How to win in seed stage investing today

0:08Welcome back to another episode of Venture Unlocked, the podcast that takes you behind the scenes of the business of venture capital. In today's episode, we are joined by Knuckle Mundin, who is the founding partner of seed stage firm Audacious Ventures, which just raised its fun too. Having known Knuckle since the early days of his journey and starting the firm in 2020, I was excited to dive deep into his unique path, from his roots in India where he started in VC, to working at legendary firms like Battery and Lightspeed before starting his own firm. As many people that have listened to the show, the venture capital landscape has evolved and grown significantly.

0:42And the table stakes of being a successful early stage manager have increased dramatically as well. As such, in our discussion, we spent a lot of time thinking about how seed stage managers should think about navigating competitive markets and how today a proper system around sourcing, picking, winning, and building brands or delivering for founders requires a machine-like approach. Knuckles spent a lot of time during the podcast talking about their own machine that they've built, which is actually unlike most firms, and provides a nice juxtaposition of more traditional models. This was a fun and candid deep dive discussion into seed stage investing, and we really hope you enjoy my conversation with Knuckle.

1:20Samir 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-party 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. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.

1:58Nekul, it's great seeing you. Thanks for being on the show. Yeah, thank you for having me. It's been long overdue, let's call it. Well, it's funny because I saw the beginning days of Audacious when you were first getting started leaving Lightspeed. And I do want to spend a lot of time about the model, which I think is very unique in the six-stage market. But let's first go through your history because I think you have a very unique history in terms of how you got into venture. Yeah, yeah. So I grew up in India. I grew up in a place called Kanpur, which is a big city relative to U.S. standards population-wise, but not a major metro.

2:31My dad was an entrepreneur throughout his career. He's retired now, so I use the word was. And, you know, my brother was born paralyzed from below his waist, my younger brother. So I grew up pretty intense as a kid through my teenage years. Like, ambition and intensity was pretty deep in me right at the beginning. My life was pretty normal. It was a middle-income normal kid. But for my parents and my brother, it was a pretty intense life. And so I grew up feeling like my family's success needs to happen through me. So you could have met me at 18. I'd have said one day I'll start a company it'll be massively successful and I'll make it happen kind of a thing sort of a naive take of life as a teenager went to IIT went to IIM for my undergrad in business school my first job out of college was Deutsche Bank but within three months of being at Deutsche in Mumbai I started feeling this is the opposite of what I want to do I want to start a company here I'm one in 50 ,000 people but Deutsche in some ways was my first brush with the good life, you know, like the flight down to Deutsche Bank's interview in Mumbai was the first time I ever flew in my life at the age of 24.

3:37They sent us to London for training. That was my first international trip. So hotels, flights was all new for me and a big cultural upgrade. And even being in a city like Mumbai where people spoke confidently was all like great upgrade. But I was very clear that I wanted to start a company. So that was pretty early in my life, mostly watching my dad as an entrepreneur and saying, hey, this is what I'll do eventually. So got into venture in India in 2006, initially thinking I'll do venture for three, four years, learn how companies are run and then start a company of my own. So I did the first three-year stint in an India-only firm called Blue River Capital.

4:15It was a first-time fund, two partners, two associates. I was one of the two associates. That was great exposure because when you're one of four people, you get exposure to the whole thing. Partner dynamics, fundraising, brand building. But in 2008-9, the financial crisis started happening. And I started feeling, look, man, this fund is not going to be able to raise another fund. And I want to do my own thing, but there's no funding available in India. And so I started thinking, I want to be at a global top tier firm to see through the next two, three years, still learn a lot on company building, and then start something.

4:50So that's how I joined Battery in India in May of 2009. And, you know, May of 2009 is a little bit like a time like right now, like people were cleaning up shops. So I joined Battery on a Monday. I'm not exaggerating. On Wednesday, the head of the firm called me and said, we just let go of the guy who was leading India. This is day three on the job. And he said, look, we still want to do India though. So why don't you come to the US, to the Bay Area, focus on India from here for a couple of years, learn our way of doing things and then you and this other guy who's a principal when he becomes a partner you guys go back and set up that office again so that's how i first came to the u.s in my life i'd never visited the u.s straight away came to the bay area as a vc focused in india as soon as i arrived here i quickly realized that the battery india story is not going to work out battery was looking for silicon valley businesses in india india didn't have those at the time So I was like, there's a reason that guy's fired.

