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Investing in the Future of Work: A New Path for Venture Capital | Virginie Raphaël
01:06:30
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- [00:04]
A
When I got into venture, I joined a very traditional fund. We raised three funds over the span of four, five, six years. And so to me, I started asking the question, well, if I invest really, really early in teams that sometimes don't even have a product and we want to solve some deeply complicated issues like affordable childcare, it may not happen in 10 years. And so I really wanted to give myself the opportunity to have a longer term horizon on my investments. Why isn't there more venture funds that are structured as open ended funds? The misalignment that starts existing when you're a 10 year fund is you get toward the fund life end and you push your companies to sell even if they're not ready for it. And I wanted to just not have my founders be subject to my own fundraising cycles because I thought that could lead to much stronger alignment and much better results.
- [00:56]
B
Welcome to the Work for Humans podcast. This is Dart Lindsley. On the show, we've been exploring how large systems change. And one of the things that we've learned is that big ideas are spread by amplifiers. Universities amplify what they teach, consulting firms amplify whatever they recommend, and money amplifies the ideas that people choose to back. If you really want to understand how any system, including work, changes its scale, you have to follow the money and see which ideas it equips to grow. Or by ignoring them, let's wither away. My guest today is Virginie Raphael, founder of Full Circle Venture Capital. Virginie invests at the very earliest stage, often before a product exists, backing founders who want to shape a more equitable, sustainable and prosperous workforce. What makes her work unusual is not only what she invests in, but how she structures her fund. Full Circle is a perpetual fund. We'll learn what that is with a different incentive model designed to align founders and funders over a much longer horizon than traditional ventures. In our conversation, Virginie and I talk about how venture capital aligns, amplifies ideas, how networks of trust shape who gets funded, and why. She believes early stage investing should focus on long term outcomes rather than the more common short term fund cycles. We also explore the current zeitgeist of work, the impact of AI on innovation, and why she sees opportunity in places and sectors that many investors overlook. All right, please subscribe wherever you listen to podcasts so you don't miss other episodes like this one. And now I bring you Virginie Raphael. Virginie Raphael, welcome to Work for Humans.
- [02:58]
A
Thank you so much for having me. I'm excited for this conversation.
- [03:02]
B
So I'll tell you the background of why I really wanted to have you on the show. We've been doing a series on large systems change, which is how do you big things change in the world and how do we help them to do that? Well, as a result of that, I've gotten interested in those parts of the ecosystem that amplify ideas. So for instance, how do universities amplify ideas or resist them? How do consultants, I think management consultants in particular in our world are incredibly important in terms of how they identify emerging ideas. They amplify those ideas. Well, you work in venture capital and venture capital, I believe, is one of those amplifiers, which is how we are equipped to enact ideas and is incredibly determined by what services and equipment are available for us to do it. And so that's what I wanted to talk to you about today.
- [04:04]
A
I think we have a good intersection here in terms of how venture capitalists themselves amplify what they're doing, what they want to see, what they want to invest more in. And the two of them together give you a really interesting combination in terms of how we amplify what we want to see, but most importantly how we drive more and more interest in what we're doing in those products and all that stuff.
- [04:31]
B
And one of the ways I was thinking about it is if you really want to know what's going on, follow the money. And the money is honestly so much the source of amplification. So let's talk about Full Circle and what it is, just on the most basic level. And by the way, there's a lot of questions that I'm going to ask today that are incredibly basic because I don't understand how venture works.
- [04:53]
A
You never do. But I'm going to throw you in for even more of a loop because Full Circle is not your traditional cookie cutter, plain vanilla venture fund. So let's start a step before that and say generally speaking, venture funds are capital vehicles. 10 years in life they have investors who invest in that fund. The manager of that fund then on behalf of those investors finds opportunity to invest in companies that generally speaking, are around a theme or thesis, don't love the word. But at a certain stage there's a certain strategy that the investors have signed up for, if you will, and then that fund goes on and usually it's a 10 year fund, although as we know, companies do tend to remain private for quite some time now. Some companies might be ready to exit, be acquired or become public within that window. Many others might not. So that's the traditional venture concept. And structure.
- [06:01]
B
So let me ask some questions. Just about essentially the data model here, which is there's a fund that's set up, the fund has a manager, could have a management team, I suppose, but has a manager. That fund attracts investors and that fund identifies investment opportunities, venture opportunities. In what order? In other words, do you stand up a fund with investors and then find opportunities to invest in, or do you find opportunities to invest in and set up the fund?
- [06:35]
A
So that gets right away to the branding and amplification. Right. So generally speaking, no investor in their right mind would look at a complete random manager that they've never heard of before for the longest time. When you start the fundraising process, unless you're independently rich, if you're actually raising a fund, it is because you want to get leverage from those investors. You want to be able to invest more than what your personal balance sheet enables you to do. And so you need to put out there something that is compelling in terms of this is who I am, this is my experience, this is the reason why I think I will be able to find, evaluate those opportunities and make good choices, that is, that will be very successful and provide a return on your money that is multiples of what you put into the fund. The magic word in the industry is track record. If you have not spent the past 10, 20 years at a venture fund making investments, if you are not a very prolific angel investor and you've been able to invest your own money into some brand name companies, the investors don't have a lot to go off of to underwrite your fund and decide whether they want to invest money in your fund or not. So that is the reason why often either you make very small investments just to demonstrate what thesis you want to follow, what type of access you have, what type of founder circles you find yourself in. Often in the industry now, people have newsletters that they can, by the way, sell to the founders that they then encounter as a way to feature those founders and find customers for them. It's a bit of a. Everything works together. Eventually there's a bit of a flywheel that sets off initially, initially when you start the fund, it's hard because you don't really have the money and people don't cut you a complete blank check. So you start making teeny tiny investments and then the things start.
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B
I see you start a sort of a flywheel. So most funds are investing in more than one venture.
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A
Yes.
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B
And so essentially you're establishing a portfolio of ventures that go into that fund.
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A
Correct.
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B
Most funds have more than One investor.
