Saga Ventures on key lessons on raising a Fund I, building healthy partnerships, and winning in a competitive seed market

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 Kaji, and today we have a special episode featuring the founders of Saga Ventures, a new seed stage firm that recently closed their first fund. We're fortunate to have all three co-founders of Saga Ventures on the pod today, Ben Braverman, Thompson Nguyen, and Max Altman. Collectively, they have a ton of experience in both operating and investing. And on today's show, we talked about the challenges of raising a first fund, their approach to team building, and the strategies they employ to differentiate themselves in a highly competitive seed market.

0:38This was a fun one, and I think you'll really enjoy the episode as we went really deep into all that goes into starting a firm. 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.

1:13This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Guys, it's great seeing you and I'm really excited about this podcast. You know, I've I've covered emerging managers for about 14 years, and I've always liked people starting new companies, new firms. I actually view a venture firm as a company where you are writing checks instead of code. But ultimately, you're thinking about building brand. You're thinking about building your product for founders. And ultimately, over time, you'll build out a team. And so I'd love to maybe start off with the origin story of Saga.

1:49How did this all happen? And where did you see a gap in the market that you wanted to fill? And maybe Max, we'll start with you. I've been fortunate enough to do a combination of three different venture funds with some different combinations of my brothers over the last couple of years. And, you know, sort of last fall, I was like, hey, I think it's time. I want to do this myself, kind of go out and build my own firm and reputation. You know, felt pretty comfortable. Time was right. But I didn't want to do a solo GP model. I don't think it's necessarily wrong, but it's not right for me. So I sort of was really like looking at my network of like, hey, who are two people that I've worked with in the past that have similar worldviews and, you know, frankly, are enticing to founders and reference well with founders.

2:38And, you know, the goal was really to try to go out and build a multi GP sort of boutique early stage fund, which is where I still think the gap in the market is. And one of the things that's really interesting when you think about teams coming together, I like this concept of when you are investing in, you know, really great founders, you have to convince them to take capital from you. And it's not just the function of you having dollars to be able to deploy, it's really the service and the product of how you're going to help accelerate them. And I look at your individual backgrounds. All of you have worked with really great people, folks like Parker Conrad, folks like Ryan Peterson, and presumably you've learned a lot of things.

3:21But I look at the backgrounds. First of all, Thompson, kind of on the data science side, Max, more product. Ben, you have been on the sales and then chief revenue officer at Flexport. And all of these are very unique sort of skill sets that you've all built over a long period of time. How did you think about those skill sets as a cohesive team in terms of the product that you wanted to build for founders? You know, the thing I've always said to folks is like founder, an operator, an investor walk into a bar and arise with a seed stage firm. And I think, you know, our three skill sets are complementary in such a unique way that I think it's compelling to founders.

4:01For example, if I was a seed stage founder again, the first thing I would think about after closing my seed round would be go to market. And so there are very few CROs in the industry that has grown a company as fast as Ben has with Flexport over his six, seven year reign there. For me personally, I'll help out with tech, thinking about engineering infrastructure, maybe hiring your first couple of engineers, some product iterations. And then when it comes time to figure out your Series A, I've met a lot of people in venture, and I don't think I've met anyone as well-connected as Max. It's a very unique combination of those three skill sets where for an early stage venture funds, especially for one as early as ours, we are the product.

4:51As you mentioned, it's not just the dollars. There has to be some actual tactical guidance and value that we provide. Ben, when you think about coming together as a team, so I think about compatibility from a skill set standpoint. We look for that in, for example, founders. If you have a technical person paired with a great business person that has key expertise, that would be considered compatible. On the venture side, clearly you guys have unique skill sets that go from sales to product to technology, acumen. But there also has to be a cultural ethos where you have a shared worldview. And you mentioned this earlier about this worldview that you have about investing, working with tech companies, and maybe an eye toward the future.

5:33Maybe talk a little bit about that and how you knew that the three of you would be compatible from just running a company together. The number one thing that whether it's like whether you're building a company or you're building a firm, all you have in the beginning is your sense of reality. How much pain are you willing to take before you start diluting yourself? Because that is the easiest self-defense mechanism in the world when you're starting something hard. And I think that's why a lot of smart founders fail, whether it's building a venture firm, whether it's building a startup. They think their way into circles rather than trying things and getting into the market and getting punched in the face and getting feedback and iterating.

