20VC: Haystack’s Semil Shah on Whether Founders Are Bypassing Seed Funds in Favour Of Less Dilutive Multi-Stage Funds, How Fund Strategy Changes With Fund Scaling & Why The Hardest Challenge is Price Discipline

Semil Shah is the Founder & General Partner @ Haystack, one of the valley's leading seed funds of the last 5 years with a portfolio including the likes of Instacart, DoorDash, Carta, OpenDoor, Hashicorp and more $Bn companies. Alongside his role at Haystack, Semil is also a Venture Partner @ Lightspeed Venture Partners. Prior to founding Swell, Semil was on the operating side as an early advisor and employee at Concept.io (Swell), acquired by Apple in August 2014. In Today’s Episode You Will Learn: 1.) How did Semil make his way into the world of venture from his start writing about startups and financing rounds? How did that also lead to his role as Venture Partner @ Lightspeed today? 2.) What does Semil mean when he says, "the most talented founders are bypassing seed firms and seed rounds"? How does this mean that seed funds need to respond? For founders, what are the pros and cons of taking a multi-stage fund at seed? Will they really get GP time with such a small check? How should they also think about potential signalling risk? 3.) Does Semil share Harry's concern with regards to pricing today? What do multi-stage funds investing at seed do to pricing? Why is staying disciplined on price the biggest challenge for Semil? How does Semil assess his own price sensitivity and when to stretch? Does Semil believe that ownership is built on first check or overtime? 4.) How does the strategy for Semil change moving from a $25m fund to a $50m fund? Why does Semil think that temporal diversification is such an important element to bake into a portfolio? What are the benefits? How does Semil think about effective reserve allocation today? What does that investment decision-making process look like the 2nd time? 5.) How has Semil seen the ecosystem for VC fundraises change over the last 5 years? What would Semil like to change about the ecosystem of LPs? What blanket rule does Semil believe that LPs should introduce for new managers to ensure discipline? For Semil, how did the fundraise differ for the latest $50m fund compared to the prior $25m fund? Items Mentioned In Today’s Show: Semil’s Fave Book: Reboot by Jerry Colonna As always you can follow Harry, The Twenty Minute VC and Semil on Twitter her

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Harry Stebbings?

  We are back for another week on the 20 minute VC with me, Harry Stebbings at H Stebbings 1996 with two Bs on Instagram. But to the episode today, and this guest has built one of the best portfolios I think I've seen for a very long time. He scaled his fund from 1 million to 50 million dollars in just six years. And so with that, I'm thrilled to welcome a very special member of our ecosystem in the form of Semil Shah, founder and general partner at Haystack, one of the valley's leading early-stage funds over the last five years. I mentioned the portfolio before with investments in the likes of, check this out, Instacart, DoorDash, Carter, Open Door, HashiCorp and more billion-dollar companies. Semil's also alongside his role at Haystack, a venture partner at Lightspeed Venture Partners. And prior to founding Haystack, Semel was on the operating side as an early advisor and employee at Concept.io or Swell,

• 0:44Harry Stebbings?

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• 1:29Harry Stebbings?

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• 2:10Harry Stebbings?

  The crucial nature of keeping track of your financial position there. But the other crucial element is communication amongst your team. And that's where DialPad comes in. DialPad allows you to connect your team with a communications platform that powers voice, video, messages and meetings across your existing devices. Plus, with DialPad Voice Intelligence, you can do more than just listen and you can really unpack powerful, real-time insights into customer conversations. And that's why some of the world's most innovative companies use DialPad today, including the likes of Stripe, Uber, HubSpot, WeWork and many more incredible companies. Learn more to stay at dialpad.com. But that's enough from me, so now I cannot wait to get into the show with Semel. So I'm thrilled to introduce Semel Shah, general partner and founder at Haystack.

• 2:56Speaker 01

  You have now arrived at your destination.

• 2:59Harry Stebbings?

  Semil, my friend, I mean, I just tweeted that there are some episodes you look forward to more than others, and this definitely is one for me. I've been looking forward to it for a long time now. So thank you so much for joining me for a third time.

• 3:10Speaker 02

  Thank you, Harry, and I'm excited to be the first US investor to be on the show three times.

• 3:16Harry Stebbings?

  Well, I'm very excited to make it happen, but I would love to start saying, for those that did the terrible sin of not listening to the first two, I want to start on the age-old question, but important. How did you make your way into what I always call the wonderful world of venture? And come to be GP at Haystack and founder at Haystack? And then also venture partner at Lightspeed?

• 3:33Speaker 02

  The quick story is, is I was working at startups many years ago and just riding the mobile wave. And this is when the iPhone came out and Uber came out. And we didn't really know how big the iPhone would be at that time. And so I just moved from digital media startup to digital media startup. And it was, it was a difficult ride, but it was a lot of fun and I made a lot of friends. During that time, I was writing a lot online, just about what's going on in the valley, interesting deals, what it's like to move to Silicon Valley. And at this time, all these platforms were rising. So Twitter was becoming more important. Quora was in the private beta. Mike Harrington and Eric Schoenfeld and MG were running TechCrunch and they had their finger on the pulse of everything. And so people started inviting me to these platforms to write.

