Cold open
We are operating in a crazy prisoner’s dilemma situation. There’s a bunch of capital that wants to go into venture still. And if you increase fund sizes, the industry as a whole needs to return a lot more than it probably will.
Welcome back. This is 20 BC
Intro
with me, Harry Stebbings, and this was such a fantastic fly on the wall discussion with a guest that I was thrilled to welcome to our studio in person in London, Sheel Mohnot. Now Sheel is the cofounder at Better Tomorrow Ventures, a $225,000,000 fund that leads rounds in pre seed and seed stage fintech companies. Sheel and Jake, his cofounder, invested for many years together before founding BTV and wrote checks into companies like Mercury, Flexport, Ramp, and Hippo Insurance. As for Sheel, before BTV, he ran 500 fintech for close to seven years.
And before that, was a founder himself founding two companies, both of which were acquired. But before we dive into the show’s
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Conversation
Sheel, I am so excited for this. We got to do this in person, baby. It’s amazing. I’m stoked. I mean, listen, you are so much better looking in person. But first, I wanna start with a little bit on you, and for those who missed our first show. So how did you make the foray into Vansha in a very succinct two to three minutes?
Yeah. Sure. I had always wanted to be in business. For those Indian people, I’m a Rajasthani, and I didn’t know what to do. But I always was tinkering with ideas as a kid, always had a bunch of small businesses. Then I went into the corporate world. I was a management consultant. Then a buddy of mine was leaving to start a company, and I joined him. And then we sold that company in 2012. Then I ended up starting a company that we sold in 2015. And then at that point, I thought, I’ve really loved what I’ve seen on the other side of the table.
I’ve loved what I’ve seen from VCs interacting just when I was fundraising. And aren’t they the smart ones? Is sort of what I was thinking. And of course, now I know better. Like, now it’s the other side of the table. It’s the founders that are the smart ones. But it’s possibly just like anyone across the table for me is smarter than me. I’d love to hear if
you could go back and cool yourself the night before your first day as a VC and say, you should know this going in. What would you say to yourself on that call?
I would say like, no one knows what they’re doing. Do you believe that? I do. I feel like the more I’ve gotten into it, the more I’ve learned. There’s no right way to do it. There are so many different strategies that can be successful. People can be very prescriptive and say, this is the only way to do it, or this is the only way to do it. You see that in so many different arguments. You have that in like, we were talking about the remote work argument.
So you can say the only way to do it is five days a week in person, and if you don’t do that, you can’t be successful. But there are clearly companies that are successful that are remote. And now it is actually my preference that companies are in person, but I can’t mandate it. I don’t mandate it because we’ve seen too many success stories that aren’t all in person.
I didn’t know I sit down with your Bill Gurley’s of the world or your Pat Grady’s at Sequoia. Yeah. And you’re saying they really fucking know what they’re doing. They do. I’ve kind of pushed back on that because I think it’s an easy trope to be like, oh, no one knows what they’re doing and it makes us feel better. But no, they do. And actually, that’s often why they continuously have the best returns.
So I I’ll push back on that. So with Bill Gurley in particular, let’s say, Pat, I haven’t spent much time with recently. But with Bill, I was talking to another one of his partners about their meetings. They actually had been talking about something I tweeted, and he said they had a rigorous internal debate about what was correct. And they don’t know. Like, they couldn’t come to a conclusion about what was right. It’s like there are ways that you can invest, but actually knowing what to invest in or what a mode is, people are still figuring it out.
And even if you look at the greats, they have a bunch of misses, and they have a bunch of companies that you say, like, why did you do that? It didn’t make sense in hindsight.
I mentioned Bill Gould even benchmarked that. And benchmark kind of famed for their discipline on fund size. Totally. You said before that fund sizes should get smaller.
Yeah. I think we are operating in a crazy prisoner’s dilemma situation where there’s a bunch of capital that wants to go into venture still, and if you increase fund sizes, the industry as a whole needs to return a lot more than it probably will. And so if everybody reduced fund sizes, then we would probably be operating at a different level. We would be investing at lower valuations, and it would probably be better for everyone. Instead, we’ve got this continual upward march of fund sizes. When you have a bigger fund size, you become relatively
agnostic about the price you pay. So if we just, like, break that down before we can move further in that argument, do you think that actually LPs are still in market? You hear continuously about funds that are struggling to raise, whether it’s the large $20,000,000,000 PE firms or actually it’s the much smaller micro firms. Across the spectrum, people are saying LPs have withdrawn or retreating in the last year.
Yeah. I think there are LPs that have withdrawn quite a bit, but then you see everybody’s in Saudi Arabia right now. I have no strong viewpoint about whether you should take money from there or not. We haven’t. But I think it is very hypocritical that all these folks who were anti Saudi money are now over there just praising everything. So
we have that on like the LPs side. Agreed. We do have funds that are starting to reflect what you say. Founders Fund is getting halved there. Yeah. Exactly. Like, do you think we’ll see more?
I think we’ll see more. I think we have to.
And why would managers do it? If you think for them, it’s a loss of fees, it’s not in their interest.
It it depends. If you’re fully returns focused, it could be in your interest. A lot of the large funds have gotten so large that they’re really more management fee focused than they are returns focused. But for the returns focused funds and like if you talk to Founders Fund, that’s what they say was the reason they did it. They felt like 1.8 was too big. They wanted to go to 900 because they wanted to stay focused on returns, and they felt like that was a better size.
Do you think we’ll see funds give back funds?
I don’t know. I don’t think so. I know that that’s happened in the past. I just don’t see it happening this cycle. And probably if it were to happen, would have already happened. Can I ask how
big’s the latest BTV fund?
