The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
20VC: Why Fund Sizes Should Be Smaller, Should Founders Also Have Their Own Funds, Is Emerging Markets Investing Gone, Is Fintech Investing Dead & Who Will Be The Winners and Losers in VC in the Next 10 Years with Sheel Mohnot, Co-Founder @ BTV
Fri Jul 14 2023Venture CapitalEmerging MarketsFintechFundraisingInvestingFounder DynamicsBoard DynamicsFund Management
Description
Operating in a crazy prisoner's dilemma situation. Venture capital industry facing prisoners dilemma situation. Struggles and opportunities in emerging markets and fintech industry. Fundraising challenges and lessons learned. Lessons learned from investing and founder dynamics. Investment strategies, board dynamics, and market trends. Challenges and successes in fund management. Insights and future predictions.
Insights
Capital wants to go into venture, but fund sizes need to increase
This is a key challenge in the venture capital industry, as larger fund sizes are needed to attract capital but can lead to higher return expectations.
Investing in emerging markets has become more difficult due to macroeconomic factors
The struggles in emerging markets and the impact of macroeconomic factors have made it challenging to find good investment opportunities in these regions.
Venture funds with huge amounts of capital face challenges in generating returns
The large amount of capital in these funds can make it difficult to achieve high returns, leading to the need for fund sizes to shrink or find different types of investors.
Not taking enough cash out was the biggest investing mistake
This highlights the importance of managing investments and ensuring sufficient liquidity to maximize returns.
Raising big rounds can make founders lose their sense of urgency
Founders may become complacent and attract employees who are better suited for larger companies, potentially impacting the success of the startup.
Misalignment between GPs and LPs can occur when GP commitments are too high
This can create financial strain on the fund and lead to premature selling of positions in companies to return capital to the GP.
Diversity and inclusion are important in fund management
Promoting diversity and inclusion in fund management is crucial for creating a more equitable and successful industry.
There has been a shift in taking chips off the table earlier in secondary investments
Founders are increasingly taking secondary investments at earlier stages, allowing them to realize some value while still growing their companies.
Venture capital needs fewer insecure individuals who put down others
Creating a supportive and collaborative environment in the venture capital industry is essential for fostering innovation and success.
In five years' time, BTV wants to be globally recognized as the first choice for fintech founders
BTV has ambitious goals for establishing itself as a leading venture capital firm in the fintech industry.
Chapters
- Operating in a crazy prisoner's dilemma situation
- Venture capital industry facing prisoners dilemma situation
- Struggles and opportunities in emerging markets and fintech industry
- Fundraising challenges and lessons learned
- Lessons learned from investing and founder dynamics
- Investment strategies, board dynamics, and market trends
- Challenges and successes in fund management
- Insights and future predictions
Summary
Transcript
Operating in a crazy prisoner's dilemma situation
00:00 - 06:23
- Capital wants to go into venture, but fund sizes need to increase
- Better Tomorrow Ventures is a $225 million fund that leads investments in pre-seed and seed stage fintech companies
- Co-founders Sheil Monard and Jake invested in companies like Mercury, Flexport, Ramp, and Hippo Insurance
- Sheil previously ran 500 fintech for close to 7 years and was a founder of two acquired companies
- No one knows what they're doing in venture capital
- There are many different strategies that can be successful
- Remote work can be successful despite arguments for in-person work
- Bill Gurley and other top investors still have debates about what is correct in investing
- Fun sizes should get smaller
Venture capital industry facing prisoners dilemma situation
06:08 - 11:57
- LPs have withdrawn from the market, but many are still investing in Saudi Arabia despite previous criticism
- Founders Fund reduced their fund size to stay focused on returns
- Funds giving back money is unlikely to happen this cycle
- Fund size decisions depend on the focus of the managers and their strategy for follow-on investments
- Follow-on strategies can be challenging as winners and losers may not be predictable early on
- Investing in emerging markets, particularly fintech, has become more difficult due to macroeconomic factors
Struggles and opportunities in emerging markets and fintech industry
11:33 - 17:19
- Emerging markets are struggling, especially in a low interest rate environment.
- Investors have been putting money into emerging markets without much knowledge or research.
- Liquidity is a challenge in emerging markets, making it difficult to exit investments.
- There are still opportunities in emerging markets for good companies.
- Paying high prices for investments in emerging markets is not sustainable.
- The fintech industry experienced overhype in 2020 and 2021, but it is still on an upward trajectory.