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A
Correct.
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B
Most managers have more than one fund.
- [08:58]
A
Yes, usually if you're successful, then yes.
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B
If you're successful, you have more than one fund. What is the basis by which managers are paid? Because it could be like a wealth advisor where it's funds under management and what's the time horizon or maturity of how the manager is incented.
- [09:21]
A
Again, traditional venture, which is not the way that full circle is structured. There's two ways that managers get compensated. One is very much that concept that you just referred to as assets under management. There is a management fee typically set around 2%, but typically on a percentage basis of total assets under management that the manager receives every year, regardless of performance. That is just managing the investor's money. In addition to that there is what's called carried interest, which is profit sharing. So if a company exits, does really well, we've made an investment, which means we own equity into that company, a percentage ownership of that company, whatever that percentage is. So we get a piece of that, we get a piece of the exit proceeds, those proceeds get distributed back. So we pay the principal back to our investors and then anything above that principal back is split, typically 20% to the manager, 80% to the investors in the fund, obviously pro rata based on their position in the fund. So that profit share of 20% is typically how managers get compensated.
- [10:34]
B
Okay, there's a couple more relationships here. Many ventures have more than one fund investing in them. Yes, this is a many to many relationship which is that there are are funds that have many ventures and there are ventures that have many funds. And I can see this sort of network effect or amplification effect which is oh, that venture fund invested in this. So that's actually a sales point on why I should invest in this. Or you talked about founder populations. Here are the kinds of founders I work with. But there's also your investor population which may be more confidential. But I can imagine being able to say, well look, so and so is invested in my fund and that's argues that my fund is good. So there's all this reputational action that's going on 100%.
- [11:26]
A
So consider that investors in my fund might also invest in other funds. It is a highly, highly people business through and through. Reputation and credibility is everything in this business. So if one of my investors asks me for recommendations as to other managers they should consider for investment, I am likely to recommend funds that I've co invested with before. And so then that investor is invested in both my fund and that other fund. But if we're friendly and know each other and can vouch for each other. That also means that when a founder comes to me and says I need 2 million, full circle is investing 300, my role, part of my value add. Another key term in the industry is to be able to make introductions to others in the industry who might also want to look at that company. And so you need to constantly think about the concentration of capital that happens. When I co invest with people. There are definitely some people I co invest with more frequently than others who then introduce investors for their fund to each other. More and more you can see all of the circles in a way to make a name for yourself and influence and amplify to be very network.
- [12:44]
B
Which by the way, you're a broker, you're a classic broker. You're bringing people together and how much people trust you and your reputation is the superpower of a broker. We had David Obstfeld, if you ever want to listen to a great episode of Work for Humans, David Obstfeld came on the show and talked about social networks. It was fascinating. But I can also see everybody's also spreading out risk, which is you don't bet the farm on anything. Most of the time you're spreading out across multiple funds, multiple ventures. And there's a lot of trust.
- [13:19]
A
Well, that's the smart thing to do, right? But whether that happens in reality or not, especially in this crazy AI world that we're in, the concentration of capital into so few companies, into so few funds, right. You can already see the train wreck. But historically, those like network effects and that trust and that credibility meant that it was the people you went to school with, it was people in your geo. Pre pandemic, there was no such thing as investing over zoom. All the founders came to office for first time meetings or second or third, there was a lot more friction in terms of who got access to it. So there's a really interesting opening of opportunities that has happened over the past, say 10 years that was generally not there. But it's hard to continue to build against very entrenched established networks of people who already trust each other and who have done business with each other for the past 20, 30 years. So it's definitely harder for people who are underrepresented in that industry.
- [14:24]
B
And by the way, it's your college buddy who's going to absolutely bankrupt you. Okay? Now in your descriptions of full circle on your website and other places, you have a long list of modifiers that say what kind of a fund you are. And all of them make sense to people in your business, but they don't make sense to me. So let's talk about full circle. And along the way there's going to be a compare and contrast because you're going to say we're this, most people aren't whatever.
- [14:58]
A
So full circle, very early stage fund, very outcome driven. So here's the first, this is what we are, this is what other people are not, generally speaking, either. Funds are very, very general, very opportunistic. They invest in enterprise SaaS or B2B SaaS. So you're like, okay, can be any category, any industry, anything. Just a business model, right?
- [15:22]
B
Okay, so those broad ones are like, we see an ROI over here, we see a potential upside.
- [15:28]
A
Could be anything or they are very specialized fund, a healthcare fund, a supply chain fund, a food fund, a whatever fund. Full circle is a little different in the sense that we're very outcome driven. So we say we think diversification is good. The outcome we want to drive is a much more flexible, fluid workforce. We want people to come in and out. We want people to gain access to employment in all sorts of different ways. And we want to make sure people don't drop out of the workforce unless they want to. They want to start their own business, that's great, we want to enable that too. But fundamentally, we want everyone to have the mode of work that suits them best at any point in time on their journey. And so to me, it's not any specific category. Yes, some of it is hr, tech people, tech, new ways of recruiting, new ways of learning. But it can be healthcare, right? Because I don't think a country like the US in 2025, we should have a situation where people don't quit because they're terrified of losing their healthcare benefit. They should just be able to procure healthcare in a very different way and be able to work in whatever way suits them best and unlocks their potential the most. I don't believe that someone who becomes a parent or a caregiver to an older adult should have to quit a job they already have in love and want to continue doing. That is not a choice. And so investors try to put us in a neat little box and category called future of work. And that to me doesn't quite feel right because we are broader than this, or at least we're future of work as defined as broadly as possible to include all of those different categories, which to me go into making a much more holistic, much more human centric approach to building what the future work can look like. So that's the first difference.
- [17:17]
B
Okay, I'm going to read the way that's written on. I believe it's on your website, but I think it might be on your LinkedIn. Full Circle invests in Pre seed founders who are building companies powering the structural changes required to create a more equitable, sustainable and prosperous workforce. And then it says up to $250,000 into initial round ranging from 500 to 2 million.
