The blueprint for starting a new firm with Chemistry Ventures, including the work needed before choosing your partners and non-consensus decision making.

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 Khadji, and today I'm excited to speak with the founding team of Chemistry Ventures, a brand new venture fund led by Christina Shen, Ethan Kurzweil, and Mark Goldberg, who respectively recently spun out of blue chip firms Andreessen Horowitz, Bessemer, and Index. The firm just announced a significantly oversubscribed $350 million debut fund. As a new entry to the market, I really was curious about asking them their blueprint of building a firm in today's environment, including how they chose to partner up and the work they did beforehand, as well as LP strategies and selection, and what they felt their unique reason was to exist in a highly competitive market.

0:41I think you'll enjoy hearing their thoughts, so let's get right into it 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.

1:14This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Well, it's good seeing everybody and I'm excited to do this. First of all, I wanted to congratulate you on the close. Raising a fund one in this environment is always a little bit tricky. There's so many interesting things in terms of how you've built this firm, how you've imagined this firm. And we're going to go through and unpack a lot of those things. The first thing I always think about when people are raising firms is really the team. And at the end of the day, every company, every venture firm is a collection of people.

1:48and when you have more than one person, one of the key things is bringing people together that are complementary, that can work together well and create a franchise. Your firm name is Chemistry. I think about that and I really think about the chemistry of the people, your chemistry with founders. But let's talk a little bit about the inner workings of how do you pick partners. I know all three of you have known each other for a while. Ethan and Christina, you've worked together. But maybe, Christina, talk about how you brought this group together and ultimately, what were the things that got you comfortable with starting an entire franchise together?

2:23Pun intended, chemistry was incredibly important for us. You know, we've all worked together, whether it be in boardrooms, Ethan, myself directly for seven years at Bessemer. But in many ways, we've kind of felt like this was the partnership outside of our existing partnerships for a very long time. We've been training notes on deals, talking about theses for many, many years. And so we say it's been a partnership 10 years in the making. As we were coming together, there were a couple attributes we really cared about. We really cared about, we were working with partners that represented the ethos of being laser focused on the early stage, very collaborative, high hustle were all the components that we thought a lot about.

3:03Even when we were dreaming up the team, we naturally came up with each other's names, which has been a big fun part of it. And when we started having the conversation earlier this year of like, hey, can we be co-founders, can we be partners? You know, it's not enough just to be friends and think highly of each other in the industry. We did co-founder dating. And that was actually a lot of work and time we put together. A couple hundred hours of sharing our ethos on what we wanted chemistry to be. That was kind of like dating where, you know, you leave with 20 questions, you come back and see how we compare.

3:35But I also was just talking about deals all the time to understand our different deal tastes, because it was very important that we felt that the three of us would come together and make each other better in terms of sector coverage, our voice on investment. And that was really what gave us a lot of conviction to jump out in April when a lot of the news hit. One of the things that I think is really important to unpack even further is not just your investing styles or what is the vision of what you want to invest in, the themes, the sectors, the stages, but also the cultural ethos of the firm. I think it has to be incredibly aligned.

4:09And the three of you came from very different places. Christina, you from Andreessen, Ethan, more recently at Bessemer and Mark from Index. How do you think about merging those different cultures? Because you do want to take some of the good things out of those cultures, bring it together. So take us inside. What are the conversations that you guys had for those 200 hours that went into the cultural piece of what you were building is to make sure that there was true alignment and how you thought about things. And you're right. That was like, we didn't know going in if there was going to be, you know, perfect chemistry alignment around us to allow this firm to blossom.

4:46And what gives us so much confidence to go out and, and raise this fund and give our, you know make the promises that we are to founders is just how we kind of meshed our styles and the trainings that we had in the backgrounds that we had and felt like we were sort of taking what we thought was really effective and changing what we thought was less so and kind of customizing it for what we think a more small boutique experience can be for founders in a you know in a firm of our size there was a lot of things that we came into the partnership very very aligned on it was almost kind of uncanny. We did this sort of exercise where we gave ourselves 20 questions and we came back with the answers and we matched them up.

