Peter:
Jon: You create a revenue base. You know, revenue is base financing. Fine. You could do another VC fund.
Peter: I probably do. I probably do something pretty similar to what I do today, which is we do we're very opportunistic. We do early growth late with an emphasis on early in growth. Okay. Kind of series eight or series C and a focus on.
Peter: But that's mostly just because that's what I've kind of built my career around and that's what I enjoy doing.
Peter: I'll tell you what. Like if I had all the money in the world, I'd also set up a seed fund where I just write checks to absolutely insane, crazy ideas just for the fun of it. And, but I wouldn't raise money for that. I would just blow my own money the way I. The way I scratch that itch today is I back stuff on Kickstarter.
Peter: Okay, I think I've backed think Today marks 140 projects on Kickstarter.
Jon: I know I get a lot of little alerts. Peter just dropped some a coin. Really? That's funny. I think it's you and maybe someone else. But anyways, what would be your thesis or your your portfolio strategy? Is it just going for early or high growth?
Peter: Yeah, I mean I think there is a lot of.
Jon: Because I think you're fairly different strategy that a lot pursue. A lot of VC tend to have like a tighter focus like album local VC. I feel like they're looking for a SAS model that's ready for a sales team to be thrown on it. Yeah.
Peter: Yeah. Look, I don't know if I'd have to think about more like what what that exact strategy is. I'll tell you, our strategy today is twofold. One is find the like under of gems of companies that are growing really fast and doing it profitably. And the other is leverage, who we are to get into some of the hottest, most competitive deals that have tons of funding and backing.
Jon: And then you got into Spotify, into Lyft. So it's working well, Yeah, well, we'll see. We'll see. But you've already you're on your second funder, third fund, second fund. Second fund.
Peter: Well, yeah, the third fund that I've run.
Jon: Okay. Third fund. Yeah. How would you identify the right LPs for your fund?
Peter: whoever will give you money. Just kidding. Like, there's.
Jon: How many dentists I have to pitch then to raise a $20 million fund?
Peter: Your LP should align well with your investment strategy. That's my belief. So I was talking to I'm an LP and one of these angel list funds, and we were talking and I was like, You need to go after because part of their thing is like, we want to write the check that convinces you to leave your job, okay?
Peter: And I was like, Your LP base needs to be those people. The people that are still have that job that are making like somewhere between like 200 and $500,000 a year, like big high salary C-suite, VP level, like an about, you know, highly compensated people that are accredited investors. They can invest in the sort of thing they are the kinds of people that could spin out and launch a company that you would want to back.
Peter: Like those should be your LPs.
Jon: It just convoy, but.
Peter: Like they shouldn't be. My LP is for my fund. Okay. Yeah, right.
Peter: It may or may not be convoy.
Peter: but I mean, for us as a venture fund, like our LPs are large and financial institutions and so like part of our investments strategy is meeting like requirements and criteria that they have that are important to them, right?
Jon: I think when I was with the Utah Angels, I thought about launching what I called in my mind, the Utah Executive Fund. Yeah. Where you have a lot of these individuals who are six and seven figure earners who want to play like the VC card. Yeah. And I think even more importantly, have the knowledge to leverage. Yeah. So, for example, Chris, can you send good friend?
Jon: He was the founding CMO of Purple who launched them from nothing to over 100 million in revenue. Yep. And having a fund like that where you could ping him and say, Hey, part of the investment is the knowledge base. The other part is the cash. Yeah, you can get, you know, sit down. Someone like Chris, I think they'd be highly valuable.
Jon: I never heard of doing that. But when I was thinking about launching a fund, that was one of my ideas.
Peter: Yeah, that's not a unique idea. Like, a lot of a lot of funds have similar strategies. I think other ones that are interesting or, you know, here in Utah there's a fund called REIT Ventures that's real estate technology ventures and all of their LPs or most of their LPs are, you know, property owners and they own, you know, hundreds of thousands, if not millions of dollars of rental properties and other things.
Peter: And that gives them a huge ad rate because when you're trying to win that deal, right, and you go to them and you say, Hey, my LP is could be your first, you know, $10 million of revenue, right? People set up and they're like, maybe I'll take your money over Sequoia who can't offer that same advantage. Okay. Yeah.
Peter: so again, like, I think like, smart fund managers will find, like, ways to drive really good alignment between their LPs and their, their investment strategy. That would be like my biggest suggestion.