• 4:17Speaker 02

  I would just share my thoughts and apparently it Just resonated with a lot of people and that kind of snowballed into people subscribing to what I was writing. A lot of those subscribers happened to be VCs, many VCs who were on your show over the last number of years. And so one of them said, why don't you be a consultant with us? And that kind of snowballed into three consulting gigs and then five and then seven. And then at the last company I worked for, the company was acquired by Apple. We all got jobs at Apple and then I thought, oh, well, you know, one of these seven firms that knows me will certainly hire me. And that was kind of the flashpoint where, you know, I didn't get a role. And looking back on it, I think it makes sense, but in that moment it was very difficult.

• 4:57Speaker 02

  And so I had two really close friends, Gautam Gupta, who's now at M13 and Niko Mandan, who's a partner at Lightspeed. At the time was at Battery, pull me aside and say, hey, look, be a venture partner at one of the firms. And that's how that's carried through over the years and just start a small fund. And what happened was is that I loved doing those initial small funds. They were just very small, $1 million, 3.2 million. And then as Mike Maples has said, perhaps even on your show, I got hit by the lucky truck. So I loved it and I got extremely lucky with some of the picks.

• 5:29Harry Stebbings?

  I mean, I, I, I love that in terms of the instruction itself. I completely agree with you that content creators make the best investors and there's no bias there at all from me. But and also, you know, I spoke to many of your founders before the episode, as you know, I do. And to hear actually the how you play a role with them, it was special to hear. So I'm lucky, I'm sure, but I think also down to you and your involvement. But I do want to dive into the meat of the show today, Semenel, because there was so much that I wanted to ask you. And so one element that I'm seeing more and more is the much larger funds going earlier and earlier. And you recently said in a tweet, the most talented founders are bypassing seed firms and seed rounds. So I wanted to dig in on this. What did you mean by this and how are you seeing it play out?

• 6:09Speaker 02

  This tweet really, I think, resonated with a lot of investors and it wasn't really my intention to kick off a weekend thread on a Friday at happy hour time. But it was something that just hit me through a few conversations. Essentially, if I break it down, it's a very 2019 observation. So in my six and a half years of investing, I have not seen What I'm going to describe to you now and unpacking the tweet. And when I say most talented, I want to be clear that not all talented people become successful entrepreneurs. Talent and entrepreneurship don't necessarily overlap all the time. And when I meant talented, I meant that it could have been maybe 10, 20 years ago. The quote pedigree of what somebody would say is like a prototypical founder.

• 6:52Speaker 02

  Someone who studied at Stanford, a computer scientist from Harvard. Someone who was an electrical engineer from Princeton or Yale or University of Chicago, Illinois. The pedigree of what people look for as a signal of talent now has shifted where if you are, you know, it doesn't even matter where you went to high school or college. If you were working for five years on the infrastructure team at at Stripe in the early days. Or if you're a user interface designer from Airbnb and became a leader at Airbnb. Or pick any of your 10 to 20, 30 Bay Area like top of mind companies. Those alums that quote talent has so many opportunities to them. Not starting with all the angels within their companies who can support them with a few hundred K to get going.

• 7:36Speaker 02

  Plus their own stock options that once they look out in the universe and they see what they want to do to leverage their prototype or start building their company. The things that they want, and this is what I was trying to convey in the tweet, are actually when you strip it down from what their revealed preferences are, are not what most seed funds can offer them. And that is in no particular order, a brand, a brand to recruit against to say, okay, I'm leaving Uber now. And I'm going to build this company and you're going to join me because so and so is backing us. It's raising more money for either the same or even less dilution. Because the larger funds have bigger chip stacks. It's tapping into this network. Imagine if a firm of repute like Excel or Lightspeed where I'm a venture partner. Or Andreessen Horowitz, which is on fire right now.

• 8:21Speaker 02

  They say, we'll give you $3 million, Harry, to start your company. And you can leverage our entire global network. Seed funds just cannot compete with this. On top of this, a lot of seed funds have gone deeper from $40 million funds to 90 to 150 to even 200. And their ownership requirements early make it. Very painful on the cap table for these founders. So that's what I was trying to convey in the tweet is that this group of people right now, they're voting with their feet and they're bypassing seed.

• 8:50Harry Stebbings?

  So I think that's a fascinating observation. I guess my question here is, and maybe it's a slight pushback, but and again, maybe slightly biased. For me, though, when you look at, say, a $3 million seed round coming from a billion dollar fund, that's 0.3% of their capital. That would be the calculation. In terms of attention, partner time and support that they get, that isn't going to be aligned to the fund's objectives. It's purely an optionality check for them in case it pops. Is that not the case or would you disagree with me?

• 9:17Speaker 02

  I wouldn't disagree with you, Harry, but I think it requires a more nuanced discussion. And you are one of the perfect people to have that discussion with. And this is a perfect venue to have that discussion. What I would say is that if you and I start a company, Harry, and then a firm like Greylock gives us $4 million. If we can't make do and make something out of the 4 million, maybe we should all go home. So I think the signal risk is minimized. Two is that a lot of entrepreneurs already, this set of entrepreneurs, and again, it's a small subset, but it's a very talented subset. They already have kind of operator, operational support from the companies that they're being birthed from. And so they may not value as much the quote partner time or the attention. They may say, look, we'll develop that over time.