5:26And 17 to the 20 was like almost complete alignment around focus around early stage, having that be the ethos of the firm from the beginning, kind of a default optimistic mindset, you know, going all in with the founders, having kind of a core set of high conviction vets, having excellence be kind of at the core of everything that we do. Like we were all saying those things already. There were some areas that we had to hammer out, of course, where, you know, Index and Bessemer did things differently around deal conviction and, you know, voting processes and how deals get approved and things like that.

5:57And we had to kind of debate them and kind of figure out like what was going to be, what was going to work for us, what was going to be the perfect fit for us. And I think we came to, you know, this may be one example that kind of speaks to your questions, like, how are we going to decide on what investments to make? It's like very core to a venture firm. How do you make decisions? We all felt very comfortable with this model that is borrowed from some firms and is different than other firms. We trust any one of us to pull the trigger on an investment, a single trigger model. But we really wanted to incentivize and ensure that there was a lot of time for the other two, in this case, or if the partnership extends the other partners, to really give rich feedback and kind of pull apart a particular investment opportunity.

6:40And so that's, we sort of structured some of our processes around that. So that's kind of one example, but it took a bunch of debates and kind of debating what had worked well and what hadn't in the past to get to that. Yeah. And 200 hours is a decent amount of time, obviously, to confront these things. And I've worked with a lot of folks that have built actually very longstanding firms that had generational succession, but they had a core ethos that was built in the beginning that kind of carried over, not just for fund one, fund two, but even fund 10, fund 11, fund 12. and one of the things that they told me was when they first started, they had really hard conversations and they confronted the harsh realities of creating a long-term business and having those conversations and sometimes uncomfortable conversations around decision making, economics, all of those things that they found if they didn't do that, that wouldn't have led to long-term growth.

7:32So it totally makes sense in terms of how you did it. And I do want to double click at some point during the conversation on decision making, because there are so many different ways that venture firms interrogate opportunities and make decisions. But I still want to kind of stay on this concept of starting a firm right now. And there's this entire world that we've seen over the last 15 years, we've seen so many new firms come to market. And one of the questions from an LP standpoint that often comes up is, what is your right to exist in today's market where we know power law exists you it's incredibly competitive especially at the series a so how did you think about forget about for the partnership you came together you felt there was good alignment but enough compatibility and complementary skill sets to succeed but when asked what was their right to exist maybe mark i'll start with you because you've obviously you know worked at a firm that has a very much a right to exist with index and maybe that was part of some of the early conversation you all had of where do we fit in?

8:36Yeah, I mean, I love this question. So, I mean, the short answer is we thought there was a product opportunity for founders that didn't exist. And the product that we're bringing is a combination of experience and hustle that we think is very hard to get at the big funds. And I think at the big funds, you kind of get, there's a paradox where the most experienced investors on the team have the least amount of time to spend with early stage founders. Because you have, you know, I just stepped off 19 investments when I was leaving 14 boards. And I think that's light relative to the industry load for people that have been at the big funds for a long time.

9:07So we thought the ability to cross-pollinate experienced investors with different investment voices, different networks, and give them clean slates to play offense just to be all in with founders with that focus was gonna be a really differentiated experience for founders at the early stage. For just to make it a little bit more personal, so when I started at Index Ventures at the end of 2015, early 2016, we were still relatively new in the U.S. market. And, you know, I still remember we didn't have a brand that was a calling card on the U.S. side. In Europe, it was a great calling card. But in the U.S., I would cold email a founder and they would say, you know, market insight, market IVP.

9:43Like people, you know, we weren't really well known. I've been in a position where you have to build a brand, where you have to kind of make a mark. And I think the opportunity is really compelling for us. And I think one of the criteria that helped pull us into this fund was, as Christina described, in our kind of working sessions to decide if we're going to do this, we talked to a lot of founders. And there was this sense, not of founder fatigue with a new fund, but of excitement. Like, yes, something different. Like, please, let's have some kind of fresh folks in the ecosystem. That's what we're bringing to the market with chemistry.

