Alexa Binns 00:03
Welcome to swimming with alligators VC podcast from the LP perspective, with your hosts Alexa boons and Earnest. You ready? Let’s dive in. Today we are thrilled to have Sunil pi GP of Angel collective Opportunity Fund. Angel Collective is a collaborative opportunity fund. That means it’s a pool of capital investing in a select group of emerging managers, top companies, Sunil will explain in more detail, thank you. He is x Deloitte X DFJ X AngelList, where he led the emerging managers business line, they handle the SPDs, the funds, the rolling funds, etc. And we are looking forward to hearing today about this alternative to SPDs as well as Sunil his unique take on how to navigate the explosion of emerging managers. Hello. Hey,

Sunil Pai 00:54
great to be here.

Alexa Binns 00:55
Would you mind giving us a little background on your career in venture?

Sunil Pai 01:03
Sure, even before venture, I grew up in Oklahoma, came out to the Bay Area for school. That kind of got me in tech. Originally I wanted to do law and then hard pivoted, but uh, you know, I wasn’t sure what I wanted to do when I graduated from school. And so I went into management consulting, and was pretty, pretty happy with that. But you know, a lot of my friends were working at startups, they’re going through YC, they were like, raising capital, and I was like, wearing a suit flying across the country. And so I was like, you know, I like what I do, but maybe there’s something else, maybe there’s something more exciting. So my journey into venture capital actually happened by, you know, me trying to go work at a startup. I’d go to demo days and pitch competitions when I was still in town, and try to meet a startup that I would want to go work at, instead, ask questions. And when I was in the audience at one of those demo days, a partner VFD was like, Oh, I like the way you’re asking questions like this is really interesting. So that was like my first point of contact with that firm. And then my roommate at the time was a YC founder who had been funded by DFJ. And so he was like, he put in a good word, he’s like, my roommate would probably be a good investor, you guys should chat with them. So then they reached out, the recruiter reached out, and we started that conversation, and ultimately landed a role at DFJ. And when I was pretty young, I was like, 23 years old. You know, at that time, I knew very little about venture capital, didn’t know what MRR was, didn’t know what ART was. Valued companies, but I was very excited about it. And they were, they’re gracious enough to take a chance on me. And so that’s kind of how I got my start there. So

Earnest Sweat 02:36
Now, that resonates with me so much. You grew up in Oklahoma, I grew up in Arkansas, like you, I don’t know about you. But I was taught that at the time. Smart people do one of two jobs. They’re an attorney, or they’re a doctor. So that’s all I thought. So that really resonates with me, that’s really cool. Um, you mentioned your, you know, you got to introduce to DFJ what were the lessons learned of that very brand name shot?

Sunil Pai 03:10
Yeah. DFJ. So they’re now called thresholds. They’ve done a rebrand but legendary kind of firm for many decades, like early into Skype and hotmail back in the day, and have still just produced incredible returns into like, more recent companies that we’ve all heard of, but you know, some of the team that I was working with Steve Jurvetson, early and SpaceX, Tesla Planet Labs, Nirvana systems, Josh, who’s, you know, kind of traditionally a SaaS investor was early in box rippling Twilio, front. LaunchDarkly. And, you know, Emily is more of a generalist, but redfin shifts and better up and Alexa, you know, that company? Well. So yeah, got got to learn the ropes from some of these really important and great investors. And as a junior person, I think that was really helpful. So, you know, I came from a very armchair background, and you know, you know, studied political science and philosophy, and then management, consulting, and then venture capital. So I didn’t have a lot of like, real work experience. I didn’t have operating experience. But what DFJ provided was, you get to be in the room with these investors and you understand how they ask questions, how they assess markets, how they think about where they want to bend and break on valuations. And it’s so interesting to be in the the partner meeting after the entrepreneur leaves, and then you hear what do we really think about this market? Is it gonna stall out? You know, he had a, she had a big exit before? Are they still motivated to do the next company? You get to hear those questions and you learn from the best. And I think that’s one of the best parts of you know, being at an institutional firm is having those gloves off conversations and being able to be an apprentice and learn from all of their experience because I had none