• 10:00Speaker 02

  And so I think some of the risks that people say, or investors would try to defend their turf and say, well, we have more skin in the game or there'll be signal risk if you do that. I think from these founders' minds, they found a way to mitigate those risks.

• 10:14Harry Stebbings?

  I do understand and I do agree in many cases. I think signaling, it's interesting for me in the UK, signaling because there's much fewer funds that can write the bigger checks. It is maybe more prominent, I think, than in the US. I guess my subsequent question then is, okay, so if we have this extremely talented cohort of founders that are doing this and have the ability to do this, how do seed funds respond? How do we adapt our strategies? How do we think about potentially missing out on this cohort of incredible entrepreneurs?

• 10:39Speaker 02

  Great question, and I want to underline the point that this is a small subset, but these are very talented people. And so the way I think about it is if you have a relationship with them or if you Can add value early, or if you can meet them early, or if you can put in a smaller check, i.e. keeping your fund size small, you have a chance to catch more of these than others. But if you're trying to win and compete against a friend like Keith Raboy at Founder's Fund, or against Rafshan Mohammed, who's done three or four seeds, two of which have gone on to billion-dollar companies from Lightspeed, or Ping Li at Excel, very few GPs at the seed level can compete at that level. And this is what Keith was trying to say in that post,

• 11:20Speaker 02

  which is that that universe of seed investors that can go toe-to-toe like a Mike Maples is very small.

• 11:26Harry Stebbings?

  Listen, I do agree, and I have nothing but a huge respect and admiration for Mike. He's one of my favorites. The subsequent question for me, though, on that is, okay, if we take that $4 million round, say, we're instantly looking at pretty lofty pricing. I've seen recently 25 million pre-launch for the pre, 100 million pre's on ones, 2 million AR companies. I guess my question is, how do you think that stays pricing? And are you concerned?

• 11:49Speaker 02

  Do you play poker, Harry?

• 11:51Harry Stebbings?

  I do.

• 11:51Speaker 02

  So the way I would think about it is, imagine you're playing a cash game with about eight to 12 people around the table, and there's a couple of people at the table, including you, where you have the largest chip stacks by an order of magnitude, but by 15 to 20 times, maybe even more. Sometimes, in order to just take more risk on into what you're doing and maybe accumulate more, you'll maybe pay to see more flops of the cards.

• 12:17Harry Stebbings?

  Mm-hmm.

• 12:17Speaker 02

  And so that's the way I think about it from the firm's point of view, is they're kind of saying, this is a limited subset, this is a special period in time. These are very talented founders who have been trained in a way, like, you know, I always pick on Stripe as like, it just seems like the most amazing company to be at and learn at. And if you're an alumni at Stripe, you've put in six, seven years there. Your knowledge base about the cutting edge of whatever you're doing is going to be incredible. And so it just seems like it doesn't really matter what the pricing is. What the funds are saying is, do I need to work with this person? Even if this one doesn't work out, do I want to have a chance to do their second company? And the pricing becomes a secondary question.

• 12:56Harry Stebbings?

  I totally understand and agree. I guess I just find it hard to stomach. In some cases, and it's probably a learning curve. And I think.

• 13:02Speaker 02

  But if you think about the portfolio construction, you know, a lot of these funds, you know, and now they're growing even since. But if you think about them, they've got about 1.5 billion across early venture growth and maybe some opportunity fund. In order to drive that return, they need to put some lumpy checks in companies that are already working. But they have the capacity to put 100 and 150 million into seeds. And partners have varying different strategies around seeds. But some of those could drive multiples with smaller exits. And some of those could turn into bigger companies that become captive within the fund. And so I think what they're saying is, look, we have the capacity with this set of talent to kind of say, look, the pricing, when you just have three people and they've got a prototype, doesn't really matter right now.

• 13:45Speaker 02

  So if they want four on 20 or four on 25 or four on 30, it just doesn't matter. We can deal with that later.

• 13:51Harry Stebbings?

  Okay. So if you think about that and the kind of their portfolio construction, if they're maybe doing a lot more of those smaller checks and building those optionality pools, do you think they have the actual kind of human capital to build the relationships and sustain the relationships with the founders? To ensure that when it comes to the round of explosive growth, the big round where they can deploy big money, they've got those relationships to leverage and actually gain that seed at the table again, versus having much bigger players, your tigers, your DSTs come in as the new investor who's willing to bid it up further. Do they have the ability to build those and sustain those relationships when they have so many more relationships?

• 14:26Speaker 02

  It's a great question, as usual, Harry. I think it really depends on the actual partner. And if you look in Keith's comments on the threads, he was very specific about talking about, if you're paired with a experienced GP at a fund and they take maybe eight to 10, 12 points of ownership, and there's actual engagement, that's a way that the relationship is built and perhaps that fund does the next round. What's happening in this environment are a couple of plays. Sometimes funds are competing for this early seed round. And the entrepreneur will say, okay, this is too much competition too early. I'm going to pick two firms and have you split the round. And then you two firms can compete for the next round. So one way they're mitigating the risk is to split the deals. Another way folks are mitigating the risk is that they may go with a large firm.