So we’re a $150,000,000 seed fund and a $75,000,000 opportunity fund.
I was with an LP last night, and they said that when you do outcome scenario planning on a $150,000,000 seed fund but I actually said a $125,000,000, and they were like, way too big. Way too big. How did you feel about your fund sizing on that?
We went from 75 to one fifty. I think for us, it was more about how many checks do we wanna write, what’s the size of those checks, and what’s our follow on strategy. Now we raised over a year ago. Part of the reason we increased was in fund I, pretty much every one of our companies raised a follow on round quickly after we invested, and we were almost forced to do that follow on round. If you lead the seed round and somebody good is following on, you kind of have to follow on.
Yeah. And so our first check to follow on strategy was totally out of whack because we didn’t have enough data, but you have a great fund leading the next round at a huge markup. Do you
have to? Can you not do the strategy of, hey, you know what, we lead and then we’re totally aligned to you and want the best for you, but we don’t actually ride anything beyond our first check?
You could do that. For a fund like ours, it doesn’t really make sense. I think for a lead investor, it doesn’t really make sense because what ends up happening is some companies need more capital, not the ones that are killing it. The ones that are killing it are able to raise easily. But there are other companies that are doing well but need a little bit more capital and you have to put more money into them. Doing well but not well enough to raise the next round.
And we’ve had companies like that that ended up being super successful. One of the companies recently, we led a seed, we put a little bit more money in six months ago, then they just raised at a 100,000,000 valuation from Andreessen. We’re really fortunate that we put that little bit more money in. If you don’t do the follow ons, if your strategy is just to do one check, but you have to do some follow ons, then you end up not following on to do best companies. You end up following on when you have to, which can be your worst companies.
I think follow on is actually just inherently hard strategy because it assumes that you can essentially predict your winners so much sooner than I think you actually can. I think me and you both been in this long enough where actually my winners are ones which I would not have put as winners first, and my winners are definitely not winners.
So I think that’s true, but you do know your losers. So I know companies that I don’t want to invest more into because the founder doesn’t have a sense
of urgency or like But actually, the losers are the same as the slow burners that go nowhere to a naught point five x to a one x.
I would say there are companies that I’ve had where I just know there’s very little chance I’m gonna put more capital into it.
Do you tell them then? Like It’s hard. You don’t wanna, like, burst the bubble of confidence and, hey, by the way, you’re struggling, and I’m not gonna give you any more money. Oh, thanks, Sheel.
No. I wouldn’t so no. It’s not it’s not necessarily that. Sometimes it’s like the market hasn’t developed the way we thought it was developing. There’s an opportunity to pivot, and sometimes they take that opportunity, sometimes it works. But if they don’t do that, then there’s little chance that I think the market isn’t developed the way we thought it originally was. So for example, we invested in a company in Southeast Asia that we were betting on the fintech market in Southeast Asia getting much bigger in a way that hasn’t really developed.
So then we have to think about, okay, unless they pivot into serving a different type of customer, we can’t continue to support them.
I totally get you. You mentioned Southeast Asia there. We both did forays into emerging markets. Yeah. We’ve spoken a little bit before on email, actually, before this about kind of the death of fintech. I think first is, like, the death of emerging markets in a macro downturn. Everyone pulls back Totally. More than ever before. Is emerging markets investing pretty dead?
It’s struggling for sure. And the more emerging you go, the tougher it gets. Yeah. So in a low interest rate environment, money’s free and you’re like searching for more risk you and go to emerging markets. And a lot of people invested in a lot of places that they’d never been, didn’t know much about. Now people are coming way closer to home. But I still think there’s opportunities in emerging markets. We we still continue to invest in emerging markets, but probably less than like really far What’s some really far out, just so I understand that?
I think people have invested a lot in, like, Pakistan, Bangladesh, parts of Africa. They will continue to. There are still good companies in these markets. The great companies will continue to raise money. But I think what had happened was there are a handful of great companies. A lot of people who had never invested in these markets before started investing. And then instead of just putting money to the handful of great companies, the 100 companies after them that weren’t that great also raised money.
Sure. But even the handful of great companies, if you do not have a liquidity mechanism to get cash out, even if it works, go to Pakistan, go to Bangladesh. Where are you gonna go public? Totally. Come to the Nasdaq? I don’t think so. It was a real lesson for me. We spoke about, like, what you wish you’d called yourself when you saw that or whatever that shit question was I asked. I’d change thought it was an interview. But I I wish I’d really, really actually listened to people when they told me that when I invested in Pakistan.
How do you think about that lack of liquidity mechanism?
Yeah. I think, first of all, I think it can happen. It’s tough. Like, but for a truly great company, there’s always gonna be an option. Is there an example of that? In Africa, we’ve had liquidity. We’ve had companies that went public. And On the Nasdaq? Or I think we’ve had companies that went public on the Nasdaq. Yeah. From Africa. You could always have made that claim about LATAM, and then we had companies. We have new banks, super successful company. You could have made these claims about different markets that ended up maturing and building a robust market.
Now what happened that I think was totally shitty in 2021 was you weren’t getting an appropriate discount. If it’s gonna be a really tough path, but you have an exceptional founder, there’s gonna be a path to liquidity at some point, but you have to get in at the right price to account for that.
And we were paying prices that were akin to developed markets.
People started paying seed rounds at $20,000,000 valuations in a market that’s gonna be a really tough path to get to a billion dollar plus exit, and that was a shame.
And you said there were about kind of NewBank. That’s kind of it. There’s D Local, which is like a $7,000,000,000 company.