6:10And frankly, if you raise a little bit of capital, whether it's from LPs or whether you raise as a startup, frankly, you now have enough rope to hang yourself. And so I think one of the things that all three of us saw in each other is we all have this really well-calibrated reality meter. And we're all super comfortable living in some amount of pain. Even when you start one of these fundraisers, even if you're as well-respected as, thankfully, I think the three of us are, it's a brutal process. And you mentioned Dan from Michigan. Before you get a commitment and an endorsement from someone who you can, frankly, hang your hat on, it's a tough process.

6:50And the fact that the three of us were all willing to just live in that pain, live in the fact that, hey, we are unsure if we're going to get the support from the world that we want on day one. and none of us, you know, none of us trended towards any sorts of like self-protective delusions. It was like, oh, like this is the kind of hardship that can really scale. And frankly, that's the same thing we look for in the people we're investing in, which is just like, are you willing to grapple with the brutal nature of reality to the extent that you can come out the victor? And I think like we really see that in each other, which is kind of special and, you know, pretty grateful for.

7:22So when you guys think about Saga, and, you know, I kind of think about saga, and I've heard you say this before, it's really a nod to the fact that, you know, running a company, you're going through a saga, and there's going to be ups and downs throughout the process. And things are always, you know, difficult, and you have to help navigate these companies through these very difficult times that happen to any company, regardless of how successful and having run a company, even if it feels like everything is calm on the top, underneath the water, you have the duck feet going really, really quickly trying to figure things out.

7:54When you guys started to think about putting this font together, how intentional was the idea, the product, the team? And more importantly, what went into the planning process before you decided to launch? I think it's pretty important, as Ben was saying earlier, to live in reality, check your ego at the door, eat a little bit of humble pie, which I think is actually probably why most... is the reason that many VCs probably struggle so they can't do that part. And be like, where are we going to win? And let's only play games we're going to win. And let's only sell a product that other people believe we can win too.

8:31So if we came and said, hey, we're going to start a Series A only firm. We're going to go head-to-head against Sequoia and Founders Fund. We're going to beat them. We're going to lead four deals a year. We're going to build the next benchmark over the next 12 months. People would be like, okay, thank you for pitching us. you can't have our money and like, thanks for coming in. And that means you have to sort of know where you're going to be successful and where the people for the fundraiser think you're going to be successful and then actually execute on that. So I think that was really the first combination, or the first discussion, which is really just like, where are we going to play?

9:06Where are we not going to play? And let's communicate that to LPs. So let's talk a little bit deeper on that and double click on a couple things you said, you know, I do think that self-awareness as a VC in terms of where you can win and what game you're actually playing is the most important thing. So what we saw during, of course, the peak period is funds started getting bigger and bigger and bigger. And every time you get bigger and bigger and bigger, your business model changes. If you're raising a$300 million seed fund, ostensibly, you may call yourself a seed fund, but it's really a series A fund at that point in terms of how you have to build out the portfolio and the construction and the people you're going to compete with.

9:45You started off with a$125 million fund. How did you think about sizing the fund? Was 125 based on a bottoms up of like, here's how many companies, here's the ownership we want, and then here's the reserves? How did you go about that number? Exactly. There's a bottoms up like, hey, the way that we think venture works is the tried and true way. We're going to do 25 or 30 seed investments. You know, we really want to be owning 7 % to 10 % of these companies. And we want to be doing, you know,$1.5 to$2 million entry checks. We want to keep the third reserves. What's the math on that? You know, it comes to be like around$120 ,000, maybe$125 ,000 sounds a little bit of a nicer number.

10:26Once you start going to$200 ,000 or$300 ,000, the math gets really hard. Unless you're just like, you know, investing, making a new investment every week or two. So, yeah, that's how we got to that number. I think about the market and you guys all have very unique experiences and it may not feel like it, but the fundraise actually went fairly quickly relative to the standard. And the standard right now for a lot of EMs is 12 to 24 months. I just spoke to somebody that's been raising for 27 months. I think you guys were about three quarters roughly from start to finish, maybe slightly less than that.