10:18I mean, Samir, just to put a finer point on it, we're working with founders all day long that are kind of like inventing new markets, bringing new product offerings to market. And yes, there have been a lot of new venture funds, but we didn't feel like there was sort of a new offering that was kind of different, that had been brought to market in a long time. And I remember the early days of Vessemer very similarly, or my time at Vessemer, very similarly to Mark's, where I wasn't a super recognized brand yet. And, you know, there was a building opportunity there. And we kind of felt like this moment in venture was crying out for that to the point where we like couldn't put the idea down as much as we tried to pressure test.

10:56Is this going to work right now? How's it going to land? But we felt like this was an idea that like the moment was screaming for. We all had our own ways of getting to conviction and talking to friends, whether it be VCs or family members or founders. And it was the founders that were like, you guys have to do this. because they're like, they want this product in the market. And I actually felt like they were the most raw, raw of like, you guys can do it. You can jump out. We're betting on partners. And that's our bet as a firm is that the partners are going to jumpstart chemistry as a fund. There's a lot of analogies you can draw, but if you think about companies and, you know, ultimately you have your target demographic that you're your ICP that you're going after, you have a product that you hope will achieve product market fit.

11:40In your case, as a venture fund, venture funds at the end of the day, the undifferentiated part of the product is the money. But of course, we know the best founders and the most interesting companies are going to be highly competitive. Therefore, you have to have product market fit for the type of companies you're going after that's differentiates you from your pure set in some meaningful way. And I think about that in all the things that I do on a day-to-day basis. And it's been everything from, we're going going to focus on a certain thesis. We're going to focus on a certain sector. We're going to get really deep.

12:13Or in certain cases, the bigger firms, and I'm not a big fan of like lionizing big funds or small funds and demonizing the other, because these are very different products for different types of groups. But you mentioned something, Mark, around this concept of early stage founders having true partners with real experience behind. And what we've seen in the past with some bigger firms and some even mid-sized firms is like portfolio teams. We have teams that do this and teams that do that. Oftentimes, they are staffed with sometimes mid-level or junior people, so you still don't get that true senior level presence.

12:51What is your view, I guess, on the competitive market when it comes to those bigger firms where you may not get the number one or number two or number three partner, but you get the mid-level partner with an entire portfolio team. How does that product differ from the product that you're providing? First off, we would share your view that there's not categorically one right to exist, a big or a small funder. It's great for founders that there's different products. We think that the product we're building is going to be really exciting, and that's why we're starting chemistry. With respect to portfolio services, I think the fallacy with portfolio services is that it's for founders.

13:28I think that in a lot of ways, portfolio services is for VCs to do what is unscalable and to give them a crutch to be able to deliver beyond what they're capable of doing. And I think if you go talk to founders and you ask them, what is the relationship that means the most to you from an investor? I think most often you're going to hear the advice that I'm getting from the partner with experience is what I want. And that the intermediary between those two people is not always an advantage and is oftentimes a disadvantage. There are very good people working inside of funds at portfolio services.

14:00So this is not a value judgment on anybody in these roles. But what's clear is if you don't have all the context, it can be very difficult to add the right level of value. And that's a core ethos that we bring to building chemistry. For us, it's we don't want to outsource the relationship. We are doing something that we believe is very important. It's the name of our fund to be in the trenches that close with our founders. and we think that's a little bit different than other choices the market has made. And we're excited to kind of see that value proposition resonate. So Samir, when founders have asked, you know, as we've been talking to founders over the past couple of weeks and they ask, do you have portfolio services?

14:36My answer has been an unequivocal, yeah, we do have portfolio services. We're portfolio services. We're providing portfolio services to you. And, you know, you should hold us accountable for that and judge us on that. And we think we'll be the best portfolio services team you could have. I love it. And Christine, obviously, you have experience in terms of a firm that had a huge portfolio services team. There are different flavors and different levels of skill set at these different firms. I really like this concept of thinking about your firm as a company. And when you think about it, one thing that struck me during our conversations over the past several weeks is how intentionally you have been, not just raising this fund of what do we think is going to work?

