The opportunity outside of Silicon Valley and how to build a strategic LP base with Brendan Wales and Kellan Carter of FUSE

0:00Welcome back to another episode of Venture Unlocked, the podcast that takes you behind the scenes of the business of venture capital. I'm your host, Samir Khaji. On this episode, we have a conversation with Brendan Wales and Kellen Carter, co-founders and GPs of Seattle-based Fuse. The firm was founded in 2020 with a thesis centered around the growth of the Pacific Northwest ecosystem, an area both partners have had substantial experience in, including Kellen's stint at Ignition Partners. Fuse just announced the close of a$250 million fund too, bringing total AUM to just over$420 million. During our chat, we covered a lot of things, including the strategic nature of building the right LP composition and how venture funds should think about their servicing model to founders.

0:40It was a really great conversation and I hope you enjoy it. 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. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.

1:18Hey guys, great to see you. Great to see you too. Thanks so much for having us today. Thanks for having us, Samir. Yeah, this will be a fun conversation. I want to go back to actually the start of the firm. It was immaculate timing. It was February of 2020, right during COVID. Kellen, I know you were one of the two co-founders of the firm. Tell us what you saw at the time, having lived in Seattle, and what the opportunity was in creating Fuse. Yeah, it's a really interesting trajectory that you've seen this region have. I first moved here in 2013 when AWS, believe it or not, was small. And I lived on Amazon's campus and lived there for seven years.

1:54And I remember when I first moved there, there were like two restaurants in the entire region. And now, if you look at it today, it's literally a region within an entire city. It's a city within a city. And so the trajectory of this broader Pacific Northwest, especially as a result of the cloud momentum, has been phenomenal. It's been truly phenomenal. It gets better every single year. It gets better every single day. And I think if you look at, you know, the position of Seattle with Microsoft and Amazon and now their leadership roles in AI, I think the future is even brighter than the last decade.

2:29So the setup for us to start Fuse became more and more obvious as we lived here, saw the quality of companies, the volume of companies and the quality of innovation coming out here. It's obviously a little scary, but, you know, hindsight now makes it a no brainer. Yeah. And if you think back during the last decade, we've seen effectively cloud flow through the area. The exit volume has been big, which we'll talk a little bit about the exit volume as well as the amount of local funding in the area. But the first thing I'd love to kind of go back to, so you start the company during COVID, right?

3:02So this is right in the heart of COVID. You raise what ultimately was about$173 million fund, of which the first part of that fund was largely a lot of executives, so very strategic LPs. And the conversation that I have with a lot of GPs is around LP construction, so institutional versus non-institutional. Maybe walk us through that initial thought process of what type of LPs you wanted as part of this, not just from a capital standpoint, but also speak to maybe the strategic angle of some of the LPs? Well, I think the first part of that is how do you get in business so you can start proving that you can do this job?

3:43And so how do you construct something that has edge, that's unique, that's differentiated? And having started in this business when I was 26, I think, Brendan, you started when you were 24, 25. You study firms like Benchmark and Sequoia, and their brands and their platforms continue to compound because they've built phenomenal networks and relationships. So if the next engineer is spinning out of Stripe, they're going to see that opportunity. If the next Airbnb exec is going to start a new marketplace business, Sequoia is going to see that opportunity. So how do we construct the network of a Sequoia 10 or a Benchmark 10, but in a Fuse 1?

4:17And we wanted to do that by having essentially what we think of as a node in one of our partners at every single company, whether it's Outreach or Isertus, or it's Costco, Starbucks, Microsoft, or Amazon. We want to know if somebody's starting a new company. We want to have better diligence, better references. We wanted to be able to lean on our LPs to help us win. And then post-investment, we wanted to have the heft and the platform of a 500-person firm, but the nimbleness of a nine-person firm. And I think it really has landed with especially the entrepreneurs here locally and just a real funny story because the next trick is how do you engage your LPs to just drive better outcomes for everybody, better access, better win percentage in competitive situations, and then, of course, better support post-investment.

