so I was always a big believer at Devils in the Details. I always felt like if you were more hands-on and helpful, you would become a better investor. You would understand that business. you'd have a better reputation with that founder, which would then lead to a better reputation would help affect like your deal flow and your ability to win great deals.

5:24And so I had a really kind of simple kind of North star of like this kind of journey as a founder, like startups are hard and founders deserve better. And if you were really helpful, that good things would really happen. So I really started there. And when I talked to my other founder friends during that time, there was a common story. Everyone felt the same kind of pain point. And so I felt like There was a real opportunity to do that in the market, which sounds kind of simple, but it kind of surprised you in venture where, especially back then, we're talking like especially 15 years ago, where there wasn't much attention on, hey, how do we really help the founder?

5:57How do we make them the center of our business and our core customer? So today, we're very familiar with things like platform teams. And of course, Andreessen, in 2009, they had this huge thesis, which was actually inspired by CAA, for example, in terms of providing all these different services. Since then, we've seen other firms emulate that where there's platform teams, small receipt funds often do it, but they have three or four people. You mentioned a second ago having 50 people. Can you just break down the cross-section of those people and how that impacts that that zero to one that you're working with, many of these founders given you're a seed stage firm?

6:34Yeah. So if you look at the 50 people that work at primary, less than 20 are investors, our investment and incubation team. We also help start companies. Almost two thirds of the organization are what we call our impact team. These are all operators dedicated with helping our companies after we invest. And so what kind of operators are we really kind of bringing on? And well, when we think about especially that seed to series A, the early stage journey, we want to say what were the most powerful levers to affect your success to graduate from seed to A? And some of the key things that we kind of reflected upon were like hiring great talent.

7:11You know, after you raise a seed round, you haven't raised enough capital to hire a cheap people officer or hire a dedicated recruiting team. And your brand is unknown. So Samir starts Allocate. He needs to reach out to people to try to find a great engineer. They're like, who are you with? And why should I talk to you? Like, that's a hard call for a recruiter than me. Versus for us, we get to call on candidates and say, hey, we're primary. We're a great venture from here in New York. Like, people take those calls. And then we can bring out also world-class kind of recruiting talent. You know, Rebecca was the chief people officer at Capsule, Enigma, and Sailthrough.

7:45And she has a team of eight people on her, people on networks team around talent acquisition. And that's a really powerful lever. Other levers are on go-to-market, getting your first customers and helping you build pipeline, learning how to set up your go-to-market organization the right way. Another big one is strategic finance. You don't have enough money to hire a CFO or a head of FP &A. And we think that that importance is, I tell people a lot of times where companies fail is not the right talent, but also not the right focus. You know, there's a thousand great things you can do, but you need to focus on the one or two things that really, really matter.

8:23And sometimes really having someone with strategic finance skills to really understand the levers of your business allows you to narrow down and say, ah, these are the one or two or three things that really, really matter that we have to execute over the next 12 or 18 months. And so we start with C-suite level execs at the top. Cassie Young was CRO, a$200 million SaaS company. Rebecca Price was chief people officer at a number of startups. Brian Guzziassi was head of FP &A at a SaaS company. So we start with teams of people like that or leaders like that. Then they have teams of people under them around talent, strategic finance, go to market.

8:56And then we really try to bring those resources in a much bespoke and hands-on way with our companies. We're not giving them playbooks or blog posts. We're saying, how do we go deep in your business, be real partners with you? often working on site at where your offices are and helping you with the early parts of the journey. And we felt like if we do that in a really material way, one, you actually make a big difference. And two, you actually start gaining a reputation in the market of being hopefully the most helpful guys at the cap table. So one of the things that often comes up, and I see this both in terms of conversations I have with LPs and GPs, but also I've seen you post and other people post.

9:38And some other people say, hey, with platform teams, they end up being just another function of marketing, and they're really not actually doing anything meaningful for these companies at the early stages. How do you actually measure success that is actually tangible to, hey, this is working? There are a lot of venture firms with so-and-so-called platform teams. I would say most of them, to be candid with you, probably aren't that impactful. The big question around them is a legit question. And I think on the question of like how you measure impact, first and foremost, your founders are your customers.

