20VC: Why Financial Models at Seed, $5M Seed Rounds & The Fear of Signalling Risk is all BS | Why Multi-Stage Firms Have Destroyed Seed & Who Wins and Who Loses in the Next 10 Years of Venture with Adam Besvinick, Founding Partner @ Looking Glass Capital

Adam Besvinick is the Founder of Looking Glass Capital, a pre-seed-focused firm started in 2020. Before starting Looking Glass, Adam spent about 5 years at Deep Fork Capital and Anchorage Capital Group investing in pre-seed through Series C. Adam's portfolio across funds includes the likes of BigID, Transfix, NomNom, and Hone Health, to name a few. In Today's Episode with Adam Besvinick We Discuss: 1. How Twitter Led to Founding a Venture Firm: How did Adam make his way into the world of venture through Twitter? What are 1-2 of his biggest lessons from working with the legend, Chris Sacca? What does Adam know now that he wishes he had known at the beginning of his time in VC? What do most young VCs misunderstand when it comes to reputation? 2. Raising Fund I: The Process: How many LP meetings did Adam have to close Fund I? What docs and materials did he have for the fundraise? How does he advise other managers on doing docs for fundraises? How do different LP profiles want different things in the managers they work with? How did Adam approach first vs final close? How does he advise others managers on closing? How did Adam instil a sense of urgency in LPs to move and commit to the fund? What are 1-2 of Adam's biggest pieces of advice to managers raising a first-time fund? 3. Looking Glass: The Very Disciplined Pre-Seed Strategy: How did Adam decide on the fund size? Why is it the optimal fund size? What is the desired ownership for Adam? What level of dilution does he expect across the lifecycle of the company? What is the average check size? What is the average entry price? How does Adam approach reserves and follow-on checks? How does Adam reflect on his own relationship to price? Why does Adam not like the majority of pre-seed micro-fund strategies? 4. The Market: Multi-Stage Firms Destroying Seed Does Adam agree that "multi-stage firms have destroyed seed rounds"? How does Adam advise founders when they have multi-stage offers and seed firm offers? Who will be the winners and losers in the next 10 years of venture? Why is it harder than ever to advise founders on fundraising rounds today?

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

• 0:00Speaker 00

  When you raise $5 million at 25, you have a target on your back before you've even written a single line of code. Giving someone $5 million and four years to figure it out is a luxury of a billion-dollar venture fund. You need to have at least 24 months of cash. If you can't find product-market fit by being that disciplined over a two-year period, you probably didn't deserve to raise more than two and a half.

• 0:20Harry Stebbings?

  Welcome back to 20 VC with me, Harry Stebbings. And it's been a while since we did an Inside Baseball VC show. And so today, that's exactly what we're gonna do. And joining me in the horse seat is Adam Bezvenik, founder of Looking Glass Capital, a pre-seed-focused firm started in 2020. And before starting Looking Glass, Adam spent five years at Deep Fort Capital and Anchorage Capital, investing in pre-seed through Series C. Adam's portfolio across funds includes the likes of Big ID, Transfix, Nom Nom, and Hone Health, to name a few. But before we dive into the show today, this episode is brought to you by Tegus, the go-to research destination for bold investing. Tegus curates expert insights, analysis, and financial data to give you powerful

• 1:00Harry Stebbings?

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• 1:43Harry Stebbings?

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• 2:26Harry Stebbings?

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• 2:49Speaker 02

  Hello. You have now arrived at your destination.

• 2:55Harry Stebbings?

  Adam, I am so excited for this. We've been back and forth on Twitter many times. I've wanted to make it happen for a while. So thank you so much for joining me today.

• 3:03Speaker 00

  Thanks for having me, Harry. Excited to be here.

• 3:05Harry Stebbings?

  Well, we're going to start with a little bit of context. So tell me, how did you make your foray into the world of venture and make those first moves?

• 3:12Speaker 00

  Honestly, I joined Twitter in 2009. That was my entry point into understanding the world of venture. And so I just started following dozens and dozens of VCs on that platform, going back and forth with them when I had like 200 followers and use that as a platform for potentially cold emailing hundreds of investors, trying to figure out how to move from traditional finance to venture. And ultimately ended up working for Chris Sacca and lowercase capital while I was in business school off of a cold email to Chris and then diligently following up with him until he gave me some work to do, basically.

• 3:43Harry Stebbings?

  Before we get any further, I just have to ask, Chris is such a good dude. What did you learn from working with Chris at such a young and formative stage of your career?

• 3:51Speaker 00

  I think the number one thing that I learned from Chris was his deference for founders, the absolute respect that he has for entrepreneurs and how that translates to your reputation as an investor. And the thing that I think is so critical as a young VC and really hopefully that's compounds over time is that reputation is the number one currency as an investor that you have control over. From working with Chris, I sort of developed this hypothesis that if you have a great reputation, that should compound over time, should yield higher and higher quality deal flow, should yield higher and higher quality references from other founders and ultimately give you the best possible chance of picking the best founders.

• 4:25Harry Stebbings?

  Do you feel that many VCs today still hold reputation as the number one currency?

• 4:30Speaker 00

  There's a difference between reputation with founders and reputation with other investors. Your reputation with founders needs to be sterling. Your reputation with other investors, ultimately, I think some people take different tacks as to how they appreciate that one way or another. I personally have always felt that if you have a great reputation on other investors, that should hopefully allow you to be brought into other deals, allow that there would be a respect that you're going to punch above your weight on the cap table and other investors want you on board. Maybe not every investor operates that way, but reputation with founders is something that you can absolutely not compromise on.