5:03And we went to announce our very first investment to a company called Owl. And of course, you're being pretty vulnerable here when you email 500 LPs about why you're excited about a new investment, what you saw in the founders, and of course, here's how the LPs can help. And we get a phone call from a Fortune 50 CFO 15 minutes after sending this blast email, and he said, I need to talk to these founders I have a major problem here. When can I talk to the owl sounders? And that was one of the moments where we realized we had what we think of as product market stint with our LP engagement to just drive better outcomes.

5:37How do you take this black box model that is traditionally venture capital and make it way more engaging, way more open, and engage this LP base to just drive better outcomes for everybody? Maybe you guys can touch a little bit on that last aspect of activating LPs. So I think that the first 60 or$70 million was highly comprised of some of these folks. What was the overall story and ask of them? So typically, when we look at funds, you often will see some of these individuals, high net worth. Sometimes they are people that work at different companies and you see their names on a logo sheet on a deck, but ultimately the activation piece is tough and it's difficult because these people are really busy.

6:24So what is it that Fuse does internally to create this activation layer that's consistent between the founders and the LPs in a way that's valuable, but for both sides? You know, in some ways it benefits us by being one of the few firms here in this incredibly fertile, rich environment. Most of these limited partners, they haven't invested in a venture firm before. For them, it's another private investment, something new, something exciting, and something local. But for us to reach out to them and say, here is what this business is doing that we're investing in, or including them in the process when we're doing due diligence on potential investment, they embrace that.

7:02And it may come surprising to people, but we have hundreds of limited partners. We're very open about that and excited. We'll get 30 to 40 responses every single time from those individuals saying, hey, here's somebody that can help move the ball forward for those businesses. Here's a potential customer. Here's a potential recruit. Though that email communication was working so well, we then launched a mobile app where our LPs can listen to a podcast we did with every founder. They could read the memo that we did. They can see how much we own of that company. And that's a level of transparency that LPs are just not used to.

7:38It's been a screaming success. So we're just doubling down on that communication. Yeah. And just to build on that, we've gotten really good feedback from our LPs. In fact, one of them, we were having coffee and he said, you guys have figured out the best form of collusion I have ever witnessed in investing. I'm like, well, that doesn't sound very positive. Can you unpack that? And he goes, well, you see all the opportunities. You lean on your LPs to help you win when it's competitive, which leads to higher win percentage in competitive situations. And then post-investment, you plug them into this program and this network that is only a significant accelerant in getting them to that next level.

8:18And he said it's just the most obvious but generally less practice venture model to lead to better outcomes. Yeah, it's an interesting way to create a competitive advantage. And we'll get back to creating replicable outcomes fund after fund around sourcing, winning, obviously picking. And it is interesting because venture is a very long feedback cycle and it can take years and years and years to really understand the directional focus of where a particular fund is going to perform. Usually from a quartile ranking, funds don't fall into their final quartile ranking until year six or seven. And so you're creating this immediate feedback loop of what do the LPs actually do?

9:02What are they seeing? And the ability to interact with these companies gives them a sense of the type of companies, not only are you investing, but the progress of these companies, which I think is really interesting. Speaking about LPs just more generally, again, this was during one of the toughest times, I'd say, at least when you started raising capital during COVID. But of course, in the last almost now two years, we've seen a very similar type of phenomenon where it's very tough raising. So I think you've raised fund one, you've raised fund two, both during really tough times. Tell us maybe about what you've learned in raising during those times, both from raising from some of these individuals, as well as raising from some of the traditional institutionals.

9:46I could start on that. I think the biggest thing is embracing the small commitments. Like a lot of folks, they put minimums on who can join the fund. And you need a parallel fund structure in order to be able to do this, to allow more investors into the fund. But embracing that small check, if it's a$50 ,000 commitment from the CRO of a local company, I mean, we're high-fiving, getting excited. you know, that's somebody that can be an advocate for the firm. They could be introducing you to a potential LP when you're going to a new city to go fundraise, whatever it may be. Those are the things that drives forward Fuse.