• 15:10Speaker 02

  Fund at the seed and then kind of say, okay, well, I already have my relationship with this fund. I want to broaden my network and go. So like it's sort of like a false narrative that like if you take a seed from a Sequoia or you take a seed from a Lightspeed, they're just going to continue to do your next rounds. If things are working and the teams are talented and the space is interesting, people may make an overture from another fund. So it really just depends on what's happening. And I've seen all of the permutations happen. It's it's pretty random. Even this this week, I can't mention what company it is, but there is a very, very top tier fund that worked with a founder, put in a million of the two and a half that this founder raised. And this founder was preempted by another great fund and honored the preemptive move and didn't allow

• 15:52Speaker 02

  the other fund to counter. And so a lot of that is based on he had worked with this person for 10 years. He felt like he wanted to honor the preemptive move of the new fund and he put his foot down.

• 16:02Harry Stebbings?

  I mean, that's super interesting in terms of kind of that preemptive round. I guess my subsequent question is, do you think you said there about choosing two firms and getting them to work together and co-lead it versus that preemptive lead themselves? Do you think we're moving into a generation of more collaborative venture on the two-handed deals or actually more not aggressive, but more dominant, a sharper elbow to get into the toughest but often best companies?

• 16:24Speaker 02

  That's a whole different topic. What I would just say at seed is that when a larger fund wants to work with an entrepreneur and they're not really sure yet, it's more of a talent or speculative investment. There's not much proof in the investment. They're more willing for defensive purposes to split the deal because it narrows down the opportunity set of who could have a chance to follow.

• 16:46Harry Stebbings?

  Mm hmm.

• 16:46Speaker 02

  But it's really up to the founders too. The VCs don't have control. What I do think is that it's tough for one of these larger VC firms to warrant a partner's time and brand extension to a seed round unless they own about 10% as an option. Because what you're saying then is like, I'm going to hold 10% in pro rata. And if for some reason the relationship doesn't work out, the other fund wins a deal or someone comes over the top and preempts it, we can still hold our 10%.

• 17:11Harry Stebbings?

  Yeah, absolutely. You know, I get you in terms of that hold and that base case scenario. We mentioned kind of the relationships between the founders and the VCs there and kind of the importance of them. One thing that really worries me today is the compression of fundraising timelines, often in the days or even week situation. Have you seen an increased velocity to raises getting done? And how do you think about that kind of compression of timelines themselves?

• 17:33Speaker 02

  You know, the immediate people that come to mind who are the experts on that question would be a former guest of your show, like a Chris Duvos or like a Beazer Clarkson. I think from what I hear from talking to LP, so this is secondhand for you, is that they do see funds, and especially it hurts with the larger funds, when they start coming back every two years versus every three years. So like the industry norm has moved from three-year vintages to two-year vintages. And I think that becomes really, really hard because as those funds grow, meaning like as a Sequoia goes from X billion to two to three X billion funds, and no one's going to leave their allocation in Sequoia on the table, and as a timeline's compressed, it makes it harder for the Harry Stebbings and

• 18:16Speaker 02

  the Samuel Shahs of haystacks of the world to raise those funds. So that's kind of one thing. The other thing, and you know, we can talk about this as it relates to haystack, but when I did the first two funds, I was just not paying attention to much pacing or reserves or anything. I was just trying to find good companies. And, you know, I did both of those funds in about 18 months, but I didn't, I wasn't really penalized for that. In Funds Three and Fund Four, I did a full two years of deployment, which I felt like, you know, was still pretty quick, but in the grand scheme of things where I was coming from was really good. And now as I move into Fund Five, we just closed Fund Five a few months ago. We haven't opened it yet. It's going to be a $50 million vehicle. You know, I told everyone, and I hope you can hold me accountable to this, Harry, you know, it'll

• 18:57Speaker 02

  be at least a three-year fund. And probably the most convincing thing to me around time, building time diversity into the portfolio, and I don't think I've actually heard this topic on your show. I learned this a lot from one LP at Cross Creek who shared some data, and then Mike Maples, where they're basically saying the same thing but using different arguments, that typically when you have a little blip in the market, not a recession, but maybe what we had at the end of 2015 going into 2016, you have these little corrections, right? And these corrections kind of last about six to 12 months where you have some Market pressure pushing prices down in both the public and the private markets. And I know this seems like a long time ago, but it it did happen a few, you know, three, three and a half years ago. If you have a three year fund or even a four year fund,

• 19:41Speaker 02

  you are more statistically likely to have that six to 12 month period fall into the vintage so that your median entry price and your cost basis for buying the shares in the startups that you're buying can be leveled out. Does that make sense?

• 19:54Harry Stebbings?

  It totally makes sense. I think I often see, especially on first time funds, the 18 to 24 month deployment cycles. And then that kind of environment comes to bear and suddenly you're on the hook for a ton of your companies now that need refinancing. And potentially the reserves aren't there, which is a core concern and problem.