• 5:02Harry Stebbings?

  When you think about all that you know now and you go back to those early days following VCs on Twitter, what do you know now that you wish you'd known when you entered before we dive into fund models?

• 5:11Speaker 00

  I think the number one thing is probably, it comes down to a mindset issue. When I originally started getting coffee and jumping on phone calls with VCs, I was blown away by the fact that so many investors felt like it was better to see an amazing company and pass on it than never see it at all. And as a 24-year-old at the time, that just blew my mind. Like, I couldn't wrap my head around the fact that you were more comfortable seeing something amazing and passing on it and that becoming Uber or Instagram or any iconic company. I sort of had this notion of a, as someone who was not doing the job, that ignorance was bliss. I would rather not see that deal and not have the sort of regret living with me every day that I missed this thing. I've been doing venture now full-time for almost a decade, but now as someone who runs their own fund and has been doing this for quite a while,

• 5:55Speaker 00

  I 100% understand that feeling where you would much rather be in the flow, you would much rather have seen the multi-billion dollar outfit and passed on it than have never seen it at all.

• 6:04Harry Stebbings?

  I agree with you totally, but I do also think there's this unwavering belligerence around having to see every deal. I don't need to see every deal, I just need to see enough of the great ones. And actually, I find that so many can have such a scattergun approach that actually they're not focused and targeted enough. I'm okay missing a deal if I'm working on something great as well. Do you see what I mean?

• 6:26Speaker 00

  Absolutely. You're feeding my argument for my thematic style of investing.

• 6:30Harry Stebbings?

  Okay, well, let's go to the fund then. But first, I have to ask, why looking glass as a name before we dive into model?

• 6:35Speaker 00

  There's definitely an allusion here to Lewis Carroll and Alice in Wonderland and sort of through the Looking Glass. And I think the fantastical elements that are necessary for what some of these founders are building, the sort of suspension of disbelief that's required for investing in something that's pre-product, pre-revenue, pre-everything. Sort of the idea that if you put down a pros and cons list for virtually every investment I've made, the cons would significantly outweigh the pros, but yet I've still said yes 27 times in the last nearly three years. That's where the name comes from.

• 7:04Harry Stebbings?

  I want to start on Looking Glass. What is the fund size and why did you decide that as the optimal size?

• 7:11Speaker 00

  The fund that I'm currently investing out of now is a $20 million target. And really I chose that size because it felt like it was incremental from Fund One. So Fund One was a little over $8.5 million, investing 300 to 400K pre-seed and very early seed rounds. So really 750K to $3 million rounds. And so I felt like the step up from 8.5 to 20 was iterative enough for me to essentially go from 300 to 500K, really 400 to 500K incremental step up in check size, allowing me to invest in 30 companies versus 24, but still maintain the exact same entry point.

• 7:44Harry Stebbings?

  I'm loving this already because I'm just going for it. Okay, so we have 24 companies in Fund One. That's a pre-seed fund, very, very constrained in terms of number of companies. Do you think you can do a pre-seed fund with that few companies being 24?

• 7:58Speaker 00

  I think you can if the ownership is sufficiently high enough. My goal with the fund was to make sure that every investment can move the needle and return the fund with a billion dollar outcome. Fundamentally, I believe if you're investing out of a $50 million fund or smaller, a billion dollar outcome has to return the fund or this job becomes even harder than it already is. All things considered, I would have rather had more like 27 companies than 24, but I was operating within the constraints of a smaller fund size. With Fund One, I need to own 86 bips at exit of a billion dollar outcome to return the fund. My average ownership was close to 4% on average at entry across Fund One. So even if I get diluted by 60, 65%, which I expect to over the life of that investment, I'll still own well north of 85 bips.

• 8:42Speaker 00

  In fact, if I get diluted by 60%, I'll actually Own 1.7%, so a billion dollar outcome, 2X is my fund.

• 8:50Harry Stebbings?

  My question is, what was the average entry price on those deals?

• 8:53Speaker 00

  9.1 post.

• 8:54Harry Stebbings?

  I saw 5 on 25 for the last three years. Where were you fishing?

• 8:58Speaker 00

  That's part of the strategy. I don't operate amongst the regular way seed investors, or at least the multi-stage seed investors that have driven up the price of seed valuation significantly and are still doing so. My strategy is to make sure that I'm part of the first money into rounds. Ideally, first yes, I literally own the domain firstyes.vc, it redirects to the Looking Glass website. The deals that I've done over the course of Fund 2 have been 6 million cap, 8 million cap, 8 million cap, and I'm stretching on one now, which is 11 million cap. This is all first money into companies over the last eight months.

• 9:32Harry Stebbings?

  But I want to ask you, that 8.4, it's quite a nice fund size to raise for. It's individuals, 100K, 250K Jax. 20, uncomfortable. You're too large really for those institutions really to start stacking up and making a difference, and you're too small for really other institutions to want to invest at that stage without hitting 10, 20% thresholds. Why did you choose 20, and is that not the hardest fund size to raise for?