Jon: If you're trying to find a fund, would you approach family offices? yeah, for sure. But what about fund of funds? Sure. You're just gonna say yes?
Peter: Well, I mean, look at how you approach everybody, right? It's like.
Jon: Or dentist? Would you go there?
Peter: There does become a point where it's like you don't want to have, like a zillion people to writing small checks because they're like herding cats. And then the other thing that's really tough, and this is a trap that a lot of fund managers, especially like first time fund managers fall into. And there's there's no real easy way around this is they'll raise that.
Peter: So the typical path is right somebody makes enough money that or they have some angle that allows them to build a track record that is like the first thing you need is a track record, right? So they do a bunch of Angel deals, they generate these great returns, they bundle up those returns, and then they go to all their friends and family, like, Look how much money I made on my angel investments.
Peter: You should invest in my fund and I'll keep making investments like I did on the angel side and generate great returns. And so they get a bunch of their friends and families and fools all together, and they put up money and they raise, you know, like sub10 million or whatever it is. And then they deploy all the money and then they go back to their friends and family like, Hey, it's ready for fun, too.
Peter: You know, it's been three years and their friends and family are like, Yeah, we gave you all our money, you know, like, give it back and we'll give you some more. And they're like, That's not how this works. Like, this money's locked up probably for another ten years. and so then they're, they're in a tough spot and so fun too can be really challenging.
Jon: I heard that's where a lot of fund managers die as we.
Peter: Go to because they can't make that. They can't cross that CASA chasm.
Jon: So yeah, you deploy most your cash for the first three years, but then after you're three, you get your way another 5 to 8 years. So you know, years, 8 to 10. Yeah. So but by that point they've gotten another job. They're other things. Yeah. They're not known as a fund manager.
Peter: So this is why I, I think there are a lot, there's a lot of speculation that funds there'll be a lot of attrition of venture funds because when, when times are good you're able to show like strong write ups across your portfolio, even though it's a paper gains and you're able to raise the next fund on those paper gains.
Peter: So you're like, Hey, look, here's my angel investments, here's my paper gains on my my front one investments. Mr. Institution, please fund fund to write. But when times are not good, what happens is all these institutions start pulling back, right? They're conserving capital. It also what happens is like they have, you know, say you're a $10 billion asset manager, endowment, whatever.
Peter: most of your money is going to go into public stock and bonds. And in the current environment where you've just taken a 30 plus percent haircut on all of your equities, all of a sudden, like the allocation that you had, maybe you had a 10% of your total assets was allocated for alternative investments like venture. Well, if you went from a $10 billion corpus down to a $7 billion corpus, all of a sudden you had a 30% drop in the size of your available cash for alternative investments, and you're not going to put those most likely into risky first time funds.
Peter: You're going to put them into stable, you know, well-known funds that you've been backing this whole time. And you want to keep supporting because you want to keep being in their next fund and the next fund and the next one. And so it just makes it really hard. And so that's that's like some of the concern is that these fund managers that are in fund one, they've got like this portfolio, they've got mostly individuals that are backing them, Those individuals, they're also seeing their own like liquidity crises.
Peter: They're not going to be able to re-up and fund to institutionalize. They're not going to have the cash for investment fund, too. And then you're just kind of a zombie fund managing out fund one, and you're in a tough spot. So if you are able in a fund one to get institutionalized, to invest like that is like Holy Grail type stuff.
Jon: For the Harvard alums. Harvard, a lot of that, that's hard. I think there's only one fund. I remember the name they pulled in institutions, but they also focused on a niche of underserved minorities. And I don't know if they didn't have didn't have that, both combos if that would have happened.
Peter: Yeah, I mean, look, we have our fund run with mostly institutional investors.
Jon: But your fund one was really your fund two in my mind.
Peter: No, our fund, the first fund I ever managed was mostly institutional too.
Peter: So it is possible. And you know, a good example of that is Fearless Fund to your earlier point, they're based out of Atlanta fantastic team. They focus on funding black women entrepreneurs. And their tagline is, you know, black women entrepreneurs are the most founded, less least funded. So they're like a percentage basis. Black women entrepreneurs start more businesses on a comparative basis than any other population, and yet they receive the least amount of funding.
Peter: But because of their like mission and because of who they are as like great, great investors, like they were able to attract large institutions like Ally Bank, like fifth, third, like Costco, like a bunch of others. So it is it is possible. But to your point, it's it's pretty hard.