11:02And I'm sure you went through a lot of meetings, a lot of learnings through that process. but how did you go about maybe sort of the inception of the fundraise? What was the strategy of identifying the type of LPs you were going to go talk to? Yeah, I mean, I candidly, I think this is an area where we could have been smarter. There were folks that we knew were going to come into the firm, but because of the, you know, we, very candidly, you know this because you know us pretty well, we only were really targeting very institutional LPs, like a very unusual mix of LPs for a so-called fund one. We knew we'd be able to get a few really important halo brands in the door because of, frankly, Max's prior relationships.

11:46And it's not a secret anymore, like pretty exceptional performance on these prior vehicles. And if we had been a little more patient, and this is, again, maybe ego got ahead of us, we should have waited for those folks to actually sign docs before we took a single meeting. because what we didn't understand is what you're describing in the market is true. People are having a heck of a time raising new vehicles right now. And even LPs who liked and respected us didn't actually trust that we had the dollars committed that we said that we're going to sign on the day that we thought they were going to sign because it's so unusual in this market.

12:20So one of the mistakes we made was we took a bunch of meetings with people who, frankly, we thought they were going to give us credit for saying, hey, trust us. We have all these big names coming in. and no one gave us credit until the ink was dry on those stocks. And then, as you know, from the time our first closed to our final, it was like less than 60 days, even with really big institutions coming in. And we're grateful they accelerated their process a little bit to meet the deadlines. We really were probably a little overconfident going in, and we should have taken zero meetings before the initial commitments were locked.

12:52Yeah. Actually, a lot of people have learned that if you can get the anchors locked in, it provides a necessary signal. It also shows that you've met the minimum viable fund size to go live. So did you do a single close or how did you think about, I think you mentioned first close, like was it a first close and then a final close? Yeah, it was a first close in March. That was a little more than half of the total number. And then the final ended up coming in May. It was primarily, you know, the second close was primarily folks who we'd already started the process with. But because of various internal process, they just said, look, we can't hit a March date, work with us on a May date.

13:33And our stance was, look, we're super grateful to have big institutions coming into a fund one. If you're coming in in earnest, which gratefully they did, we'll work with you on May versus March. Maybe speak a little bit about what you were optimizing. You mentioned institutional capital. Some of these folks you had known before, Max, I think you had worked with some of these folks in the past and they knew you guys and they were behind. But what were you optimizing for for those institutional LPs? Obviously, institutions do bring the ability to follow on for multiple funds over, they tend to be a little bit more consistent.

14:08But was there anything else that you were looking as you're putting the pieces of the LP puzzle together? And in particular, like at the very end, my guess is there was a level of oversubscription that you got to because people tend to want to pile in at the very end after it becomes very clear that it's a viable strategy. So maybe talk a little bit about how you guys thought about optimizing sort of the mix. Like you said, we were in the fortunate position to have to cut a lot of people back and, you know, unfortunately cut some people out entirely. I think there are three things we were looking for.

14:41The most obvious one, like you mentioned, is obviously like, hey, who's going to be around for fun, two, three, four, five, you know, assuming we do what we said we're going to do is, you know, the most obvious one there. the other two are just like bcs hopefully can advise their founders because they've seen you know a lot of different companies the best lps we actually find can advise their gps because they've looked at 800 decks and they have 25 gp relationships and the best one's like hey you know here's what you're doing here's what we think you could be doing even better so that was valuable and then the last one is frankly i think the level of asks from founders to VCs has up-leveled a lot in the last eight years since I've been doing this, just as more capital has flooded into the market and it's gotten more competitive to sell your dollars.

15:31Obviously, we're in the business of selling money. Like, hey, guys, please take our money. We know you're good. Everyone knows you're good. It used to be like, hey, help us hire a designer or a product manager or an engineer. And I think now it's become table stakes. Now it's like, hey, we're trying to sell into this big multinational hold co or this bank or this manufacturing company do you happen to know anyone there so maybe working with some of the family offices who might own those is a big advantage and in a world where it's becoming you know vc is a very competitive industry we are not above trying to work with those lps to to have offerings to maybe get them direct on the cap table or whatever to try to win some competitive deals at c stage and maybe this is a question for all of you just presumably all of you had some time to talk to some of the LPs, take some of the questions that were asked.