• 20:10Speaker 02

  I would say the LPs need to get together and kind of say, we need to standardize terms. Because look, if a fund like Lightspeed or a fund like Andreessen, or you you name your best fund, where they've already returned billions and billions of dollars of capital over different vintages. And they want to invest their fund, this next one a little faster and the next one a little slower. You let them do their thing. But for people like you and me and other new people starting funds who aren't trained as managers, we're we're becoming managers over time. They don't put any time diversity clauses in the documents, right? What they do is they'll say, look, if you raise X amount of money, once you've deployed and reserved against 70%, then you can go out to raise your next fund. But that includes a reserve. So the capital in the market is enabling people to do this.

• 20:55Harry Stebbings?

  No, I totally agree with you. So would you stress that we implement these frameworks from the LP side? And really standardize the time diversification element of the deployment cycles?

• 21:04Speaker 02

  I mean, I think if you asked 100 LPs, would you like to do that? You'd get 101 hands being raised. They would all want that. I think in a lot of these cases with the larger funds, they don't have the leverage to do it. I think it's more a case of newer funds and newer managers kind of putting them a little bit on these, not training wheels, but kind of guardrails so that they at least have a chance as they're managing the money to get a little time diversity in the portfolio. That would be something that I think would be very easy for GPs to agree to, unproven GPs and very beneficial to LPs.

• 21:35Harry Stebbings?

  Listen, this is fascinating and I agree with you. We haven't discussed it before, but I'm. Really pleased we got to today. We spoke about kind of Paystack and the new fund there. Huge congratulations with regards to the new fund. My question to you is, in terms of the change in strategy, you know, it's doubled since the last fund in size from twenty five to fifty. So the immediate question is, what's changing with regards to the strategy? And how does it differ from those prior funds?

• 21:58Speaker 02

  So if you think about it, and thank you, Harry, if you think about the progression of Paystack, one of my LPs who came into this fund, she crunched all the data of everything we've done, and it hasn't been very focused in the sense, I was just focusing on seed. But within seed, there's a lot of variance. What she said is that the median round size that we participate in and the median valuation band is extremely consistent and tight. And I was really proud of that because it meant that I was kind of staying in my lane, if you will. And if you think about Fund One was twenty five K checks, Fund Two was fifty and a hundred K checks with a couple of two hundreds. Fund Three was a hundred to two fifty K checks with a couple of six, four to six hundred checks. And then Fund Four, which we're just closing up, has been around five hundred K checks, give or take, with heavier reserves.

• 22:43Speaker 02

  And I feel like I've kind of, Paystack has kind of hit its cruising altitude, where we've been doing the same rounds, except that we've just been slowly increasing our check size. So really what changes, Harry, and a lot of this learning came from Duvo, so I have to give them credit, is that I've been staying in the same rounds, I've been increasing the check size, I've been increasing the reserve, and now I'm going to increase the time diversity. So the portfolio construction of what is happening in Fund Four with twenty three million dollars will look very similar to Fund Five. And that's what I told all the LPs.

• 23:15Harry Stebbings?

  Totally agree with you in terms of that time diversification coming into play there in terms of the cadence and size of checks. Was a big question that you got in terms of fundraising, seminal, incredible portfolio, some obviously game changing companies in here. How are you going to increase the check size and become not the collaborator, but actually the really sizable check that people really need to make room for? Was that a big question?

• 23:34Speaker 02

  Oh, absolutely. Luckily, I'm pretty direct and straightforward and understand what my limitations are. I felt like what I could offer people as founders is to earn the right to be five to ten points on the cap table and maintain that over time and not really try to Do more because I felt like if I would try to do more, it's going to really butt up against the market. And I can't credibly tell an entrepreneur today, hey, I need to own fifteen percent of your company. I didn't want to make that promise. And so what I told the LPs is my pitch is two fifty to seven fifty K initial check. And guess what? We have lots of money for things that work beyond that. And so that's kind of the lane we play in, and I was very, very careful to not promise we're going to do a million dollar, million and a half, two million dollar checks.

• 24:19Speaker 02

  Can we do that? Absolutely. But I did not make that promise.

• 24:23Harry Stebbings?

  No, I totally get you. And that way then you don't rub up against the shoulders of people who you would normally have collaborated with and you keep them as friends. So I totally get that positioning, which is super nice.

• 24:32Speaker 02

  There's that too, Harry, but there's also just the brute force of the market. Someone may really want to work with me and Paystack is a very boutique thing. It's a relationship with me and we have a small team now, but we don't have a platform service. We don't have people on staff to help you do things. We don't have a designer on staff. And so I think founders who are going to give up more of their cap table, fifteen, twenty percent to some of these larger seed funds. Perhaps that's why they're looking at the market and looking at less dilutive capital too. So I wanted to be very conservative about how much we could ask for on the cap table.

• 25:06Harry Stebbings?

  Totally get that thinking. The next question for me is in terms of kind of the fund size setup. It does require almost a different process, a different mindset. And so my question to you is, what have been some of your biggest learnings with regards to really learning fund management and kind of being a pro at it? Because it is a real learning curve.