5:49This guy, other guy's going to get fired. I'm going to get fired. This is not working out. And you know, the idea of getting fired was pretty like remote for me. I went to IIT, IAM and venture. So it was like a pretty strange time. But I thought, look, I'm in Silicon Valley. Might as well maximize my learning while I'm here. And when they shut down the India practice, I'll just go back and find a job. I wasn't an H-1B visa. So there was no career at that time here. So I started volunteering for the US partners at the battery offices, more thinking, I'll maximize my learning. But in six months, when they shut down the India practice, they gave me a chance to reinvent myself.

6:27So they were very generous with me. You know, I'll give a shout out to this partner. She's now a GP there, Chelsea Stoner. She was a principal. She went to all the partners and said, Hey, if the guy is willing to reinvent himself, I'd like to take him under my wing. So singularly, she changed my life. She's now more on the buyout side of the firm. So she took me under her wing. I ended up focusing on the US after that. So since early 2010, I've been an enterprise software investor in the Bay Area. Had a great run at battery after that. Got promoted, all of that. And then June 2014, I joined Lightspeed as a principal.

7:01That was a great run. Became a partner in a year and a half. Became a GP in five years. By the time I was leaving, I was one of the eight senior partners in all of that. but then got my green card around the same time I became a GP. And this is where you and I had met. And that for me, as soon as the green card came, the moment of truth was there, which is I've told the story of my life to myself that one day I'll start something. And, you know, it was a tough decision rationally because in VC, you dream of a career where you become a GP at a firm like Lightspeed, right? It's the top tier firm and all of that.

7:35And I really enjoyed it personally. you know, I love my stint there and still have amazing relationships with the entire firm. But emotionally, I just felt like I didn't want to look back at my career and or life and say, hey, I'm healthy. I've beaten the structural barriers with which I grew up. And, you know, I'm in Silicon Valley. If I can't go for my dreams and who can? And so I just felt like I had to do it. So that's what led me to start Audacious. I'll pause there. But yeah, that was pretty good. Well, there's so much there that resonates. And similarly, I went through, I was working at a couple of different institutions that were bigger, greater organizations in Silicon Valley Bank and First Republic.

8:16I had that itch to start something. My dad was also an entrepreneur. And so around the same time you started, I left to start the current company that I run. And one of the things that I always think about when people are leaving, there's obviously an opportunity cost and there's some type of desire to create something that you believe in and that you're passionate about. But at the same time, the business model needs to make sense. And this was around the time COVID was in full swing, very tough to actually meet people in person. There was a lot of VC firms that had come to market in the prior five years.

8:50And one of the questions I think I asked you is, why does the world need another venture firm? And what were the things that informed the type of business that you wanted to build? So I think since 2010, the business was already, the business of venture has dramatically changed since 2010. For 30, 40 years, it was similar, which is there were 20 to 30 great firms. It was a collective of artisanal partners coming together in the room and all doing the same things. And we'll talk about this in depth in the model. But it was essentially a collective of artisanal partners where each person is doing their own solo practice and they all come together.

9:27Then around 2010, everything started changing. Two, three years before that, AWS came and crashed the cost of launching a business from$10 million to$2 million. The seed market we talk about today didn't exist before that because you couldn't have started a company with$3 million. You needed to put up the cloud infrastructure. So people would raise from angels and then straight away a$10 million round. Around the same time, Andreessen Horowitz came around and changed the model. Before Andreessen, the value prop of VC was, I'm a board member, I'll give advice. Andreessen changed that in many dramatic ways.

10:01YC came along, AngelList came along. All of this actually came along in the same four, five-year period. And so fast forward to 2020, when I was leaving, my view was VC is no longer a boutique artisanal business. And today, there are 500 VC firms and 6 ,000 seed deals that go down in the market every year in the US. This is actual data. In 2007, the number of seed deals that went down in the US market was 600. This year, it'll be 6 ,000 plus. YC alone graduates a thousand companies every year now, four batches, right? So in today's world, if you're just a collective of artisanal partners waiting around and just doing good hustle, you're relying on luck.