16:21And every time you go through a fundraise, I mean, most of these institutional LPs have a level of rigor when they do add a net new manager, right? There's ODDs, there's a lot of things that you have to kind of go through. And some of it's going to be investment related, such as, okay, give me your meaningful differentiation when it comes to picking, winning, and then, you know, ultimately sourcing, sourcing and winning, you can talk about picking takes a while to really understand, although you do have track records, go through for us, I guess, some of the most interesting and maybe surprising questions or things that you had to address pretty repeatedly with the different institutions that you didn't expect going into the fundraise.

17:01One thing that we expected, but I, for me personally, I didn't realize was going to be a recurring theme across every LP we had talked to was the threat of partnership risk. You know, like I think when you evaluate early stage startups, the thing that's in the back of your head as an angel investor or an institutional investor is whether the founders themselves are going to break up, you know, like other than like cash starvation, founder breakups are one of the biggest reasons why early stage startups fail. You know, I guess it was like surprising to not surprising yet, not too surprising that it ended up being a big point of discussion where, you know, We sat down with a lot of our LPs and talked through why we believe the three of us are going to last for five funds and beyond.

17:46The shared worldview that we have on what makes a good early stage venture firm. The complementary skill sets and profound professional and personal respect we have for each other. And then even just the shared ambition of what we want to be when we grow up. What does fund five look like? Is that going to be like a multi-strategy, multi-stage behemoth? Or are we going to maintain discipline? And so I think aligning on all of those different bullet points really helped assuage our LPs that we were extremely thoughtful in figuring out whether this partnership between the three of us was going to last.

18:23It's a great point. And I do think partnership risk is one of the things that is probably one of the biggest risk for venture firms to succeed or not to succeed. And generally what happens and what we've seen over the last decade is a lot of partnerships have come together very quickly. You know, folks that got together, pedigrees were good. Maybe they sat on a board or two. And then a year or two or three years later, there's a divergence in the worldview and decision making starts to fracture. How did you think about addressing this? Because it's really hard, because people don't know until you go through a few years.

19:00What did you have to evidence about the long-term view of the franchise to be able to get people comfortable with partnership risk? One thing going in is all of us have a track record of playing long-term games with the same people. All of us, if you look at our friend networks, how we all came together, Max and Thompson came together through a guy named Kevin Mahaffey. Kevin's the founder of Lookout Mobile Security, which had a big outcome. and now he runs a venture firm called SNR. He and Thompson have been friends since they were children, like second or third grade, so that's something wild.

19:34Max and Thompson met when they were being hosted at an event by Kevin seven, eight years ago, a really long time ago. I met Max five years ago. I've known Jack, his brother, for about the same amount of time. We've all just been in the same ecosystem. Max worked for Parker Conrad twice. There's very few people who aren't amazing that got to work for Parker two times. If you look at most of the people who ended up building Rippling, it was the same. It was the A-team from Zenefits. I think going into this, and we were trying to sort of suss each other out, the idea that we were partnering with people who had proven they could play in this really small ecosystem where, frankly, any bad behavior just reverberates so much, and we had so much connectivity between all of our networks, we felt pretty comfortable going in.

20:19And I think when LPs dug into all of us individually and dug into how much connectivity we have personally, people got pretty comfortable with it. The nice thing is also, it's very clear roles and responsibilities in this firm. I would never overrule Thompson on technical diligence. I would never argue with Max on the cadence for introducing new investors to a potential deal process. It's just kind of nice. We all know where the others are more experienced, and we're pretty comfortable saying, hey, I'm strong here, you're strong here. Then there's not a lot of overlap. going back to the point we made earlier about just this ability to be very self-aware of where each of you fit in and the compatibility of each company is going to need different things.