Alexa Binns 04:59
and Then what came next? Yeah,

Sunil Pai 05:02
So after about four years at DFJ, I knew I liked investing. But I felt I had a chip on my shoulder because it’s very obvious. I was like, my career has been evaluating outputs, you know, you’re looking at growth rates, you’re looking at metrics or, you know, as a consultant, you’re you’re from the outside, you’re evaluating, you know, high level strategy decisions. But I had not been operationally involved in a company, I’d never been responsible for a metric like a real deadline, I needed to attest to never having a board or anything like that. And so I wanted to do something in an operating role. But I knew I loved investing. So it’s like a really difficult decision to leave. And AngelList was such a perfect fit. Because it’s a startup within the context of investing. I had known the team had done several of the members there before I joined and was incredibly impressed by them. And as I got to know, the company, this was in 2017, there was a really cool vision that resonated with me, which is, hey, these, these venture funds are getting bigger and bigger, they’re, you know, now billion dollar funds, they’re going to be $3 billion funds. And if you just kind of draw that out, what does it mean that, if you’re a partner to a $3 billion fund, it makes no sense for you to sit across the table from an entrepreneur raising a million and a half dollar pre seed round, it’s not worth your time. And so what the vision for AngelList was, and what I was really sold on is, we’re going to be the infrastructure and tools to enable these angels kind of turning super angels to be emerging managers. And then they’ll take over preceding, they’ll take over seed investing, and maybe even Series A, which was not obvious at the time. But that was kind of the vision. And that’s what got me really excited about the team back in 2017. Were

Alexa Binns 06:49
Are there any insights there that led to what you’re doing now? With the collected? Yeah,

Sunil Pai 06:57
totally. So when I joined AngelList, it was like a single product, it was syndicated, you could do SPVs. And you know, a lot of people had the impression that it was crowdfunding, like, Oh, it’s you know, someone investing $1,000 into a startup, and maybe they’re in the Midwest and are not that sophisticated. But the vision was always to kind of build up more products and move up market, almost like classic Clay Christensen disruptive innovation theory, start like a toy, and then you move up. And so what we would see, you know, it started with syndicates. And then as we brought emerging managers on the platform, I saw this problem repeatedly, which is, there’s a category of people called like solo GPS, they, they start their own fund, and it’s like a team of one, they’re the ones sourcing deals, evaluating deals, supporting the companies, and you get a lot of flexibility, you build your own brand, there’s not bureaucracy there, you can move really quickly. Generally these solo GP funds are like, let’s say sub $30 million, often. And some of them are very, very talented. They know their niche, they know how to pick, they know how to support companies, they have great reputations with founders, but they all run into this problem of what happens after I pick a winner. You know, as the company grows up and raises a Series A, B, and beyond, they end up losing their ownership. You know, they get crammed down by the larger institutional venture funds, because they don’t have enough reserves to invest in their pro rata. And so it’s like one of two things happens, either they just give up their pro rata, and it’s not part of their strategy, or they scramble, and they try to put together an SPV. And that is very hard to do, for a couple of reasons. First, it’s their LP bases, primarily, like other operators, maybe some family offices, they’re not primed to move, maybe it’s not their strategy to do co investments. And it’s often hard to get them to move really quickly. And if you you know, you were a seed investor in a great company, and a tier one venture firm is leading the Series A, you don’t have three weeks to scramble around and pick up, you know, put together 500k someone else wants it, and they have a dedicated fund, and they’ll take it immediately, that’s often a better decision for the founder. So we saw that these, you know, there’s this category of managers that are really interesting, the data showing that they’re quite talented, and they have this problem of not being able to double down on their best companies. So that’s it from a GP perspective. And from an LP perspective, we’re seeing this explosion of managers, hundreds of managers, like, you know, getting into business, and how does an LP, you know, whose venture allocations kind of a smaller part of their overall strategy? How do they evaluate this manager who’s been at stripe for a few years versus this manager who was working at SLAC? Like, how do you pick if you’re not really in the field? And so that was kind of the genesis for the fund we started. Wow.