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A
Okay, precede it did not exist five years ago. Pre seed is very early stage, so people define it differently in different places. To us it means the founder might be pre product. They have an idea, they have a brilliant team, they have a problem space that they're looking to bring a solution to, but they don't quite know what that solution is quite yet. These days again with AI it's not all that complicated to build a little bit of a product and a prototype. And so it's the rare case over the past six to 12 months where a company has come to me truly pre product. But Pre seed is about as early as it gets.
- [18:23]
B
There's an assumption there which is that they're going to have a product. In other words, that down the road this is a company that can have a product as opposed to, for instance, this is a company that's going to provide services.
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A
Correct. Tech driven will have a product, usually software. There can be a little bit of a layer of service delivery, especially in health care, but usually it's tech enabled.
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B
Okay, why?
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A
Scalability margins. Generally speaking, the math on venture fund. Remember we were talking about that in alignment of incentives. Right. So the way that companies are funded in the venture side of things is they take equity, they sell a portion of the company to funds like mine who want a piece of it in exchange for being risky enough and tolerating that risk early on. Where you don't have a product but you need capital to start building the product and someone is willing to put that capital down for you, that translates into an equity ownership into the company. Over time that equity ownership gets diluted because additional investors come into the company for future funding needs. And so if at exit you own a very tiny percentage of a company, like if they exit at a billion, 10 billion more, even a percentage of that, a sub percentage of that can be very, very meaningful from a multiple standpoint. The assumption there is the fastest that can happen with the least amount of capital possible, the best for me. And so if most funds like I was mentioning earlier, are structured as 10 year funds by being a service driven company Usually you just don't get to numbers that are that big because you can't roll it out as fast as a software product.
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B
So you say up to 250k into initial rounds ranging from 500 to 2 million. And so one of the things that that means is that you're not going to invest in a company that doesn't have another investor.
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A
That's right. Eventually I might come in first.
- [20:19]
B
You might come in first. Okay.
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A
I decided to do that before any other investor has committed and take the risk that no one ever does in this particular round. But generally speaking, yes, I co invest with others.
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B
The next sentence is full circle. Is a perpetual fund.
- [20:35]
A
Yes.
- [20:36]
B
Leveraging a unique LP shareholder model to provide better alignment between funders and founders. Okay, let's start with perpetual fund. It's not a ten year fund.
- [20:46]
A
Nope. When fundamental I got into venture, I joined a very traditional fund. We raised three funds over the span of four, five, six years, something like that. And so to me I started asking the question, well wait a minute, if I invest really, really early in teams that sometimes don't even have a product and we want to solve some deeply structural, deeply complicated issues like affordable childcare, it may not happen in 10 years. And so I really wanted to give myself the opportunity to have a longer term horizon on my investments. And there are some funds who are just limited in terms of if you see massive potential in a company, but you're already in year four or five of your ten year fund, you sort of know that that company won't have enough time to fully create the value that they would need to create for us to benefit from a full exit before the fund comes at the end of its life. And so I became really intrigued by this concept of why isn't there more venture funds that are structured as open ended funds? We see that in hedge funds. We see obviously very liquid assets. Right. Ventures a lot less liquid than that. I get that. But I really started thinking about of all the features that tend to be unquestioned in venture, of course you're going to have a 10 year fund and of course the compensation structure is going to be that 2% management fee, 20% carry, which we refer to as 2 in 20. I simply ask the question, well, why not? Why not a different structure and is there appetite in the market for a different flavor of a venture fund and fundamentally different product and different ways of backing companies at that early stage? And to me the answer was yes and started with let's open up the fund life. It is true that companies are remaining private longer. And it is also true that you can drive much stronger alignment by attracting founders who know that once you're in, you're in. To me, the misalignment that starts existing when you're a 10 year fund is you get toward the fund life end and you push your companies to sell even if they're not ready for it. You push fire sells because your timeline is just not exactly aligned with the company's timeline or you're raising another fund for whatever. Insert the reason. And I wanted to just not have my founders be subject to my own fundraising cycles because I thought that could lead to much stronger alignment and much better results.
- [23:14]
B
We're really right getting to the crux of this very quickly, which is full circle invests in ventures that can improve the world, that are going to change the world in a way. And some of those changes might require paradigm shifts. So I would imagine you try to identify shifts that are happening. That's got great benefits because there's blue ocean opportunities out there where you might find a market that doesn't even exist yet by starting early with world changing opportunities. So that's the upside. But there's more risk in it because you are working on something for which the demand may not yet be obvious.
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A
Correct.
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B
Everybody else is investing in horses, you're going to invest in cars. And the market for cars doesn't exist yet. So you need a little more time on the end. I guess my first question is if a company starts doing well at year five, is there the equivalent of a dividend for investors or is everybody waiting until some exit?
- [24:25]
A
It's rare in venture, usually you wait until an exit. That said, with that open ended nature that we have, that gives us a lot more flexibility again to not push companies towards an exit any faster than you otherwise would want them to. And so I do think that opens up that opportunity of cash flow generating companies remaining in a fund.
- [24:44]
B
So initially I imagined your investors being people, but they might be institutional. Is it a mix?
- [24:53]
A
It's a mix which is typical for our initial fund. There are people who had worked with me in the past who just wanted to be part of what I was going to do next. And that's wonderful. But yes, there's also institutions, predominantly endowment, who deploy programmatically, who really saw the benefit of our structure in terms of knowing that I was going to call capital on a set cadence over a set period of time, but that they were going to start seeing returns come back on a regular basis and not have to Play the same game of picking a fund but not the next one. There's a lot of just risk that is additional if you have to pick what's called the vintage of the fund, which is the year in which they make their first investment. In our case, we exist in perpetuity. And so if you back me day one, you will have a piece of the fund perpetually. That was a core, core, core component and reason why I wanted to have a different structure. For me, it makes no sense. If someone puts you in business, you raise a first fund, you have an investor, typically family offices, high net worth individuals, you have a family office that backs you in fund one. By the time you raise fund three, call it, the fund is bigger, bigger, more institutional investors, usually that means that you have to invest a bigger ticket size into those funds and that those family offices just can't write that big of a check, then they don't get a piece of the upside. And so it makes no sense for me that they put you in business without them. To be very clear, there would be no Fund 3 and yet they don't have a piece of that upside. To me, that was not right, but also not a good business to run. And so I wanted to find a way to reward my early backers. And yet, look, if they don't ever recommit capital to the fund, they will be diluted over time for sure. And yet they continue to maintain a piece of the fund and be rewarded for having taken the risk early on, as an early investor should and would. So that's the key.