• 25:22Speaker 02

  Yeah, I mean, I'm still learning. I think that there's a long way to go, but I feel like in five or six years, I've really tried to study it. I mean, I, I love it, kind of like you love it. And so I think that passion for it helps a lot. It was really important for me to learn to be credible in front of LPs. You know, I've had the luxury of being a venture partner at three firms that have all returned multiples of capital over many vintages. And then having so many LPs as successful VCs in the past have started their own funds. And I'm able to ask people all sorts of questions in the moment. And so I, I still feel like there's a long way to go, but I feel like I've really, in the last Funds learned a lot. What I haven't seen yet is what happens when cash is super, super tight.

• 26:05Speaker 02

  I've only seen that one six month blip. I haven't seen what happens, what's going to happen today. Like as I, we opened this new fund and the market is like I've never seen before. So that's a huge unknown, but I feel like in terms of the management, I've got most of that down finally. And what I would say to people out there who are just starting is, and I'm actually going to put some coursework out on fund management. It sounds kind of funny because I don't consider myself an expert, but I'm going to share what I know and document in real time. So that can help other people find all this stuff in one place, but that's a project I'm working on right now.

• 26:35Harry Stebbings?

  Because I couldn't agree more. I don't think there's enough content and education out there when it comes to fund management. I guess my question to you is also, what did you find the most challenging elements in terms of really getting to grips with the granular work of fund management? What was that more challenging element for you?

• 26:49Speaker 02

  I think the most challenging element, I think it requires a level of systems thinking and long range thinking. That when you're just kind of investing in seed companies and you haven't been around funds for a long time. So you don't intuitively have that sensibility. It's kind of like learning an offense. If you're an athlete and you, you're, you're moving to a new team or a new league and you have to understand the system. And it takes a while to kind of understand the system and embody the system. And so for me, it wasn't something I could turn on. It was just kind of an evolution. And I think to answer your question, the hardest part was just kind of sticking through it and being able to ask people, what are the best in breed do? So I could try to at least emulate some percentage of that.

• 27:30Harry Stebbings?

  Yeah, I think having that support network is, is crucial. I do want to dig in on one element of the strategy in particular though, and we touched on it before, which is the two fifty to seven fifty. And then having more dry reserves if needed and when things take off. My question to you on reserves and reserve allocation itself is what, how do you think about it? And then in terms of the reinvestment decision-making process, what does that look like to you?

• 27:51Speaker 02

  Yeah, and this is sort of a nice segue from episode number two with us to now where I now have some answers for you, Harry. I think my philosophy in deploying fund four, for the most part, and then going through this fundraiser five, when people asking about it. Is I feel like I got to a ground truth of what I want to be able to. To do, which is I want to be in that first million or two that the company raises. I want to do a top up round when I get excited about a company before a round. And I want to be able to earn the right to participate in that, let's say, small or large A round. But I think after that, once it goes to the B where you're looking at hundred million valuation, maybe two hundred, maybe more. Then I think it becomes a different consideration set. And so every opportunity is unique, but I would lay out a couple of points.

• 28:36Speaker 02

  One is Maples always kind of says, look, if your competency is seed and then you follow on an A or B. You don't really have the competency as a manager to assess whether that's a good A deal, whether that's a good B deal. So part of what you need to do as a manager is outsource that decision to the quality of the fund going there. More sophisticated way to say who's actually doing the round and how competitive was it? I think the other piece is just, is it a consumer facing company or a company with consumer properties? Where it can grow beyond the US, grow beyond its current incarnation, where you have more headroom like a Zoom. Where the upside may be so great that you want to continue to invest with the company. Another one could be just for relationship.

• 29:17Speaker 02

  It could be a very hot cloud infrastructure company that maybe is not going to grow into five to 10 billion dollars. But you have a really close relationship. So do you put a little money in? And I think the other one is just to have the reserves to at least defend the position. So that's how I think about it. But what we've done so far in Fund Four, because it's late 2017, the late 2019 vintage. Is those, you know, a number of companies have gone to Series As and a few of them are starting to go to B now. And the second wave of As is coming. So that's kind of how I would answer that question.

• 29:47Harry Stebbings?

  I'm totally with you and it gets to the point where the opportunity cost of the capital deployed in the B round at the 150, 200 million pre. Is actually more worthy put creating another line in terms of the portfolio itself than incremental, incremental sustaining of the position itself. So totally agreed there. I, I, it's interesting, you mentioned that the consumer and the enterprise elements. And when I spoke to your partner at Lightspeed, Jeremy Liu before, he mentioned to me about your emphasis and focus on consumer in the early days. And now you're very much embracing the enterprise world. And his question was, why did you make the switch from consumer to enterprise? And switch is probably a binary word, but why did the emphasis and focus alter in terms of consumer to enterprise? And what was that reasoning for you?

• 30:28Speaker 02

  Yeah, I mean, it's been really amazing to watch how Jeremy has built up his own practice and portfolio. And then the team that he's grooming and helping rise at light speed. When I started, I wasn't really thinking about it. Every other investment was a consumer investment. And really what I was thinking about was how do you get into the wallet share of the consumer? So if you look at some of the companies that I was lucky to identify, Instacart, DoorDash, Open Door, in particular, WAG. There was a kind of daily active or weekly active use case of dipping into the user's wallet in a transactional way to earn revenue. What I found kind of towards the end of 2015 was that two things happened. One is perhaps I personally started to see less of that flow.

