Stephanie Palmeri and Melody Koh of NextView Ventures on incentives within venture partnerships, the changes in seed financing, and operating remotely

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 this week on the show, we're joined by Stephanie Palmieri and Melody Co., partners at NextView Ventures. NextView was founded in 2010 and recently raised$200 million for their new set of funds, located in San Francisco, New York, and Boston. The firm invests all across the U.S. and has currently invested in over 170 companies at the seed stage since founding, including companies such as Devoted Health, thread up and attentive. We had a great conversation about how next to you thinks about VC partnerships, what seed and pre-seed investing looks like today, and what they believe it means to be successful in working with founders.

0:42We really hope you enjoy my conversation with Stephanie and Melody, and let's get right into it. Samir Khadji 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.

1:16This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Stephanie and Melody, it's so great to have you on the show today. Thanks for joining us. Thanks for having us. Yeah, thanks for having us. So before this chat, I was reading an article that announced the most recent funds. And within that article, there was a quote that stood out to me, and it went something along to the effect of, as a partnership, we don't want to be a federation of lone wolves. And I'd love to maybe start of what does it actually mean in terms of the day-to-day partnership?

1:50And Stephanie, you just joined a year ago. Why did that speak to you? I'm not new to NextU in the sense that I've actually known my partners for the past dozen years in which I've been an early stage seed investor. And one of the biggest reasons why I wanted to join this team was because we function as a team. And I think that's fairly unique within how venture firms operate. And I think one might be able to say like, hey, this is a firm that has offices in Boston, in New York, and now San Francisco. how do you orient yourselves around being a team when you're actually more distributed than most firms, let alone seed firms?

2:29And the reality is we're constantly connected to one another. You know, we have our formal partner meetings and team meetings where we're touching base, but we're constantly sharing insights that we're seeing, ideas we're hearing from founders coming to each other as partners early with problems we're trying to solve on behalf of the companies we're working with. So I think that constant communication and trust in each other that we can come with not just the good news, but also the bad news really creates this foundation where we're there to support each other just as much as we're there to support the founders that we value.

3:02So one of the things that also stood out to me when I was reading the article is this concept of equal carry with all partners. And regardless whether they're a founding partner or somebody like yourself that just joined. Benchmark has been pretty famous for having this type of model, which has worked incredibly well for them. But Melody, you've been with the organization now, I think since 2017. Tell us why this has been so important to align economics with this model of not a single person, but a team and how that works in practice. A lot of times economics drive action, you know, business model drive behavior, right?

3:41So it was really important concept for me when I first joined, uh, next view and just kind of how we operate, because I personally want it to be at a place that is truly collaborative. I think every firm you talk to is like, Oh, we're collaborative and we work together. But I, I firmly believe, um, you know, the economic design drive behavior outcome. Right. So, uh, in reality, you know, when you're truly equal, that really implies a high level of trust, which is a prerequisite so i think that you know smaller firms can do this and larger partnership is you know this is a more difficult thing to do but you know i think really translates into day-to-day of really there is no keeping score of anything and you know it manifests into little things like we do a decent amount of what we call handoff we don't really think about deal attribution when it comes to who's who sourced it a lot of times it's like maybe it's through my relationship, but then stuff is a better fit.

4:40So stuff takes point or stuff comes to Rob and Lee has more capacity. And so Lee takes it. So we do a lot of handoff and then post investment. We also truly think about it as a next few investment. And we try to be careful with the language we use internally. So we try to say things like, Oh, this is a company that I'm point on for us as opposed to, you know, this is not like my company certainly, or this is not. And we try to make sure that from a language perspective, it really is a next few investment. And practically speaking, if you talk to any next few founders, they'll probably say that, oh, Rob is playing, but Melody has done this and Dave has done that.

5:20And because we really, truly try to think that way. I think that hopefully might have a positive outcome and impact on the companies and the founders that we work with. And Samir, if I might add, I think that becomes even more paramount as you think about we're not just making initial investments in seed and pre-seed companies. We're obviously following on to those opportunities, both from the main core fund. But now that we have an opportunity vehicle, we're also investing out of that in existing portfolio companies. So this idea that we're all shared equally around the table in support of these companies, and we all equally want to see the companies we back and the winners we back continue to be winners, that really matters a lot.