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B
What I'm exploring with this is I can imagine that there can be incentives to invest in the status quo, especially in the B2B world where it's a product that's B2B and the B that we're selling to, we're going to have a caricature of who the second B company is and what they're willing to buy and what they're not willing to buy. And we're going to say all they want is profit. And there's all these different things. And if you had individual investors, not many individual investors, well, you'd have to be pretty wealthy to give away a big chunk of money for 15 years or young. But if you're a family, okay, then it's for the family and the family is enduring. And if you're an institution, okay, because the institution's enduring and they have a longer time horizon. But there's at its core, your investors are interested in returns, but not returns solely for the most part, which is that they are interested in returns and they want to make the world better.
- [27:58]
A
Yeah, that's correct. And those two things can absolutely coexist.
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B
Yes, they can.
- [28:03]
A
From day one we were very clear on that. We are a market rate return fund, meaning in venture generally speaking, people look for three times net their money back 30% IR. The way that you drive that type of return to me is by investing by definition in massively impactful companies. And that can mean whatever it can mean to you. Every single investment I make have an impact, negative or positive. To me that impact needs to be that outcome that I want to drive, which is have we created a structural change in the workforce? Have we put someone into a job that they otherwise wouldn't have known existed? Have we prevented a caregiver from leaving the workforce? So very simple, right? It's sort of like this is the type of companies that I want to build and whether they come out of Utah or the bay or New York or anywhere else, and whether they're built by two men and a woman, three women, I don't care. I just want to see a very outcome driven founder who has such a deep experience of the issue they're looking to solve that they will be the best solving it, right? So we talk a lot about founder market fit and I spend a lot of time getting to know the founders in which I'm considering an investment because it's a very long term type of commitment that you're making if you start building a company. And it's by no means a get rich fast type of plan. And so of all the things that those people can typically do with their time and talent and a lot of times don't include building a startup. And so why I spend a ton of time around the why are they doing this and why are they the one to succeed in it? And why is now the right time?
- [29:48]
B
There's another word in your description that I don't understand. Unique LP shareholder model. What does LP mean in that?
- [29:57]
A
Limited partners, they're the investors in the fund. So I am the general partner gp, they're the limited partners in the fund and shareholder model as in. So in my case this goes back to the unique model. Not only is a fund perpetual, but it's a whole co strategy. If you think of full circle in itself as a company that is structured very much like the founders in which I invest are structured, it means that our business happens to be investing in early stage companies, but I also have shareholders. So you would invest in Apple you can also invest in Full Circle. And then once you have invested, so as we said, you're in the fund in perpetuity. Every so often we reopen the fund for additional capital because we raised an initial pool of capital from initial 28 shareholders. Eventually we'll have made close to 40 investments. We'll have deployed all the capital that those initial shareholders will have committed to us. And so if we want to remain in business, we'll gain additional capital to deploy. At that point in time, we'll see how the portfolio is performing. We'll have made 40 investments and we'll say, okay, what are those 40 investments on a combined basis, what are they worth? We will have a new price at which you can enter the company. At this stage, again, it's not public market, but if you want to buy a piece of Apple stock today, you can. There's a value of the stock and you can decide to buy it or not. Very similar here. A new set of investors will say, okay, I'm interested in joining the group of shareholders that are already invested in Full Circle. Price per unit gets me X amount for a $1 million investment, I will now be a shareholder in the fund. And then we'll close the fund again and not have 28 investors, but 35 now who each provide a share into the returns of the fund and so on and so forth. So that's the uniqueness of the model is typically a fund is a fund, it's just one entity. For those that 10 year period of time, the next time you want to invest in the fund, it's very separate, it's another fund altogether. There are some fees associated with that. On the legal side of things, you form a new fund every time. And so if you're lucky enough to be part of fund one that does extraordinarily well, or conversely, if fund one is like, ah, you were getting started, it was a little shaky, that fund doesn't perform well. But fund two is amazing. If you decide not to, you're done, you're part of fund one, that's it. In my case, there's no such thing as Fund 1, Fund 2, Fund 3, everyone is part of one vehicle. If I have a huge winner 10 years from now, again, the investors who are part of the shareholders of the fund will benefit from that.
- [32:37]
B
So if all funds, if all venture funds looked like Full Circle, I would be very encouraged because it means that these funds are thinking about not just return, but what change they're creating in the world. How weird is Full Circle in Other words, in the universe of funds, what slice of the funds are outcome oriented beyond return?
- [33:10]
A
I don't know what the exact percentage is. So here's the issue on that spectrum of pure impact. Another word for that is concessionary, where you find a set of funders who don't expect any return whatsoever. True impact funds to purely, purely market rate written funds. There's been a little bit of a struggle to find an in between. If you start talking about impact and investors are, ah, not for me. I'm looking to make money. You will make money. The how is just important. So you'll make money in a particular way, but you will make money like market rate return. There's too much of a separation between the two.
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B
I see. It seems to me that on one end you start to go into philanthropy.
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A
Yes.
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B
Which is, I'm just going to give you some money. There is no way I'm ever getting any money back. But the problem with philanthropy is that often you're investing into something that is not sustainable without continued philanthropy. And so in this case, it has some of the same motives of philanthropy, which is we're trying to increase more good in the world, but we're trying to do it in a way that's going to create sustainable value beyond our investment.