Well, now it’s probably a lot lower after that. There was a short seller report. I think it’s like a few billion now.
Okay. You know, we had Seba on the show, so, you know, maybe I wanted to be nice. But wherever they are, like, you know, Seba’s fantastic, but there’s like two or three. Yeah. There aren’t that many. Like, to build a firm on the back of that for sure would be a tough sell. Totally. Like, for you when you and Jacob sit down, do you guys go, shit. We’re gonna have a lot of hungry mouths to feed in emerging markets.
Yeah. I think there is some of that, and I think we’re probably more focused on The US now than we were two years ago.
Okay. So we went to geography that obviously BTV has a big fintech focus. It’s not AI, is that? I mean, let’s just let’s just be honest. Everybody should everybody just pivot AI now. One or AI. I feel this is happening.
Running this weekend was new to AR.
My favorite is the way we shit on these companies like, oh, you know, Facebook, I want Google. Google with AI was so far behind. Who are these guys? Release barred. Everyone’s like, I knew they were coming. I knew they were coming. The same with Apple and AI. Like, what are Apple innovating on? They do it. It’s like, AI. Question for you though. How do you think about the negativity towards fintech today? Yeah. And respond to that.
Yeah. Sure. So I’d say, like, from 2016 to 2021, there was this, like, crazy upward slope of trajectory of fintech companies. If I’m being honest, 2020 and 2021 were just, like, overhyped. That upward trajectory, like that chart of ecommerce, like, went up and then it went like crazy hockey stick, and then it went down. But it’s still continuing on that same trajectory. I don’t think fintech’s dead. I think we’re just back to where we were a few years ago. Is it better for you now because there’s much less competition?
I think so. Yeah. So less competition for capital, but also less competition for companies. In 2020, 2021, every company we funded, there were five companies just like it, also with great founders, with great investors. So what ended up happening is a bunch of capital went into these companies, five companies serving the same customer set, that’s a lot of competitive pressure, and nobody makes money because you’re all price competitive and you’re all serving the same customer set that now is comparing against others. Now we’re in a much better place and the people that incremental founder that was building in fintech because it was cool is now building a Gen AI tool.
And that’s great.
On the venture side there, when we think about, like, next ten years of venture, how do we think it changes? We mentioned Andreessen earlier. We mentioned Benchmark. How do we think about, like, what venture looks like in the longer term and who the winners and who the losers are?
Well, right now, seems like we have these, like, super big funds. Yeah. Right? We talked about Andreessen, general catalyst, all these other guys. Those guys seem to be in the AUM accumulation game, and it’s a tough business to have. If you think about these huge funds, just getting returns on these huge funds is really tough. You’re really only shooting for $10,000,000,000 plus outcomes. And then I don’t know how many of those there are gonna be.
But if you actually project that, you know, your NEAs as well at 3,000,000,000, you have a $10,000,000,000 outcome and you have 10%, which is pretty good 10%. Pretty good,
but doesn’t return to five. But then there’s a third. Yeah. I don’t know how many $10,000,000,000 outcomes there are gonna be. Like, if we’re honest, like, in 2021, it looked like there were a ton of them. And now those companies aren’t looking so hot, so I don’t know how often there’s gonna be a $10,000,000,000 outcome. So what happens with those funds? I think it’s tough. I think they have to shrink if they wanna be returns focused.
Do they or actually, do they just move into a different class of LP? Because now they’ve moved away from your family offices, your Totally. Even university numbers, it’s like the biggest of the biggest sovereign wealth funds.
Totally. Yeah. But like those guys also at some point want returns. So in that vein, we actually don’t pay ourselves as much as we could. We actually don’t even take full management fees. What do you mean you don’t pay take full management fees? So now we have 300,000,000 AUM. We could take 2%, which is 6,000,000 to run our business. We actually take a much smaller amount and return it to LPs. We just wanted to be returns focused, and the more money we have to invest, the better.
So I would
argue, and I’m being deliberately divisive here.
Yeah.
But I would argue that short sighted because you can invest in your firm at a much more efficient rate that will deliver outsized returns with that $6,000,000.
So we think we’re investing as much as we want. We like the lean team. We have seven people, and we think we’re doing everything we want. The reality is most other managers, it’s not actually investing in their firms. It’s like, if we wanted to, we could take a $2,000,000 salary each and have that’s $4,000,000, then we still have 2,000,000 to invest, right, in building the firm. And that’s actually a lot of money. So instead, we don’t want to be fat and lazy is basically what what it comes down to.
I think a lot also spend money on like VC value add services, which they’re making use and sell to get subsequent LPs. Do you believe that these venture value add platforms actually add any value?
I’ll say we we recently won a highly competitive deal, and a big part of it was actually, like, we’ve landed several high quality candidates into our portfolio. And they were like, this is the hardest thing, and these guys have helped us with the hardest thing that we have to do, find talent. But generally, I’ve heard the same thing where people say it’s all bullshit. What do you think are the biggest misconceptions about venture? Oh, man. A lot of people think it’s like a very easy, cushy job.
But I think especially when you’re starting out, it can be very tough. And I think there’s a big divergence among managers. Like, it can be an easy, cushy job at some of these big funds. But for the manager that’s just starting out, it can be tough. You can be investing more into it and not getting paid for quite a while before you end up Well, talk to me. On the first fund, did you have an anchor? No. We had no anchor. So there was fund zero, my $15,000,000 fund, then fund one, 75, and we had no anchor in the $75,000,000 fund.