• 9:56Speaker 00

  20 is definitely not the easiest fund size to raise for, I'll put it that way. But really, it came down to, I'm trying to build a firm over the next 20 to 25 years, and I wanted Fund 2 to be an iterative step up from Fund 1. And I felt like going from 8.5 to 20 allowed me to incrementally increase my check size in such a way that I was very comfortable doing so. LPs don't require a major leap of faith to believe that I can go from writing a 325K check to writing a 425K check on average, from earning 4.2% on average to earning 5.25% to 5.5% on average. These are baby steps in terms of increases that I felt like were very easily underwritable.

• 10:38Speaker 00

  Now, in terms of LP type, yes, that fund size definitely plays below the sort of normal threshold of institutional LPs. I generally think 40, really 50 is kind of the floor for a lot of those groups. And so I'm living in a world of smaller fund of funds and family offices and high net worth. Individuals who sort of look and act like a family office, but they don't have a family office sort of entity created yet. That's generally the majority of LPs.

• 11:04Harry Stebbings?

  On the fundraise, what docs do you have ready? How do you think about the materials that you need to get in place to go out and raise?

• 11:10Speaker 00

  That's a big lesson learned from Fund One. I started having conversations and people were like, send me subdocs. I was like, oh no, I don't have subdocs ready. Now I err on the side of formality in terms of data room and materials. And I write an investment memo for every single investment I make, even though it's just me reading them. So every single one of those investment memos is in a data room that LPs can pour over and see my thought process at the time of investment. Every LP update I've sent out, I write a very lengthy letter every eight weeks. That's very transparent on every company in the portfolio to LPs. So potential LPs can see how I communicate transparently and regularly with with my investors. And then obviously, of course, deck and an appendix to that deck and statement of investments and all the necessary legal legal docs.

• 11:52Harry Stebbings?

  How do you advise founders on the docs they need to get ready? The one thing that worries me when I hear you speak there is there's a lot. Respectfully, LPs often don't go through docs that efficiently. Do you worry that one LPs are not engaging because there's too many? And what advice would you have to founders on the doc preparation element?

• 12:09Speaker 00

  I do sometimes wonder if there's like paralysis by analysis. My philosophy as an investor and founder of this fund has always been to err on the side of providing more information to LPs. And if they so choose not to engage in it, then that's fine. It's the same way I tell founders after a first meeting, if they have a data room, just send me everything. I'd rather not be drip fed one piece of material after another and rely on me to ask a question that like unlocks another door for me to see something. Just throw it all at me and I'll pour through it.

• 12:37Harry Stebbings?

  Do you send the deck ahead of time before the call?

• 12:39Speaker 00

  If it's required to start to get a conversation going for sure, either through a warm intro or because someone insists upon it. I've never walked through a deck on a call. I don't think that's really necessary as an investor in the same way that it is as a founder who has like screenshots and competitors to show and revenue charts. Like, I just don't think that that's as necessary as a as a VC.

• 12:59Harry Stebbings?

  Okay, interesting one. You said revenue charts there, and I know where you invest. Do you expect founders to have financial modeling? That precedes.

• 13:06Speaker 00

  No, of course not. My general view is that a financial model, if a founder so chooses to have one, it's a great level of insight into what they think the drivers of their business are and the levers that they can pull over time. But ultimately, I am fully aware that what I'm underwriting is 100% going to change and not occur. As it was, I mean, I was an investment banker in a previous life. I know I can make a model say whatever I want. It doesn't matter what the model says. I just want to understand that the founder knows what the drivers of their business may end up being over time.

• 13:35Harry Stebbings?

  I want to get back to the LP process before we leave that. How did you get the majority of your LP instructions?

• 13:40Speaker 00

  Before I started the process, I spoke to our mutual friend Semel Shah. Semel said, the only people that are going to invest in your first fund are people that know you. I was like, I invest in founders all the time that I don't know. He goes, this is different. He was almost 100% correct. Every single LP in Fund One is someone that I knew personally over my prior years and years in and around the early-stage tech ecosystem. If they weren't an LP I knew before the Fund One process, they came from an intro from an LP who said yes to Fund One and then introduced me to somebody else. That has continued to be the case for Fund Two as well.

• 14:14Harry Stebbings?

  What type of LP composition do you have?

• 14:16Speaker 00

  Fund One, it's a lot. It's probably north of 80.

• 14:19Harry Stebbings?

  Okay, north of 80. How many meetings did you have?

• 14:21Speaker 00

  It's hundreds. I've had hundreds of meetings with potential LPs ranging from the individual who wrote a 10 to 25K check into Fund One to the family office that's done 10% of Fund Two and everything in between.

• 14:34Harry Stebbings?

  And so we had 81 there, all individuals?

• 14:37Speaker 00

  Virtually all. There's, there's one corporate investor in Fund One who's in, also in Fund Two.

• 14:42Harry Stebbings?

  And then what does it look like for Fund Two? Does the profile change?

• 14:45Speaker 00

  Higher net worth individuals, more official family office types in Fund Two that I either didn't know when I was raising Fund One or that wanted to track for Fund One. And then newer fund-to-fund style investors that have emerged.

• 14:59Harry Stebbings?

  Did you notice different desires in the different profile types?

• 15:04Speaker 00

  One of the biggest surprising things to me from over the course of building this firm is how people interact with money and make decisions around money, particularly individuals. The way that people think about investing. In relation to their net worth, in relation to risk is fascinating. I've been shocked by the dollar amounts that some people have committed, both way smaller than I expected and way larger than I would have anticipated. It's generally indicated to me that you can't come close to sizing up, at least on an individual LP, like a high net worth individual LP. You can't handicap what their check size is going to be unless they explicitly tell you, because I've been shocked both directions up and down. When it comes to professional allocators and family offices, my strategy is very inside baseball VC.