10:14So we do a regular semi-annual, like one CSAT or NPS survey to our founders, where we really want to know not only how we score, but all the really direct feedback of like, hey, was our talent team really impactful for helping you hire? Was, you know, Brian Gozowski and strategic fan resources really helpful, in your process of building out your finance function and thinking about the business correctly. I mean, those are the real things that we go deep on. And then we have our own internal KPIs of how we're measuring things as well. So I'll give you an example. We measure how many people we directly place in the portfolio via our talent team.

10:51We're now placing four or five people a week in the portfolio. Our go-to-market team helps generate customer leads. We measure pipeline that we provide. So we have like really tangible metrics that also the portfolio companies obviously know because we work hand in hand with them that we also measure on both externally internally. So you really need to understand one, the levers, like how impactful they are being and how actually well you're pulling on those levers. And I'd say most firms don't invest that heavily in it because they're almost disincentivized from doing it. Venture capital, when you look at from a manager company, profit margin, these venture funds have now become big where the fees are actually a very profitable business.

11:39And so I tell folks, hey, we have 50 people as a billion of AUM to be candid with you. We can easily fire half the people in our LPs probably wouldn't blink of an eye because they rarely see a venture firm at a billion AUM with 25 people. So they'd be like, oh, you guys are best in class already. What would we do with all that money that we'd save from those 25 people that we would fire? We put it in our own pockets. A lot of managers are almost incentivized to kind of poo-poo platform because, wow, that's manager fee going in their own pockets. And so Jeff Bezos has this great line, like your margin is my opportunity.

12:18That's basically what we saw. We said, wow, this has become a high margin business. our chance to build a new venture firm to hopefully do it better is our opportunity. And the idea, of course, is if you do it right, you're going to get into those companies, you're going to help those companies get to a standpoint or at least a stage that they're more likely and have a higher probability of success. And in your case, it's how do you get a company from C to Series A? And what are those milestones that are necessary? And what do they have to show from a talent standpoint, from a go-to-market standpoint, and also from a capitalization standpoint, which of course will in turn provide better returns for you as an individual and the team because you'll have better carry because you've actually performed these funds.

13:02How do you then think about this KPI? And I've seen you write about this and I really agree with it, which is when you invest in a company at the seed stage, there are certain markers, but there's not a lot of markers. There's not a lot of traction. Maybe it's a first-time entrepreneur. Even if it's a repeat entrepreneur, you don't know what the company is going to look like in five, seven, 10 years. You don't know if Coupang, for example, is going to go from a Groupon company to becoming the Amazon of Korea. So you never know those things. But you can measure, as you've mentioned, can I get a company from C to Series A?

13:37And you've had some compelling stats around this. Maybe we can unpack that. How do you think about investing in companies and this notion of like, I have to underwrite to that Series A? Over the last really kind of 14, 15 years, I've really gotten the opportunity to be a student of the asset class. And I've worked with a lot of really great LPs and also potential LPs that have kind of shared a lot of their insights and data. I remember one family office I met with looked at early stage venture being basically seed and sharing their data over the last 25 years, what the median IRR was for basically seed, the precedency part of the asset class and the median IRR of the last 25 years was seven percent not that compelling for such an illiquid high risky high volatile asset the mean was 50 and this was like oh this is what power law exemplifies we talk about power law distribution versus a normal distribution or egosian or in between it's like a log normal like even within venture, the real power law is an early stage.

14:48If you actually get back to like late stage, it really becomes more log normal, close to, you know, normal. And so really when you then look at the early parts of it, you're like, wow, you see this huge spread between median and mean. I often call it like, it's like the good lottery odds problem. If I said to you, Samir, like, your chances of winning the lottery are one in a hundred million. And the jackpot is a billion dollars but you can only buy a hundred thousand dollars worth of lottery tickets because that's all the money you have would you do it probably not right because it's most likely you're going to go to zero now if you could buy 60 million dollars of lottery tickets maybe you would do it still pretty risky but at least like you roll the dice on it because you say all right more than 50 chance that i'm going to get to that billion dollar mark but that's the problem with venture was like, wow, as an asset class, you have all these seed managers that are going to be at more of the median, but the few that get to that be the outliers and capture the outliers, they're going to have amazing funds.