Earnest Sweat 09:49
We’re Where did just before we kind of dig into the collective. Where do you think your initial thesis that you were building while still at AngelList So, where do you think you were right? And where do you think things have kind of turned out differently?

Sunil Pai 10:05
Yeah, when we started the fund, we’ve been noticing this for a while, but we started the fund in 2021. This is a very different market than it is today. And so you know, even the name Opportunity Fund, we thought we were going to be doing much later stage investing, which we’re going to do like mostly Series C and beyond, into these companies. And what we realized is, for a couple of reasons, we want to move earlier into the market. And so we’re where we often invest now is, you know, 90% of what we’re doing is like a series. Maybe it’s like right before the series A and maybe it’s right after, and that’s where we want to play. And the reason for that is, you know, emerging managers have a really good instinct around when companies are starting to work. It’s a very different kind of decision making calculus to be evaluating price and valuation for a growth stage company. And so over time, we’ve kind of moved down market and increased our ownership, which was, you know, it’s I think, a good realization, but something that that took a little bit of time for us to kind of refocus on

Alexa Binns 11:11
Yeah, yeah, you have a lot less insight to it doesn’t necessarily align with your skill set or the like when you are the number one phone call for that founder.

Earnest Sweat 11:20
Now we’re gonna take a quick break to speak with our sponsor. Next

Alexa Binns 11:24
up we have our industry expert and sponsor Brian Huber fun partner at Gunderson Dettmer. PitchBook, has named Gunderson the number one law firm globally for investors 10 years in a row, our guest Brian’s practice focuses specifically on structuring, forming and operating VC funds. I have used Gundersen in my own fund formation, and I can highly recommend them. Thank you, Brian, so much for your advice and expertise. And in addition to helping on the fundraising side, you obviously also help your managers operating. Are there any issues that’s been top of mind for your clients these days? On the operating side? I

Brian Huber 12:09
i would say Yeah, so there’s two things in, in their semi influenced Well, one of them is definitely influenced by regulation, because it is regulation happening this year, just went into effect. January 1 Is the corporate Transparency Act, which is impacting not only funds, but pretty much any business. And it’s a requirement, unless you’re exempt from reporting certain information about your beneficial owners. Again, I think this is going to be something that we’re going to see more and more of in the US. It’s something that’s already seen in other countries and other jurisdictions. And so it’s not necessarily a surprise, but it is a very broad scope, law. And so one of the things we’re dealing with, a lot of venture funds are exempt. A lot of venture funded entities are exempt. But there are some entities that don’t technically meet the requirement of exemption. So there might be, you know, you might need to decide whether you’re going to report, but you know, which way you’re going to report beneficial ownership. It’s still very new. And we’re, you know, we don’t have a lot of info right now on enforcement and who they’re going to go after and what it’s going to look like. So that’s something that is just, you know, you try to be as upfront and advanced about getting it done as you can be. And it’s one of the things that that again, that’s more for the lawyers to deal with, but the clients are dealing with it because it is, you know, you’re telling other people who your owners are?

Alexa Binns 13:30
No, that’s why you’ve got lawyers. Thank you for dealing with it.

Brian Huber 13:35
So and then I think the other one is, you know, for the past few years, the states have had, you know, California is one of them, has an anti competition regulation that by and large restricts, or prohibits the ability to use non competes. Recently, there’s been a federal ban on non-competes. And so I think you mix that with an environment where people are reevaluating whether they want to stay with a firm one, you know, one issue, I think that comes from that is retention, you know, keeping talent, and what are other methods if we can’t use a non compete to inspire folks to stay with us. And so there’s been a number of discussions this year on whether, you know, whether it is how we approach vesting, vesting of interests, do we? Do we expand it to be longer? Is it sort of, you have to know, you only invest a certain percentage, not 100% until you’ve liquidated, that sort of thing? And again, I think it’ll be interesting to see where that goes. Because I also think that while we had non competes in a lot of these management companies, and in general partner agreements, I didn’t see a lot of people actually enforcing them. And I think that’s important because the expectation is that if you leave a firm you’re probably going to go compete. And, you know, while there are certainly things you want to restrict them from sharing, yeah, it just hasn’t been In the nature of venture to, to say you can’t, you’re on timeout for a year. Right. And so maybe it won’t be a big change. But it’s definitely something that folks are thinking about. Yeah.