- [34:27]
A
Yes, correct. For some reason it has been quite challenging. There's a term now, venture philanthropy. It has been quite challenging to convince someone either because let's just say it's a family that has made money in a certain way, or it's the next generation that doesn't maybe is particularly proud about the way that the money was made anyway. There's a tendency there of just taking the position of we are going to sort of rectify that or fix that by making fully concessionary, entirely philanthropic donations. The threshold that they don't cross usually, which is a huge shame for a number of funds like mine who do awesome work on a very outcome driven thesis that can drive a lot of great change and make a ton of money. Is that the idea of investing in a for profit, let alone a venture fund, which is why I don't even call myself a venture capitalist, doesn't seem right. It's like, well, I don't want to make more money. Like, well, but if you make more money in that way, you'll have even more money to do all of the other things that you want to do on the philanthropic side. And if you make money in the right way, there's nothing fundamentally intrinsically wrong about making money. If you align yourself with the manager and the type of things that they fund. Like, there's nothing wrong with that, but there's a little bit of a gap there that I'm working so hard to fill. The model is unique. It's special. It's not weird.
- [35:56]
B
Yeah, no, it's unique and thoughtful. I shouldn't have said weird. I should have said rare. Hi everyone. Here are some gift ideas inspired by guests on Work for Humans. For the people in your life who like a challenge, try the exquisite puzzles of Stump Craft's Jason Robillard, who told us all about the essentials of great puzzle design. For something seasonal, you might like Mistletoe Market, but my favorite is called Queen Bee. If someone you know is taking work way too seriously, help them to lighten up with Greebroff's shiny new book. Today was fun. If you have a friend who's at sea in the pace of change, I recommend Embracing Uncertainty. It's the latest book from Margaret Heffernan in which she tells us the techniques that writers, musicians and artists use to thrive in an unpredictable world, and the one that I'm definitely going to put in my own stocking this year. Joe Pine's new book, the Transformation Economy is now available for pre order.
- [37:10]
A
Though I do need to tell you about another thing about the fees, because that's an important piece of the puzzle. So remember I was telling you 2% management fee on assets under management, 20% profit share based on performance. If you hear that, especially from someone coming outside the industry, but you hear well, Aum is good then assets under management, the more the better. Because if I can make 2% out of whatever I manage, if I'm a really excellent fundraiser, but I'm really bad at making good investments, it does not matter, I can still get 2%. And so what has happened over time? Not every fund is like this. But generally speaking, as a logical, economically driven, very rational behavior, most funds tend to increase the fund size over time because more is more on our end. And there again some other funds who are not structured the way we are, who still do what's called a budget based management fee. I do not charge management fee on a percentage basis because it's a terrible misalignment. If you entrust your money to me and you say go make more money for me, go and triple that, I do not want to have any other incentive than to do just that and to be in the profit share. I want to make excellent investments where our founders will make money, my investors in Google will make money, and that's how I will make money. I do not want to make the game harder on myself by saying, wait, but if I raise more, it doesn't matter how I deploy the capital and whether I'm successful or not, if I raise more, I will make more. To me, that's a terrible misalignment. And so we've taken away that piece and we go back to that concentration of capital and funds being larger and larger. A lot of that is alignment. And Charlie Munger at Berkshire famously said, show me the incentive, I'll show you the outcome. It's true. I think a lot about business model. I think a lot about incentive alignment in every investment that I make. If you look at that often, you will see predictor of success in a way that you otherwise wouldn't. If you think about who stands to benefit from that, who cares, who will care and why? And is the economic incentive around it reflective of what you're telling me they should care about? Right. If you're a manager of a fund and you have investors who invest in you because they think you can make more money for them, they should be incentivized on making money. When you make money, it's very simple, except there's that little piece that they can clip without performing at all. And so that's, to me, that's an indication that the model is not working exactly as it. And so I wanted very badly to change that.
- [39:45]
B
That's why I have traditionally not trusted such a large proportion of the financial industry is exactly that math, which is higher fees independent of returns. So I can see different ways to structure that. One is you cap the size of the fund. Yes, it's 2%, but I'm going to cap it at this amount. And so I don't have any incentive to grow. But that still doesn't solve the problem that if you set that bar high enough. Okay, so then the other possibility is you say, no, I get a salary because you still have to put food on the table. And so you can have a salary that's paid by the fund, that's independent. How does that work?
- [40:25]
A
So the 2% management fee is actually supposed to be exactly that. So there's a management company that is the firm behind the actual investments. Right. So I'm going to have a website, I'm going to have maybe some junior people that I need to pay. All of that is supposed to come out of that 2%, anything that goes into running the fund and building the firm. And so as you can imagine, again, if it's a Percentage basis, whether I spend it on a website and a bunch of brilliant junior people to help me or it goes straight to my pocket. Often that's why those budgets get a little bit bloated. The main reason why funds move to a budget based management fee is to prevent that is look, I have a modest salary. Yes, I do need to put food on the table, but that's not what I'm after. That's not what I need. I really need carry.
- [41:15]
B
All right, let's talk about the zeitgeist. I want to talk about sort of two zeitgeists. I think one of the things that I know you do so thoroughly is you study what's happening in the world of work and you need to develop a mental model of where it's going and what's a good investment and which investments are going to both be heading toward a market that's going to be a profitable market. But also that make the difference, the kind of difference that you want to see in the world. There could be no supply of that. So there's two things I really want to explore here is one is what's exciting and what do you see? Is there a supply of interesting opportunities and where's it going? And I know that it's not going one place because your outcome is broad and it could be going bunch of places that create that outcome. What's going on?
- [42:16]
A
There are many, many answers to that question. But I'll give you elements of responses. So one is geographic. Historically, tech, a lot has been happening in the Bay, still is the case today. A lot of it has been very coastal, right? Either east coast or west coast. Currently our portfolio at full circle is about 60% coastal, 40% middle of the country. And by coastal I mean not just Bay area and New York. That includes Seattle where we have a company that includes la where we have two or three of them, but nonetheless. Right.
- [42:49]
B
Are you talking about that because that's where the founders are?