• 15:48Speaker 00

  And so if you don't have an appreciation for the nuances of venture capital as a business, then I don't think you're going to say yes to invest in my fund. You might not necessarily appreciate the strategy that I'm employing.

• 16:01Harry Stebbings?

  Can I ask, do you have a minimum check size?

• 16:03Speaker 00

  Yeah, I was 100 on Fund One and 250 on Fund Two.

• 16:06Harry Stebbings?

  Why do you have that? Like, my best deals have come from a 25K head of product.

• 16:11Speaker 00

  I've broken it for the right people who have the right network, who I really wanted to be involved in helping me get off the ground and build this business.

• 16:19Harry Stebbings?

  Okay, so we have that in the minimum. How do you enforce a sense of urgency? We both know LPs, they can be a little bit slower. How do you kind of get them over the line when you feel they're around the hoop?

• 16:28Speaker 00

  I think that's the absolute hardest part of fundraising as a fund manager. LPs smell a bluff a mile away. That deadline is going to come and go, and I say, oh, well, what happened to that date? And so the way that I've tried to demonstrate it since the urgency is really by demonstrating compelling momentum. So it's consistent updates and conversations with LPs to share progress and markups from Fund One, sharing new investments on Fund Two, who has co-invested with me, that they might be LPs in that fund already, using those investors as catalysts for demonstrating that there's inertia with this fundraise and that they should be a part of it. That compounding of updates and progress to me is the best way to demonstrate less of a sense of urgency and more that, like, I'm putting one foot in front of the other every single day.

• 17:12Speaker 00

  There are other people that are getting these updates too, not just you.

• 17:15Harry Stebbings?

  On closes, how do you approach first close, final close? What was the take there and how do you advise managers there?

• 17:22Speaker 00

  Yeah, that was a huge lesson learned from Fund One. I was fundraising. During Fund One through lockdown and peak COVID, I had a lot of GPs invest in Fund One. And they said, do a first close as soon as you have whatever number I had, which I felt was way too small to do a first close on on Fund One. And they're like, just get going, just put points on the board, just be in the game. And I frankly probably waited too long to do an official first close on Fund One.

• 17:47Harry Stebbings?

  What did you put as a threshold?

• 17:48Speaker 00

  I think I was trying to get to at least 50 to 60% of the fund before doing that first close. Now, my rule of thumb to other founders would be get to 50% of your minimum viable fund size and then do the first close. If your minimum viable fund size is 10, you got to get to 5, even if you're trying to get to 20. Your minimum viable fund size might not be 50% of your target. But if it is, effectively, you're trying to get to 25% of your target to do a first close. And then invest like you're not going to get beyond your minimum viable fund size. Because if you do, you're going to end up with a portfolio that's way too small. If you end up with a number that's a lot lower than your target.

• 18:25Harry Stebbings?

  In terms of like what you know now on fundraising that you wish you'd known at the beginning? What do you know now that you wish you'd known at the beginning?

• 18:32Speaker 00

  I would say you need to figure out the phenotype of your LP quickly. Figure out who the LP is that's going to understand your business. It's really no different than a founder who needs to find the VC that really understands their business. LPs are obviously a little bit more challenging to put into a box. But I definitely can describe the LP who's a good fit for me way more easily now than I could three years ago. And so when I talk to other LPs and I ask for intros, or when I talk to managers and I ask for intros, it makes it a lot easier for those people to say, oh, I know exactly who is a good fit for you.

• 19:09Harry Stebbings?

  I want to discuss the strategy. You said that, and it kind of touches on that. But you said it's very like insider baseball, inside VC. What makes you say that? Because we heard earlier 24 to 30 companies between funds, three to 400K, 4% average ownership. What's the insider baseball element?

• 19:25Speaker 00

  The strategy that I'm pursuing of being a pre-seed investor that takes a much more institutional approach to investing and discipline is definitely uncommon.

• 19:36Speaker 00

  Forty million dollar funds, really, especially most sub twenty five million dollar funds, have way more investments. They write way smaller checks. It's not necessarily spray and pray, but it definitely is more of a scattershot approach. I just don't deviate from the strategy that I'm pursuing at all. I don't make any compromises around it. I'm never gonna be like, oh, I got a seventy five K allocation here. Yeah, I'll do that one. I stick to my target check size range. I stick to my target ownership, which is an average ownership across the portfolio. It's not like every single deal has to be in there because I know that some are gonna be higher, some are gonna be lower. It really comes down to a lot of what I learned investing at Anchorage prior to starting Looking Glass. I was surrounded by credit investors who took a very conservative approach

• 20:18Speaker 00

  to investing. Credit investors think everything is gonna go wrong. VCs underwrite everything going right. It required me to be incredibly buttoned up when I evaluated companies, when I went to investment committees to pitch them. And I think that mindset actually not really all that helpful at the pre-seed stage. I think it actually is quite helpful when it comes to instituting a set of guide rails and allowing me to focus on what I invest in and what I don't invest in.

• 20:44Harry Stebbings?