Alexa Binns 15:12
No, that’s, that’s fascinating. Because, certainly,

15:18
whether it’s

Alexa Binns 15:19
processes or relationships, there’s a lot of things that are personal in the VC role as opposed to owned by the company. You work with a lot of these leading venture capital firms as well, first time managers. Is there anything that in operating, the larger, more established firms, you see them do really well, that our emerging managers would benefit to hear about?

Brian Huber 15:47
Yeah, so I think on this one, and it’s, it’s kind of an obvious answer, but there’s also some nuance to why I think it works, the obvious answer is that they have much more well functioning back offices, and, and that’s because they have more money to spend on that. But I think the nuance here is that they’ve gotten to a place where they’ve, they’ve picked and stayed with service providers that they vibe with, that they think work well with their approach to things. And that’s, you know, legal advice, accounting, audit, fund administration, I think it’s really important to try to partner with somebody that sees your vision and sort of goes about it in a way that complements what you’re doing. I think with newer managers, there’s this, everything’s expensive, I don’t want to, you know, I kind of want to control a lot of what I’m doing, there’s, you know, I want to make sure that my hand isn’t everything, and that I’ve signed off on everything. And I totally get that I think we’re the freeing moment. And the moment where you become efficient is realizing that your talent is to invest and seek the companies, let people that do this, you know, this for a living, handle the stuff in the background and support you and your way and, and I think, to do that, it’s a matter of finding people that that work with you don’t go for the low don’t necessarily go for the lowest cost provider. Because what you’ll get is what you pay for what you pay for is what you get. And I think, you know, what’s what’s really good about the current state of things is that there are a lot of options where a lot of is becoming automated, and and, you know, the use of AI to help with mundane functions that would otherwise be done by somebody who has a, you know, a feat fee bearing or fee accruing a person that cuts out a lot of that work. And I think that’ll be super helpful in getting to the I’ve hired this person to provide, you know, advice on uncertain things. And so I think that’ll help emerging managers get to a place of very good efficiency a lot quicker than maybe they could in the past. Brian,

Alexa Binns 17:56
It’s been a pleasure to get in touch with Brian or any of the other lawyers at Gunderson Dettmer, please visit gunner.com G U, n, d e r, DOT c o m. And now back to our LPs. Let’s do a 411. What is the angel collective Opportunity Fund?

Sunil Pai 18:19
Well, sure, so we call it we call it aclf. It stands for Angel collective Opportunity Fund. And the idea is, you know, there are these really talented emerging managers who generally don’t have the capital to double down on their best companies. And so what we do is kind of form a collaborative opportunity fund. So my co-founder, Nick and I were kind of in the field constantly talking to these emerging managers figuring out who we think is really great. And often, if you’re, you know, a manager with sub 30 million, or even sub 50 million, you don’t have capital for reserves. And so there is a problem that we can solve for those GPS. And what we do is we partner with four of them every year, and they continue to run their fund. They continue to invest in things like pre-seed and seed opportunities from their fund. But we became the investment vehicle right after that. And so when they’ve invested in a breakout company at the seed level, and they’ve been tracking it really closely, and now the company is hitting an inflection point, maybe a brand name, Vc is like leading the round, and they have their pro rata, we can enable them to move quickly into the company and double down protect their ownership. And it happens through our fund. The fund is making a direct investment into the company. And then we share the carry back with the manager. So importantly, it’s not a fund to fund. We’re investing directly into companies. It’s sourced by these emerging managers that we think are really special.

Earnest Sweat 19:46
Is there a commitment when you said you bring on I would love to get into like how you select them, but before you know once you’ve selected them, is there a commitment on how many potential or is it just from that time period?