6:04Yeah, and we've seen that where firms that have done well through a team first approach are really strong when it comes to aligning around culture, around things like economics. We saw so many firms in the mid 2000s struggle with generational succession, struggle with getting things like economics right. And we saw a lot of people leave in those firms. And these things are easier said than done. And as you get larger, as you get more distributed as a team, there's just more complexities in terms of keeping the culture in that really aligned team first way. NextViewNow has been around for 12 years, let's say.

6:43You've grown as a team. You have many different people in different locations. How do you think about making sure that the culture remains strong and that you remain this team first and not this federation of lone wolves? It's interesting because I think now post-COVID, a lot of firms are distributed, but we actually started that a couple of years before this whole COVID thing, of course, with Steph joining. So I think we had good practice under our belt. And, you know, fast forward to now what we do, you know, the practical thing that we try to make sure we do is that the whole team, not just the five of us, but the whole next few team get together at least once a month in a single location.

7:28And these days we rotate between New York and SF. That is not an equal amount of travel. In fact, Rob, Dave, and Lee end up traveling the most because they're in Boston. And then we really only meet in New York and San Francisco as a whole team. But I think that's like a culturally very important thing. And we make sure that we don't just meet for team meeting and then we go off and do our own stuff. We try to sit down and have team dinner and really make sure we spend in-person time as a whole team. On top of that, we do quarterly offsites. Some of them are a whole team. Some of them are just the partners.

8:06And again, in-person. I mean, these offsites are not really like quote-unquote fun offsites. These are like most of the time in our lawyer's office or whatnot in the conference room and have strategy discussions. But we really try to over-index on spending in-person time and do the travel internally to make sure that culturally we are in sync. And a lot of times, especially for strategic conversations, it's very hard to do on Zoom. And I'll say even little things now that Steph is in a Bay Area, we have a San Francisco office, we have two different time zones. and we try to be conscious of that and make sure that stuff doesn't wake up and with a bunch of slack conversations and decisions already made by east coast folks because east coast wakes up first so even little things like that we're thinking hey if we were to hire someone else onto the next team down the line we want to put more human beings in the west coast so that culturally we're more conscious of the west coast time zone those are large and small things we try to make sure we we are aware in that different locations have equal footing.

9:11And when we think about doing events in New York, we think about doing events in San Francisco, for example. Ultimately goes back to where supportive of each other as, as teammates, as partners. And, and we work together to find solutions that work for everyone on the team. Right. So when I, when I came on board and I knew I'd be traveling back to New York, which for me is a feature, not a bug. I'm from the East coast. I fly bagels back home with me every time I come out. But it was really important to me to not have to take a red eye or to blow up my Sunday. I have young kids at home. So we shifted our partner meetings to start on Tuesdays.

9:49And that means that everybody can have Monday for your own personal meetings. But if I'm going to be traveling to the East Coast, I've got that buffer of time to actually get there and be ready to spend a full day with my team. So, I think those little subtleties matter. And the fact that we're constantly doing these offsites and checking in with each other, we have the ability to kind of adjust. At the end of the day, we're still a small team, right? So, we can make these tweaks as we go. We can learn. We can test. We can experiment. And I'm really impressed with, again, I'm relatively new to this team, but I'm really impressed at which the speed at which we evaluate and iterate feels very startup-like.

10:29So one thing that I'd like to really unpack a little bit more about, we're all evolving as organizations in terms of figuring out how to work both where we are meeting once in a while together, but also through async, through some of these conversations over Zoom and phone calls. But when you do get together, and I had this conversation with a GP, it's actually two GP firm, and they're in different locations. And one of the things that they do is they get together every single quarter, if not more. But there's things that they really heavily index on during those in-person times. So I'd love to hear how do you think about what are the things that are most important and strategic when you are together that really help not only create this culture, but continue to promote this level of being the best within the pre -seed and seed class?