  Adam, do you worry about adverse selection? You know, when I look at Fund One, I'm being very open here in a way that I've never been before on the show. Be real, pre-seed sixty K check, linear hundred K check, remote fifty K check, some of my, like, on paper, definitely best investments. I always went for two fifty, like, broke the rules there, and they're the ones which were bangers. And my two fifties are like, yeah, they'll be fine. But actually, the exceptions is where I've seen the alpha. Do you worry about that? And how do you think about if you should make exceptions?

• 21:16Speaker 00

  I do think that having this set of rules allows for when you do want to make an exception, it's very clear why you're making that exception, right? Like, the more constraints you put in place, the fact that when you do want to or need to make an exception, it means that it's reached some level that you thought might be previously unattainable. So for instance, in Fund One, I have an investment that I made that was outside of my valuation range. The round size got larger after I had committed. I wasn't gonna back out. I still got my three hundred allocation. But the round size got larger after I committed, a bunch of people piled in. I wasn't going to tell the founder, oh, sorry, I'm not in anymore because you raised four and a half instead of three. Like, if anything, the optics were this deal was even more compelling now than it was when I said yes.

• 22:00Speaker 00

  And this team is by far the best executing team I've ever worked with in a decade of being in venture, bar none. And so I obviously am very happy that I didn't compromise on my valuation rules and I stuck to that yes. If I believe that I'm getting adversely selected because I'm getting my allocation, then I should probably just quit doing this job. Right? Like, I have to have the confidence to believe that I'm getting into deals at the target check size that I want. And founders are selecting me because they believe that I'm a great fit for them. And I believe that this is a great company. If I thought that every investment that I made was open to me writing the full amount that I wanted to, because they weren't getting anyone else to say yes, I definitely couldn't go to sleep at night.

• 22:41Speaker 00

  My philosophy has been be a first yes, lead around, set the terms, commit early, and then basically put on my investment banker hat and become placement agent. Help bring in the rest of the money into that round by going to a select group of investors that I feel are highly complimentary to me. That might not be household names, but I know are going to be awesome value adds to this business.

• 23:03Harry Stebbings?

  Can you lead rounds if you're not the biggest check, Adam?

• 23:06Speaker 00

  I guess it depends on how you define lead. Like, I saw Jason Lemkin tweet the other day, like, a lead investor is the investor who writes the next check when nobody else will. If that's the only definition of a lead, then no, like, I'm investing out of small funds. I can't necessarily justify writing follow-on checks. To me, that's not necessarily the only definition of a lead. To me, the definition of a lead is one that helps catalyze a raise, the one that sets the terms, the one that's the first call, the one that's the most responsive to that entrepreneur when things are going terribly. It's the investor who helps compel other investors to say yes to that company, both at the time they're investing as well as in subsequent rounds.

• 23:43Harry Stebbings?

  Adam, do you ever get big multi-stage funds come in after you've committed and say, we'll put down three on 15 or four on 20, kill that pre-seed round, you're way better than this founder. Do you ever get that?

• 23:55Speaker 00

  No. In fact, I've had General Catalyst, True Ventures, Tribe, Lower Carbon, forgetting others that have come in after me, after I've said yes, and have not altered the terms of those rounds.

• 24:06Harry Stebbings?

  And you don't find your check size uncomfortable in terms of like unfriendly? The thing I worry about with the 300 to 500 ranges, it's a lot of angel checks in that one bulk, and you're not really big enough to also take more than 60, 70% of the round. Do you see what I mean?

• 24:21Speaker 00

  I haven't found it to be a challenging check size. So like I said, in Fund One, ranges were 750K to 3.5 million, it's 4 million dollar round sizes. I got what I was looking for in virtually every single investment. I don't think it's that unfriendly. I've come into rounds with a 300 to 400K check after there was already a lead. So it didn't prevent me from getting what I was looking for. A quintessential round for me would be 1.5 to 2 million at a 6 to 10 post down the middle of the fairway structure for me. If I want to write a 500K check, if there's a 1.75 million dollar round and they already have a quote unquote, "traditional" lead who's taken a million, I can still get 300 to 500K and it's on me to compel that founder to give me that allocation.

• 25:05Speaker 00

  It's on me to sell them on why I should have that much of the remaining 750K. I'm not bashful about preemptively having founders give references to other founders. It's a key part of why I'm investing in a thematic way is that I can build instant credibility and rapport with a founder building in healthcare because I can probably point to half a dozen other companies in the portfolio that are super relevant to what they're building, that might be customers. If I do cold outreach to a founder, which I've done in probably half a dozen investments I've made so far, I immediately am validated in their mind because I have a portfolio of very relevant companies that they care about.

• 25:40Harry Stebbings?

  How do you think about loss ratio? How many do you expect to fail at this stage?

• 25:45Speaker 00

  It's not a home run game, it's a grand slam game. There's going to be companies that inevitably go to zero. Out of 24 companies, there's only a few that make me lose sleep at night right now, call it three years in. But ultimately, I know that the vast majority of returns are going to come from 20 to 30% of the portfolio. And I'm comfortable with the inevitable zero or less than 1X. That's going to make up 40 to 50% of the portfolio, call it eventually eight to 10 years in.

• 26:09Harry Stebbings?

  When you look at those ones that keep you up at night, is there something that now you would have seen? When you look back, did you miss something?