Sunil Pai 19:58
Yeah, There’s two parts, which is, we only work with four managers every calendar year. And we found that to be the right number, because we share the economics very generously. And, you know, we want managers to be incentivized to do their best deals in the companies, if we brought on 10 managers, and let’s just say we did the math, and everybody’s just getting 2% Carry on every deal. I don’t know, if we would be able to incentivize the best managers to do this, maybe they’d go out and do SPVs instead, or maybe they’d raise a larger fund. But if we can give them strong economics, then we can make a really compelling case for them to do their best for their companies. So we find these managers, and we ask them to make a one year commitment to us. Because, you know, if you want to go out and raise $100 million, fund yourself, we’re not going to stop you. And so we say, let’s try this out for one year. If this works out, and we’re solving a problem for you, and you like working with us, we can continue for another year, another year. But we’re not going to try to handcuff you into being into the fund. So let’s try this as a one year experiment. And it’s worked out really well. So that one year commitment is like the minimum that we ask for. And we often kind of rework with managers over the years as well. How

Earnest Sweat 21:11
Do you decide on which managers you’re going to work with?

Sunil Pai 21:17
What we’re looking for is an early stage. And these are guidelines, we’ve broken the rules sometimes. So what we generally look for is, first we want to see a body of work generally that they’ve invested in about 50 companies. And it might have been they’ve worked at a fund before, might have been through an angel track record, or maybe they’re on fun right now. But there’s enough of like a corpus that we can see like, you know, there, this isn’t their one of their first five deals, we know we can assess their judgment, their taste, we can do references on them with founders, we know how they work with people, generally, you know, under $30 million funds, so they don’t really have a reserve strategy. And we can solve a problem for them with high performance. So like 30% Plus IRR as a floor, and then what we like is we like folks who are pretty specialized in what they do, they’ve got a swim lane of what they’re looking at. And so you know, this year, we’ve got one manager who works on data tools and infrastructure, just what he does, or like we’re talking about Tommy earlier, he’s focused on climate tech, or national defense. And we like that, because it’s, you know, there’s manager market fit, we can see like, they’ve been doing this, they’ve got a reputation in this space. This is their swim lane, they’ve built a brand around it. And we really like that, obviously, generalist investors work. And we’ve worked with some of them in the past as well. But we think that having a specific swim lane makes it really clear when you’re adding managers together, that people aren’t stepping on each other’s toes and deals. And they’re focusing on what their superpower is, essentially.

Alexa Binns 22:57
And what’s the pitch to the founders, because you’re your ultimate decision maker is the founder raising the capital.

Sunil Pai 23:06
Yeah, so we, you know, our fund doesn’t want to cause friction in the investment process for a founder, that would completely break the model. And so essentially, you know, how an investment works is, it’s an emerging manager, who’s often taking the first bet on the founder, they had first invested the procedure seat, they’re working with the founder very closely. And you know, they’re texting them, they’re helping them raise the rounds, and they’ve got their pro rata, they talk to the founder, and they say, Hey, I’m part of an opportunity fund, I’d love to do my pro rata from aclf, here’s how it works, I’m still going to be the point of contact to you, like we still continue this relationship, but the capital is coming from a later stage vehicle that I work with, and I want you to meet these folks as well. So we generally are in contact with the founders. We don’t want to stand in the way, but it’s essentially just a different name on the cap table, but the founder, so interfacing with the manager, that that kind of took the bet on them, they’re the face of the check.

Alexa Binns 23:59
And do you have an average check size, so they know what they’re representing? Yeah,

Sunil Pai 24:05
So you know, we’re structured as a rolling fund. And so we’re able to take capital in at any point. And each manager, there’s four managers, so they each have access to about a quarter of the funds capital. And what that means is generally on the smaller end, we’re writing checks of about 250k. And then a little bit upwards of a million dollars. The other

Earnest Sweat 24:26
stakeholder is the LPS you bring in so talk to me about you know, being a rolling fund. What’s the kind of ideal LP for you?