How did you know about that, man? Was it friends and family first? Was it institutions So our first close, mainly friends, like people who knew us in the fintech ecosystem who were willing to back us just because they’d seen us in the ecosystem. And then we had one institution of Sandana. What does that get you to? Like the friends and family sell that? Yeah. So it got us to 18,000,000. 18,000,000.
And it’s no family. Families have no money. Maybe $10. Mine gave me an invoice, but it makes so it took you to 18. It was good. But it’s not near enough. Not near enough. But we hit Sundana in the
first close, which was wonderful. Do they help a lot having an institution like them? Or I think it gave some credibility. I think like also just having a first close gave a lot of credibility, like and we’ve done our first investment. We were investing. We’d had a first close. How big did you do for the first close? 18. That is a really early first close if you It’s an early first close. Now part of the reason we did the first close is we had a company that we had to invest in.
We had committed to this company in, like, September. We said we’re gonna lead your seed round, but we actually didn’t have a fund at that point. So we had to close as soon as possible so we could fund that company. It’s the company’s unit, a banking as service space. Yeah. It’s tight. Yeah. Exactly. Yeah. So it was amazing because that company has been super successful. Like, I think the winner in this banking as a service space.
Okay. So you closed on 1718 there. Was that right in hindsight? Would you advise managers to close as soon as As close as soon as possible. Like, then LPs can take you seriously because you have a fund and you’re investing. But true. But then, like, how much was that first check into unit? Because, like, if you close on 10 and you wanna do 75, if you committed to Leader Z round with one or one and a you’re putting 15% of what you’ve raised out the door in the first go.
Yeah. I think we did a first call of, like, 10%, which is a lot, but it was also fine. And then once you do a first capital call of 10%, we were able to get a line of credit, so then you can take more on the line of credit.
Totally. Yeah. You okay. So you do the first close on 1718. Yeah. What happens then?
So then we were like, we’re feeling pretty good. It was December 2019. And so we’re like, alright. We’re gonna do a second close. We decided March 2020. And we felt like we had a bunch of folks committed. We did one road trip. We went out to the East Coast from San Francisco. Jake and I went out the second week of March twenty twenty. When we flew out there, things were fine. All of a sudden, everyone canceled all the meetings. COVID started. The NBA shut down. Like, everything happened, and it was basically a totally wasted trip.
And we came back on a completely empty flight. There were 10 people on a flight that would hold 200 people. And this close that we were supposed to do in March, everyone who had already committed, including people who had signed, backed out. So we were like, shit. We don’t have a fund. The world is melting. The world is falling apart. The stock market is going strictly downwards. I don’t mind that people were like, I can’t invest in your fund. I don’t know how much money I have.
I don’t know what’s going on in the world. Totally get it. So what do you do then? You get back and you’re like Like, shit. So we’re like at that point, we were shooting for a $60,000,000 fund. We sent a letter to LPs saying, you know what? We’re gonna go for, like, 30 to 40. We said all these things that in hindsight were wrong, which is we thought came back and said, hey, actually, like, we were looking at the managers that we spoke to. We’d like to talk to you again.
And several of the folks that said no to us actually came back and came into the fund, and we ended up with a pretty institutional fund. Did it get easy? Everyone was always like, oh, when you get to halfway,
people
really get around the
table.
It did get easier. It did. And so our our target was 60. We ended up going to 75. And even at the 75, we had to push people down from what they wanted to invest. When did it get easier? Was there a tipping point? I think it was when we were like over half. We got a few of these institutions in. Do you find names helped? I think names probably helped some of them. We have, I think, several of the very good fund of funds that are invested in us.
And we have like a university endowment and and and others. And I think all of that helps. What was the single best LP meeting? Now fund II we raised in December 2021, the whole process only took a month. For fund II, we had a bunch of folks who knew us by reputation. They talked to other managers about us. They knew companies in our portfolio well, like they tried to invest in them or whatever. So there were folks who were literally just checking the box by talking to us.
And in a twenty minute meeting, they were willing to commit large sums of money, so like double digit millions, because they knew us, and I get where they’re coming from. They know us by reputation. They’ve spoken to other managers who sit on boards with us or whatever. What more do you need?
How did you instill a sense of urgency in the fundraise where it was a case of really committing to a closed date and getting LPs to move in unison?
So in fund I, we tried to do it and frankly it didn’t work.
Hard. It’s hard. Yeah. It was really You know, it’s really hard because you don’t want to force them to a no. But you also don’t want to say a month where it looks like you’ve got too much time and then they don’t move to it.
Yeah. So there’s no easy way. I think you give them a date and then odds are they’re gonna be like, okay. Like, I know that date doesn’t matter because if I want to invest, I’m gonna be able to invest. And so that’s what happened in fund one. It took a while. So it took us about a year from start to finish. And fund II was very different. There really was much more demand than we had space. We told our existing LPs, fund I LPs, commit to us by this date.
All of them came back and committed by that date. We were actually kind of surprised. By that Resizing up. Yeah. We didn’t know that that was gonna happen. And it actually caught us by surprise and screwed us up a little bit in some ways. We had intended on running a process and we’d spoken to a bunch of LPs and actually told these LPs, like, you have plenty of time. And, you know, for some LPs, university endowments, it just takes time. It takes a few months. Like, they have a different IC process.
And we told them, like, yeah, we’re meeting now, but don’t worry. We’re gonna raise in q one, and you can commit to us by March. What ended up happening was we closed everything in December, and we we did it all pretty quickly. Part of it was December 2021 was a good time to raise them. Yeah. So we ended up closing pretty quickly. Some of these folks that we actually would really like to have in our fund, some like university endowments that we have a great relationship with, and we told them that they had more time than they did.