11:21Yeah, I mean, Melody touched on this a little bit at the start, which is we are together as a team once a month by design. And so again, it could be here in San Francisco. It could be in New York where Melody is based out of. It could be somewhere in the middle where we decide to meet more for a kind of remote offsite. Could be in the lawyer's office again if we're doing a retreat of some sort. But the reality is, it's not just about the productive meeting time. It's really about the fact that after that work time together, we're taking the time to spend some personal time together to share a meal, to not have the conversation revolve necessarily around the agenda from the day.

12:08So we come in and we form an agenda over time and we collaborate on what we're going to spend our time on, whether, again, it's just a team meeting and looking at companies together or whether it's more of a formalized offsite where we've got a strategic agenda or more an operational agenda. But at the end of all of that, at the end of the day, we wrap with doing something that feels a lot more personal and the dialogue and the conversation around the table becomes a lot more personal as well. and I think it allows us to build trust and get to know each other as human beings, not just as colleagues.

12:43Beyond that, of course, you are constantly working on building the firm together, not just investing in companies, but on the investing side, you talked a little bit earlier about not having partner by partner attribution and with the partner team right now being five full-time people, one of the things that I think NextView does that's a little bit different from a lot of seed funds is the number of deals per partner is actually fairly small. In many ways, it represents what we typically see of a traditional Series A firm where one partner is doing two to four deals. Typical seed funds, you have one person managing$40 to$100 million, making up to 10 to 15 investments in some cases per year.

13:27Tell us why you've decided to, for a seed fund that's$135 million, have five partners, fewer deals per partners. What does this actually map back to in terms of your overall objectives with the founders you work with? You know, we do seed and pre-seed. And the reality of these companies is that half of the time where we invest is not even launched as a concept stage or pre-launched business. And the founder journey at this earliest stage, pre-product market fit is pretty up and down. We're not yet at the stage where, oh, here's a little machine and that's amp up the volume of output. We're still in a very early phase of designing what that machine looks like.

14:07Our belief is that we want to bias towards having the senior folks on the team to really be able to spend time with the founders. And that's not necessarily just tactical help, although we do a lot of that as well. I think it's really like mental bandwidth and proactiveness when it comes to these are the three companies that are top of mind for me. And every day I wake up, I think about how's each company making progress? What are the founders of each company needs and be able to be proactive. And I think sometimes I explain this to founders like, look, it's a math problem, right? Every investor has a certain number of hours of the day.

14:47And we want to make sure we're designing the firm so that we can provide the level of attention to the small number of founders that each of us work with. So that's kind of the idea and why we bias towards that. And I'll say the other thing is that we just, I think we as human beings enjoy that style of collaboration and working with the founders that we invest in that has kind of really transpired over the years. And I think if you look at that further from sort of more of an LP perspective or shareholder perspective, it also allows us to concentrate where our dollars are going. The output of that is that when we're able to build ownership at the very start by concentrating our dollars, and then we can continue to concentrate those dollars in the companies that we think are going to drive real value for our shareholders or LPs.

15:34Given that backdrop of only doing two to three companies per year, spending a lot of time with each one of those companies versus treating them as call options for the future. I would presume that the diligence and the decision making process is highly involved with the entire partnership, you're spending a lot of time before making those investments, because it is such a impact on your own time from an opportunity cost standpoint, on the companies you do versus the ones you don't. How do you then think about what happened in 2021? So 2021, I feel everybody was moving at hyperspeed, there was so much capital slushing around the system.

16:17And the time to actually make decisions for seed stage pre-seed was actually really quick. Tell us a little bit about how this model worked during times of high velocity and what you're right now seeing within the pre-seed and seed market. Yeah, back in 21, this is before Steph joined, you know, honestly, I think that it was, it was difficult. It was difficult for, I think, not just us, but for many folks who were forced to make a decision in a week or sometimes even less. I would say that there are certain areas that we think a lot about and we have more of a prepared mind. And in those situations, then we can make a pretty quick decision.

