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- [00:00]
David Tetton
And Square is well aware of that. Right. And so they use their influence to allocate to the people that they want to build relationships with that they think are additive to that particular company. I also see this dynamic where in venture, if you come out of central casting, right? So you're a white or Asian male who majored in CS at a top school and worked for one of the top five tech companies, people are giving you crazy valuations and that's sort of the equivalent of algorithmic trading in public markets because everyone's automated system are saying, wow. Companies at this profile have become unicorns in the past to throw money at them.
- [00:35]
Joel Palo Thinkle
Welcome to the Investor, a podcast where I, Joel Palo Thinkle, your host, dives deep into the minds of the world's most influential institutional investors. In each episode, we sit down with an investor to hear about their journeys and how global markets are driving capital allocation. So join us on this journey as we explore these insights. Should give me a button here. Okay, so we are live here with a good friend, a good mentor which I've known for several years. I'd like to consider him one of the OGs in New York City, you know, for being venture capitalist, really good friend of mine, David Tetton, welcome. Thanks for offering up your time and being super generous with it and just all the things that you've been helping me with for the last five to six years. So super excited about today. I think this is going to be one of our best sessions. But David, he's currently a new fund manager and has just been at some very well known venture funds in New York City. So I'll let you go ahead, David, and just kick it off with maybe your intro. Talk us through your career, your education. I know you spent some time in Israel for some time, so walk us through kind of your whole education. I know you went to Harvard as well and how you broke into venture capital and now your new journey of starting versatile vc.
- [02:04]
David Tetton
So Joel, thank you so much for having me on the show. Looking forward to our conversation. Appreciate the great work you've done building up Sutton. And I am a member, or I guess I should say a graduate of the last Sutton cohort. So I think you've put together some great content and a helpful community. So briefly, I'll give the background, but I think people will be more interested in the future than the past. From California, my father's from France, went to Yale, did consulting, investment banking, went to Harvard for business school. Then I moved to Israel, which is not a very common move. After finishing Business school and was CEO of a startup there. Came back to New York and I've been here in New York since 2001. I started another startup and another one had two exits. And then I joined FF Venture Capital as the first outside partner besides our founder John Frankel. And I joined when we were just 10 million AUM just kicking off our fund 2 and I was fortunate to be at FF when we raised several funds in a row we grew to 150 million 25 employees. Top quartile returns across three funds in a row. And then I joined Hoff Capital as a managing partner which is another early stage New York VC fund. Again we're fortunate to do very well there and then to launch a new venture capital functional, versatile vc. And for some reason my voice is being heard twice. I think someone on may not have their mute button on so hopefully they fix that. So I just put in a link to that. So I also along the way I founded Harvard Business School Alumni Angels of New York which is now the largest angel group on the east coast. We're part of the Global Harvard Alumni Network, their sister angel organizations in Norcal, SoCal, Sao Paulo, a number of other major cities globally where Harvard alumni congregate. But I emphasize that we invest blind to school affiliation. If anything, there is a bias against the Harvard grads because of the opportunity cost and ego issues associated with the Harvard alumni community. With due respect to my friends in the community and lastly, I've also in the past consulted to a lot of other investors. I've been a consultant to Goldman Sachs, LLR Partners, Carl Icahn, right side Capital Real Ventures in a variety of capacities. Just drawing on my experience, having now grown two different VC firms, 10x in both AUM, a number of LPs and with fortunately good returns during my tenure.
- [04:28]
Joel Palo Thinkle
So you know, fun fact, I had the privilege of meeting David's mom. You know, we had a little event, like a mentorship event a couple years ago and you know, was honored to meet, you know, his mother. So you know, tell me a little bit about your family and you know, how that kind of influenced your career and your ambition. You know, I know you went to Harvard, so maybe start with your, your early days and your upbringing and how that shaped who you are and then I'd love to hear your take on just business school in general. Right. I mean the conventional wisdom is if you want to get an adventure, go to go to Harvard. Right? Which you're like the perfect example of that.
- [05:04]
David Tetton
Right.
- [05:05]
Joel Palo Thinkle
So I'd love to hear A little bit of that and then just kind of Context on an MBA, sure.
- [05:11]
David Tetton
So my father came here at age 25. He had dropped out of school at 16 to apprentice in a handbag factory. This is after World War II in Paris. And he built a successful business in America selling handmade leather goods and artisan products, mainly out of leather. And then he moved into fabric. So his materials are in Back to the future 3. They're used in Mick Jagger's concerts and Grateful Dead concerts because he made very exotic, beautiful materials. And my mother trained briefly as a dancer and then she realized when you're a dancer you take orders. So she didn't like that. She's also 4 foot 10 which limits your career options as a dancer. So she became a choreographer where you actually give orders to tall beautiful people, as she herself would observe. So she ran a dance company for several decades and then she became an Internet entrepreneur. There are not many female senior citizen Internet entrepreneurs who exited their business in their 70s, but that is my mother. And so she sold it to someone else, took over dancetimepublications.com My father passed away about two years ago. My mom lives in the Upper west side and is super active and is single. So if anyone wants to meet 80 year old ballet dancer, be in touch.