So that didn’t really work out.
How would you advise managers on capital concentration on a per LP basis?
All of our LPs are 10% or less of our fund. It makes us feel good now in a market where if any one LP doesn’t come into our next fund because, you know, circumstances changed, it’s fine for us. We have other folks who wanna fill those gaps. We actually pushed folks down to the 10%. So some folks had wanted to do larger checks and we pushed them down. Do have an LPAC? We do. Yeah. Who’s on the L pack? Five of our, like, biggest investors. One family office and then the others are fund of funds.
I would say we don’t use it that much. We use it for, like, conflicts or we launched this accelerator recently. When we launched the accelerator, we said, hey, we should get their approval. And so we we talked to them. Why did you launch the accelerator? This seems like the worst time to do an accelerator, respectfully. I think it’s the best time to do an accelerator. Number one. So I ran an accelerator from 2016 to 2018, and that fund has incredible performance. More important than that, founders that we backed back then in the accelerator said, hey, my friends are starting a company.
What’s the closest thing to what we had? Which was in person, super hands on. So we had experts in growth marketing recruiting available to them. The answer was there’s nothing like it. YC is a totally different beast, but it’s really built for scale. Some of our portfolio companies that went through YC said they didn’t really get the support in fintech that they needed. They have like a generalist mentor who doesn’t know anything about fintech. And so they would be asking these questions and they had no idea what to do.
So we felt like, oh, there’s an opportunity here. Once again, people are asking for a fintech solution and we can give them that. In 2016 to 2018, I did it, five cohorts. I was investing in a $2,500,000 valuation then, and we have five companies that are more than 70 x. So we did five cohorts of six to 10 companies. Out of all those, so say it’s like 40 companies in total, we have five companies that are delivering more than 70 x return. We have DPI. We we have returned the full fund.
Karen, how do you think about DPI? Again, I’ve spent some time with them, different LPs over the last few days, and they’re like, any manager who had the chance to return DPI and didn’t over the last few years, you’re in trouble.
I think that’s right. You had to see the market and say, we should sell here. So we did in some cases. Now, of course, we didn’t sell nearly enough. We we should have we should have sold more and we had opportunities to and we did. But you did sell? We did sell.
Yeah. How do you advise on selling in terms of take it 30% off the table and, you know, just protect your initial position, but ride the upside, take majority off, take all off.
I generally think in one case, we sold our entire position to a a later stage investor, but that’s unusual for us. I think generally speaking, we’d like to just ease our position. And if you can return an entire fund, there’s something about having one x DPI that’s quite nice. If you can get to a point where you can return one x DPI and still have upside in the company, that’s great. Ideally, if you’re still excited about the company, you want to keep half of your capital or half of your equity still in the company.
What would you say is your single biggest investing mistake? For me, it was not taking enough cash out. I had the opportunity. I could have returned multiples on the fund, and I didn’t. And why did you not? There’s one company I’m thinking of that could have returned multiples on the fund. And in between when I had started to discuss taking money off the table and when we had finally, like, the documents, it took, like, a few months. And during that time, this company grew so much.
And they were like, you know what? I wouldn’t sell at that price. They told me, we’ll get this through for you, but I wouldn’t sell at that price given how much we’ve increased in value. And they were like, we’ll probably do another round in the next couple months. You might wanna wait. I talked to the founders, and they were like, you might wanna may wait. We might be worth double what you’re selling at. And so I did that, and then, of course, they never they never were able to.
The mark this is, you know, beginning of twenty twenty two. The market started tanking, and they were never able to get that round done that they thought would be a double. Do you find it
difficult? It’s quite a tough conversation. Hey. I love you. I love you. I love you. I wanna sell my whole position in your company.
Yeah. We haven’t found it difficult in the selling. Well, we said like, we’re at a point where like we’ve invested for so many years in this company. We wanna start reducing our position. And founders get it. It’s not a big deal. Especially back then when there was way too much demand for every round of the company.
Okay. So that’s your mistake. When you look back over the last twenty four months, what’s the biggest mistake you’ve seen other investors make in the industry?
People can get too excited about an idea and invest behind the wrong founder just in that idea. In our case, banking as a service, we talked about unit. So unit’s a banking as a service company. A lot of folks looked at that company and said, we love this company, but they couldn’t invest. They ended up investing in another company in the same space, and that was just a mistake. Invest in the best company, not in number two or number three, and a lot of those haven’t have shaken out to not not work out that well.
Founder, product, market. How do you weigh them up? So we invest at the at super early stages. It’s all about the founder. Three of my top five companies were pivots.
I had a guest on the show the other day, and they said there’s an inverse correlation between a founder’s ability to sell, sell a vision Yeah. Sell to customers, whatever, and their ability to operate and build.
I don’t think that’s exactly true. I think there are founders who could do both. But many of our top ones, they had a competitor that was raising more and more money than they were. And then in the end, that competitor tanked. Our like build guy who like never was a great fundraiser ended up doing well. One thing about this, like, founder versus market. There’s a Warren Buffett quote that everybody likes to reference, which is when a great founder meets a bad market, the market wins. And so he says that.
But one of my favorite stories is Rose Blumkin. So there was this woman who came over from Belarus. This is the one that doesn’t speak a word of English. When she comes over, she starts a furniture store in Nebraska, Omaha. Originally in their basement, then it grows and grows and grows. She didn’t even go to school. She never even went to kindergarten. But she’s just got such a mind for business. She continues to grow this thing incredibly. He eventually buys it 90% of it for like $60,000,000 or something.