16:59Again, because a lot of times we're invested in pre-launch and pre-traction companies. So that's really just about forming an opinion and a judgment on the team and our thoughts around the market. The other style of investment with founders, we've been able to build a relationship for an amount of time before those founders started their formal process. So in those situations, we're also able to make a decision fairly quickly. But I will say that I think there were certain instances where we just couldn't build conviction quickly enough, which I think happened to everybody in that 21 and early 22 timeframe.

17:45And there are probably a few investments that we had to really kind of hustle and accelerate our decision-making and conviction building process faster than we probably feel comfortable with. We always say that when we first meet a founder, so we'll get back to you in a week where our heads are at. And it's either we'll do more work, in which case we tell you kind of the roadmap of the work or we pass if it's not a fit. So we never want to try to sit on it for longer than a week in terms of our internal process, regardless of what the market environment looks like. But I think it is nice now that we can get to know the team better.

18:21We can have more than one meeting. We can actually dig in to the data for companies that are post-launched and have data to look at. So it is a slightly different pace where we're sitting in now in 2023. If I might add, I think everybody benefits from that. It's not just the investors that benefit from having more time. And we're not talking about months, right? We're talking still at Seed. Seed still moves a lot faster than downstream. So we might be talking weeks, but more time, founders also benefit from having more time. And at the end of the day, it's a relationship that's going to be a lasting relationship for many, many years.

18:59And so I think both sides of the table having the opportunity to get to know each other and get to know not just a person, but also a team through a process is really important for everyone. There are challenges to a market when a market slows down and when prices start to come down. But at the same time, there are benefits, I think, that are long-term benefits, like the ability to form stronger opinions and stronger relationships before entering into an investment on both sides. I would agree with that 100%. And I do think that from a founder perspective, we were all moving at this warp speed that we had never seen before.

19:39And you really never got to assess, both as a founder, whether a venture firm was actually right for you from a personality standpoint, ability to alter the outcome of the company. And ultimately, all startups go through peaks and valleys. And you really want somebody that really relates to you and has a similar sort of value set. And we just never had the opportunity in 2021 to have enough time to understand on either side, whether that was going to be the case. And I do think obviously now things have slowed down. Precedency very different from later stage. Later stage has slowed down dramatically.

20:18And even at the Series A, oftentimes it could be a month or greater of the process of meeting versus getting to a term sheet and closing. But when you look at today's market and you're doing pre-seed and seed, we are in a different climate whereby getting that Series A is a little bit harder than before. We were, in many cases, and I'm sure you both saw this, in 21, oftentimes we saw a seed go to a Series A in six months, in nine months, without a lot of tangible progress by the company. And now that Series A market has shifted, the goalposts have moved. How do you now think about investing in companies knowing that the milestones that companies need to meet may be materially different than we've seen in a long time?

21:04I think that is very true right now, Samira. And there's a lot of things to think about. The first is, and I think this is true regardless of the market in which we invest in. And again, we concentrate our investments, but I think we've always had a mindset that companies should be raising when they're at this early of a stage with a goal towards, call it 24 months of runway. I don't think that's a huge internal shift, but the shift here is now for everyone around the table to realize that that runway actually does have to last for 24 months or until you have the traction to show you can graduate to that next level.

21:42I think one factor, you know, in the same way we're talking about how decisions have been made very fast, that was happening at every single stage of venture investing for the last couple of last few years. It goes back again to building these long term relationships. And so I think we are now in a shift where, you know, six to nine months out, a company that we've backed and we've supported at Seed is going to start thinking about building relationships with the firms and the partners who might invest in that company's next round of financing, as opposed to hitting the market to raise prematurely.