- [06:21]
Joel Palo Thinkle
And you know, so what I hear is the entrepreneurial spirit. So I'm sure that carried through. But you know, you ended up becoming a venture capitalist and then you also did start a couple successful companies as well. Right. So walk us through how that inspired you to break into venture and how those things kind of fed into that excitement to kind of break into the industry.
- [06:45]
David Tetton
So I started one business in Israel which didn't work out and then I started a technology enabled recruiting business that was bringing greater speed to the recruiting industry and I sold that to a venture backed startup called Ecolo and then I started an expert network which we worked with large hedge funds, private equity funds, VC funds in identifying domain experts. And I sold the business to valueserve, which is out of India, which is the largest pure play knowledge process outsourcing company. It was started by the former head of McKinsey's India based research team and the former head of IBM's research team in India. So if you think about the stack of the professional services industry, you have your junior people who gather data and crunch numbers and you have your senior people who understand the industry deeply and know the, the dynamics of it and know all the players. So Evalu had the lower level people at low cost out of their offices in India, China, Chile and Romania. But they didn't have the senior people. So they acquired my business to synthetically replicate the stack of a McKinsey at a lower cost. So I worked for them for a couple years as a managing director before I became a vc. To your question about how I became a vc, so I met John Frankel, founder of ffvc and I said, I'm interested in joining you. And he said, of course, reasonably, what can you do for me? And so I made a spreadsheet, three page spreadsheet, saying here are all the things that I think I can do to grow your organization and to be an effective investor and have me join as a partner and I will do that. And so if you look post facto at what I actually did at ff, I executed just about everything on that spreadsheet. So that's basically what happened. When I joined Hoff Capital as a partner, I said these are the ways in which I think I can help grow this organization. So given my background as an operating entrepreneur, I don't look at VC as just a deal business. I look at it as a business that needs to be managed and organized just like any other. And that's core to the DNA of versatile vc. We are a fintech startup, just like the fintech startups that we have backed and will continue to back. And so we're always thinking about how we can use technology as a differentiator. And so getting a venture is always hard, but I think having a clear value proposal that you can be held accountable for that says these are KPIs is certainly helpful. Yeah.
- [09:01]
Joel Palo Thinkle
And you and I have brainstormed on just the VC tech stack and as you know, I'm building something as well on the tech side. So where do you see technology heading to support venture? Where do you think the main pain points are? Right. I mean obviously it's tough to find great deals with all these Tiger Globals and CO2s, so obviously deal flow could probably get sourced and screened better. But what are the pain points? And then what do you think needs to be catalyzed with technology to improve those pain points if you were to rebuild the tech stack because you are a fintech company as well.
- [09:36]
David Tetton
Right. So I just put in a link in the chat to my detailed roadmap to answer your question briefly, if you think about the world of public markets, we've seen a clear trend towards use of greater technology and analytics. D.E. shaw, Two Sigma, very, very successful investment organizations which internally look, look more like software companies than Like Warren Buffett going through a 10k with his pencil. Although Warren Buffett seems to have done just fine for himself. But that said, this has been a very successful model in the public liquid markets. If you look at how these sort of firms spend their calories, they are spending most of it on what we in venture call origination. They might call it trade selection and trade weighting. They're trying to figure out what trade to put on, how long do you hold it, how do you hedge it, et cetera. And that's because most of the other parts of public securities are relatively push button. Literally you can press a button on your terminal and you can buy 100 mil of stock. You can't do that in our world. And so I would argue that at every stage of investing, from sourcing to DD to deal execution, portfolio acceleration, there are ways to use technology to do your job better. And a lot of people, I find overweight origination because they're taking a public markets mentality. But I think that's the worst wrong mentality. In fact, one of the things I really like about private markets is in public markets, once you go long to Apple, what can you do? You can pray, you can hedge or you can sell. And that's about it. Right. In our world, there's a lot of other things you can do. You invest in a private company, you typically can help introduce clients, help produce talent, have impact on strategy, depending of course on your experience and your equity stake. Do you have a board seat? But you, but nonetheless you typically have a lot more influence than you do in the public markets world. And so you can use technology to use your power as effectively as possible. So I see ways to use technology throughout. I'd say the best solved problem in terms of most technology solutions is around origination, but it's not fully solved. It's still a very manual process. And so I am eager to be a early beta client, as I've been in the past, of people who are working on the problems, the addressable problems in this industry.
- [11:50]
Joel Palo Thinkle
Yeah, one thing that I've seen recently, a couple months ago, was somebody that could follow top tier VCs and track who the founders are that they follow and try to triangulate signals. So do you think that with Twitter, with having Twitter VC and these social signals, do you think some of those could help provide some indicators kind of similar to the public markets? Right. I mean, I see the public and private markets already converging as we look at like these crossover funds. So do you think some of that hedge fund web scraping technology could provide some signals in the future.