- [42:54]
A
Yes, that's where the majority of the team is. And so the market starts there. And so naturally their customers tend to maybe be in that geo. It's not perfect, especially post Covid. But generally speaking, HQ of the company is there, majority of the team is there. Their initial market is typically around where they are. And so the reason why I mention this is not because JIO is particularly relevant to any investment that we make. A lot of it can be remote, a lot of it is software, a lot of it is just like where the company is is not that relevant. Except that I Think in this evolving AI post AI wherever we might be in the cycle of AI, my emerging thesis is actually the middle of the country is going to be a much better testing bet for all the tech that are currently coming out. From an adoption standpoint, there are big emerging or existing corporate centers where they know they don't have a choice. They're going to need to recommend their people. They want to use AI, but they want to use it for very specific use cases where you can have a clear demonstratable ROI relatively quickly. They are not as much in the sort of like next shiny object. More AI is just better because I don't know, it's just what my peers are doing. And so I'm behind on AI and I want more AI tools. Not like that. Right. If you go to places like Atlanta, Raleigh, Charlotte, Nashville, someplace in the Midwest for sure. I was just on the phone with someone from Cincinnati earlier. They are going to see a lot of innovation where the tech is going to be a lot more sticky because if you build the right product they have enormous pain points that they haven't solved for years where if you bring them a solution that works and solves a very specific issue, you are much more likely to be successful and the cost of living is lower. And in those GEOs it's just like you can build very solid, highly cash flow generating companies relatively capital efficiently. That to me are great for a right size fund that invest early enough disciplined in terms of the valuation point of entry into a company that remains disciplined on not raising larger and larger funds. An exit for any company that can really serve a very particular GEO with a very specific identified needs doesn't need to be a $10 billion exit for it to be extremely meaningful. 1015 x multiple on my fund. Right. That's something that excites me is that different GEO approach of where can we go in other ponds where people are not, where the valuations are a lot more reasonable and where innovation is going to look differently, a little bit more down to earth and concrete and pragmatic and on the ground helping real people.
- [45:44]
B
I spoke at a conference in Madison, Wisconsin and the thing that the University of Wisconsin talks about is something called the Wisconsin idea. And the Wisconsin idea is we're going to help business leaders inside Wisconsin succeed. Well, many of those businesses, they are value companies, not growth companies. They don't have a ton of fluff in terms of where the money comes from and super pragmatic ethical. The ones that I've spoken to are really thinking about the ethics of their community and supporting their community and the workforce in their community. Not mercenary like some of the coasts are honestly bigger cities. So anyway, I have some support for that hypothesis.
- [46:36]
A
That's the first one. The second theme, or the way that identify opportunities is as humans, we tend to underestimate the time that it takes to get to the point where something so transformative, as I believe AI is, it's a truly transformative change. First of all, you get to the point where it's ubiquitous and common and you're like, okay, well that thing just sort of happened. And then you take it for granted and you're like, all right, so you tend to underestimate how transformative it truly is once you actually get there. But the second thing we tend to underestimate is how long of a transition period of time there usually is between what we have now and the point at which the tech works 100% of the time or close to it, is used by the vast, vast, vast majority of people and does the thing that it's supposed to be doing consistently and reliably and in a way that's both ethical and economically advantageous. And so I think in that transition period of time, you still have a massive amount of opportunity to invest in real tangible things that can be augmented by AI for sure. But I think the time of all of us living on universal basic income, on the beach, because we can, is just not upon us. Okay. I think you and I can have a lifetime worth of work still to do before that is true. And so I think a lot about where do we have labor shortages? We are short in the U.S. 650,000 auto technicians. 650,000. That's a huge amount of jobs, well paying jobs. The issue is it takes two years to become an auto technicians. Meanwhile, and this goes back to alignment of incentives. Any shop, any auto repair shop that is short one technician, that translates into $120,000 roughly in auto parts that they don't sell that year. The link here is very clear. If I can invest in a company that can train auto technicians by leveraging AI and VR in a much shorter period of time, not two years, closer to 30 days, in a way that's massively scalable because it uses AI and VR. All you need to do is put on a headset. You don't need to go to school, you don't need to go to a simulation lab. No, no, no, you can do it all in the shop. The auto reverse shop is going to be all over this again. One technician translates into a direct impact in revenue. Meanwhile, from my perspective, I help small shop owners to make more money who then will create more jobs. Right. And their technicians will be able to learn other skills and become more skilled technicians right there on the shop, earning money as they learn new skills. To me, that's a great example of there's a massive amount of opportunity here.
- [49:15]
B
Fantastic example. I have some support for that. Again, hypothesis, which is that a relative of mine was responsible for making sure there were enough auto technicians in California. And what he said was the problem was the job of being an auto technician has gotten more and more technical as cars became computers. And so what's happened is he said only about 3% of the population can become an auto technician today. And he says the problem is that that same 3% is the one that can become software engineers. And so the auto shops are being out competed by companies that hire software engineers. And so the idea that AI can make that less of a technical job and open up the doors to a larger population of people to become auto technicians, it's not just the two years, honestly. So you were saying it takes a long time to train up an auto technician. It's not just that not everybody can train up to be an auto technician today. And so opening the population that can is really a valuable thing to do. Interesting.
