Venture with Grace
00:06:39 · Jay Zhao
[00:06:39] S1: We do a lot of research posting on our website and on Substack and try to share our opinion and our viewpoints about the tech stack. But at the same time, we call our belief like the world view. We believe certain things will happen over the next two or three years and we want to be loud about our worldview and so that we can attract the right founders to it. So for example right now we're wrapping up our fund three, we're gonna close fund three by the end of this year and heading to next year for the next vintage of 2027 to 2030, there are three things that we spend a lot of time thinking about. One one single world view is that we believe in the future, people will have more AI agents working for the person and for companies, both on the person side and the personal side and the company side. And the implication of that is that the whole infrastructure built out for AI agents need to be rebuilt and that has huge implications for agent payment, e commerce side has huge implications for like for example we invest in this company called Agent Phone. They are almost like a Twilio for agents. So it definitely needs to build from the ground up in terms of agent identity, persistent identity and compliance and so on and so forth. So we think that's a very interesting opportunity. You don't see the volume as big right now, but we think one or two years later it's going to build up. It's going to be explosive growth. The other area that we spent a lot of time thinking about, and frankly, Seeds Fund two, two years ago, when we invested in a company like Bigger AI, that was an investment that we did in 2024. And at the time, I think a lot of VCs and companies were mostly talking about chatbot and copilot at the time, two years ago. And we put out a thesis and research post to our OPs. And we think that as AI becomes more capable in terms of executing long time horizon tasks, the agent should be able to complete tasks, action, like end to end, right? So I think we put out our worldview to our LPs, to our operator network, and when we met the team at Victor, Frederic and Peter, they were at Meta, you know, working on two or three paper at the time. So we spent a lot of time thinking about can we align from that world view and that's how we are the right companies.
00:09:09 · Jay Zhao, Grace Gong
So that was consistent to be a thesis for All Funds three, but we package in a way that's easier for frankly for our OP to understand. It's called system of actions. So basically the idea is that the last generation of companies like Anaplan, was a system of record. Salesforce is a system of record, monday.com is a system of record. And they want to be a system of record because they want to be at the premium place to charge this kind of SaaS premium pricing predictable annual revenue. But going forward, I think those companies face big trouble because just a lot more vulnerable. The next phase of companies, software companies, really have to be the system of action where agents can perform action in a reliable way. That's where we really spent a lot of time in the other piece of token economics, agent name wrap, and all it's kind of a stirrup from both thinkings. [00:10:06] S0: I wanna talk about, I guess when you guys were, I wanna shout out to the audience. Hi, LinkedIn user. We'll address your question in a minute. Hi, John. So LinkedIn user is asking how do companies position themselves and their value are ahead of the curve with new legislation, which impact research AI companies in healthcare, for example, when it is not something most VCs are paying attention to.
00:10:32 · Jay Zhao
[00:10:32] S1: So the question is that how companies position ahead of the curve, which impact when it's not something most of these pay attention to. I guess the question is how do we think about the regulation and the impact on AI companies? I think when we think about there are certain areas that are very high compliance driven, right? Healthcare, finance, legal, those areas are vertical AI companies that have much more either headwind or tailwind when there is a regulation change. At the same time, most of the companies that you see in the AI application side that's really kind of breaking out over the past few years. Harvey of the world, OpenEvidence of the world, they are still trying to solve the problem that's a little bit distance away from the regulation. In my major career, we try to stay at the application level. So we don't really I guess if one regulation need either become a breaking or making factor for a company, it's probably the type of investment that we do not touch anyway Because the underwriting risk for VC, the underwriting mechanism of VC is really about one, does the technology work? And two, is the right team to build this technology and bring it to the market? And three, is the market growing and will be growing further? I think ranking wise, those are the three criteria that's most important. And the regulation piece, if the regulation piece comes at the IC meeting and becomes a huge debate out of the three factor, typically I think, at least for us, we try to stay away from that because we just don't understand how the regulation will change one way or the other. But I do think I talked to my friends who are running hedge fund and private equity fund. I think those type of companies, they will have much more immediate impact, negative or positive, based on regulation environment. Yeah, I don't know if that answered your question, but that's kind of how think about all these companies.
00:12:44 · Grace Gong
[00:12:44] S0: Is there like, so I want to start with the fund aspect as well. Since like, know, I believe your first fund was like $10,000,000 and 7,000 was like $25,000,000 and maybe we can talk about like the portfolio construction. I feel like the smallest track you guys wrote is like 25 ks to like later, I guess like, I don't know what is the biggest trend, like, know, I'm sure it's like probably closer to like millions or something. How do you think about leading in the aspect of, I know that you guys lead deals and in the like a era, I feel like a lot of the companies are raising, you know, like we had like the fund of core automation in last week and then he raised like 532,000,000 for seed. So when you're looking at these like crazy rounds, like how do you think about leading or, you know, just like Yeah. Just be like, you know, like a participation like track into the company and what kind of ownership are we targeting since I felt like the labs era is kind of coming to an end. Now it's like everyone's investing in different agent or sector specific companies or in general. What is something that you personally feel like feed into your thesis? Yeah. No,
00:14:02 · Jay Zhao
[00:14:02] S1: it's a great question because we're at the tail end of wrapping up all new funds. So we've got this question a lot, especially from an LPs perspective. I can understand it's quite confusing, you know, like how do you actually gain position, do you actually get the right entry evaluation point. For Hong one, we started with 10 because we just wanted to see if our thesis work, like how our methodology works, right? So anything that we write between like a 100 k to 200 k type of check, consider a core position for that fund and MaintainX was in that category, Spectro Cloud within that category. Our idea is that can we consistently, using a concerted approach, consistently find the right company and get access to it and invest in it and make a good relationship. Fund one turned out to be a really good fund to this day, five years in. Fund two, our AUM is actually 40,000,000, so it gets a step up a little bit. Then the idea is that, okay, so now Leonis has some brand. It's not fully established yet, but can we actually find maybe 20%, 30% of the deal that we can lead or co lead the round, meaning that the audience will have 5% or 10% ownership. And we execute that over the past two to two and a half years. So what happened is that heading to this year, the market becomes super hot for various reasons, right? The AI boom and then the inflation and all that stuff. And it definitely rhymes with a a 2021 vintage. 2021 is very high of the year as well, high valuation. It's just different engine, driver behind the scene. In that time, twenty one, five years ago, the driver was a stimulus plan, the zero interest rate, the people was interested in SPAC, all that stuff. So we're seeing a similar environment right now, but right now the driver is different because people just want to invest in AI companies and AI stock and, you know, chasing the AI boom. It does present a challenge across the board, I would say, for VCs. But one thing that I worry a lot more about is legacy side. Because if you think about the companies that got SPAC listed in 2021, and a lot of companies get high valuation at growth stage in 2021, a lot of these valuations got slashed 50%, sometimes 70%. And a lot of companies either they just could not raise full on capital or they just kind of went down or whatever, right?
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.