Jon: Okay. My last question is for a first time fund manager, is there any special terms you have to throw on there?
Peter: it depends. So oftentimes what happens. So one, you have to understand like a fund structure. So there are basically three entities. You have a management company, that's the brand, right? So I mean, you think Sequoia, there's a management company called Sequoia essentially, and I actually don't know if that's the technical legal term for the management company, but there's this management company that holds the brand and then you've got a general partner and you have a limited partner and the limited partners, the actual fund.
Peter: So it's a partnership with a bunch of limited partners. They'll kick in money and then that money gets allocated to deals and the stock certificates are held at the limited partnership. And then you have a general partner. And that general partner controls the flow of funds effectively of the limited partnership. They're limited, right? So they you know, they're limited in what they can do, and that's why you have a general partner to control it anyway.
Peter: So all of that is backdrop. Usually what happens when you go out fundraise is you get limited partners into your fund, right? Your rate, your fundraising from limited partners. One of the things that's happened recently, some recently, you know, maybe over the last like 5 to 10 years, is that more and more funds are fundraising for the management company and or for the general partner, and they're effectively selling a piece of their management company or a piece of their general partnership to give them the startup capital they need in order to launch this fund.
Peter: Right, to cover legal expenses, travel, salaries, like all of those things. and so that could be a potential like term, special privilege term or whatever, where it's like, hey, I would like $1,000,000 in, you know, but maybe you invest you by, you know, 10%, 20%, 30% of that general partnership or of the management company.
Jon: So then you get percentage.
Peter: Firm for a million bucks and then ever. Yeah. And then Yeah, that's right. So you would get a cut. So you have management fees. Management fees are used to cover salary and overhead and all that sort of stuff. So management fees primarily flow to the management company. So if you own a piece in the management company, you are getting a piece of those management fee flows from every fund you know, today and into the future.
Peter: The management company also controls when a fund raises another fund. And then if you own a piece of the general partner, then you're getting usually a piece of the carry. and for that one fund as opposed to that fund and all subsequent funds, it's usually just for that one fund. So yeah, there's a lot of different things outside of that.
Peter: You know, I've seen, I've seen cases where, first time fund managers have given lower carry or taken lower carry. So instead of the standard to 20%, they take 10% or 15% or they've given their anchor investor, you know, like, hey, we'll, we'll give you a better deal on terms like lower management fee, lower carry, but everybody else pays full freight.
Peter: I've seen, you know, same thing drops in management fee or different structures around management fee in terms of like maybe you get paid only on capital that's been deployed, right. Those types of things to incentivize you to get money out the door and not just sit on your, your haunches. but I think generally I would say when you get cut on terms, you can set yourself up to lose a little bit.
Peter: And the reason for that is because it's like this signaling this signal, this negative signal, that you're, it's like you should never invest in a venture fund because you're getting a deal in terms of. Yeah, you're right. Like, it's like you should invest in a venture fund because they're good investors. And the corollary to that is like Bain charges at least I don't know if they still do, but I know at some at one point they weren't charging two and 22% management fee and 20% they're charging 3% management fee and 30% carry because they were like so confident in their ability to generate better returns than their peers that were charging 20% that even
Peter: at charging at 30%, investors would be better off investing in Bain. Right? That's like the opposite. That's like an that's a signal. That's one like really ambitious and, you know, it's interesting. I was listening to another podcast and they were talking about the history of benchmarking and kind of pointed out like that's what Benchmark did for Fund one as they came out.
Peter: They're like, We're going to charge higher fees. And he's just average and, and some of the LP is like Stanford were like pissed about it and like tried to fight him on it. but it was like this incredibly strong signal to of like, know what, we're going to knock this thing out of the park and we're going to charge fee for it because we know what we're worth, blah, blah, blah.
Peter: So, and I don't know that I recommend that for everybody, but it is kind of an interesting thing to be thinking about. Like I would just figure out like, what's market go with market, right? Market terms, is probably your best bet.
Jon: Okay, well, that works well. Thanks so much. I had one more question. I remember what it was. It must not be that good. So let's. There we go. Well, thanks for the episode, Peter. Join us for the next one. Venture capital firm and make sure you go to us because you can find where we are on all the on all the socials.
Peter: Thanks for joining.
Jon: All right. Thanks, guys.