10:28We're able to get big commitments over time, but those are long sales cycles. And the more people in your community and network that can vouch for you, that's what's going to get those big LP commits over the line. And look, we asked a lot of favors from our LPs, from our fellow GPs, when we're going to a new city to get introduction to a foundation or a family office. And the only way that happens is by being open and constantly communicating with those folks. Yeah, it's amazing how the notion of compounding happens with your LP base. You land a significant executive, at least to their friends that are executive.

11:08You land a very notable institution while you get confidence by proxy with other notable institutions. And so as Brendan put it so eloquently, building a platform that can continue to compound on itself with your LP base is really, really important. And it lets CEOs of Fortune 100 companies joining the fund and being big advocates of ours because people that they know well and trust and have gotten to know us are part of the platform. So this whole compounding platform notion of your LP base has really played out the way we had hoped. And this is something that we've seen fairly new over the last decade, decade and a half, in terms of having high net worth investors that could bring unique value, both as part of insights, but also helping the companies and acting as, in many ways, essentially extensions of the firm.

12:00Yet, at the same time, you want to create long-term stability in the LP base by having some of those institutions that are going to be cross multi-fund investors through cycles. Was there a mix that you were looking to get in terms of the strategic LPs that could really lean in versus the traditional financial investors that you know were at least in for two, maybe three funds so long as you did what you said you were going to do? Fund one, it was 70 % of our capital. We like to be transparent here, very open. 70 % of our capital was from individuals, 30 % from larger groups, whether it be big institutions or wealth managers that pool capital.

12:39Obviously, as you alluded to, there is going to be some attrition rate with the individuals, although we do manage each one very tightly and we want to have the highest retention rate as possible or over 100 % net dollar retention rate on those individuals. Going into fund two, we wanted to shift that, go to the inverse, get to 70 % institutional. And really, we think about that is large family offices and above, really folks committing more than$1 million to the fund with the potential of being much greater over time. And we feel really good about having achieved that in fund too, to have that more stable LP base.

13:15At the same time, we're not going to dramatically increase our fund size over time either. So we're trying to build that LP base that is really that group of folks that are going to be backing$250 million fund sizes over time. So I'd love to maybe unpack that a little bit. So going from 173 to 250 in Fund 2, obviously, you know, changing the LP base mix to being much more institutional in nature, which leads me to believe there was a lot of conversations between Fund 1 and Fund 2, maybe people that couldn't quite get through on Fund 1 but kept close to. But maybe give us some overall examples of how you kept close with people that led them to be comfortable investing in, you know, let's say 2022 and 2023 into fund two at a time where the market had fundamentally shifted.

14:08And we had actually seen so many institutional piece pulling back because of something called the denominator effect. So being well over allocated to privates because their public holdings had gone down so far. How did you get to that mix of 70-30, which if I'm just doing the math of$250 million, you're over$160 million in institutional capital. How did you make that happen during a really tough time? Right when we started the firm, we made a big investment of starting to build relationships. And starting to build relationships over Zoom or Teams was a little weird, but at least it is a starting point.

14:47And then we got on the road when we needed to get on the road. We like traveling together. We think it's really important for people to get to know us who's on our cap tables, for us to really get to know who's on our cap table, but really building relationships. And I think a couple of things that really, really mattered in this fundraise, in what is arguably one of the most difficult fundraising environments is with fund one going into fund two, we did what we said we're going to do in fund one. We stayed true to the Pacific Northwest focus. We stayed disciplined on stage and in category, you know, really focusing on B2B software at a time where crypto deals were getting done at ridiculous valuations at a time where, you know, it was YOLO out there.

15:29And we stayed hyper-focused on the region, on stage, and on category. We built the team. We added three junior folks that are really developing nicely. We added three operating partners, including John Sopier and then Bobby Wagner. And so we built this team that is mixed with gray hair and lots of experience and really useful energy and really focused on their career. And then if you look at the drift from fund size from 173 to 250, all we were solving for was the ability to still write 30 checks into companies per fund, but owning more and being slightly more competitive at the Series A stage where we don't necessarily have to syndicate with another firm that puts you at a disadvantage with the founder that only wants one new investor.