- [50:24]
A
There's plenty of sectors where as much as we can augment the humans, we're going to need them. Care is a fantastic example of that. There are massive labor shortages everywhere in healthcare. I always look for intersection between workforce development and that idea of purpose and potential in a human. So if you think about speech, humans are going to continue to speak. There are some children who are born with speech difficulties. They receive that therapy in school. And so I invested in a company that helps speech language pathologists, specifically in the school concept, to do their work better. And by that I mean a lot of them are burnt out and leaving the industry because the amount of children that they now see due to the shortages in that industry is enormous. Their caseload in some states is 75 to 80 children versus a recommended 30. 35. Right. What do you think is the quality of the therapy that those children receive even when the therapist has not yet quit, it has diminished. Right. Post Covid. I think that demand for those services has only increased. The problem here is obvious. Speech is very repetitive. Is there an application there for AI? Absolutely. Is there an application to help the therapist do the reporting and the note taking and the summarization that they need to do after each Session. Can AI do that? Yes. Do they need guardrails, privacy? Yes. Also yes. But is it a good application for it? Absolutely. And then you come up with a set of games, AI generated games, who the therapist can use during the session, typically received in group. In the school context, the therapist can work with one of the child in the group while the others continue to practice. Great application of AI. Very repetitive. Right. And then they can take those games home and continue to make progress at home. You help the child. The therapists are actually doing their best work, practicing at the top of their license, as it's referred to in healthcare. While the children are making progress, the parents of those children can remain in the workforce because they're receiving good therapy in the school context. They don't need to schlep them around to private therapy. To me, that's a win, win, win. And a perfect example of our thesis, which is if you think holistically about some of the issues that exist in the world, they are 100% venture backable, highly, highly scalable companies that can solve real issues for real people all across the US and more. That's what we invest behind.
- [52:51]
B
Very interesting. I like that phrase. Practicing at the top of their license. We all face that in some way or another, which is what proportion of our work is going toward our unique value. Add our highest margin self. You mentioned precede seed. There are phases of investment over time. You focus on the very early stage. Well, and interestingly, because of the time horizon that you work with, they can grow beyond that early stage. Potentially. But how is the health of the next step the larger? Because I assume that those are larger investments later after seed. So a company has proven itself during seed and now there's an opportunity to grow a lot larger. Do you feel like there's a venture economy ready to take the kinds of companies that you invest in to the next stage?
- [53:52]
A
Yes, absolutely. The market has changed a fair bit over the next 12, 24 months, call it. And so what's happening is there used to be a time where companies would raise a little bit of money, 500k or so, just to get started. Right. Get a little bit of a prototype starting and then they would raise a seed and then they would raise a series A and B, et cetera. What's happening in the current market is companies typically raise more capital upfront, so the rounds are more so 1 to 2 million, even pre product. Right. Even if they haven't built anything yet, they raise a little bit more money up front. I think that's a Better way to capitalize companies, actually, because you have truly the Runway necessary to build something meaningful, to start having a little bit of customers demonstrating demand, demonstrating product market fit, as we refer to it. What is happening now is Seed is a little bit struggling to find its new footing. I think I've been on a lot of panels recently where the topic was, is seed dead? Each time you raise a new round of money, the founders obviously get diluted and they sell a portion of their companies. Right. So a lot of founders have to watch for that because again, we go back to alignment of incentive. Why would someone continue to build a company if they'd own such a limited percentage of it? So we as investors pay a lot of attention to how much dilution has the founding team taken and do they have enough to continue to have the incentive to continue building the company? And so there's often a bit of a skipping seed in the next round that the company raises because they've made a lot of progress based on the amount of Runway that they had to get there with more elongated timeline. Again, not necessarily a bad thing, except if you're trying to raise a fund every two years, which we're not, typically the company that then jumps straight to a different pool of capital more in the series A, B and above. So growth stage, if you will, and I think that's a healthy development. We're going to see this more and more. The sort of the middle will either come down and become an earlier and earlier fund or merger consolidate, or there's going to be some consolidation in the industry. I think if those trends that I'm describing continue.
- [55:58]
B
It's very interesting because I can see these sort of competing things in the world, which is that there's a whole lot of people who are investing in unemployment. In other words, investing in the idea that AI is going to be able to reduce the workforce. And that's this sort of countervailing force in investment. And you're investing in ways that are going to open up opportunity. And in fact, I think one of the big questions is which of those forces is going to win? I mean, they're not forces, they're more like dynamics. I don't know how to talk about money exactly. Is it a force? Well, it's an amplifier, that's for sure. And I think that there's going to be this. Imagine this. I don't know how to talk about it exactly. But it's certainly true that if the side that is about generating unemployment is going to create opportunities that we can't see yet to benefit people in other ways.
- [56:56]
A
I think it's been true in every transition. There are definitely jobs that disappear and others are created. Right. Like when Uber was created, all of a sudden we had all those gig workers and all those drivers that were created. Does that go away when we have autonomous vehicles? Yeah, absolutely it does. Right. I think what we need to think about is do we ensure that we have the proper infrastructure to properly reskill people into things that will continue to need them? I think how do we think about the fact that the pendulums early in those big transformative moments? The pendulum swings in big ways. And so from a political marketing PR standpoint, the cynical side of me tends to think that a lot of those layoffs were going to happen. AI or no AI. That always happens. It always provides some political cover for the companies.
- [57:46]
B
I don't believe those statements. I don't believe those statements. I mean, eventually that may be true.
- [57:53]
A
Yeah. But I think it's going to take a while. I also think it's real, it's happening. Absolutely. The companies should leverage AI as a shareholder in those companies. That's what you should expect and demand. But I think the degree to which it's happening is always a little bit overblown. I also think that we need to think about the way that if it's not completely replacing your workforce, then well, yeah, as a piece of crap software, we're not going to use it anymore. There's always a little bit of a more measured approach to all of this. That's sort of like, yes, there's some real things happening. No, it's not either or, or all or nothing. There's some companies doing some really interesting things that are going to augment the humans and help them. And I also think. So we haven't come to the point where I'm blaming it on my Frenchness. But you know, being from France, from my perspective, the US is not a country where if we can do more, we start sending people home or we're going to transition to like a four day week because, well, now AI can do it all. It's like companies are going to keep the same amount of workers and ask them to do more. That's usually what happens in the us. More is more. More is better. Always.
- [58:58]
B
Yes, that's absolutely true.
- [59:00]
A
And so are we really going to have so much of a displacement? I don't know. I think the jury's very much still out on this and I am not sure that AI is going to replace as many jobs as perhaps you and I have read in all sorts of places.