• 31:12Speaker 02

  And so sometimes as a seed investor, the portfolio you build is a function of the network and the people that you meet. And so that might have changed around 2016. The other thing is that I feel that the cost of customer acquisition and the ability to go into the consumer's wallet got significantly more difficult after 2016. And I think that this has been reflected, actually, if you look at the top 10 to 15 venture funds in the Bay Area, for example. I think that their allocation towards consumer has gone down relative to before. Now, I don't have the stats to support it, but I do think there's fewer of those big breakouts since then.

• 31:49Speaker 02

  And so my intuition was a platform maturity of the iPhones, of the App Store on iOS, of Facebook, of Google, of Snap and Pinterest kind of hit a ceiling where I felt the cost of acquiring these customers in the LTV, according to it, would make the businesses very capital inefficient. Now, that's not to say I want to do more consumer deals. I love consumer deals. What we did in Fund Four is we did a couple of discovery checks, maybe about five to eight in consumer companies that we really liked, hoping that one would convert to a core. And so one of my goals is to build in more consumer in there. I don't think of myself as an enterprise investor. I don't think of myself as a cloud investor. I want to find really Gritty entrepreneurial people that have talent and drive.

• 32:33Speaker 02

  And if they happen to be in the consumer business, that's great.

• 32:35Harry Stebbings?

  Listen, I I love that in terms of the purity and concentration on finding the best regardless of sector. Well, you mentioned the word allocation now in the final one, because it's a big point of actual difference of opinion in terms of the venture ecosystem. It's time allocation regardless of sector. One always needs to spend time with the portfolio and with the founders. And I'm fascinated. How do you think about the allocation of your time across the portfolio?

• 32:56Speaker 02

  Yeah, and I mean, this question comes up with LPs too, obviously, because that's your most finite asset. The way I explain it is in Fund One, which is a 2013 to mid 2014 vintage. Most of those companies now I'm just friends with the CEO and they've the ones that have gone on have really gone on. And there's one active company raising sort of a B C round that I'm helping. In Fund Two, it's maybe a couple more, but most of those outcomes have sort of taken shape. And again, I have very personal relationships with the founders, so they're always texting me. But they have big investors around the table and so I'm just a buddy now that they met along the way. In Fund Three, we have a couple more As to do maybe two, maybe two or three more Bs and most of that is set.

• 33:39Speaker 02

  So most of my time is on the Fund Four portfolio. I was actually just working with my senior associate on this, where we have two or three in the fall that are going to do either small to big As and we're preparing for all of that work. And then we have a couple that probably we need to start to persuade the founder to think about finding a home for the company. So there's a lot of time being spent there. And then obviously we're cutting over to the new fund and, you know, going to be looking at the next new things.

• 34:05Harry Stebbings?

  I've been super excited to see what you build with the new fund and couldn't agree more there in terms of how to spend that time and kind of the maturation of the companies. I do want to dive into my favorite element, though, Samuel, as you know with me, the quickfire round. So I say the short statement and you give me your immediate thoughts. Ready to dive in?

• 34:20Speaker 02

  Yes, sir.

• 34:21Harry Stebbings?

  Okay, so we've had two favorite books so far, so I want another. I'm flying to the West Coast, what should I be reading on the plane?

• 34:28Speaker 02

  The truthful answer, Harry, is that I haven't read a book since our last podcast, but I can tell you the most recent book I bought.

• 34:35Harry Stebbings?

  Well, go for it.

• 34:36Speaker 02

  It's Jerry Colonna's reboot. Jerry was very generous. With me, just as a friend and civilian during my Fund III and transition to Fund IV, would just spend some time with me on the phone, you know, maybe an hour or two here or there, uh, very limited. And I even just those couple of hours were so impactful for me. And just how he would interpret what I was saying and hold a mirror up to what I was saying, that most people will send you their book when they write it and say, hey, can you tweet it out? And Jerry sent an email saying, buy my book and I bought it.

• 35:06Harry Stebbings?

  That is absolutely hilarious. And no, I couldn't agree with you more in terms of receiving those books and that it's sitting right in place on my shelf, waiting for the next holiday. So I'm with you there. And next one, what would you most like to change about the world of LPs in particular?

• 35:18Speaker 02

  I think LPs, what I would say is if I'm an LP and I want to be competitive over the next 10 to 20 years, I'd better be extra nice, have fun with my GPs and be available to answer questions around fund management, connecting them to new people, giving hard feedback when it's needed, but being a really friendly interface to the capital. Because there's a lot of capital out there and, you know, not everybody has to be the most friendly or liked person out there, but there are some people there who can, in a meeting or two, and the same applies to VCs, can really turn off the wrong person. And so what I would just say is I don't, I don't necessarily want to see a change, but it's more advice for LPs who are perhaps younger in their career and charting it out,

• 36:00Speaker 02

  to say the stakes have gone up and the competition has really gone up for GP Capital.

• 36:05Harry Stebbings?