10:42You need to build a machine in this world. So I would say there were two things further along that played into my mind. One is that VCs, the large, the branded firms that we all admire, Lightspeed, Sequoia, all of these became too large to service the seed stage entrepreneur. So as crowded as the VC market is, the one gap in the VC market that I saw was that there's no gold standard VC or seed stage firm. Other than first round, there's no platform firm at seed. First round has the brand cachet and rightly so of being the sequoia of seed. But after that, there's a steep drop in seed firms. And at that time, at least people like me would not start seed firms.

11:25People like me would typically start series A firms, Unusual Ventures and some others before that. And even hence, our friend, Dimash, Chemistry, always want to start series A firms. So true GPs don't ever start seed firms. So I felt there was this opportunity where the large firms are great, but they're too large to care about the seed stage entrepreneur. And seed firms were not equipped with the platform DNA or the dealmaking intensity it takes to compete. So the first gap I saw was that there's an opportunity to build a gold standard seed firm, which people like me can do, and I've been trained to do, but people like me don't do it.

12:04The second gap I saw was, which is more fun, actually is, okay, if we do want to build a platform firm, what is it going to be our value proposition beyond advice? For me, as I thought a lot about it, it came down to where we can create the maximum impact is building an exceptional team around the founder. And I can go in a lot of depth around So our first employee after me was our talent partner alongside MZ, my investment partner. And half of our team today is recruiters. So we focus on two jobs at Audacious. Invest in force of nature founders, help them recruit an amazing team. Then we get out of the way.

12:42Then the last piece, which we can transition to is the model itself that I've created a few. But those were the two gaps I saw. And then the model itself was informed by how do we build a machine ready to win? I want to spend a lot of time pulling the thread on this whole concept of a machine. And when I think about any investment firm, particularly a venture, there's a few pillars that you have to execute on. It's seeing deals. You have to then use good judgment to pick the right deals. Then there's the, you found them, you picked them, you still have to win those deals in a world where it's highly competitive.

13:19And then ultimately, once you win the deal, you want to create the flywheel by adding a lot of value to those founders so that those founders say good things about you and you get repeat sort of business a lot of the first round capitals who have built a tremendous reputation over multiple decades. And we'll get into that machine in a second. But the first thing was you did start this during COVID. And there's this old adage in sort of fundraising is you want to be differentiated, but not too differentiated. And so there's too many moving parts, it becomes tough. Talk about like that first fundraise.

13:53And if you look back, is there anything you would have done differently? So by the way, that adage, I lived through it. You want to be different enough to show differentiation, but not too different. And I definitely went too different in my first fundraise. I think you were there and as a witness to some of that journey. But I'd say so. Yeah. So I kicked off the first fundraise in the first month of COVID lockdowns, April 2020. Brutal time to kick off the raise. When I resigned, I had no idea of COVID. Like none of us knew August 2019, I'd resigned, but timing worked out that way. The first fundraiser was fucking brutal.

14:27No other way to put it. It took 14 months. It was ego bruising. You know, I still carry candidly. I still keep alive some anger every single day that it took me that long because I think like, you know, that anger is good for me in some ways, but it does make me angry. And so why did it go long? First is first few months of COVID lockdown, nobody even wanted to meet. People were like, what are you talking about? My kid's schooling is disrupted. People are talking about toilet paper. This is a species level problem. Like, what are you even talking about? And LPs were not used to making Zoom-based decisions, right?

15:03And now things have evolved. So LPs are used to making decisions. And rightfully so, they are betting on a person's 10, 12, 12, 14-year journey. They're betting on three funds at a time sometimes. times. So how do you make a decision on a person who you've never had sat down for dinner with, right? So that slowed down things. Second was I was bringing a new model, but it was just me at the time. So I have created this functional log design on the topic of machine rather than artisanal group of VCs do four things, sourcing, picking, winning, helping. In any partner room, in any partner meeting you sit in VC, we all know whose judgment we trust more, whose winning is better than other people, who's great at sourcing versus who has okay deal flow, who's actually a good board member versus a very mediocre board member.

