Venture with Grace
00:16:37 · Jay Zhao, Grace Gong
But nobody talked about it because it's not a good story, not a flashy story, but it does happen. So I think if the market work on its own mechanism and work the way it's supposed to be, that's something that we would pay attention to heading into next year. To answer your question, for Fund III, we are wrapping up $75,000,000 fund. [00:16:59] S0: Congratulations. Oh, thank you. I feel like raising money in this climate is a challenge for everyone. [00:17:07] S1: Yeah, it definitely is. One raised one to you was challenging as well. [00:17:13] S0: Do you feel like raising a $75,000,000 front cover to a 25 is a different set of challenge or like it's kind of the same because we kind of like up your game as well. And then the better performed company is kind like a more like obvious to the universe. Do you feel like it's the same kind of like difficulties or like do you feel like it's like it's because the number is Vanguard, so it's like Vanguard? [00:17:36] S1: Yeah, I think each vintage or each fund sequence has its own challenge or benefit, if you will. One thing I didn't appreciate or didn't realize is that how much VC fundraising is actually tied to the macro market. [00:17:53] S0: I think it's all about the macro market, right? I know. Yeah, I feel like it's all about if you tap into some sort of huge trend.
00:18:01 · Jay Zhao
[00:18:01] S1: Right, yes, but the other thing I did not realize heading to Fund one and Fund two fund raise is that it's so tied to the interest rate because it dictates the capital allocator whether they want to invest in private side or not. So in Fund two, the reason it was hard is because the interest rate was super high across the board, So people don't want to invest in private sector, period. They'd rather park their money at some saving account. So for Fund III, I think it really had to say to our founders, MaintainX has good exit, so they returned Fund I multiple times already. And Venture performed really well out of Fund II. And all that happened around the same time. So when we go back to our LPs and talk about our strategy, how it works, and then forward to a five year mark and two year mark, it has pretty clear evidence that something's working. One thing that we of the LPs actually talking to us about this is that right now AI, at least for the better part of this year, has been really hot. And he was saying that if you guys keep the funds openly longer, can you raise $200,000,000 of funds. And he has seen multiple cases like that. And I have seen my GP's friends do that as well. I think one thing that we don't want to do is that we don't want to change our capital raising cadence because the market is hot. Because I think that's the easiest mistake, very tempting mistake to be honest, because if you rack up your AUM, you have more fees and so on and so forth. But I think both Jay and I, we kind of talk about this, like this is a long term game, right? So we would rather make sure that each fund returns the capital return at the top tier level. We're not going anywhere, right? We can raise fund four and fund five and kind of gradually scale up AUM from there. That's how we think about this. But the other thing I do think is presented a challenge is that where do we sit as a $75,000,000 fund in the ecosystem, right? I think one of the things, I was kind of talking about this, if you raise a $200,000,000 fund, $300,000,000 fund, at Fund three, or even at Fund one, the challenge is that you're competing with more established names at a Series A stage.
00:20:15 · Jay Zhao
And that's a terrible space to be in right now because Series A typically meaning that the company already have product market fit, something's working, and then you're competing with probably 10 or 15 other term sheets. Whereas if we stay below 100,000,000, we think we can still make meaningful impact to the founder's journey before they find product market fits. That's why we say we're a specialist at VC to C stage investing and that's kind of where we think the high alpha comes from. But yeah, it's tough across the board for both VCs and maybe for founders as well because everybody is racing new around, high valuation, and everybody has a huge war chest these days. So it'll be interesting to see how it unfolds in the next few years.
00:21:02 · Grace Gong, Jay Zhao
[00:21:02] S0: Do you have, does it like a strategy change since like, do you feel like you will still go back to let's say, if you have more concentrated portfolio or like, I think the average of like seed stage people are having like 28 to like 32 kind of like companies. Like regardless how concentrated it is, it's like everyone is like making model bets. For you guys, do you feel like you are more of a good, like a picking company versus like you know getting into the hottest deals or like how do you kind of like think about the unique like advantages that you guys have? I know that you guys are very research driven like What's the difference between nowadays everybody's using ChatGPT or all these kind of other AI tools. I feel like whenever I travel with a fund manager, whether it's left like name your top five VC firms, wherever people left they always say, oh we're using AI to compete with the platform team of our old firm. So basically people not competing with the old firm particular but that category of firms. That's kind of like most emerging managers' mindset on how to use AI and how do you think about the differentiation of your quote unquote alpha compared to the rest of the same stage? [00:22:23] S1: Yeah, I think there's a few things going on here. Is definitely we want to stay early. Mean, Sequoia, they just made the new announcement based on setting their scout program etc. I think for those bigger funds, once you get to 1,000,000,000 I think [00:22:40] S0: it's a quite a decent set of London department too.
00:22:44 · Jay Zhao
[00:22:44] S1: Yeah, they want to concentrate and focus on what's good for them for the past decade also. I think it kind makes sense, Once you get to $1,000,000,000 and above AUM, you really have to focus on the core strengths to generate return at that high AUM level. And which is why it's important for us to stay at the earlier stage because our fund size supports that strategy and frankly that's our strengths and our passion lies at the earlier stage. The other thing I would say, there is art and science in early stage investing, right? The science, the art part is really just about understanding founder psychology. I think one of the, even for good and bad, I've been in this field for fourteen years and then it's just like, I studied founder psychology really well because I used to be a founder. I know what struggle means and what it takes for that person to actually persist and have that resilience. And we actually look for some sort of life experience that highly impact the person's journey and thinking, some sort of adversity along the way. And I think that's really, you know, not everybody can be a founder, but founder is for long jobs and it's quite suffering a lot of times. So I think we look for that as our piece. That part I actually don't think AI can replace yet. I can generate a bunch of text, right, and guide you with different directions and different thoughts, but I just don't think AI understands the real world and real human interaction the way that we actually do a So person, that part is one component of the peeking piece. The science piece is actually well suited for AI stuff. So for example, we built our own AI agent internally. We've been doing that for the past two years now. But now with open call from our early this year, it's actually introduced a really good framework for the agent to be more proactive and actually in the self improving path as well. One example is that we analyze all the companies, including YC, including all the accelerator companies, and understand founder trade and market, and we come up with an algorithm, what we call the Founder Shine Score, and we actually retrofit, retro analyze our own founder case studies on what works and what doesn't work. And it turned out that founder shine score is a five star score that we have.
00:25:21 · Jay Zhao, Grace Gong
It turned out that the most high valuation company founders is that ranked at five star because they are the typical pattern recognized founders, break out from big labs or big companies and have certain contracts. So that's like the gut founders? Well actually, counterintuitively it's not. I agree. I [00:25:44] S0: so I was also introduced by one of the top one lab person, one of the very early employee of the top one lab person and introduced me to two companies like and then one of them is like it's seemingly like coming out of like the right background, tier one firm, one like you know experiences, blah blah blah and then on the other hand there was another company that's like in YC and it's like very scrappy person come from high school I guess, not high school but like I'm sure they went to college at some point but like drop out or something and then like on paper like one would outperform the the other one a lot, but the other one kind of sunset their company recently, the big firm people, and then I guess they went back to big firm. And then the other person is like, their company got acquired. And I would say that part, I don't think that part was a huge success of your IPO ing, but on the other hand, they didn't really sense of the company and they have some sort of access. So it's a really interesting lesson for myself. I felt you can never really judge people [00:26:53] S1: by That's the off the true. I think the part that's super interesting is that out of the five scores, it's actually two and three historically produced the best venture outcome.