Sunil Pai 24:38
Yeah, so the rolling fund structure just to break it down is essentially it’s an open but open ended fund where LPS kind of make a subscription on a quarterly basis. So, you know, typically the process in a traditional fund is I’m an LP I, you know, typically invest $2 million. So I, you know, make that commitment and then there’s multiple capital costs. balls, there’s $2 million that is invested over two years or something like that. What a rolling fund does is enable LPs to invest on a quarterly basis. So you can do the same thing, you can say I’m going to invest $2 million over eight quarters, you just break that down into a quarterly subscription. But it enables us as managers to take in capital as at any point, there’s no final close to our fund. If we made an LP today, they’re interested in our model, they can join next quarter, we’re open ended in that sense. So it gives us a lot of flexibility. And it’s in essence, we can take capital in at any point. But there are drawbacks, right? And part of that is it’s a new model, it didn’t exist five years ago. And so there, it does require education for LPS, we’re telling about this model, we’re telling them, we’re giving guidance on what a subscription should look like, if you want to portfolio diversity across different managers in different classes. So there’s the time it takes to explain that is important. And, you know, I think that our story resonates really well, with family offices as an LP base. They’re the ones that are kind of interested in early stage emerging managers, they’ve met a lot of them, it’s very hard to make that decision on how to pick because there’s hundreds, they felt this problem. And they’re open to novel structures like this. And this enables them to join for a year, join for one year, and then decide if you want to, you know, come back for the next year. We’ve had conversations, you know, we have a fund of funds invested in us as an LP, but mostly it’s been family offices. And I think the model allows them flexibility, it’s something that they get, we found larger institutions and endowments, it’s a little bit too new for them. And so we found our LP base to be strictly family offices.

Alexa Binns 26:49
We’ve had a few fun hands on to explain sort of the benefits of, okay, we’re meeting all of these emerging managers, so you don’t have to, and you’re getting diversification. What’s the data around opportunity funds? Your beer now sounds pretty squarely in the series A B, rounds? What should LPS know about the opportunity at this sort of echelon? Yeah,

Sunil Pai 27:15
like, I think opportunity funds, it’s generally met, like, context wise, I think a lot of like the institutional funds do it almost like a growth fund. It’s like where they cherry pick their best companies, but they are investing at the later stages. So what we’re doing is a little bit different from that just because we’re coming in early, but I think that you know, PitchBook data is showing that, like some of the highest performing funds of all time, have been opportunity funds. Like if you look, I think it’s USBs 2018 vintage USB or something like that. It performs terrifically if you can get that model to work where you’re seeing the company early, you’ve got the relationship, and you’ve got this separate vehicle that you can double down, then, you know, across the lifecycle that that’s a winning strategy. I think where we’re a little bit different from that is just that we’re coming in early, we think the best returns are still early. We’re not the best late stage pickers, but we can identify when a company is going from inception, it’s having that inflection point where there’s strong pool of product market fit, valuations are still low, that’s where we kind of consider the opportunity to be the greatest,

Earnest Sweat 28:18
Is there any expectation on the rate of deployment.

Sunil Pai 28:25
So the rolling fund model, just very tactically, you know, we’ve got an amount of capital that we can invest this quarter, if we don’t invest it, it just rolls over to the next quarter, and new capital comes in. So there’s no gun to your head, no pressure to deploy, it just rolls over by default into the next quarter, we generally want each of our four managers to be doing maybe four to five deals a year into their best companies. And so we’re investing 20 to 25 million, maybe a little bit better than 20 to 25 companies per year. And that’s kind of where we see the portfolio construction come in.

Alexa Binns 29:02
Does this end up being a full time job?

Sunil Pai 29:05
Yeah, this is what I do full time, I’m still involved in, you know, a couple of companies, I’m an advisor. But this is full time and hands-on in the sense that my co founder, and I were, you know, putting together the team of managers without raising the capital, kind of constantly raising because it’s an open ended fund. And we also, you know, helped make the decisions on the fund. So the managers are the ones sourcing, they provide their diligence, like, I’ve known this company for 24 months. Here’s why I’m a believer in them. Here’s why I think the valuation makes sense. Here’s the upside. But ultimately, my co founder, Nick and I are like the governance layer on the fund. And so this is where we’re kind of full time. So

Earnest Sweat 29:43
Now you’ve had a very interesting perspective, from being inside a firm to being at AngelList. And at AngelList. Your firm was kind of responsible for the boom of this new crop of emerging managers, and I will say emerging founders who are part of the fund administration stack. But on the emerging managers, who do you think should be starting to fund now? And who shouldn’t? Yeah,