15:52We all know this in any room, right? LPs know this too. When they're investing in a firm, that I'd rather have most of the money deployed by this one person, right? So I was like, why is the same person trying to do all four of these things? And the reason was, I mean, pre-2010, the world of venture revolved around the central idea of something called proprietary deal flow because there were fewer deals, fewer firms, people had relationships in each industry, and that's how deal flow came to them. They would call the same network to pick, win, and help. I would submit that in 2020 and beyond, and definitely today, there is no such thing as proprietary deal flow.

16:32I'm sure exceptions exist, but my general submission would be. If somebody is still talking about proprietary deal flow, they're bullshitting you. And so you have to then maximize the four inputs that drive returns, sourcing, picking, winning, helping. People have different superpowers. And so we've created a functional log design of sourcing, picking, winning, helping. I've said these words so many times that Hunter from Stepstone jokes with me that I should get these words tattooed on my face, literally. So creating that functional org design in a first-time fundraise when it was just me in COVID, it became too much differentiation, candidly.

17:09And that took time. And the questions I would get were rightful. How will you recruit people in this model? How will founder interactions work? We had answers and all the right answers, but it still was a leap of faith. The third thing that made the fundraise trickier and it's easy for me to say it today than like when it was playing out was candidly my track record was genuinely early had only been at light speed for five years and the middle age of venture sucks because your losers have started showing up in the track record but the winners haven't popped yet and so i'd probably say so just high level numbers was i deployed like north of 100 million, like 140 million, but it was at a 2x because you keep deploying more, the multiple comes down.

17:57There's only a five-year track record. So it was all ballooning to be good. Today it's at 4.5x already, and I think it landed 5 to 8x by the time it's done. But at that moment, it wasn't enough. So I would even say to people that I was able to pull off that$90 million first fundraise, which is a sizable raise for that time. Like today, the world has even moved beyond. Because I had an immigrant journey, because I'm probably a good salesperson, like I've had a lot of intensity around it that people are giving me some X-factor leap of faith. Right. That is how it came together. It took time. Yeah.

18:34Remind me again, how long did it take from start to finish from when you showed the first deck to final close? 14 months. 14 months, which, you know, in today's world, 14 months, you know, for a first-time fund is probably 90 % of the funds out there. Yeah. At least that, if not longer. And of course, that was also a very unique time in 2020 because you had the uncertainty that was brought forth by COVID. And you had the fact that you couldn't visit people, which in-person conversations, obviously, are far different than what you and I are doing right now. We're on Riverside, but on Zoom, obviously, you don't have the same type of relationship and rapport building.

19:12So you had that done. Now, we talked a little bit about differentiation. So when I think about a traditional seed fund, generally it's one or two partners. You're investing in 25, 35 companies, and you have the partners doing everything from finding deals, picking deals, helping the companies. And that's been fairly tried and true. A lot of funds go down the route. You mentioned Andreessen as almost having this agency model, which is modeled in some ways after CAA, right? So if you think about that agency model, but there also have been conversations around sometimes those platform teams are more marketing than they're real in terms of really driving value.

19:52Tell me a little bit about how you conceived this in terms of the organizational design. And you mentioned the talent person, like why this? Yeah. So maybe a more macro question is also why this model at all? Is this the only model that can work? I don't believe that this is the only model that can work. Other people can do what they believe to be true and in venture there are multiple ways to win it. But I do think any founder needs to build a firm that is authentic to their personality, right? So the first thing I'd say is my role models in VC are platforms like Andreessen, YC, First Round Capital, and AngelList.

20:36And you put AngelList there because AngelList in some ways is a programmatic, systematic way of capturing their share of cap tables. All four of these firms that I've talked, I would argue that they don't think of themselves as artisanal collectives. They are platforms, they are machines which go beyond one individual. for me that was very critical it's an authentic part of how I believe I want to build a firm so first is like I've never thought of myself as a craftsman I think of myself as an individual I'm a brute force bulldog and what I want to build is accordingly a reflection of my me which is a machine a sports team then on the model itself as I said like the way it came pretty organically I was waiting for my dream card in the last year to two years I would write down all kinds of business model potentially?