It was actually the largest acquisition that Berkshire had made at that point. Her kids end up kind of pushing her out of the business. She’s 95 years old at this point. Oh, fattener. And and actually what’s really funny is they pushed her out of the business in part because they were fighting over the control of the carpet department. She said, I never wanna let go of the carpet department. That’s gonna be my thing still. And they were like, no. You should get out of here. And they pushed her out.
Her kids. And then what she does is six months later, she opens a place across the street from them. Literally a furniture store competing with them across the street. It’s called miss missus B’s Furniture Clearance Market or something like that across the street from the Nebraska Furniture Mart. And then eventually Warren Buffett has to buy that one too. And then he he puts a non compete clause in there that she, whatever, 96 years old, is not gonna compete with them again. And so your point is, Harry And what he said about her was he said, I would back her in anything she did.
Any business she wanted to go into, she would be successful. And so it it’s actually a counter. Like, it’s a great founder. She would be successful at anything she did.
Have you ever had a really not good founder win?
Yes. But it was an interim win. It was like a too early win. I’ve seen in my angel portfolio a founder that I thought was just okay ended up getting to an exit, and I think if they’d continued on the business, it wouldn’t have been that successful. And that happens all the time. Like, you have companies that are successful up to a certain point. The worst company gets an acquisition. The better company sticks around, and then they go public and then totally tank. It’s happened many times in the past few years.
What are the biggest reasons for you why great founders fail?
First of all, like, you can fail to find product market fit even if you’re a great founder. Yeah. And you can get stuck behind your idea, not pivot early enough. I I think you have to come to a point, and this is actually where VCs, I think, actually can be very value add, is say, we should think about a different business and, like, make a plan. So actually, I have this going on with one of my portfolio companies now. We have a plan, and if we don’t get to that plan in the next two months, we’re going to think about a different company.
We’re going to pivot. We have years of runway, but the current thing, it’s working a little bit. There are signs that it’s working, but we worry that even if it’s working, it’s not going to get to a huge business. We’re going to test this out for a few months and we’re staying close on it as investors. And if it doesn’t work, we’re gonna pivot.
Do you worry about the length of runway some companies have? I have some companies and they’re like, they’ve got like 60.
Yeah. And it’s like We do. Yeah. Honest urgency is but like, do you worry about that? And what happens? I think bad founders raise a ton of money and spend it. Great founders raise a ton of money and still have the same sense of urgency, still are on the same roadmap as if they’d raised a much smaller
one. So I say always on Twitter, and it’s these are so much hate, it’s probably why Andreessen hate me. But like, know, five on 25, I think has destroyed much of this evening. Totally. But everyone goes, if you get great founders, I’ll raise five on 25 and spend like they have two. And I’m like It’s so neat. Lovely idea. I love it. Yeah. You’re right. And if you do that, then I promise you you’re right.
Yeah. It’s actually almost impossible because what happens is if you raise five, the expectations people have for salaries are different than if you raise two. It’s basically impossible to have the same mentality as if you raise two. Absolutely. And I I agree with you completely. Like raising big rounds makes people cushy. You end up attracting people with salaries that, like, they they could have gone into a big company. Actually, they they belong at a big company. Yeah. They do not belong anywhere. They do not belong at a hard scrap hardworking, scrappy startup.
I completely agree with you. Do we see them continue, or do they go back? You know, we’ve always seen multistage come in and out of seed. Are they here to stay?
A lot of the multistage stuff is quite dumb. A lot of these folks have invested, like, million dollar checks to kind of a lot of folks Yeah. And and letting their junior team invest million dollar checks in anyone. It’s a learning check. It’s a learning check. But what happens is my portfolio company that is working is raising a series a or series b. They don’t want to talk to that investor because that investor invested a million dollars in their competitor. That competitor is almost dead anyway, but they’re like, fuck them.
I’m not gonna talk to that guy. They invested a million dollars in my competitor. And so they missed the opportunity to invest $100,000,000 in a great company that is winning the category because they invested a million dollars in their competitor. So I just don’t think it makes sense for a multistage fund to do it, especially in a category where, like, there are multiple competitors. Why would you invest when you know that, like, you might have invested in the wrong one and that prevent you from investing in the good one?
When you think about
the multistage strategies coming in seed, who do you think has done it the best?
I can’t think of any multistage fund that I feel like has done a great job at seed. I
always think Founders Fund are pretty good at seed, actually.
They do a lot of seeds, and and they have had good success. My friends at Excel have done a pretty good job. I think the folks that have done the spray and pray approach is very bad. And people go in and out of it. So, like, Andreessen did a lot of it early on in Andreessen Horowitz’s tenure, and then they stopped doing it, and they started doing it again. And I would guess they stopped doing it now.
We’ve seen also, like, large, large seed funds. I think True Ventures’ seed fund was 700,000,000. Yeah. Maybe split across some, but It’s
I think it’s half and half.
I think it’s 400, 500. The initialized is 500.
Yeah. I think they’re too big. Throwing shade on it. Are they too big? I think they’re too big. They’re both doing what I would call series a’s as well. Like they are writing $10,000,000 checks. And I don’t think of that as a seed round. But I think it’s too big. And I think as you get bigger, you’re more open to doing these five on 25 deals that actually aren’t good for the founders either. You’re like, oh yeah, it doesn’t matter to me as your fund size increases.
And actually, need to put the dollars out the the dollars out the door. Yeah.
Exactly. What are the biggest sources of tension between VCs and founders?