22:24So, you know, in a sense, we're going back to a model where building a long-term relationship, being able to show proof points around the company making progress against its milestones, I think will matter more. And again, companies aren't going to necessarily be hitting the market six months after they close the seed round. But those founders will be out meeting investors with a mindset of this is a long term relationship I'm building and I'm just starting a relationship today to build to a raise months, if not a year out. Yeah, I completely agree. And one thing I would just add is, I think in addition to what Steph mentioned in terms of 24 months run when it really needs to show real progress, as opposed to just relying on the hype to push you forward to the next round of financing, I think in this environment, there's probably another level of conscious decision around how do we get to not necessarily profitable, but capital efficient growth.

23:27And in the way that you have to show traction is no longer just, hey, let's burn through a ton of dough and just focus on the top line. It's like, how do we show proof points around unit economics in day five and be able to show growth still at the earliest stage while showcasing your eventual unit economics when the next round of financing is around the corner? Yeah, it's funny. I mean, that's going to be a wake-up call, I think, for a lot of founders who are going out to market in the next year who have raised a pre-seed and then a seed and then another safe and another safe on top of that. And you start to look at where revenue and product is relative to the amount of capital already invested in the company.

24:10And when there's a mismatch there, it becomes quite difficult, I think, for the next level of investor to step in and do kind of that larger price round. Yeah, we're definitely seeing that anecdotally, and I'm sure the data will support that in terms of the number of pre-seed and seed companies that go on to raise a Series A. And it is going to be difficult for those that raise far too much money at too high of a valuation, and maybe even more so difficult for those that never really had a clear lead to help them navigate through the markets. And in today's world, of course, being a good venture firm is even harder.

24:48You know, those rounds, those markups aren't coming as quickly. And I remember reading this quote from Fred Wilson some time back, and he was just thinking about what does it mean to serve the founder community? And he said, as a fund or as a venture firm, our clients are and our customers are the founders, our LPs are the shareholders. and I'd love to get your view on how you think about your founders and are they your clients? And then ultimately, what do you do differently in today's market to make sure that you're serving your founders in a way that really helps them through what could be a very difficult equity climate for the next year or two?

25:27Fred refers to the founders that Union Square works with as customers, at NextView, we think of ourselves as invited guests with the founders that we are supporting. We look at it very much as a privilege to be part of the cap table and to be alongside that founder on their journey. For me personally, I actually got my coaching certification last year. And I did that in part because I very much view the role that I'm in as an investor and and oftentimes a lead investor, as supporting the founders of that company, the founders that we as a firm have backed in making decisions that will help the company as well as the founders of that company be successful.

26:17They're so closely tied together at Seed. I think that mindset, obviously, again, kind of lends itself to concentration of capital. It lends itself to viewing our role as not only to not do harm, but also to be in support of founders getting their vision, their company, their teams to that next level. You know, Samir, you mentioned party round. I remember having this conversation a couple of months ago with a founder that we recently let the seed round for. And we were talking about how to think about syndicate construction. And this founder has had many options. And I told him, I was like, look, think about who's going to give a damn relative to their check size, their model, their fund size.

27:02And I would highly encourage you to prioritize for the folks that is going to give a damn if they must. And again, you know, you have to be smart about thinking about their business model in relation to their fund structure and objective and how they work. But I think that has always been important. And that's kind of how we always bias towards thinking about syndicate partners. But I think in this environment is even more important, both for the company and also making sure that they're like-minded co-investors around the table to roll up the sleeves and do the work together. The other thing is another investment that we recently led, and this founder was doing references on us.

27:47And he called a couple other founders that I've worked with. and he, he told me that one of, he shared the reference results back with me, which was nice. And then he said, you know, one of the founders that said that I was her ride or die in the first two years. And I, I was, it was very nice of her to say that, but I also think that's kind of how we, we ought to think about how we actually do work and present ourselves and, and support founders in that, in that early state journey. So I thought it was kind of interesting, of course very nice of her to say that but given like step set given our model we inherently are concentrated and we can really be there to support the journey and not only just like kind of the strategic advice and things like that but really like emotionally just be there for them and be available if i may i want to double click on this a little bit around this concept of founder experience and i will go to something i'm familiar with which is net promoter score or nps and how that translates within the firm on how you get to high founder NPS, which of course, if you get that right, your sourcing, your winning gets better.