21:24Should I partner with somebody? Should I do growth late stage early? Ultimately for me, I authentically love early stage. I love the most joyful part of venture for me is working with the founder. And I found in my life during those years at battery and light speed, board meetings are performative. The best work happens outside of board meetings, one-on-one helping founders do something, think about things or all of that. So I wanted to take this one call and do everything that is authentically my belief and then I'll edit. So I don't take board seats anymore. So as an example on helping, right?

22:00So then I came down to, for me, it came down to the highest impact we can create are a few things. Help a founder build amazing go-to-market engine that is customer intros or just helping them on building repeatability. but before that comes an amazing team. So my conclusion was the first thing that I want to build at Audacious is how do we help two founders go from two amazing founders to 15 amazing people? And our best founders, actually what we found, already have their first three, four hires identified because they are exceptional people, they live with exceptional people, right? But around the fourth or fifth person is where they start feeling, should I hire the fifth best person that I know or now I go for the global maxima?

22:44That was my learning during the Lightspeed years. So I felt that customer intros, I was deciding between customer intros and recruiting. My learning was that customer intros from VC are fake signals because they are not qualified pipeline. And so they waste a lot of time. They work better at series B and beyond. The starting point of all greatness starts with exceptional teams, starts with exceptional founders. And so that's how the helping piece came. And then sourcing, picking, winning piece came because as I said, like I was sitting in those rooms and I was like, you know, people have different superpowers.

23:18I can literally see, like I grew in venture because I was amazing at sourcing initially. Then I became better at picking and winning. And by the time I was leaving Lightspeed, I felt like, hey, I'm top quartile at picking, but I'm top five percentile amongst VCs and winning competitive deals, right? So if I want to maximize my superpower and I get busier every time as people get more portfolio, how do you ensure that sourcing still remains a superpower? And so that's how this model came together. And it fit instantly for me because again, I don't think of myself as artisanal and that's not an ambition I have.

23:53I want to build a machine. And Reason is a machine. GC is a machine. Lightspeed is a machine. It doesn't rely on one individual leaving, right? Obviously, there are one or two people at the very center. The leader is at the center of these organizations. But beyond that the individual can leave the platform remains. Once it's artisanal firms rely on that collective of artisans being in that room, I don't want to rely. How do you think about this notion? And I've talked to a lot of seed stage managers on this, and we talked about the big firms. The reality of their business models are fundamentally different.

24:30When you're raising a billion, two billion, five billion, even$8 billion, at the end of the day, your job is to put as much money in very clear consensus companies, Series A, Series B, Series C, Series D. If you do seed checks, it's typically for option value versus anything else. And one of the things that a lot of seed stage funds sell against is, well, if you work with big fund X, and they put in a million dollars, 2 million out of a billion dollar fund, they're not going to pay attention. You're not going to get the senior partner. With us, you get the senior partner. I I have one person. I do everything.

25:06I'm your first call. And the question that sometimes comes is if you have platform teams, the relative value of each person on the platform team has to be consistent for this machine to work. So my NPS with you is, you know, let's call it a 9, 99 or whatever it is. And then somebody on your talent team is a 30. Well, the audacious brand is not going to go. How do you ensure that this machine has consistency in the service model where you're taking advantage of what each person's superpowers, but not losing the overall value to the entrepreneur because you have different people doing different things?

25:46Phenomenal question. And this is where everything comes to live or thrive or die. There's no middle ground. So first piece, our team has to be excellent. We can't help other people build exceptional teams if we are not excellent. You meet Sam. She's fucking amazing. Best challenge partner in Silicon Valley period. Not a second person can compare. Second, structure matters. We have our full weekly meeting every Monday. When we go down to the partner meeting, it's my investment partner, MZ, me and Sam. She's involved in every single partner decision. Our first AGM three years ago, Sam was up there on stage for 40 % MZ and I were 30 % each.