- [59:16]
B
Yeah. Because as you may know from us talking in the past, we believe that employees are customers and work as a product, and that there's this enormous opportunity to apply design principles to design work that creates companies in which people can bring more of themselves every day to work. So I ask product questions about work, and one of those is, virginie, what do you hire your job to do for you?
- [59:46]
A
To me, it's a driver of purpose. Truly. There's a strong dichotomy. We were both that responsive. So we can talk about that. I think it's a great conversation, which is like, there are some people who are into jobs because it's a good enough job and it pay the bills and that's what it is. That's perfectly acceptable. And then there's some people who are like, not a minute of my time should be spent on something I don't care about. And so that's fully purpose driven. I think I fall more in this category of I've gotten to this point in my life where my job needs to provide full. What's the opposite of dissonance in English?
- [60:18]
B
Harmony.
- [60:19]
A
Yeah, full harmony. Full alignment. I want to have investors and founders and partners and a team, and I need it to all make sense. I need it to make it such that I don't have to justify myself in any way, shape or form. It's so obvious and so logical across the board that it all makes sense. I need it to be a driver of. Yeah, makes perfect sense.
- [60:44]
B
It's a very interesting description. Harmony. Consonance is not a word that's used very often. Alignment is good, but I understand what you're talking about.
- [60:57]
A
Like, it's not a means to an end. It's truly part of, you know, this is what I believe in the world. This is what I believe the workforce should look like. Should be full of individuals who have agency and pride over what they're doing. Anything short of that is a waste of human potential. It's truly pathetic. Nobody should be in the miserable job. Nobody should be in a boring and unsafe job. AI can automate those jobs away and take them by all means. And so, yeah, a lot of that is very repetitive and automatable. I don't think that's a bad thing. Again, provided that we have other spots for people and we think a little bit more smartly about what is the. The path for those people.
- [61:44]
B
Then whenever I go to the supermarket and I see on the shelf handmade tortillas, I'm like, why would I want anybody to make tortillas by hand in this world? Surely I'm fine with a machine made tortilla.
- [61:58]
A
But you know, the issue is for as long as there's such a disconnect between schools, like the education system, the way we think about training people up to the point in their life where they're going to have a job work and what companies look for and the ways that they recruit, there's so many different gaps. You can have a hospital that's like, look, I need surgical techs. If I don't have the operating room prepared by surgical technicians, I cannot conduct surgeries. That's obviously a massive issue. It's a revenue issue for the hospital, it's a massive issue for the people who need the surgery. It's a huge opportunity to create jobs, real jobs. We've gotten to the point where some hospitals have created internal training programs so that they would no longer have a shortage in surgical technicians because the schools around them are like, regardless of how many times they went to them and said, I need 26 of them next year, 32 the following year, they know what retention looks like and who's going to retire and all that stuff. Schools just are not really incentivized to do that. So the hospital was like, fine, let's take matters in our own hand. We'll just start an apprenticeship program. That's the issue. How do we have a more open understanding of what are the skills we need, who needs them, and who should then train those people to get into exactly those jobs that are available. And I understand some of it take time. The most we can compress the amount of time that it takes to get people into jobs that are available. Now the whole idea of, well, we don't know what's going to be needed two or three years from now. Four, let alone four, is wrong. Like, okay, we can do so much better than this. Like, it's not like the kids aren't going to go to school anymore because we don't know what we're going to train them for. But yeah, maybe four year college with very ill defined majors and no strong outcomes tied to those majors are going to that school for four years. That's going to have to stop. Maybe that's not such a bad thing, right? Like to drive stronger KPIs and clear outcomes that the education system writ large should be able to drive for people who go through it. Sure, I believe that's possible.
- [63:56]
B
What does your work cost you?
- [63:58]
A
Tied to the geo, it costs Me, time away from the family sometimes because in what I do, it's very people driven. I believe in meeting people in person, seeing them repeatedly, touch base, high trust. You don't build trust without seeing people. So that cost me, brings me so much more than it costs me.
- [64:16]
B
Founders often feel that way, by the way, that it gives you more value than it costs you. And that's because you have more control over what you've created and you've built something around what you want. Have you found that New York is a better platform for you to work from than other places? And why?
- [64:36]
A
Yes, it depends what you compare it to. I find New York to be a lot more collaborative and resilient. New York is a place where there's a lot more diversity of perspectives and talent. Right. We have fashion, we have finance. So it's less tunnel vision than other places where tech is a big tech venture. To me, that tunnel vision is just too restrictive. I like to have holistic thinking and ways to challenge my thinking in different ways. Sometimes it has completely nothing to do with venture and what I do on a day to day basis. I think that's healthy. So I like New York from that standpoint. And it's gritty. New York is just we have a little bit of something to prove and we're not the first topic ecosystem in the country. And I like that. I like that aspect of that ecosystem.
- [65:18]
B
Where can people learn more about you? And full circle.
- [65:22]
A
The website is full of information. Fullcirclefund.IO I'm not hard to find on LinkedIn either. And I write a substack called Closing the Loop where I tend to post just things that drive me nuts that I want people to solve. So if you're a founder, it's a good place to hang because you know exactly what I'm looking to fund.
- [65:40]
B
Great. That's a great thing to know. Well, thank you very much for taking the time to be a guest on Work for Humans.
- [65:48]
A
Thank you for having me. That's fun.
- [65:50]
B
I often have guests on the show who I. Well, in fact, I select guests because of what I don't know. This is one of those cases where I know way less than usual. And so that's good.
- [66:01]
A
Hopefully you learned. Was that right? Did you learn that? Okay, good.
- [66:04]
B
Yeah, it was great. Thank you very much. Thanks for joining me for another episode of Work for Humans. If you enjoyed this episode, please give us a five star rating. Wherever you listen to podcasts and share the show with one person you think would get value from it, believe it or not. This really helps us grow the show and reach more people who want to build the kind of work that people really want. As always, thank you to my producer Jason Ames at 9th Path Audio for his insights into content and his high standard for quality. Final note, the opinions shared here are my own and not the views of Google or Cisco Systems. Thanks again for listening. See you next time.