- [12:30]
David Tetton
Absolutely. And I know a number of folks who are doing that. I will just caution that any strategy involving scraping what the major investors, the well regarded VCs are doing, you're running this problem that everyone, everyone is fighting to get into those deals. Right. It's very difficult to join the syndicate for the round led by Sequoia and Sequoia is well aware of that. Right. And so they use their influence to allocate to the people that they want to build relationships with that they think are additive to that particular company. I also see this dynamic where in venture, if you come out of central casting, right, so you're a white or Asian male who majored in CS at her top school and worked for one of the top five tech companies. People are giving you crazy valuations and that's sort of the equivalent of algorithmic trading in public markets. Because everyone's automated system is saying, wow, companies at this profile have become unicorns in the past, so throw money at them. Well, that could work, but there's a vast universe of founders who don't come out of central casting or actually great founders who you can actually get better returns with. And so I'm particularly interested in how to use technology to systematically source and add value to founders who may not come to central casting, who ironically need the least help and work with them because a lot fewer people are paying attention to the folks who may not trigger the automatic filters of the automated systems.
- [13:53]
Joel Palo Thinkle
What do you think are the biggest pain points that founders need support with? I mean, I, over the coming month, over the last couple months, I had a lot of founders just ping me because things weren't working out well. Right. So I've just kind of served as a, as a sounding board to brainstorm and come through problems. And that's something that is not always easy to programmatically support, you know, so for me it's really just been moral support and brainstorming. I'm not here to tell them how to run the company, but you know, you've spoken to, you know, thousands of founders, right. So what's the common thread that you normally see founders needing help with? Is it, is it fundraising? Is it a go to market strategy? Is it all the above? I don't know if there's any patterns that you've been seeing.
- [14:36]
David Tetton
There are a lot of patterns and I've written about this. I wrote a detailed research paper around how VCs can systematically add value to their port codes. So when Founders need help in fundraising. That's a second order problem. If the business is doing well, fundraising is not a challenge or you're profitable and therefore you're not in dire need of fundraising. So I always try and focus first on can we help on the revenue side, can we recruit talent that will up the game of the company because that solves the fundraising issue. That said, I was pointing at my two prior firms on helping our companies raise further rounds. And typical founders certainly can benefit by expertise in finding the right investors. An area of particular weakness for many founders is understanding the dynamics of different types of investors. Once you graduate from the seed stage, you become eligible for venture debt for revenue based finance for MCA or lots of other options. And I have particularly been doubling down on understanding the trade offs between those. Another huge pain point for companies is recruiting, right? Because what do they do with the money we give them? Number one use is recruiting and so we make a systematic effort to help them. Lastly, your question was about current founders, but I will highlight there's a related population which is founders in transition. So one of my learnings over my career is that founders as a bucket, including me personally, we're a different part of the labor market, right? We are not eligible for a lot of the traditional jobs you get as you work up the corporate ladder because a lot of employers say, great, you're a founder, wonderful, you're going to quit this job in a year to go start a competitor. Why do I hire you? There are different sorts of options available to you. And so we have launched on our website a suite of free resources for founders who are in transition, meaning they're thinking about the next company they're going to start. Or maybe they say the last one shut down. I really would just like a stable job with health insurance, right? They maybe want to become an angel and that the resources are all free. We then have a gated community where you have to verify that you're a serial founder has achieved some traction to join where we share more sensitive resources. So for example, we recently shared two different startups with Traction that we're seeking new CEOs to take them the next level. And some of the people in our community are, I think, going to be a fit for those two startups.
- [16:52]
Joel Palo Thinkle
Is that the founders?
- [16:55]
David Tetton
Yeah, exactly. Founders next move. So our ambition is to be a hub for founders in transition, particularly at that point, that liminal point where they're moving between roles. And some of them we're going to invest in, some of them we're going to Co invest for them because founders tend to get good deal flow. Some of them will recruit for portcos because founders by definition are people who get things done and, and I want to make sure our portfolio companies have access to that talent.
- [17:21]
Joel Palo Thinkle
Yeah, I mean, even thinking about the tech stack, I mean, there's a lot of cool things that you can do with APIs and services and I don't see that available right now. But it would be really cool if you can have integrations to your cap table with Carta. A better data room. I mean, I don't know if you've seen amazing data rooms, David, but I mean I normally just see Dropbox and box.com and I think there's just better ways to kind of make it easy for, you know, found VCs to get your information. So I think there's still a lot of ways to innovate. I haven't seen amazing, you know, experiences yet, but, you know, you've probably seen more than me. But I think there's still opportunity in the tech stack for founders too.
- [17:59]
David Tetton
Absolutely.
- [18:02]
Joel Palo Thinkle
No, that's great. Yeah. So, you know, definitely check that out. You know, if anybody's looking to start a business, you know, we've got that. We'll post all those links there. So, you know, what I'm most excited about is hearing your journey into starting Versatile. Right. And I think what has been interesting too is you've already had this franchise of content and community, but, you know, it seems like you're also leveraging that to build your brand at Versatile. So walk me through the day that you decided to start Versatile and what was going on through your head and why you started the firm and tell us about, you know, that journey and where you are now.