16:15And so it was getting the platform, building the team, doing what you said you were going to do, and now just owning more of the businesses. Nothing else has changed. The only variable that we changed was higher ownership. And so if you're an LP and you like Seattle, you think this is the right team, and you know that this team is going to be doing this for the next 30 years, which hopefully we're blessed to be able to do that. It was a, hey, we got to make the decision in this fund if we're going to continue to partner with these guys at Future Farts. And that was a big part of getting there with a number of institutions that we built relationships with and got excited about this team in the region.

16:49Getting on the road as a team, it was really key for us. As you know, Samir, institutional LPs, they're looking at, hey, is this group of GPs, are they committed to this? Are there any issues that may come up when meeting them in person? Do we see any risks that they're going to break up at some point in time? Are they all perfectly aligned on the strategy? And that's one of our massive strengths. So for us to all get on the road and for those LPs to see us all together, see the excitement, see the energy, but also see the tight, tight focus on the strategy and the plan was the thing that got the bigger checks over the line.

17:25Yeah, that all makes sense. And maybe we can spend a little bit more time on what happened between fund one and fund two and how you got to this new mix of largely institutional investors, of course, in that short timeframe, you're not going to have a lot of performance to show. You're still on the J curve, still deploying into net new companies and doing follow-ons. But as LPs look at it, they're looking at, have you executed on certain things? And one thing that's really stood out during the course of our conversation so far is this view of serving the founder, whether it be the strategic LPs, you as investment people, as well as the operating partners that you've had, people like Bobby Wagner, who played on the Seahawks, or John, of course, as a longtime executives.

18:12Maybe you can go into what an operating partner does, how it creates this holistic value add to the founders, and how you went about picking these particular people. A few items there. First, I wanted to touch on the progression at the firm level between Fund one and fund two. As Kellen mentioned, it's about doing what you said you were going to do as it relates to your particular strategy. There's obviously the geography or geographic focus, but there's also the entry points that we said we were going to focus on. Is there any drifting there in the ownerships that we were focused on? Our pre-money entry point in fund one was$22 million.

18:48Our average ownerships was in the mid-teens. Those are the things that those LPs are looking for. We didn't do anything crazy. We're not investing in companies that$150 million pre at the series a that's just not our strategy or focus the team is everything right we are together in the office every single day as everybody else is sprawled apart like we are tighter and in person together and we operate the firm to get the best side of everybody on the team and that doesn't mean that means we don't have you know one meeting together on tuesdays where everybody's together we separate these things so that we can get the best out of everybody Monday mornings, we're with our associates.

19:28We're talking about every single company that every single person met with. Every company. Every company, right? And there are no stones left unturned here. We have a separate meeting where we talk about the unresponsives, who are the people that haven't returned our emails, right? All of that stuff. People are specializing in these certain things. Then there's the operating partners. And we like to think of them as sort of the rocket boosters to us GPs to get the best out of our portfolio companies. and the three operating partners solve different challenges that we have. John is an iconic business leader here in the Pacific Northwest.

20:01In addition to having been the CFO of Microsoft, he was also on the board of Nike, which is based in Portland. He was on the board of Splunk for a long time. He is this preeminent board member here and really the ultimate CEO whisperer. Then you've got Sockbeer Kanuja, our second operating partner who ran a company that ignition it back. So deep relationship with Sockbeer. and he's working with our portfolio CEOs to solve real deep operational problems. And he's more of a Swiss army knife. He's going into specific companies whenever you're having challenges. And then lastly, Bobby Wagner, who's this iconic football player, eight-time pro bowler, he is the most well-known athlete in Seattle.

20:41And so for us, it's how do we build more of an aura around Fuse? How do we get more people to know about us? And then you obviously, you can't just add an athlete to the team without that athlete individual being focused on startups. This is something he's extremely passionate about. He was, in quotes, an intern at Ignition when he joined the NFL and had John as a mentor of his. And Bobby's joining every single partner meeting too. So it's about getting the best out of everybody. And I think if you think about team, you know, you want the team to be so aligned as Brendan mentioned. I think that's something we're so proud of.