15:53So I was like, wow, how do you create consistent returns, fund after fund after fund as a pre-seed investor running funds? And when we dug into this data on IRR for seed, the big opportunity that we saw was the reason for this low IRR on a median basis was that there's a low C to A graduation rate. The average C to A graduation rate is between 20 % to 30 % over these couple of decades. And I remember the folks at Horsley Bridge, one of the partners there, shared me this insight. When you get to a series A, 60 % of series A's get to a B 60 % of series B's get to a C 60 % of C's get to a D and usually the unicorn you become a unicorn in either D E or F if you look at historical data so I tell people like hey you need to get hopefully a couple unicorns in a fund usually at least 10 % of your fund needs to be unicorns that have over a 3x net and in order to get there you need a high CTA graduation rate.

17:04And you can't be at 20, 30%. I kind of talk about like, if it's like infant mortality. If you want a country to have a growing population, but 80 % of this population dies between the ages of zero and two, it's going to be really hard for that population to grow. Well, we saw the opportunity to say, well, there's an opportunity to go after a high CTA graduation rate. And so how do you do that? I think the reason why the graduation rates are low is that one, you have a lot of these kind of small funds, non-sophisticated investors that really don't really study the asset class and know what are series A, series B investors really looking for to really understand that the plane is going to land and how to underwrite it.

17:49There's also a lot of seed bets that get done by big multi-stage firms as optionality bets. And inherently by optionality bets, you aren't investing a lot of time and making sure that like, hey, it's going to be a high CDA graduation rate. If you thought it was a high CDA graduation rate, you wouldn't be an optionality bet. You just make the bet. So you just start taking a lot more swings at wild pitches instead of like waiting for your pitch. And that's often our mantra here at the firm is, hey, we want every partner to maybe do two max three deals a year. Wait for your pitch. Wait for your pitch.

18:22Make seed your core business. There is no optionality bet here. And so we really kind of start with that. And then the next thing that we do is say, hey, let's give these portfolio companies that we invest in at Cedar Core Competency the resources to get to the A. And that's what our impact team really does. Let's get into talent, the customers, the capital that they need to get to that Series A. We think about it as, hey, this is a great asset class in aggregate, but with too much volatility, but you can hack the volatility if you focus on that C to A graduation rate. If you can focus on C to A graduation rate, the more things you get to that A, the better the chance that you'll get a unicorn out of that because it's hard to go from C to unicorn if you don't get to a series A.

19:10Based on the 30 % graduation rate, it basically says that only about 12 out of 100 companies will get to the Series C if you do 100 seed stage companies, which is really difficult. And your unicorn status is usually E, which then means you're down to 3%, which is actually the industry average. If you looked at historical data the last 20 years, seed to unicorn graduation rate is 3%. So it's exactly that funnel is what happened. It's that low graduation rate that gets you to 3%. Now let's talk about that 3%. If you do a seed deal right now at a 20 post, most of your unicorns are really between one to two billion.

19:51Like even among unicorns, it's not a distribution of a normal distribution. It's power law again. 80%, 90 % unicorns are going to be one to two billion because look at decacorns. Decaorns, there are 1200 unicorns. They're only about 70 decacorns. So only about 6 % of all unicorns are private decacorns. You got again, this power law distribution among unicorns. So let's say the range of your unicorn outcome is usually going to be to one to two billion dollars even if you come at a 20 post if you took zero dilution you're most likely going to make 50 to let's call it 100 times your money once you from your seed bet if you follow on the a that's going to drop your cash on cash returns because usually your a price is two to three times higher than your seed bet but let's take that out you're just talking if you just didn't reserve and follow on the and you just put in the seed bet, you'd be making 50 to 100 extra money.

20:46That's assuming no additional dilution. If you look at historical data, you're going to get diluted at least 50%, usually 50 to 60 % by the unicorn status. So now you're talking about a multiple of 25 to 50 times. Let's call it roughly 30X and you're only 3%. That's one turn of your entire fund gross. That's not net of fees and carry. So that's one X gross on your outlier. And then you're maybe getting another turn at best from the rest of your book, right? So then we're talking, that's why you're suddenly looking at 7 % median IRR is because you're really at like a one and a half to two X gross.

21:26That's the problem. And so we saw that and said, Oh, let's get to a higher graduation rate. So our first fund,$60 million fund, it's at a 6x net, 2.5x DPI almost. That was over a 90 % seed day graduation rate. The math is so difficult. So let's talk a little bit about what is a great fund. I think a great fund historically is something that is 5x or higher, maybe 10x or the DecoCorn version of a venture firm. Even the unicorns that you mentioned, let's say there's 1 ,200 global unicorns, many were a product of the ZERP environment, are never going to actually exit for those amounts, and people never took money off the table.