- [18:38]
David Tetton
Well, from when I was young, people who know me have said that I was going to be a founder. You know, my parents were both founders. Right. Not in tech, but that's sort of the DNA of the family, not to mention my grandfather and other people. So both grandfathers in fact. So that's just my heritage. So it's not surprising, just for various reasons. I was excited about what we were building ff. I was excited about what we were building Hoff. But I saw an opportunity to build a very differentiated firm. And so Versatile is the culmination of skills that I've built, networks that I've built, resources that I've built over the course of my career. And I already, although we're a very young firm, we've already invested a lot more energy in our tech stack internally on our website than a lot of VCs that I think are much older and better developed. And that's because this business is more than just writing a check. Right. It's about how you add value to companies. It's about how you surround them with resources. People like Harry Stubbings have shown the media aspect of what we're doing. So I have to learn from all those models and do it, but in a way that leverages my particular focus and expertise. So I've made a point along the way of sharing a lot of my learnings and that's maybe just personality, but it's also because a lot of my responsibility as a manager has been figuring out what is the process that people around me are doing. Documenting it, iterating the process and making sure people are trained on it. I've developed various trainings that I did in house and process documents that I developed in house at my two prior firms. And I've sanitized those and published a lot of them because that's helpful to the broader community and speeds up cycle time for others. So that's the genesis of the material that I've shared. I just put in a link to a whole syllabus that I publish around the different aspects of building a firm.
- [20:34]
Joel Palo Thinkle
Yeah, that's really helpful. What, what should people think about as they're developing their thesis? So you know, if somebody's brand new starting a firm, and I know it's probably in your syllabus as well, but you know, what are some of the, what are some of the critical skills that maybe somebody should start building and kind of developing as they're kind of thinking about starting a firm?
- [20:55]
David Tetton
So I think that the first thing to understand is what is your unique competitive advantage? Right. Technologies, you understand the networks you're part of and focus on that. I see a lot of people who aren't really being honest with themselves about what is their edge and they're trying to position themselves as something that they're really not. Now they might grow up to be the next Sequoia. Great, Wonderful. But you don't get there without a smaller fund along the way. Right. And proving yourself along the way. LPs don't trust you usually with tons of money on day one. And so I encourage people to pick the low hanging fruit based on your particular competence. Do well there and then you can expand to be a generalist firm. I also think that founders of VC firms need to be well aware of how the industry's changed. Right. Obviously the bar for starting a VC fund has dropped the bar for building institutional caliber. VC fund has gone up, I would argue because we see this stacks of capital going to the large players, right? And then this long tail of small players and fewer firms in between. So if you want to graduate and be a multibillion dollar VC fund, you should work today to set up the infrastructure to get there. And most firms aren't doing that because they don't have that long term view.
- [22:13]
Joel Palo Thinkle
You know, it's really good advice. So, you know, with, with you, you and I spending time together the last couple months and just all of your research, what are some recent trends that you've been seeing with the emerging managers? I mean, one thing that I've seen and I've talked to you about this, right, Families are raising capital, so the LPs are also raising money. And then another big thing is, you know, with the pandemic, I don't know if you listened to Mac the VC's episode with Harry Stebbings, but it was really, really good. And you know, VCs are taking a lot of LP positions into funds. So we're seeing smaller minimums to get into funds. We're seeing tech platforms like Allocate allow retail investors to invest in funds. I think that allows a lot of opportunity for more people to become emerging managers. There's people that are using unique technology platforms to not have to always do the 1% GP commit. There's creative ways to get around that. So I think with everybody being virtual and then people having to break the rules because they don't have a million dollar GP commit, I've seen some of those things, but we'd love to hear any kind of high level trends or observations that you've observed from maybe our cohort or maybe just all the other people that you've been speaking with.
- [23:30]
David Tetton
Well, I'll highlight one trend that I think is dangerous, but yet a lot of people do it. So in the public markets, which are highly regulated, highly transparent, almost every academic or financial advisor will tell you, don't buy stocks direct. Put your money into a hedge fund or mutual fund. Let the professionals do it. You're an amateur, right? You're going to get taken advantage by the professionals. That's a fact. Yet there are lots and lots of retail investors out there who think they're smarter than the professionals and they go out and they put on their own trades, right? That's a fact. So let's look at venture, right? Historically, most people didn't invest directly in tech. They couldn't, right? There was a lot of friction. They wanted to though. So we see lots and lots of mechanisms like SV's which are making it easier for people to invest directly in tech companies instead of going through a fund. But the math of our industry is that the dispersion of returns is much greater in private markets than in public. So if you're investing in 10 SPVs, you're paying carry per deal, right? And you're going to lose money on eight of them, maybe make money on two. So the narrative is five for your total portfolio. You may lose money. You certainly pay fees on the winner. If you invest in those 10 through fund, then you pay less carry because there's netting of carry taking account of all the losses. So I would argue that the incentives for you to invest through a fund as opposed to an SBV are much greater in private markets than in public markets. And that's what I tell people ask me how do you think I should invest? Because I'm so excited about everything that's gone early stage tech. Who listens to me clearly lots of people don't because lots of people say I want to invest directly in tech. I don't care about the math. I think that I'm a top quartile investor and so I'm going to go do that. Right? So that's the reality of how investor psychology works. And so I do pound the table that I think people should be investing in funds. I think they're better off doing it. And it might sound like I'm preaching my own book, but I'm also, you know, when I've been part of putting together SPVs, which I've done at both of my two prior firms, I was very cautious because I knew if you advertise 10 SPVs to LPs, your LPs will lose money on some of them. Right? That's a fact. That's our industry. And I hate losing money for people. When people put money through fun, they're a lot less likely to lose money. So I think that's a better long term product to sell to LPs because you'll have a happier client.