  Totally with you there and the relationships at the centre of it all, I couldn't be more aligned. What advice would you give to a graduate entering the workforce today, Samuel?

• 36:12Speaker 02

  You know, I always give this advice and it's, it's just what I wish I had done myself. And it's hopefully broad enough that it doesn't apply to tech or VC, but it's to having a mindset of an investor. And what I don't mean, I don't necessarily mean you buy these stocks or you buy this real estate, but everything you do is an investment. The time that you spend learning Mandarin is an investment. The time you spend taking a cooking class with your friends is in some kind of investment. And to really think about how you're spending your resources and time to either have fun, get better, learn something, buy a property with your friends, buy a piece of- Artwork, just to have that mindset. I wish I could rewind the clock back and have that mindset.

• 36:54Harry Stebbings?

  I love that in terms of the mindset that required. What's the single biggest challenge of your role with Haystack today, Semil?

• 37:00Speaker 02

  The biggest challenge is staying disciplined around entry price. When we all invest so early, the outcomes are completely random, they're completely unknown. And so we have to kind of take a cohort basis. And what you have now is, especially in the Bay Area, such a free flow of capital and a loosening of norms around how funds are raised and the requirements that founders even need to create decks or one pagers or blurbs, you know, on email to get funding. How to stay disciplined around entry price? How to stay disciplined around ensuring that the entrepreneur does the work to warrant the funding? Because it's very easy to kind of go along with the crowd. That's the most difficult piece.

• 37:42Harry Stebbings?

  What do you know now that you wish you'd known at the start of your career in venture and the start of Haystack?

• 37:47Speaker 02

  Either start small like I did and don't assume it's all going to work out. You have to get very lucky. Or start off with a real capital partner because a capital partner helps save you time and a lot of cycles. And it can help you scale to deploy capital quickly. If you end up spending 18 months, 24 months, 36 months to raise just a small amount of money to keep going, the opportunity cost of that time is very severe.

• 38:11Harry Stebbings?

  Final one, Semil. I'm excited for this one. What's the most recent publicly announced investment? And why did you say yes and get so excited?

• 38:18Speaker 02

  I decided in Fund Four, Harry, we don't really announce the investments and it's an interesting topic. What happened in the first three funds is, I think partly because we were successful in finding good companies early and there was a good rate of series A conversion and the venture industry grew. I just started hearing from founders that we would put them on the site or we would write a blog post about them too early and they would get bombarded with VCs emails. So they would forward it to me and say, do you know this person? Should I take this meeting? And that can just be super distracting for the entrepreneur before they're ready. So it's a balance between the entrepreneurs building the relationships with the downstream capital, which is super important, versus ignoring all the noise of the inbound and the robo calls and the big data platforms

• 39:00Speaker 02

  that are just sending you emails through outreach to see if you'll bite. So we actually don't really announce them. And occasionally an entrepreneur will want to do that, but what I try to do is announce these rounds in smaller circles when the entrepreneur is ready to go meet these investors. So kind of a counter answer to your question, but I don't even know.

• 39:19Harry Stebbings?

  Semil, listen, this was a first in terms of a third time around. And it was also a first in terms of that answer. So listen, after 2,800 episodes, anything that is different, I totally love and embrace. Totally makes sense. Listen, obviously I've adored having you on the show again, Semil. So thank you so much for joining me.

• 39:35Speaker 02

  Thank you for having me again. And I hope if Haystack is lucky to raise a sixth fund in three years now, we can cut album number four.

• 39:43Harry Stebbings?

  I will hold you to the three years, my friend.

• 39:48Harry Stebbings?

  As I said at the beginning, just such a special member of our ecosystem. And I couldn't be more thrilled to see the continued success of Haystack. I do want to thank Semil. He's been so kind to me, so really do so appreciate that. And if you'd like to see more from him, you can find him on Twitter at Semmel. Likewise, it'd be great to welcome you behind the scenes here. You can do that on Instagram at H Stabbings 1996 with two Bs. But before we leave you today, I have to talk about the company that's taken this ecosystem by storm. Brex, the company which built the corporate card for startups and who is the fastest company to reach unicorn status in history. Brex founders Henrique and Pedro built a payments business in Brazil, but kept getting rejected for a corporate card in the States. So they built Brex with no personal liability, up to 20 times higher card limits and huge rewards like seven X points on Uber and Lyft,

• 40:31Harry Stebbings?

  four X on Brex Travel and two X on SaaS software. If you're a VC backed startup based in the US, see if you qualify for a Brex card at brex.com and get card fees waived for life by entering the code HARRY during signup. And before Brex, the consumer experience for corporate cards was broken. And it's the same for bookkeeping. I doubt you started a business to track financial statements or make cash flow spreadsheets. However, now we have Pilot and Pilot for bookkeeping gives you back the freedom to focus on your business. Every month, your dedicated account manager will send you an accurate, detailed financial report. Pilot does accrual basis bookkeeping in QuickBooks Online, so you're never locked into a proprietary platform. Plus you'll work with the same person each month, so you can rely on them to become an expert in your business.

• 41:13Harry Stebbings?

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• 41:29Harry Stebbings?

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