I’ve seen it in some of our portfolio companies. Like, a lot of VCs are very prescriptive on how to do things. We try to not be that. We try to be supportive, but not too prescriptive. I think you can get into a mistake being too prescriptive, telling founders what to do rather than like recommending what to do. And I’ve seen that even from good investors that I’ve been alongside on the board. I’ve had founders like call me after a board meeting saying like, hey, what the fuck was that?
I’m doing everything I was supposed to do. Why is this VC telling me what to do? Do you find boards very helpful? No. I want to be supportive to a founder in there when they need me, and that can happen in a board relationship, but usually that’s not what happens in the board. And so I’m meeting with the founder every week or every couple weeks anyway, and the board is a totally different beast. It’s like structured. A board can be helpful for the founders to sit back and reflect on their business once a quarter,
and it’s very effective for that. Who’s the single best board member you’ve sat on a board with?
I have a board with Jeff Hoering, the founder of Insight. He doesn’t speak that much, but when he does, it’s like, oh, he’s absolutely right. And, like, I can look back a couple times about what he said. He was like, absolutely right. One of my other companies we had, David Lawey, who was CMO of Google. Same thing. Didn’t speak that much, but when he did, he was absolutely right. He had a story about Google, and it was really good. Their experience is right, and I think a lot of younger guys can discount that experience, but like, it’s really valuable.
And the same shit happens time and time again. And you realize that, like, them having seen it over the past twenty years is incredibly valuable. What about tension between LPs
and GPs?
Oh, yeah. A lot of GPs went a little crazy in 2021. LPs were probably unhappy about that. I think if you do what you say you’re gonna do, LPs are happy.
So I think the GP commits actually an area of misalignment, not alignment, in the way that a lot of them will be like, hey. We need 3%. Yeah. And you’re like, well, shit. My fund’s a 140,000,000. Totally. I have not been working for years and years. This is like 4,000,000 plus. Yeah. I’m gonna have to borrow and bag and steal to not literally, but do know what I mean?
That’s Totally. Good. And I’ll tell you what can happen if the GP commit is too high. You can be financially strapped and you can say, oh, I’m gonna sell my position in this company in the series b because I need to return that capital to myself. And that can be a misalignment. But the absolute
make it out of fees, which then is not invested into the firm where it should be. Totally. And then also just bluntly, like, we want diversity and, you know, amazing ecosystem.
I think that’s true, but I think the way things are, like, a couple percent, one to 2%. Like, if you can’t do it, it’s probably fine, but I actually don’t think we need, like, a 100 new managers or or thousands of new managers every year. Do you think we see way less? Yeah. Yeah. It’s just so hard to raise a fund now. And you have wonderful I’m still seeing a lot raised, though.
I’m seeing it too. We’re not we’re not raised, but companies telling me they’re racing. Same. I haven’t seen much of a slowdown. No. I haven’t at all. A lot of operators are doing 3 to 5,000,000 fund, which I’m not against the door. Think it’s funny. It’s
really hard business. Yeah. You’re running a tiny fund. It’s really hard. Many of these folks are gonna continue on. Like, their fund II, fund III’s are gonna be really tough. What do you think of, like, founders who have funds on the side? There are founders who have funds on the side who, like, lead deals, and that is crazy to me. If you think about like, especially now when we have a bunch of companies that are struggling, we had the SVB crisis, like, you need to be there for your founders.
And if you’re there for your founders, you’re not there for your company. And that is a problem. So founders would like investing checks on the side occasionally is fine, or or if it’s strategic, it’s fine. But there are founders who are, like, leading rounds. I think that’s bonkers. We have a company going through some shit right now. I’m there for them any time of the day or night. And if I was running my own company and this wasn’t all I was doing, like, I wouldn’t be able to do that.
I don’t know how you square that. How can you be operating a fund and running a company? What do you think?
I think the biggest challenge that I just struggled to get over, and I’m not really shaved, but I struggled to get over it, which is like, when you take external capital, that is an incredible responsibility. And when you take external capital for a second thing, on top of something that you’ve already raised significant millions of Totally. For the first one. If I’m in the first one, I’m like, that is disrespectful to my money. I gave you money to do this, and that’s like, I’m thrilled to do it.
But like, do what you said you were gonna do. Totally. And so I don’t have a problem with Founders Angel investing, but LP management. Yeah. Suddenly you have 50 LPs and you’re I am doing
this job like round the clock. I just can’t imagine having another full time job. Final Four in a one. Your wedding was like It was in the metaverse. So Yeah. How do you know how to Okay. So it was in the Taco Bell metaverse. It was an Indian wedding, Taco Bell in the metaverse. And you’re like, why the fuck would you do that? And credit to my wife, Amrita, because she went along with all this crazy shit. You know me. I say yes to a lot of stupid stuff, and this was just another one in a long line of those examples.
In this case, Taco Bell had a contest about getting married in the Taco Bell metaverse, and I’m a fan of Taco Bell. People on my Twitter know that. So when they came out with this, a lot of folks tagged me. They were like, Sheel, this is for you. They saw that I just gotten engaged, and they were like, this is perfect for you. You should do it. I was with my wife driving on a road trip, and I mentioned to her, I was like, hey. Look at this casually.
Like, hey. Look at this. Wouldn’t it be fun? And to my surprise, she said, yeah. Alright. Let’s make the video. It’d be fun. It’d be like a fun exercise. So we we took twenty minutes and thought about what we would say, and we stopped and recorded it. We only recorded it twice. We didn’t think that much about it because we just thought it’s a fun thing to do, but we’re probably not gonna actually submit it. And And if we submit it, we’re not gonna win. If we win, we’re not gonna do it.