- [25:55]
Joel Palo Thinkle
Well, you can solve both and make it a win win because people can invest in your fund and then the perk is co investment rights and then you can also sell the pro rata. So you can still let people double dip. And you know, look, another big trend that I've been seeing is people want to invest in funds for access because to your point, like you said earlier, you can't get into Any of these deals. Right. So we see that A16Z followed this really hot AIML company. So what like if I email them they're never going to respond? They'll respond if a 16 does or some other well known fund that has access. So I see a lot of LPs just investing in the fund. They do a nominal check to get in but if there's co investment rights they get best of both worlds. Right. They get their risk mitigated but with the 20 to 25, whatever you think the IRR is, but their risk is mitigated for a lower IRR. But they can also, if they have extra liquidity, they can also invest in those direct deals and hopefully get those hundreds of thousand x returns. So you really can make it a win win. Especially if you're a fund that has proven to show that you have really high quality proprietary deal flow.
- [27:02]
David Tetton
Yeah. And I've been the beneficiary of some later stage VCs who invest for that axis. And that's part of the service that I as an emerging manager am happy to provide is in my self interest. That's separate from the people who say well I want to double down and go direct on your best companies. So when people say that, my answer is how do I know what are the best companies? Right. If I priori new then I would put half my fund into one company. But that would be dumb of me, right? No, no VC in the world can tell you a priori which will be the winners out of their portfolio. There's always lots of unexpected ups and downs.
- [27:36]
Joel Palo Thinkle
Yeah, no, I totally agree and I think mitigating that, I think another trend that I've been seeing is LPs also want to invest in funds that are focused on a sector that maybe they don't have experience in and it's exciting to them. Right. So Web three there's a quantum fund that I've been building a relationship with Women's Health. That's another big trend, climate change. So a lot of times you're not going to. There's so many different sectors and there's so many exciting things in the candy store but you don't have the time to do the diligence and source and screen every single one of those deals. So why not just if you want to get exposure to climate change or I think you're doing a lot of B2B SaaS, FinTech, InsurTech, so you have a package in a product that kind of offers that and that helps people just scale their money Faster because they're mitigating their risk. Right. So I think that's a big pattern that I've been seeing from LPs too. They'll just do it to get access and to also learn about the sector. And I've done the same thing just to get into Web3. I've been looking at a couple of Web3 and crypto funds because I just don't have the time and diligent time to go to every single discord channel and get to know all those communities.
- [28:51]
David Tetton
Yeah, I think emerging managers should keep in mind LPs have lots of reasons to invest. So I've had LPs who invested because they wanted to build relationships in the early stage ecosystem. They wanted to get board seats. I had an investment banker invest because he was hoping that some of the portcos would go public and he would be chosen to be part of that or do an M and A and he would advise on that. There are people who just want to help their younger, their next generation get internships in tech because the next generation is so interested in tech. So you have to be aware of the goals of an LP investing which is not only about returns. In the majority of cases I'm talking about retail. At the institutional level, institutional are much more focused on just returns. But even they have their own agendas that you should be aware of.
- [29:37]
Joel Palo Thinkle
Yeah, that tees up a good follow up question. So, and you probably have a blog on this because you have a lot of really great premium content. But some of the people in this channel here are looking to start their own fund. So as they start thinking about building their LP pipeline, what are some pieces of advice that you'd have for them? Maybe for setting up the tech stack? You and I have talked about different CRMs and then I think a lot of it just comes down to what problem are they trying to solve. So some LPs, they get a lot of deal flow, there's a lot of noise, but maybe the problem is they just don't know about a certain sector. So this is an opportunity for them to learn about venture if they've mainly been in real estate their whole life. So for me it's kind of like let's profile these people and figure out what they care about. But you know, that's kind of how I would think about it. But I'd love, because you're kind of hot off the press building these relationships and pipelines and having a lot of conversations. So what advice would you have to someone who's just getting started, they got their fun form, they know they have a thesis. How should they go about meeting LPs and, you know, kind of engaging with them and converting them to LPs.
- [30:51]
David Tetton
So first off, I've compiled my recommendations at the link I just put in the chat, ted.comvcraise Second, my advice for anyone who is in a sales role, right, and when you're raising money, you are a salesperson, is figure out ways to make people come to you so you don't have to spend six months having coffees with 100 different people. Right? That's very inefficient. So what I've done in the past and I'm doing right now, there are three different organizations I'm part of that are organizing family office events in the next one to two quarters and I'm helping them out. I'm bringing in some speakers who are my LPs or other people with whom I have relationships. And then I'll be at those events, virtual or live. And that's a chance for LPs who know me to hopefully say good things about our organization and for me to meet people in an efficient and high credibility way. So I always look for them. It's one of the reasons why I write content and document my processes because it's recyclable and it creates inbound traffic from people who find me and are doing work, have interest in my areas of interest and I connect with them. We in VC are not going to be competing with Kim Kardashian for clicks, excluding Harry Stubbings. But in my little niche, right, I have, I think, pretty good content and people find me online because of that. And those are the people I want to connect with.