- Competition for capital and companies has decreased, leading to a better investment landscape.
- Venture funds with huge amounts of capital face challenges in generating returns.
- These funds may need to shrink or find different types of investors to focus on returns.
Fundraising challenges and lessons learned
16:52 - 22:55
- Funds need to shrink if they want to be returns focused
- Moving into a different class of LP is an option for funds
- Having more money to invest can lead to better returns
- Venture value ad platforms can provide value in finding talent for portfolios
- Starting out as a manager can be tough and require investment without immediate pay
- The first close of the fund was mainly backed by friends and family in the FinTech ecosystem
- Having an institution like Sundana helped with credibility and attracting other investors
- Closing as soon as possible allows LPs to take you seriously and shows that you are actively investing
- The first check into Unit was around 10% of the raised amount, which allowed for further funding through a line of credit
- A second close was planned but canceled due to COVID-19, causing some investors to back out temporarily
- Interest rates going down and market conditions improving led to renewed interest from investors, resulting in a larger institutional fund
Lessons learned from investing and founder dynamics
27:52 - 33:22
- Not taking enough cash out was the biggest investing mistake
- Missed opportunity to return multiples on the fund
- Delay in selling due to company growth and potential for higher valuation
- Difficulty in discussing selling position with founders
- Investing behind the wrong founder instead of the best company
- Founder's ability to sell and raise funds is not always correlated with success
- Warren Buffett quote: When a great founder meets a bad market, the market wins
- Example of Rose Blumkin as a successful founder in any business venture
- Interim wins can happen even with average founders
- Reasons for great founders failing include failure to find product-market fit and reluctance to pivot early enough
- Importance of having a plan and considering a pivot if necessary
- Length of runway can be a concern but doesn't determine urgency or success
Investment strategies, board dynamics, and market trends
33:00 - 38:24
- Raising big rounds can make founders lose their sense of urgency and attract employees who belong at big companies
- Multi-stage funds that invest in competitors of their portfolio companies can miss out on investing in the winning company
- There are few multi-stage funds that have done a great job at seed funding, but Founders Fund and Excel have had good success
- Large seed funds like True Ventures and Initialized are too big and end up doing series A rounds instead of true seed rounds
- VCs being too prescriptive with founders can cause tension, it's better to be supportive and recommend rather than dictate
- Boards can be helpful for founders to reflect on their business, but they should not replace regular meetings with the founder
- Having experienced board members who don't speak often but provide valuable insights is beneficial for startups
- Misalignment between GPs and LPs can occur when GP commitments are too high, causing financial strain on the fund
- High GP commitments may lead to selling positions in companies prematurely to return capital to the GP
Challenges and successes in fund management
37:56 - 43:17
- High GP commit can lead to financial strain and misalignment
- Diversity and inclusion are important in fund management
- Raising a fund is difficult, but some still succeed
- Founders with side funds may struggle to balance their responsibilities
- Taking external capital is a significant responsibility
- Operating a fund and running a company simultaneously is challenging
- The speaker had an unconventional wedding in the Taco Bell metaverse
- Winning the Taco Bell contest came as a surprise
- The speaker initially hesitated but eventually agreed to the metaverse wedding
- The metaverse wedding was emotional and attended by people from around the world
- Taco Bell provided credits and paid for a honeymoon as part of the prize
- Homebrew, IA, Founders Collective, Excel, and Benchmark are mentioned as notable seed and Series A firms
Insights and future predictions
42:56 - 48:40
- The best venture capitalists are those who have retired and are now investing their own money, such as Homebrew and IA
- Excel is a great series A firm to invest with
- Benchmark is hard to beat for keeping fund size small
- Founders Fund, Greeno's, Addition, and Ribbit are all good options for investment
- There has been a shift in taking chips off the table earlier in secondary investments
- The rule of thumb for founders taking secondary is at the series B and beyond, you can take as much secondary as you have an ARR (Annual Recurring Revenue)
- VC pressure often leads founders to take off a lot of money in secondary investments
- Venture capital needs fewer insecure individuals who put down others
- There is an overhang of valuations that will eventually lead to a severe drop in the market
- Softbank has made poor decisions by pouring money into bad companies
- Zoom, the pizza company, was not surprising in its failure due to questionable investment decisions based on Facebook shares about it being shared on social media platforms like Zoom
- In five years' time, BTV wants to be globally recognized as the first choice for fintech founders