21:15But this team has all known each other for years. Brendan and I have known each other since 2014, Cam and myself since 2015. John dates back to 2009, stop year 2013. Bobby started interning at Ignition in 2017. Every junior person we've hired, it's been a year-long get-to-know-you process because getting the team right and solving for any gaps that we might have is so important. It all starts there. Brendan mentioned these operating partners are major accelerants to the companies that we back. They have experienced unparalleled enterprise, on paralleled marketplace and SMB experience that really covers the gamut of the type of companies that we partnered with here in the Pacific Northwest.

21:55When you think about all of these different people, and of course, as with any organization, the more people that you are working with that are representing, in this case, Fuse, right? So each person, whether it's an operating partner, strategic LP, somebody on the investment team, at the end of the day, it is representing the firm and the brand. It can be really tough from a cultural standpoint to make sure everybody's aligned. Everyone has the same value system. Are there some definable traits that you look for, for any of these people to know that these are the right folks to really represent the Fuse franchise?

22:33Well, first and foremost, it's about responsiveness and being a good partner to potential investments and existing investments. We are not in the boat of just managing a lot of money and not responding to people and any of that. We want to be so, so deep in the weeds in this ecosystem that we feel approachable from anybody. Anybody with an idea or a thought or somebody thinking about spinning out of Microsoft or Amazon or another startup. That openness is really key. There are no egos here. If you can't get on a phone call for 20 minutes with somebody thinking about starting their own company, then we are lost completely as a firm.

23:13And so that's the number one thing. We have to be right there and extremely approachable. And that's the number one thing. And then obviously just bringing a huge amount of energy to the whole process. with an investment period of three to four years, I mean, that flies by, as you know. And so moving at the speed of light on everything, we always say, why do tomorrow? What can be done today? And we really mean that. And we live by it. Our first slide we created, Samir, was our value slide. The very first slide, acronym ready, relentless, engaged, accountable, dedicated, and integrity. And the whole purpose was to align our values around how we want to build this firm, how we want to hire, how we want to treat entrepreneurs.

23:54And in a very simple way, we wanted to design the very best product for founders because you attract the very best founders. And that starts with the team, the LPs, the way we run our processes, as Brendan mentioned, with all the different meetings that we have. Because as you build the very best product for founders, you attract the best founders. And as we all know, venture is an asymmetrical return business. You deliver the best product to LPs in the form of returns. And so it all starts with the team and the values and the urgency that we have as a firm in our culture. When you think about products, and I do like the term products and whether it's defined as a service or in the case that you're providing, it's also capital.

24:32So you're also providing capital. I think the latter can be viewed as highly commoditized for the best and most interesting companies and founders. What is the actual product that you want founders, if they're talking about Fuse, what does that product look like? The urgency and intimacy of a nine-person firm and the heft and scale of a 500-person firm that has your back. And founders like to work with founders. We're founders of our business. That, it's hard to quantify how much that means in a conversation than you're having with the founder that's laying it all out there on the line, because that's what we're doing every single day on behalf of our LPs and on behalf of our founders.

25:11As you think about, and I love the answer. I think it's a great answer of, you know, staying nimble, but yet having the scale to provide value of a much larger firm, given the number of people you have. One thing I'm curious about is as you think about the founders that you're working with, over time, you start to build a brand. And both of you have been at firms before, Brandon and Headline or eVentures before that, the prior name, and then Kellen, of course, Ignition. Over time, there's this advantage that brands can have, whether it be sourcing, winning. Picking takes a long time to determine if you're really good at picking and if there's a replicable model.

25:52But as you think about the product that you're building, where have you seen it benefit views the most? Is it sourcing? Is it winning? Of course, there's the portfolio value that these companies will get, or at least the companies will get from all these people. But where do you see the big benefit, sourcing or winning? Well, six of our 31 investments have been sourced by our LPs, so we are proud of that, and they are highly engaged in adding value there. They do help win, and we lean on them quite a bit when we're trying to win an investment, having a C-level executive from an important company reaching out to that founder.