- [32:13]
Joel Palo Thinkle
Yeah. You know, it reminds me of a piece of advice. I think it was in one of our sessions there was a family office that said, stay on top, stay on top of people's news feeds. There's an emerging manager that just got an LP allocation from a tier one fund because they have just very unique content on the sector that they're focused on. So it's just the law of attraction. One thing that I really enjoyed, David, was that conversation that you and I had about LP swaps. And then you brought up that story about Mark Schuster. So maybe you can tell me a little, maybe you can share that with the audience about the confidence that was it. Mark Schuster, he had his LP event. So a lot of times people are super protective about their LPs, but maybe you can share. I don't know if there's an article about that, but I wanted to write about it. But maybe you can tell the audience about that story and how, how he handles his LP community building.
- [33:06]
David Tetton
Sure. So this is public knowledge. So Mark is well known, well regarded VC and he has an annual conference where he invites all of his LPs and he also invites his VC buddies. And so his goal there he said, is this a problem? Right. I am exposing to basically my competitors when it comes to capital raising to my best LPs. Is that smart? Why am I doing it? And the answer is because it makes all of the other VCs grateful, right? That they're in the room. They're going to be nice to him when it comes to fighting for room on a cap table because he's helping giving them access. All the LPs are going to reference check Mark and sure, they might look at putting some money in someone else, but in the course of doing that they're going to say so what do you think about Mark's fund? Right. And they'll hopefully say good things. So his calculation is, look, no one's, I'm not a monopoly provider, right? There are lots of funds out there. LPs can allocate to all of them. Any competent LP has a choice of funds, right. I have a good product, I have a fund with a good track record and so I'm not hesitant to introduce my LPs because I'm confident that after meeting a bunch of other LPs they'll give me money too. Right? So that's I think a really healthy, self confident attitude. And it's easier of course to do that when you're on your fund for whatever and you've had good returns. But I judiciously make intros to my LPs or service them publicly, for example by organizing events for the same reason. Right. Like I'm confident in my product that my LP have bought and I think I'm just being sort of foolish if I assume that my LPs are so ignorant they're not aware there are other VC funds in the world that exist. That said, you of course have to respect privacy of LPs. You have to not annoy them. And you introductions are a very scarce resource to high value people. So you, I and other, I think managers in my position are going to be protective of making intros. Sure.
- [35:05]
Joel Palo Thinkle
Yeah, that's super helpful. Switching gears going back because we covered a lot of great topics on the emerging manager side going back to career building and development. One thing that I see as A challenge is, number one, it's hard to get into venture capital, but what's even harder is to stay in venture capital. So what could people do when they finally land a role in venture capital? How can they stay in that role for multiple years like you did? What are some tips from a professional standpoint that you'd like to pass on?
- [35:35]
David Tetton
Yeah, so this is an interesting question. If you come in at the partner level, as I did, then you just have to keep good relationships with your partners and do a good job, right? It's very much like a marriage because you have to be tolerant of differences, of errors, of problems. You have to change what you're working on based on what your partners are doing and also not be a pushover. Right. And sometimes you might have to raise a concern about one of your partners where you feel like they're not really carrying their weight. So there's a lot of interesting dynamics around this. Ironically, in business school, 100% of my cases were about CEO situations. But in VC funds, there's often no CEO per se. There are partners, and they're spending time, sometimes a lot of time, managing the partner dynamic. If you come into VC as a junior person, there's a different sort of dynamic. So I, as a manager of a firm, I want my junior person to think about the firm as a whole. What can I do to grow the firm? And I want them to think holistically. Just like if I'm running a tech startup software company, I don't want a new hire thinking, how can I, you know, make the widgets go ship out the door faster. They should be thinking holistically, how can I help the firm? And they should be willing to do whatever it takes to move the firm forward. Here's the problem. If you go, you get hired as an analyst and you rise up and get promoted, but you don't see a path to partner. You want to go, leave the firm. So what gives you the opportunity to launch a new fund or to get hired as a partner by some other firm? It's your investment track record. It's not. Did you help with the website? Did you add value to the Portcoast? It's 90%. Did you write checks that produced a good return? And is that an attributable track record? So there's a conflict of interest here, right? Because I, as a firm manager, want the person to not think just about writing checks. I want them to think about all the other stuff you have to do to grow the firm. But the individual has an incentive to only think, how do I attach my name to a deal that wins so I can say I source such and such. Right. So how do you address that? Well, for example, First Round Capital, a number of years ago they promoted their head of platform to partner and they said he's going to continue, continue as head of platform. Right. His job is not a check writing role, but he's so value added that he deserves the title of partner. We're happy to give him title partner and I assume the economics of a partner. And that was, I'm sure, done in part because they realized that to retain him they had to compensate him competitively. And again, this is public knowledge what I'm sharing. So that's certainly how I view the role of people in the firm who may have roles that are partially or entirely non investing. And then when I'm recruiting, I don't just look for people who wrote checks because that's not the only skill you need, contrary to popular belief. Right. If you want to grow a franchise, you have to think about all the other facets of the business. By analogy, you can't grow a software company by just hiring software developers who only know software and only want to do software. At some point you have to hire customer service and sales and marketing and all those other functions. Right. If you want to grow a substantive organization. Yeah.