Sunil Pai 30:13
it’s funny, I sometimes joke that AngelList is the arms dealer for emerging brands, it’d be prior to the infrastructure for everyone. I think like, you know, we saw a lot of interesting things happen in the 2021 timeline, right? Like, I think there was a period where it almost became like a meme. Like, if you have a big Twitter following, when are you going to raise a rolling fine, you know, a lot of people just thought because they have distribution, they could be great investors. And that’s, that’s generally not the case. There are some cases in which it works out. But I think like, where I like to see, you know, emerging managers and their backgrounds is like the emerging manager market fit. Are you doing? Are you investing in something where you have a lot of experience? You know, the things I personally don’t like to see are like, maybe a person who’s had a career in consumer marketing, and then they’re just excited about deep tech, and they want to raise a deep tech fund and invest in national defense. That doesn’t translate, right. I don’t think it does. And so I think about where people should really think about. Do I want to start a fund ? First, you know, am I unique in the market? Does my experience translate into better access, better judgment? Do I have taste in companies that are doing? Well, second, I think you need to, to the extent that you can learn on your own dime, there’s there’s folks out there that just because they have a megaphone, and they can raise a 10 or $20 million fund, doesn’t mean you should start that way, you should start if you can, as an angel. And even if you don’t have a lot of personal capital to invest, it kind of tests your skills. Can you convince a great founder to take a $2,000 check or a $5,000 check and let you be on the cap table? So you learn by yourself. And then I think you take other capital when you’ve proven out the track record. And I think one thing that I really like to see is that I love managers that have a lot of skin in the game, who are betting on themselves. Obviously, a fund is a great source of leverage. But do you do more than the average GP commit? Or if you’re not able to? Are you reinvesting your management fees back into the fund? Are you aligned with your LPs? And so those are the kind of subtle things that I think are really important in assessing managers motives. And when you’re making a bet on them early, you want to be paying attention to the signs. And then it’s not just necessarily how loud someone is how much hype or how much brand they have, they’re really looking to can they connect the dots that have a unique perspective that founders want to listen to where founders will take their money, where they will work with founders and build a reference network that will create a cycle for them to go to fund to and beyond. And I think emerging managers should be really thoughtful about that down the road before choosing to start a fund.

Alexa Binns 32:58
you’ve enabled so many people to become angel investors. And it is sort of tough to make billions if you’re investing $1,000 at a time. Best case, you get a 100x. And, you know, your $100 is still not enough to do a downpayment on a house today. So do you see sort of an emergence of a new LP class as well? And who should be putting LPS into funds or opportunity funds, like your own? Like is, is your product something that is well suited for somebody maybe with fewer net assets than somebody who’s in order to do venture well, going to have to invest in five emerging managers a year? For 10 years?

Sunil Pai 33:51
Yeah, I think so. So, on the emerging manager side, I think like, yes, it’s certainly hard to invest, you know, 1000 $2,000 into companies, and then the returns are generally going to be kept. There’s alternative models to instead of starting a fund, someone could go be a scout, you know, someone could be a part of a program there or partner with other folks and do a fund together, maybe not as a solo GP. But I think it’s important to show proof points before you scale up font size. That was my point on that side. But on the LP part, I think it’s really interesting. I think LPs are phased in, they’re kind of like, inundated with all of these small fund managers, and it’s really hard to evaluate. And in venture, you want to also be diversified. You don’t want to just invest in a couple of funds, you need to have broader access to the asset class you want to receive like, you know, diversification across vintages. I think our model kind of solves some of those challenges, as well as it’s actually very challenging to be an LP in an institutional fund. If you’re a smaller family office, how do you be an LP in a tier one brand? They are weightless, they have investment minimums, you know, there’s a lot of competition to be an LP and one of those multistage funds. And so what we provide our LPS is diversification across top managers and across vintages, where you know, we’re very open with our LPs, we work collaboratively, we share a lot of updates, we share our investment memos. And so they can see like, Okay, I understand why, why these four managers were chosen, I can see their track record, I know why they’re interesting. And I’m going to take a bet, because they’re still, you know, unproven, they’re not household names yet. But you know, this will give me diversification, and I’ll be able to learn, and the returns are potentially really high if they’re successful in what they’re doing, because they’re investing so early. So on the LP side, I think we hit the mark on family offices, because it solves a real core problem for them.