• 26:16Speaker 00

  No, when I look back, I acknowledged something and I thought it could be mitigated over time and it was not. With every investment memo, the last slide of it is a risks and mitigants section. And so I've usually put three to four risks and three to four counter mitigants that could mitigate that risk over time based on what I'm currently seeing at the time of investment. It's a good check for when a company inevitably fails or isn't doing well. For me to go back and look at, was this a risk that I was aware of, but I underwrote it and was comfortable with it anyway? This might change over time, but right now, at this moment in 2023, with these particular companies, the things that are keeping me up at night are things that I was aware of at the time of investment that I was just comfortable with and thought would get mitigated over the life of that company.

• 27:01Speaker 00

  And in a couple of instances, they have not.

• 27:03Harry Stebbings?

  You mentioned a little bit on touching on the benefits of thematic investing at Preseed. Honestly, I disagree. How do you think about the benefits of Preseed thematic investing, given everything is in such transient state of flux?

• 27:17Speaker 00

  I mean, I'm a single GP, so my bandwidth is constrained. I can't be a generalist. I can't see every deal. I can't chase every hot company. The thematic investing that I do is the fundamental driver of all of my sourcing. It allows me to be top of mind for other investors when they share deal flow because they know what I invest in. They know the constraints that I invest around and they know that I could be a good fit because I invest in healthcare or climate or education or small business. They know that I should be top of mind for them compared to a generalist firm who they might not necessarily immediately think of when they're building a syndicate. It allows founders to come to me directly. I invest in cold inbound. I respond to every single email, even if it's simply to tell a founder, this isn't a fit for me. Again, reputation matters.

• 28:01Speaker 00

  The deals that I've done that have been cold inbound have been explicitly because they're looking for investors that invest in relevant themes to what they're building. Those have been great companies. In fact, those are some of the best companies out of Fund One. And then with my own cold outbound to entrepreneurs, it allows me to build immediate credibility and rapport with them because I can point to a bunch of companies in the portfolio that are very Relevant to them. When I build a syndicate of investors around a company after I've committed to lead that round, or just a first yes to that round, I go through a list of literally hundreds of investors that I have relationships with, that I've tagged based on stage and category that they invest in and check size and a bunch of other notes that I have for them. And I send that curated list over to the founder and say, which of these do you want introductions to?

• 28:44Speaker 00

  Give me a blurb and I'll send this note over. I know that I'm not the only investor that operates that way. And the ones that go to the top of the list are the ones that I know that are hyper relevant to what that company is doing.

• 28:55Harry Stebbings?

  What are the single biggest mistakes founders make when it comes to round composition?

• 28:59Speaker 00

  They're too narrow with who they go out to. They don't actually realize that there's lots of other investors that are not the household name pre-seed and seed funds. That would be phenomenal investors on the cap table. I'm talking about the really niche healthcare investor that only does healthcare, that's based in Nashville, that nobody knows about unless they're a healthcare investor. And this founder just thinks like, well, I should just go to up and down the Midas list and that's, that's my lead list. And it's like, well, no, you need to have a much broader funnel. And you also need to recognize that there's a lot of strategic value that an investor can bring to the table. You might not have ever known that investor before this process started, but I'm going to put you in front of them. I'd say the second point that they don't think about is they don't appreciate that the partner at the fund matters.

• 29:42Speaker 00

  They just think about the fund as a giant entity and don't realize that there are personalities and motivations and bureaucracy and all sorts of things that internal dynamics of any large organization and venture funds are no different. The individual partner that you get introduced to really matters because he or she might specifically be looking for a company like yours. Their personality might really be aligned with yours or be really counter to yours. And I can help steer a founder to the right individual at a certain fund in a way that they probably aren't thinking about.

• 30:14Harry Stebbings?

  Aphelia Brown said on the show from Blossom, one of Europe's leading venture investors, multi-stage firms have destroyed seed. In many ways, I agree. Do you agree?

• 30:23Speaker 00

  It's hard to disagree. I don't know how you define seed these days, right? I saw an announcement in Dan Primack's newsletter yesterday that a company raised a $7.3 million seed round. That's not a seed round. To me, that's someone who combined a seed and an A into one round. And maybe they're combining, you know, two pre-seeds and a seed and calling it a $7.3 million seed. The announcements don't give you any signal into the dynamics of these raises.

• 30:46Harry Stebbings?

  Pre-seed doesn't exist anymore if you're a pedigree founder. But if you've been at Uber or Square or Twitter or you name it for six years plus, they all just come out and raise five.

• 30:56Speaker 00

  That's fair, but those aren't looking glass founders, right? Like the founder that rolls out of bed and says, I'm starting a company and I'm leaving Stripe. That's not a looking glass founder. The person that has like eight term sheets lined up before they get their coffee at psych class. When you raise five million at 25, you have a target on your back before you've even written a single line of code. But raising one and a half to two at something high, maybe 12, they're taking less dilution than maybe a first time founder who has zero track record and needs to raise one and a half at six. But they're doing so because they understand that there's real discipline that's necessary to execute well. And there's significant margin for error when you raise at a lower number. I've had nine companies raise rounds since the start of Q4. Six have been priced up rounds. Three have been saved with higher caps.

• 31:41Speaker 00

  Out of 24 companies in Fund One, all of them have been able to do so because they raised at very sensible levels. And so the ability to raise an up round when your original round was quite sensible is very achievable when the market is hard like it is now. It's not achievable when you raise at 15 to 25 before you've written a line of code.

• 32:01Harry Stebbings?