15:20What's a product market fit? What does chemistry two look like? What is chemistry three? And that speaks to kind of building a franchise. And during this time, you were out there fundraising, telling this story to people in a time where, you know, candidly, raising a first-time fund has been incredibly hard. Dollars seem to gravitate to the firms that you were part of before, with a few exceptions like yourself. Maybe tell me a little bit about what you learned during the fundraising process on the LP side, because at your prior firms, a lot of those funds are just raised, you know, and you are the arbiter of making decisions and obviously making investment decisions, working with the founders.

16:02Maybe Christina, give us a little bit about how you started the fundraise, what went into the planning, and what were some maybe surprises that happened during that raise itself? Well, so I mean, first of all, we feel incredibly fortunate that we were able to raise and kickstart as quickly as we were able to kickstart. A couple of things, I don't know, and Mark and Ethan chimed in as well, but a couple of things were notable in the fundraise. First of all, we were looking for LP partners in the same way that I think founders look for investors, which we were looking for people who are aligned with our ethos, our story, and believe the same things that we believed.

16:37And we very intentionally sized this fund so that a founder's success would be our success as well. People who were nodding their heads in the first meeting, they tended to be the obvious ones that actually wanted to partner with chemistry too. And so we found that actually that was quite prevalent. And we think there's no right answer. Venture is a collection of different products. We think there are different products for different founders and we think there are different LPs for different VC firms. And we found the right LPs for us. But it was the first time raising our funds. So we had a lot of learning lessons.

17:07When we first started, we probably could have been a little better packaged. This was our first time doing it. We were learning a lot. The biggest thing I learned actually was being the first time fundraising. I actually grew so much empathy for the founders that we talked to. And that's something that even as I've spoken to founders in the last couple of weeks, last couple of months has really resonated, which is, you know, it's a hard journey. It's hard to try to in a quick moment, package your story, get people to understand you and, you know, bring people along that journey. But, you know, a couple messages really hit, you know, I think the laser focus on early stage venture was something that really hit.

17:41An experienced team with clean slates because we've had 35 years of venture experience. And I think we've led almost a hundred investments up to this point in about a dozen unicorns that we invested at the early stage. I think that really hit. But starting afresh where we bring that experience and have the time to actually focus on founders really hit. And then pun intended, I think people saw our chemistry. This is a partnership and partnerships last. It's not a couple years. It's not one fund. When LPs were looking at us, they're looking at us for a 10, 20 year journey. What you want to see is a group of people who enjoy working together are very aligned in the same way that we assess founders, right?

18:20Very aligned on what they want to build next and are planning for the future. You said something there that I think is really interesting. So from a founder standpoint, yes, you want partners that are going to be with you for the long term, really understand your ethos. You're going to be there and really push you in ways that help you improve. And these are not short-term partnerships. I mean, a single fund may last 14, 16, 17 years. So you're kind of stuck with people for a while. So you might as well like them and know that they're going to be along with the journey with you, or you can be honest with them.

18:49How did you assess that on the other side? So if somebody is listening to, and I'm an LP that wants to get into interesting funds, what are the things that you forced to rank that you wanted to see from your LPs to say, hey, we want you as a long term partner. That's just for fun one. But as long as we go along this journey, the best meetings we had in our fundraise were the meetings where we walked in. And as soon as we started to give our pitch, the other side would stop us and say, is it kind of like this? And they would tell the pitch to us. And we would just kind of sit there and be like, yeah, that's that's what we're saying.

19:22Like those are the dynamics that we're also seeing. That's why we're doing. And it was very exciting when we would walk into some of these meetings. And that was my favorite conversations from the summer, which was somebody had that thesis and it was the same thesis that we're building the fund around. And you just knew immediately that that connection was going to be there. So I think that was a very fun way where when we kind of walked into LPs that we knew we're on the same page, we knew we were going to have a good conversation. For what it's worth, that was not all our meetings. We had meetings where it was the opposite.