Earnest Sweat 35:53
You were a junior VC. So what advice do you have for your younger self? If you know, someone had aspirations of starting their own fund, what should they be doing?

Sunil Pai 36:04
I think the single best thing that I did in my venture time at DFJ was I just had, like, you know, an Excel spreadsheet open every Monday partner meeting. And I just kept myself completely accountable. I was not a decision maker, I was junior, I was at the bottom of the totem pole, I was doing the grunt work, great, happy to do it, you know, I would provide my opinion, but I couldn’t lead a deal. And so when I was working with the partners, I would write down for myself, you know, here’s the company, here’s what it does. If I was a decision maker, would I do this deal? And I just kept track of that across multiple partner meetings and over time. And so now I can see it’s not an official track record. But it allows me to, like, assess my own judgment. And where was I wrong? And where was I right? I think that’s really important, because there’s this, you know, tempting allure of revisionist history, where when a company becomes successful now, everyone, you know, we all saw the whole partnership wanted to do this deal. But often, like the best companies, they are very controversial. There’s a lot of loud noise in the room. And so it’s easy to sometimes, like generously forget what that conversation was. And so I think if you’re, if you’re junior, and you’re not yet in the position to be leading, deal yourself as a general partner, just keeping track of that, and monitoring your own judgment over time, and you’ll be wrong. Sometimes we’ll be right sometimes, but just being open and accountable to data is important.

Alexa Binns 37:31
And part of being trained as a VC is we’re supposed to see blue ocean opportunities. And curious, this is such a unique model that you’ve pulled together. Are there any others that you are intrigued by when you look sort of around at what your colleagues who are getting creative are doing? Where do you think, oh, that’s actually different? And actually makes a lot of sense?

Sunil Pai 37:57
Yeah, it’s a good question. I think some people are, I think there’s a lot of trends of emerging managers kind of going from solo to GPS to combining brands, which is interesting, were a couple of years ago, the capital markets were different, it was maybe easier to raise a fund, now it’s a little bit harder, maybe they want a support system with another manager, or maybe they want to combine forces, I think that’s going to be happening more and more, where there’s kind of like, mergers between emerging managers, which is an interesting trend that we’re keeping track of. And I also think, what I really like to see is, you know, fund managers who don’t necessarily want to be franchise names, not everybody’s goal is to have a billion dollars under aum. And I really want to be on the lookout for these managers. And there’s, you know, there’s, there’s not a whole lot of them, but they want to stay small, they know their model, they know the cottage-like model of where they’re really good. And they don’t want to expand quickly into being a growth stage investor and having seven other partners and you know, all the scale problems that come with deploying large amounts of capital, they know what they do, and they kind of stick to that, that knitting. That’s something that I’m keeping an eye on. That’s

Earnest Sweat 39:15
fascinating, because I just earlier today spoke with somebody, they were asking me what I think is going to happen in the industry. And I was like, I mean, a lot of great solo GPS that I know want to partner with someone. And they just didn’t want to rush it. I was like, so I think they’re going to be merged, but wow, that’s crazy. So Sunil just says we kind of have closing thoughts and want to know, is there anything else that you would love to cover that maybe we didn’t didn’t mention? Any ideas, predictions? Or the other thing

Sunil Pai 39:46
it’s just, I want to give a lot of credit to my co-founder, Nick, because I’m the one representing our firm here. But yeah, my background has been in kind of institutional investing and then working at AngelList but he comes from the fact Her background. and so that push and pull of the different kinds of styles of investing has been really helpful to us. So yeah, shout out to Nick. Good stuff.

Alexa Binns 40:37
Now, it’s been so cool to hear how you all have come to this model. Thanks, Sunil. Thanks for being on the show. Awesome.

Sunil Pai 40:44
Thank you. Thanks, now.

Alexa Binns 40:47
See you later, allocator.