So, you know, what happens? We get back from the trip, and I I’m just like, let me just submit it. Whatever. And then we get notified by Taco Bell we’ve won. And then we kind of pushed back and said, hey. Like, I don’t know if this is for us. We don’t wanna get married in this Taco Bell metaverse. And then they were like, hey. Just get on a Zoom call with us. So we get on a Zoom call with them. They convince us. They say it’s gonna be your wedding.
We’re gonna do whatever you want. It can be Indian. We’ll design it for you. You’re gonna be part of the Taco Bell family. They said you’re be part of the Taco Bell family. And I was like, that’s what I’ve always wanted. So we eventually did it. It was really fun. It was in February.
What does it mean? So you sit in a room Yeah.
So you’re sitting in a room with some of our friends were there too. And we’re on camera, and there’s this metaverse. It’s in Decentraland. It was actually really cool. For a while, I was pretty skeptical about it. I’ve never spent any time in the metaverse, but it was actually really, really cool. I rode it on an elephant. People from around the world were there. My family in India was attending. They have their avatars. It was actually really cool. It sounds really stupid. Actually, the day of, I was thinking this is cool.
And you say your vows through it? Said our vows through it. Did everything. It was a legal wedding. We we we were legally married with this medical Was it quite emotional? It was very emotional. Yeah. Yeah. Did your wife did your wife like it? Yeah. She loved it. Do you get like Taco Bell credits? We do. We have a lot of Taco Bell dramas. How many credits do you get? I don’t know. They gave me $500 for my birthday in Taco Bell credits, which actually Taco Bell gets you pretty far.
They also paid for a honeymoon, 25 k, which is pretty nice, and they’ve been great. I mean,
that is amazing. I saw this, and I was like, what the fuck has he got? It’s crazy. Yeah. Listen, I wanna do a quick fire answer. I say a short statement, you give me your immediate thoughts. Okay? What one seed firm other than BTV would you invest in?
I think the best ones have now retired and only they’re investing their own money. So that’s Homebrew and IA. We found a collective as well at
Brex Ravikant. Oh, yeah. Super good. Yeah. What series a firm would you most invest
in? We’ve invested a lot with Excel. I think they do a really good job. In the spirit of keeping fund size small, it’s hard to beat benchmark.
Yeah. You can do a multistage firm now. We’re going kinda growth slash multistage. Who would you go for?
Because Founders Fund shrunk their fund size, I’m gonna go with Founders Fund.
Green Oaks, I really like. Yeah. I really like addition. All good. Really like Ribbet. They’re all good. What have you changed your mind on in the last twelve months?
We talked about secondary a bunch. I think I’m much more likely to do to take some chips off the table earlier than I was before. What do you advise founders on taking secondary? My rule that I like to live by is at the series b and beyond, you can take as much secondary as you have in ARR. Just think about it. It makes sense. Right? Like, if you’re building a real business, I don’t mind if you take chips off the table, but like, you’ve gotta be building a real business.
But do you blame the founders? He took off a lot of money. No. A lot of times it was Yeah. Like, VC’s pressure Pushing them. Do it. And they’re getting so much hate now from the media, and it’s like They should hate. I don’t hate the founders at all for doing it. Yeah. But if you did an index of companies where founders took a lot more than that, what I described, like one x ARR off the table, You have a very negative returning fund. Yeah. What would you most like to change about the world of venture?
Fewer douchebags who like think they know it all. I think there’s a lot of like insecure folks who just like put down other people. We don’t need that. What do you see that you don’t think enough people are spending time on? Tough question. I think there’s this overhang of valuations, and we haven’t yet seen the drop that is gonna come and it’s gonna be so severe. All these growth round investors that had companies go pipe IPO and then fall, they haven’t made any investments. What we’re not seeing in some of these companies that have raised more money is just the immense amount of structure that’s going into them.
What happens to Tiger and SoftBank? They recently led a series a of one of our portfolio companies, and they actually, in contrast to their investments in 2021, which John Curtis and others were writing a lot of checks and sometimes very quickly. This one, they led our series a. They did a ton of work, and they’ve actually been super helpful to the company. It’s a very different tiger than the one of 2021. They’re doing a really good job now. Think I it’s gonna be a much smaller fund, and like you said, it’s gonna be a ton of their own GP money.
I think they’re they’re good actors. Is there a return for SoftBank? SoftBank, I think, is just really tough. Like, they made just a ton of incredibly poor decisions, poured a ton of money into bad companies. And we talked about five on 25. For them, it’s more like 500 on 2.5 for a company that was nowhere near ready to accept that kind of money. Unfair.
I thought Wag was a brilliant dog on demand company.
What about Zoom, the pizza company?
It was exact I was surprised to see
that one, Trevor. He went to that
and you’re
like, wasn’t a surprise, was it? No. Like, literally from day one so, okay, on that company, I met a guy who invested in that company relatively early. It was a data driven VC. I I was like, what data do you have for this company? And he was like, we have all this data on, like, number of shares on Facebook of this video about them. I was like, why the fuck would you invest off of a shares on Facebook shares on a pizza company? Like, people were sharing this video about this pizza company on Zoom.
It’s like a robotic pizza company, and they used it as input to invest. And I was like, that’s crazy. Final one, my friend. BTV in five years time. Where do you wanna be then? I think we wanna be cemented our reputation as the first choice of founders building a fintech company globally. My friend, I’ve loved it. It’s so much nice to
do it in person. Thank you so much for coming and I’ve loved it. So fun. Loved it. You the man. My word, that was so much fun to do in person with Sheel. I hope you enjoyed the fly on the wall nature of that discussion. You can see more, of course, on YouTube at twenty BC. That’s two zero BC. But before we leave you today,
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