22:10Increasing your probability of generating a great fund. So number one, you have to increase that 30 % to something substantially higher. It can't be 30 % because the math just doesn't work. Number two, you have to have enough ownership in those companies that are unicorns that are between one and two billion at the time they do exit. And number three, you have to do that consistently over many cycles and turns. So what is the internal rubric? You mentioned waiting for your pitch. What is waiting for your pitch actually mean in identifying the companies? Maybe you can talk a little bit about what is primaries, fall on rate from CTA, and how it's different from 30%.

22:52But maybe just talk a little bit about that. How do you wait for your pitch? I remember years ago, I was talking to one potential LP. They actually didn't end up being LP, but we've co-invested on another company together. And they did this analysis on venture managers. And they were trying to lock into like, what is that key input for success? And the factor that they thought was most material was deals per partner. The lower the amount of deals per partner, the better the performing fund. And that kind of made sense to me. I was like, huh, if you're a benchmark and it's a smaller fund, but more importantly, you have a number of partners and only doing one deal a year and they get great deal flow, right?

23:36Because they have such a great brand. If you get great deal flow and you're saying to yourself, you know, I'm not only do one deal a year. Is this the one deal I really want to do? You wait for your pitch. you know you're like hey this is good maybe great but i'm not like blown away like holy cow i have to do this attraction looks good but is it unbelievable those guys can wait for great and so when we thought about it we said well we went from our first one being a 60 million dollar seed fund to this new fund that our fund for is now 280 million the difference is we had two partners being me and my co-founder, Brad Svluga, to now seven check writers.

24:18And if you look at the number of deals we do per partner, it's actually less than when we started our first fund. I get to add a partner and say, hey, you're only doing two deals a year versus Brad and I were doing like really like four a year. And so I'm like, you can, and our deal flow is much more robust. I get to say, hey, wait for your pitch. Wait for great, right? That's step one. And then And when you do that, if you don't have that larger of a portfolio, you have more time to spend with that company. Your impact team is less spread thin. That 30-person team is like, okay, the amount of seed investments we're doing out of this fund at 280 is 25 to 30 deals.

24:59This is outside of incubation. Our first fund was 25 deals, even though it's a$60 million fund versus a 280. The difference is we're writing the whole round for the seed round instead of like, hey, we're just collaborating with four or five guys. We're writing a 750K check. We're writing$4 million seed checks a second. We're writing the whole round and buying ownership up front. So I'd say the main lever there is we start with this one principle, Samir, of like, if each partner is waiting for their pitch lower volume and focused on, hey, get that seed bet to your A. And so I'd say, hey, Samir, man, you're a partner at primary.

25:38you need to get over 80 % of your seed bets to a series A. You start underwriting differently. You start thinking about the companies differently. I don't want you to do optionality bets. Every seed deal that you do, you got to get it to over 80 % of an A. And in fact, our funds, if you look historically, are about 90%, it's high 80s because investors, our partners come with that mindset. And that's how you start as your basis of fund construction. The rest of it, in terms of number of deals, ownership, deploy capital, all that is basically just outputs off that main input of your partner per the amount of deals you want them to do.

26:17Let's say a partner comes in and joins primary and they know that they're going to do two deals in this given year. How do you avoid the situation where somebody comes in and no deals get done in January and February because it sounds like there's got to be another deal that's going to come over the next 10 months. You have no activity in the first six months because people are too afraid of essentially not waiting for the pitch and not seeing enough opportunities for that given year. Is there a certain rubric of what that pitch looks like where it's so clear regardless of how much time is left in the year?

26:49So we've now, with the seven partner checkwriters, each of them are more focused on a sector specialization. Venture and tech has gotten more complicated because there's so many companies and the complexity of the sectors, you need to make sure you best understand that. So what do we mean by that? Emily Mann joined us last year around this time from Redpoint. She's been in venture for the last decade. She helped launch Point72's fund and then went over to Redpoint to do early growth over there, where she did a lot of fintech deals, including companies like Ramp. Emily came on with this deep understanding of fintech.