  So I totally agree with you. My only pushback or other people's pushback to me is the core goal is to get to product market fit. And you need often multiple iterations to get there. A larger runway gives you that. So raise five and operate and spend like you have one and a half and give yourself four years and V6 to get to PMF. How do you feel about that? About that.

• 32:24Speaker 00

  You're describing a founder that has an uncanny level of discipline. It's easier said than done to say raise five and operate like you have one and a half. You and I both know that most people don't have the willpower or self-control. I would much rather invest in a founder that says, I'm going to raise two and a half and operate like I raised one. My general rule of thumb is you need to have at least 24 months of cash gross burn, not net burn. When you raise your round that I'm involved in, I assume the fact that they're probably going to overspend a little bit. So it's probably more like 21 months, but let's call it 24 months of gross burn. If you can't find product market fit by being that disciplined over a two-year period, you probably didn't deserve to raise more than two and a half or two or whatever the number was in the first place.

• 33:08Speaker 00

  Giving someone $5 million and four years to figure it out, to me, is a luxury of a billion-dollar venture fund. That's a luxury of the multi-stage fund that knows that a $5 million check doesn't matter or doesn't move the needle for them. And it's an option for writing a very large check into the Series A to level up their ownership.

• 33:26Harry Stebbings?

  Adam, we're going to do like two quick fire rounds that I'm super excited for. So this is specifically on venture. What does venture look like in 10 years?

• 33:33Speaker 00

  The way I think it's trending is hopefully smaller funds, more specialized funds, even firms that have a lot of AUM. You've seen them spin out dedicated funds that are focused on certain categories. And I think those smaller funds ultimately will outperform. And smaller doesn't necessarily mean 50, right? It could mean 250 or 300 compared to, you know, 2 billion. But I think what you're ultimately going to see is a very distinct bifurcation of relatively smaller, vertical-oriented, thematic-oriented funds and then behemoths. And if you're just in the middle, it's very tough to stand out.

• 34:06Harry Stebbings?

  So who are the winners? Who are the losers?

• 34:08Speaker 00

  I think the winners are the ones who are willing to adapt and the losers are people that have nothing distinct to offer when it comes to compelling a founder to take their investment. Or we have a boatload of cash. We could probably lead every single one of your rounds if that was what was necessary. I don't really know that there's anything in the middle.

• 34:24Harry Stebbings?

  What happens to SoftBank and Tiger?

• 34:26Speaker 00

  They've been quiet this year. When I see an announcement that Tiger is involved in a round, it's shocking versus, you know, in 2021, where I think there was one time in pre-max newsletter where they like led seven deals in a single newsletter. I think people are returning to what they're good at.

• 34:40Harry Stebbings?

  If you could invest in one pre-seed or seed firm other than your own, which would it be and why?

• 34:46Speaker 00

  I'd go with Bold Start. I think Ed and Elliot are phenomenal investors, very disciplined on how they get involved and what they invest in. I've co-invested with them a couple of times at a prior firm and they were phenomenal to work with. They're investing in a lot of stuff now that I don't touch and will rarely touch. And so from a diversification perspective, it would be great to be an LP in that fund.

• 35:07Harry Stebbings?

  If you could do a series A firm, which would you do and why?

• 35:09Speaker 00

  Benchmark. They're still the standard, in my opinion. As someone who knows what they're good at, doesn't deviate from it, I have a ton of respect for the people that I know personally over there. And I just think they're outstanding investors.

• 35:21Harry Stebbings?

  If you were to invest in a growth fund, which would it be?

• 35:23Speaker 00

  I'd take Lux's growth fund. I think that firm is incredible. I think the work that they do is backing some of the most innovative and thought-provoking companies. And again, they're investing in things that I will rarely ever invest in. It's pretty challenging to argue with the returns that they've that they've generated over the last few years.

• 35:39Harry Stebbings?

  What have you changed your mind on in the last 12 months?

• 35:41Speaker 00

  Signaling as relates to who is involved in your round. I used to be very, very averse to multi-stage firms being involved early with smaller checks. And I thought that there was signaling risk. Oh, well, if you have this family office in versus this other investor, then the optics of that don't look great because nobody knows who they are. And what the last 12 months have shown me is raise capital from reputable, reliable sources that align with your ethical standards and that are providing clean terms. Beyond that, it almost doesn't matter, at least in this current venture climate, who you raise from, because raising at all is an accomplishment right now. To me, all else being equal, you'd rather have, you know, tier one investor involved. They provide great optics, great signal,

• 36:26Speaker 00

  et cetera, et cetera. But like the signaling risk of certain investors being involved, in my mind, is completely out the window because ultimately you can overcome that with good execution.

• 36:35Harry Stebbings?

  What's the craziest thing we saw happen in 2020 to 2021?

• 36:38Speaker 00

  Companies that were raising multi-billion dollar valuations at 1000x ARR is the craziest, like just as a pure like investment multiple valuation perspective. Ultimately, the craziest thing that happened was just the level of fervor and the pace of investment that you saw from funds that are now course correcting to an extreme degree and it's really hurting founders. The level of slow playing of funds now, just extreme whiplash for entrepreneurs.

• 37:06Harry Stebbings?

  What do you mean by that? Just unpack that because that's important if founders are getting hurt.