19:52We'd walk in, and if somebody came in and said, explain to me why I should continue investing in the asset class of venture capital. We already knew we were kind of fishing in the wrong pond. But fortunately, we had a bunch of those where it was, oh, yeah, we love venture, but a lot of the venture funds we were in have become asset managers. We're looking for something pure play. We like the idea of experience. We like the idea of a fun one where, of course, there's risk and three people coming together. But man, there's a lot of excitement. If you guys get this right, we can see it being successful.

20:20One other thing to Christina's founder empathy point is we got better at forecasting which boat people were in, where they really liked experienced managers. They really didn't like VC at all. Both of those categories were probably not going to be fits for us. I mean, in some cases, maybe people came around, but we really wanted folks, to Mark's point, that we're aligned anyway on an opportunity for a new founder product, opportunity for a new firm brand that spoke to some of the things that we felt were missing in the industry. Then it came down to, do they believe in us? Do they assess our chemistry to be a lasting one that'll lead to the firm continuing existing?

20:59I think all LPs were assessing that risk of like, are we going to get along well? Are we going to, when things are hard and the moments when they are, are we going to strangle each other or are we going to get stronger through it? And so it's a very hard thing to sort of package in a pitch. I think it came through that like we had we had pressure tested that and kind of every way you possibly can but there's still that unknown of well what's going to happen when x goes wrong or y goes wrong i preface this you know initial question with this is one of the hardest times fundraise you're kind of in a unique subsection of the market where you were able to raise and raise from great people and in a time period that was actually very quick even for normal periods and a lot of it is it harkens back to what you've done in the past, the firms you've been, the track record, and then really your relationships that you built with both founders and some of the folks on the LP side.

21:52We talked a little bit about what you look for in an LP. So that alignment, that cultural ethos, the ability to want to invest over the course of the franchise, but that there's also LP portfolio construction, like how many LPs, the type of LPs, There's endowments, foundations, there's fund of funds. How did you think about, I guess, that piece of the top-down portfolio construction? We learned a lot. I think one thing that was constant throughout the fundraise was we wanted a relatively concentrated LP base so that on the portfolio, once we raised the fund from an investor relations standpoint, it was very manageable.

22:29We didn't want to have so many LPs that we needed to hire somebody to manage that group. We loved the idea of having direct relationships with LPs. And we thought that would be impractical if we had 100 LPs. So about 20 LPs felt like the right balance between not having too much concentration, but also having a concentrated enough group that we could really build some relationships that were meaningful to us. When I say we learned a lot, maybe I'll just speak for myself, because I think Christina and Ethan might have been more sophisticated than me. I came in thinking, oh, the game here is this type of investor is the most sophisticated, whether it's endowments and foundations or this or that.

23:06And I leave with a totally different impression. I left with a sense of there was no correlation in a lot of times between what I perceived prestige of the institution and the quality of the LP at that institution. What really resonated with us was people that were sophisticated, that were independent thinkers, that understood what we were pitching, what the risks were and what we were pitching. And that represented a very broad and diverse set of LPs, which kind of reflects who ended up investing in the fund. And that's something I didn't expect from day one. You know, I've been really focused on the GP part of the job, the investing in founders, not the fundraising side.

23:42So the whole thing was a learning experience for me. But that was one of the big takeaways is kind of great can come, a great LP can come from any bucket and the value of independent thinking being an attribute that I wouldn't have presupposed before we started that has become quite valuable after the fact. You also learn how venture fits into the broader asset allocation universe out there. Like what is the asset class designed to do? This is not stuff I was thinking about every day as a partner at Bessemer, but we kind of got some empathy for LPs and also some just understanding of it. And I think that was a little bit in a backwards way.

24:17Our pitch ended up hitting on that. I think if you want venture exposure, in some cases, it was about sort of like high beta. Like, I want you guys to swing for it and go for those outlier situations, and that's going to be noisy. And I want you to take big risks. Again, I think folks that want early stage venture exposure, that's a little bit the mentality because there's other parts of their portfolio that just have less of a beta component to them. I also think that maybe played in our favor a little bit in that we were saying, look, we're early stage VCs. We're going to go all in. We're going to have a concentrated portfolio and really make each bet count.