21:01Some companies are going to lean into things like products. Some companies are really going to need help with the sales function. Some need on the technical function. I would say that I think the best lesson I've ever learned in venture, I was fortunate enough to be around a lot of who are now sort of PayPal Mafia styles, very successful VCs. and sort of maybe just through osmosis listening to them when I was in my young mid-20s without even kind of realizing at the time is just kind of ask the founders what you need to do to win. Again, back to checking your ego at the door. A lot of people are like, hey, I'm this VC and we do exactly this and I'm going to help you with this.

21:37It's like, maybe they don't want help with that. Maybe you just say, hey guys, what do you need? What are you looking for in a partnership with a fund? Where are the holes you want to help us fill in that great maybe ben can offer you that or maybe thompson can offer you that or maybe i can offer you this thing but you really want this thing for me it's not that hard you know it's obviously hard but it's like just just ask them what you need to do to win the deal and if you could do that again life gets a lot easier and maybe i was the one who sourced it but thompson was a guy and they're like they really connected with him a little bit more and then said hey we'd actually like to spend more time with you okay great that's fine and i think you have to think that way when you're trying to go after the competitive deals.

22:15And it does speak to being a team sport and ultimately being able to lever the entire enterprise for a company to be able to get these unique value adds. I want to shift a little bit away from sort of the fundraise to the business model itself. And in venture, we've always said, okay, at the end of the day, it's sourcing, winning and picking, sourcing, are you in the right rooms that allow you to see the most interesting founders and companies for the thesis or the themes that you're going after. Picking is usually a function of looking well into the future, looking at the founder and seeing, do they really have that ability to navigate through whatever the company will go through over time?

22:54And the last thing is you got to win those deals, right? You can see every deal, you could pick the deals, but if you can't win the term sheets, then it really doesn't work. So the two areas that I want to focus a little bit on, number one is picking. So there's a long feedback cycle, of course, from the day you invest to whether you know if it's a great company, but there are probably signals and patterns that you're looking at. You all have worked with really unique founders. And I feel like at the seed stage, as much as the idea, it's really the founding team. So maybe draw from your experiences working with people, whether it's Jack Dorsey or Parker Conrad and all these folks, what are some characteristics that you found in highly successful founders that used it as your framework for identifying and evaluating founders that you're backing?

23:39What I've realized, not just as like an angel investor, but you know, like working at Square, a block, I guess we're calling it now, was that there was just an intensity, even as a public company. It started with Jack, and then it cascaded into his directs, which then cascaded into the entire company of, you know, building a product for our end user. By all measures, Square Capital and Square could be called an AI ML company or a fintech company using AI ML, but it wasn't. If you were a seller and you took a Square Capital loan or you were using the Square point of sale, you just knew it as a very easy to use product.

24:18And Square Capital was a very easy to use business loan where you clicked a button and then you got money within 24 to 48 hours. And so all the fancy tech and whatever the tech du jour of the day, whether it was like big data or deep learning or LLMs, was used in service of building like a 10x better product. You know, abstracting from that, when we look at early stage founders, it's not enough to talk about fancy tech. You know, you have to build a product that you strongly believe will serve in an extremely large market. And, you know, extremely large markets exist, certainly in New York City and San Francisco.

24:55But we just believe that, you know, there are larger markets by serving the entirety of the United States, or eventually, you know, like the average small business globally. Go on to that for a second. I mean, you look at these variety of factors, and I think about markets, I mean, actually some of the best companies of all time. It was unclear what the TAM was, you know, whether Airbnb, I think people thought the TAM was X, it was actually Y, similar to Uber and Lyft. I mean, Uber in particular, right? People are thinking it's Blackheart actually became an entire sort of transportation and logistics company.

25:28And so sometimes those things are really difficult to get on. So I actually want to understand a little bit more about this overall rubric on drawing on the founder side itself. Like what are some of the characteristics? Tenacity is something that you mentioned, Thompson. But other than that, are there markers of people that you can look at at the early stages when they're first starting, even a first time founder, that get you comfortable with their ability to lead? They have to be pretty likable. And I don't mean likable in like, oh, they're so nice, like kumbaya style, but they have to be charismatic enough to make all their employees make terrible financial decisions.