• 37:10Speaker 00

  I think the number of companies that are having a hard time raising seed and A rounds right now, like, hey, we've got half a million of ARR and we want to raise like $3 million. Like the level of companies that are raising seed and A, I think are unjustifiably being punished because VCs deployed way too quickly in 2021. And now they're like, well, we deployed hundreds and hundreds of millions of dollars in 12 months. Now we need to make sure this fund lasts for three and a half to four years because our LPs have told us that. And so you have investors doing way fewer deals than before. They're now actually doing diligence, which slows down processes as well. And they've reserved an increasing amount of their dry powder for reserves for existing portfolio companies to keep them alive versus net new deals because they're going to have existing companies that are doing well,

• 37:54Speaker 00

  that are going to struggle to raise for no fault of their own. And so they need to have dry powder to keep those companies afloat. And so when you add up all three of those things, that just means there's a lot less capital available for new deals and a lot of companies are going to struggle to raise, not because their businesses aren't doing well, but because there are so few people that are actually investing right now.

• 38:15Harry Stebbings?

  Just help me out, if you're moving from 50 to eight deals, the impact on that on founders, how do we think about that?

• 38:21Speaker 00

  Yeah, I think very challenging to advise founders right now as to what to expect in this market. Like what benchmarks matter, what milestones matter, what gets around done versus not done. The whiplash that's been experienced from 2021 to 2023 is challenging. Founders shouldn't necessarily rely on venture dollars to keep them afloat. Founders should figure out, all right, how do we extend runway? How do we grow revenue faster than expenses? How do we hit the profitability? Even if we're not profitable. How do we reduce our burn to such an extent that we're able to get through 2023 and 2024? So that we have runway well into 25 and we can fundraise in 2025. That's an exercise I've done with at least half a dozen founders in the portfolio. How much cash do you have at the end of this year? How much cash at the end of 2024?

• 39:04Speaker 00

  If you don't raise any dollars at all until January 1st of 2025, make sure you have at least seven months of cash at that point. But I do think that it's a healthy shakeout for the ecosystem. It's the way things used to be. And when I say used to, I mean like a decade ago. But I think the fervor of 2021 is doing more harm than good, at least for a founder mindset.

• 39:25Harry Stebbings?

  I think the seed is actually immune. I think we're seeing multi-stage funds move down. I think we're seeing seed funds still continue to invest like they have done. Seed pricing to me has stayed where it always has been. And I think we'll continue to see it stay where it has been. A has been preemptively aggressively done where anything working has been aggressively taken out of market. Anything that's in market bluntly has not got the support of existings. B and C and D is fucking dead and it's a death zone. But I think seed is actually relatively immune. Tell me, what would you most like to change about the world of venture, Adam? Penultimate one.

• 39:55Speaker 00

  I'd have to say I wish that things were a little bit more transparent. I wish that things were more consistent for processes for entrepreneurs. The process for raising capital as a founder is incredibly opaque and it probably shouldn't be. The amount of times that I've had to advise and coach founders, how to have certain conversations when they're out raising, what certain signals mean from investors, how to position the company and they're blown away by what my advice is, is an indication to me that companies aren't being evaluated and founders aren't being evaluated in the most transparent, systematic way. If I could change anything, I wish that that dog and pony show, as I said before, wasn't as much of a dog and pony show. It's really hard to change an industry that is still in the grand scheme of things quite niche

• 40:40Speaker 00

  and has 10 to 15 year feedback loops before someone realizes that things need to be different.

• 40:44Harry Stebbings?

  Adam, final one. Now is five years for you and for Looking Boss. If we do this in 2028, why do you want to be then?

• 40:50Speaker 00

  Probably in the midst of investing out of Fund III, a very iterative step up from Fund II, maybe in like the 40 to 50 range. Still solo GP, still with a 27 to 30 company portfolio, still investing in the same themes, iterative step up in check size, continuing to be consistent with how I operate. As long as I can do that five years from now, I know I'm going to be successful.

• 41:11Harry Stebbings?

  Adam, thank you so much for joining me today. Thank you for putting up with my pressing questions and assertive remarks. I really appreciate it and I'm glad we got to do this after the many Twitter engagements.

• 41:20Speaker 00

  Thank you very much. This has been a ton of fun.

• 41:24Harry Stebbings?

  I told you that was an inside baseball show, but I love doing that one. If you want to see more from us behind the scenes, of course you can. By searching for 20 VC on YouTube, we always love to see you there. But before we leave you today, this episode is brought to you by Tegus, the go-to research destination for bold investing. Tegus curates expert insights, analysis and financial data to give you powerful perspective for your investment decisions. With lightning-fast access to over 60,000 transcripts across 20,000 companies, you'll discover a wealth of unique insights to fuel your fundamental research, gain perspectives, synthesise information, model outcomes and ultimately make better decisions, all on Tegus. As a 20-minute VC listener, you can try it for free at tegus.com/gross.

• 42:07Harry Stebbings?

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• 42:50Harry Stebbings?

  Schedule a demo today at secureframe.com. And finally, are you tired of using the same old tools and platforms in an attempt to manage your global team? Well, so are we. Why use 16-plus different tools when you could just use Deal? Deal's the only global first HR tool with unmatched automation, customisations and integration, making it the only platform for built-in contracts, visas, background checks, payroll, equipment, benefits and beyond. So are you ready to see how Deal can scale with your global and local teams? Visit deal.com/20vc and book your demo today. That's deal.com/20vc to book your demo today. As always, I so appreciate all your support and I can't wait to bring you an incredible episode with David,

• 43:34Harry Stebbings?

  founder and chairman at On Running on Wednesday.