- [38:46]
Joel Palo Thinkle
And when you were developing talent, you know, in your past roles, what were some things that you saw that stood out as just really good qualities as maybe an analyst or an associate, maybe on the tactical side and then maybe even on the emotional intelligence side, you know, were they bringing in, you know, 10, 15 new deals a week, you know, anything that you can quantify or qualify. I'm sure when you're developing the talent, maybe you had some type of developmental, you know, goal system for those, for those new analysts or associates just trying to tee up some, some things for these people to think about when they, when they join the firm and what should, but you know, what micro or macro goals they should be thinking about.
- [39:28]
David Tetton
So there's a set of generic skills that any early career person should have. And I actually just published my second book where I compile, it's called To University and beyond. Put your career in high gear. So I'm not going to talk about that because that's generic. But things like work hard, take good notes, be responsible, don't ever, ever let people down, keep your promises. Let's just talk more narrowly about vc, right? How do you advance in your career in vc? So first off is A certain level of tech savvy is super important. You want someone who says, sure, I'll configure the CRM, right? I'll figure out a way to use some no code platform to automate the integration of our social media presence with our CRM with our mailing list, right. In whatever way makes sense. So that's almost a job requirement for any entry level job in tech. And if it's not a job requirement 100% of the time, it will be another year or two because it's just part. It's like writing emails. You have to be email savvy, obviously. You have to be relatively literate in some of those aspects of any modern platform. Second is I encourage people to figure out some domain expertise. It could be geography, it could be some interest group like people specialize in investing in women founders or African American founders. The best of all possible worlds is to pick a sector like Bitcoin 2013 and say, I'm going to be all about Bitcoin and for that sector to go become really hot. Right? That's how you become a partner at a very young age. Of course you're taking a big risk there because Bitcoin could have just flopped many times, it could still flop. And that's true for any sort of bet you make on a particular sector. I very publicly have taken bets on certain areas of fintech and I'm doing that because I'm super confident, right? Like I don't see any state of the world where I am not right in my publicly stated assertions about how I think the industry is going. Maybe I'm not being bold enough when I say I don't see any real state of the world where this is not the future of the industry. But I think that that's a good model, right? And I have other things I haven't published, other areas that are of interest as well. So lastly, I would say that this industry is tiny at the level of the investors and it's small at the level of the tech founders, right? So every single person you meet, there are meaningful odds you will run into them again in a Slack group at a conference, whatever, and you can end up on a captail with them, you can end up working the same company with them. So really important to keep in mind this is very much a long term game.
- [42:22]
Joel Palo Thinkle
Yeah, no, that's really helpful advice. Well, we got about 15 minutes. I'll just leave a little bit of room if anybody has any questions. So anybody in the audience, you guys have any questions? For David. And while they're thinking of a question, maybe you can share a piece of life advice from a mentor that you've carried with you, maybe a mentor or family member that you'd like to share with us.
- [42:52]
David Tetton
I'll share one of my most influential books. I'm a huge fan of Edward Tufte, who's a professor at Yale, who is the world's leading expert on visualization of quantitative data. I channel him almost every day, and so I encourage everyone to read all of his books and also visit his sculpture garden in Connecticut, if you can. I'd say one of the most impactful pieces of advice I got was from a mentor who said to me, public speaking is a really useful skill. And it is unlike almost every other skill in that you can't develop it without a large group. If you want to get good at tennis or chess, you only need one or maybe even zero people. But you can't be good at public speaking without large numbers of people sitting in front of you. And so he said, the logical conclusion from that is anytime you have a chance to present in public, for example, in a classroom setting, you should do it because you will build up that skill by being on a stage in front of lots of people who are examining everything you do. And so someone said that to me, I don't even remember who, when I was in my 20s and I was always a person in school who volunteered to present the findings of my study group. And that's definitely been a useful skill to me because I made a point of sharpening that saw whenever I had an opportunity to do so.
- [44:13]
Joel Palo Thinkle
Yeah, that's great. Well, anybody else have any questions for David? Feel free to yell it out.
- [44:19]
C
Just a quick question on my end, David and I know that you had a session. This is John. At one point, you shared with us some good advice on the decks that we review from co founders. What is the most important? Like three aspects of the deck that you would look do a deep dive and make sure that they have it solid instead of, you know, just a wishy washy situation or something that's too ambiguous.
- [44:54]
David Tetton
So I have a checklist of what I recommend you put in your deck, along with recommendations on service providers who can help you. So I'd say the first thing is the team. You want to make sure that you have the right team in place. And secondly is the product right. So more important than the the deck is when I go to your site, your app, whatever, does it work? And you'd be surprised how often I Go to the site and it's just clunky, it's not there. They don't even have a website up. And so I would focus on that above all else.
- [45:32]
C
Okay. And when it comes to structuring the deal, whether you're going to use a equity round or a safe, opposed safe. Which one do you lean towards mostly?
- [45:50]
David Tetton
So I generally have a preference for priced rounds. I know safes are super popular, but the problem that founders, I think, don't fully realize is that when you do that, you are creating the risk of a pile of debt that makes it harder for you to fund the company over time. And I've certainly seen companies that have been hurt because they had this pile of debt that had to convert in the next round and they couldn't get someone to fund them. Founders often say, well, I don't know the right valuation. I'll punt on the valuation conversation. But the problem with that is at some point you got to bite the bullet and acknowledge valuation, whatever it is. And, and that's healthier because then you have a real cap table with equity participants and a board seat and you're setting yourself up for having a clean corporate ownership structure which will make you more attractive to later investors.
- [46:52]
C
But wouldn't that risk be offset by making sure that they have vesting schedules? And I know one year cliffs, and I would think that there's a way to prevent a challenge while you're structuring a post safe agreement.
- [47:14]
David Tetton
So at the level of employees, sure, you can mitigate those issues through appropriate vesting, but that doesn't really apply for investors. Right. Because there's no investor.
- [47:28]
C
Yes.
- [47:29]
David Tetton
Okay.
- [47:29]
C
So investors are going to be still at high risk of having the founders go overboard and not having the appropriate fund, appropriate percentage for dilution. Is that correct?
- [47:47]
David Tetton
Yeah. So, you know, one of the things I look for as an investor is making sure the cap table has appropriate dilution. Sorry, appropriate vesting for the founders. Yes, over time. Right. Because I want to retain the founders.
- [48:00]
C
Yes.
- [48:00]
David Tetton
Okay.
- [48:01]
C
All right, thank you very much, David. Appreciate it.
- [48:05]
D
Hi, David, this is Anu. One question I had was, you know, in today's times, even founders right out of the gate have astronomical valuations. So how do you introduce a grain of reality, especially if you're not a, you know, you're not a lead investor, you're not the one leading the round. What are ways and tips and tricks in your opinion of managing that, the valuation?
- [48:29]
David Tetton
So I can't emphasize enough that in my experience the crazy valuation phenomenon happens, but it happens to a subset of all the startups out there. I certainly know startups out there that are having lots of problems finding investors and they have potential, right? They're investible, they just don't come out of central casting. And there's this dramatic difference in valuation from the central casting startups and everyone else. Let's say you're talking with a YC company that has a reputable lead investor and they're getting a 50 million valuation on demo day for their three month old startup, right? So good for them that they got that valuation. Although they should be aware of their cost raising at that high valuation. So you know, I know investors who will negotiate or try to negotiate warrants or some other side deal. There is a cost to that because it will definitely impact your reputation in the ecosystem that you're an investor who tries to get side deals. Because other investors will say, hey, why did you get the deal? What makes you better than me that you got something preferential? And also it may reduce future deal flow from the founders. By the point at which a lead investor set a valuation, you have very little leverage. So the point at which you have leverage is when the company doesn't have a lead investor and they're looking around. And if you can make an argument to them, first of all, if you're the only investor, you're the only deal in town and that happens a lot more than people think, right? That you are the only person providing term sheet and then you hopefully can say I am so value added in your space that my term sheet makes sense. And yeah, I know someone else might offer higher valuation but don't take it. There's plenty of examples of people took a lower valuation from an investor because they said that investor is value added, well regarded. And I'm not going to take a risk of having some random person who's trying to bid up on my cap table.
- [50:22]
D
Great, thanks.
- [50:24]
Joel Palo Thinkle
All right. And if you got a second, David, it looks like we have one final question here. John, you want to shout out your question?
- [50:32]
E
Yeah, thanks Joel. Hi David. This is great. Really appreciate it. I have an angel list syndicate and I'm brand new to venture and Joel's been helping me a lot build out my network and I've invested in some VC funds. But my issue is that I have kind of a general syndicate. I'm working on my first deal. It's kind of tough but my real question I guess is I want to eventually build out the syndicate successfully and then hopefully have that give me a chance at starting my own fund down the road. So just what advice would you have for someone like me?
- [51:10]
David Tetton
So the good news is, if you get into the VC business by running a syndicate, your track record is public. You own your track record, it's easy for people to audit it. So it really comes down to just having good returns and to marketing it. I think one challenge you'll have is my experience on angellist syndicates. Is that because it is so easy to look for deals, someone who goes on says, okay, I've got 100k, I'm willing to put it into an early stage startup. What do I do? They very strongly bias towards the brand names that they see. So you can't just go to angellist and the money comes to you. Right. You often have to go hustle and look for it. And of course you should make sure that people are registering through the dedicated AngelList affiliate links so you get credit that they are your LP and not just a general LP. And the advantage of AngelList is they certainly take care of a lot of back office work for you and they will make it easier for you to hopefully raise further syndicates over time, maybe even a fund, because you effectively have an audited track record. Not technically, but effectively. Whereas if you say we're a principal at a VC fund and then left to start your own firm, you're going to run into issues around attribution of your track record, is it audited, et cetera. And so that's hopefully helpful to you.
- [52:31]
E
Thank you so much.
- [52:34]
David Tetton
Great.
- [52:35]
Joel Palo Thinkle
Well, hey David, thank you so much. I really appreciate your generosity with your time and hope to catch up soon, you know, at one of these events in New York. And it was good seeing you the last couple weeks as well.
- [52:46]
David Tetton
Definitely look forward to seeing you soon. I am emerging from my home office as appropriate, so take care. And anyone who wants to reach out, feel free to contact me via my website. Thank you for your time. All right, take care.
- [52:59]
Joel Palo Thinkle
Have a good day everyone.