20VC Fintech OG Sheel Mohnot on Lessons from Investing in Flexport and ChipperCash and Missing Robinhood and Chime, Why Overly Large GP Commits are Dangerous, Biggest Mistakes Managers Make with Fund I and Emerging Markets; Which Survive

In this episode of 20vc, host welcomes Sheil Monet, co-founder and general partner at Better Tomorrow Ventures (BTV), a $225 million fund focusing on early-stage fintech companies. Monet shares his journey from founding two acquired companies to running 500 Fintech, before teaming up with Jake Gibson to create BTV. He highlights the importance of price discipline, portfolio construction, and investing in capital-efficient businesses. Monet also discusses the challenges of investing in emerging markets, the shift towards cash flow positivity, and the goal for BTV to become the go-to fund for fintech startups. Additionally, the episode touches on the personal side of venture capital, such as the difficulty of saying no to founders and the balance between professional and personal life aspirations.

• Sheel Mohnot is a co-founder and general partner at Better Tomorrow Ventures (BTV).
• BTV is a $225 million fund focusing on pre-seed and seed-stage fintech companies globally.
• Sheel has a background in founding companies, with two successful acquisitions.
• Prior to BTV, Sheel ran 500 Fintech for nearly seven years.
• Investments include Mercury, Flexport, Ramp, and Hippo Insurance.

"I'm so thrilled to welcome Sheel Mohnot, co-founder and general partner at Better Tomorrow Ventures, a $225,000,000 fund that leads rounds in pre-seed and seed stage fintech companies globally."

This quote introduces Sheel Mohnot and his venture fund, Better Tomorrow Ventures, highlighting its focus on early-stage fintech investments.

• Sheel started as a founder and transitioned to venture capital after his companies were acquired.
• His first company was acquired in 2012, and the second in 2015.
• Post-acquisition, he joined 500 Startups as a mentor before moving into venture capital full-time.
• He started 500 Fintech within 500 Startups and later explored opportunities at other funds.
• Sheel and Jake Gibson, a friend and founder of NerdWallet, decided to launch their own fund instead of joining existing ones.

"So I made my way into venture. I was a founder. I first joined on with a friend to start a company, and then that company got acquired in 2012, ended up starting a company shortly afterwards. That company got acquired in 2015 at that .5 hundred startups who'd invested in the first company asked me to join them."

Sheel describes his path from being a founder to entering the venture capital space, emphasizing the acquisitions of his companies as turning points in his career.

• Sheel and Jake Gibson bonded over their mutual experiences interviewing at other funds.
• Despite receiving offers, they chose to start their own fund, Better Tomorrow Ventures, in late 2019.
• Their decision was based on a desire for less bureaucracy and a better alignment with their personalities.

"We decided, hey, maybe we should just do our own thing. These funds are not for us. Some of them are too bureaucratic. Some of them have different personalities than we like, let's just do our own thing."

The quote explains the rationale behind Sheel and Jake's decision to establish Better Tomorrow Ventures, highlighting their preference for an independent approach.

• Sheel's acquisitions provided financial independence, which he used to start angel investing.
• His low-burn lifestyle, influenced by living in India on a dollar a day, shaped his approach to wealth.
• He values experiences and relationships over material possessions.

"So, yes, absolutely. I did not come from money or anything like that. Didn't have much money before, so it was a big unlock. And the first thing I did was started investing in other companies, literally, like, within a month of getting the paycheck started, angel investing."

Sheel discusses the impact of his financial gains from selling his companies and how it led him to angel investing, emphasizing his transition to the investment world.

• Sheel contrasts his conservative family background with his own entrepreneurial path.
• He is inspired by his grandfather's business ventures and enjoys trying out different businesses.

"What parts of your history are you rebelling from first, and what parts of your history are you running towards?"

This question prompts Sheel to reflect on his personal history, revealing his divergence from family expectations and his alignment with the entrepreneurial spirit of his ancestors.

• At 500 Startups, Sheel learned the operational aspects of running a fund.
• He experienced the power law in venture capital, realizing the significance of a few high-performing investments.
• Sheel's time at 500 Startups informed his investment strategy, emphasizing the importance of seeking outsized returns.

"You can read about the power law, but actually seeing it for me was a big game changer. And you realize, actually, even though I invested in 70 plus companies, there's only a handful of them that really matter."

Sheel reflects on the realization of the power law's impact on venture capital, where a small number of investments can generate the majority of returns.

• Sheel expresses gratitude for question suggestions from Ariel Zuckerberg and Amit Kumar at Excel.
• Harry Stebbings shares his positive experiences with tools like Notion, Angellist, and Squarespace, highlighting their utility in business operations.

"And I want to say a huge thank you to Ariel Zuckerberg and Amit Kumar at excel for some fantastic questions suggestions today."

Harry thanks contributors for their input in preparing for the interview with Sheel, acknowledging the collaborative effort behind the podcast episode.

• Harry Stebbings discusses his regret of not selling his winners when he had the chance.
• Sheel Mohnot shares a similar experience, having sold some shares but not as much as he should have.
• Both highlight the importance of realizing gains and not holding on too tightly to investments.

"My biggest regret and my biggest lesson is that I didn't, because I believed in Sequoia, is hold on to your winners, never sell your winners. And I didn't. And I probably could have taken off about $25 million for an $8 million fund." "I have, unfortunately, the same lesson learned I did take off some, but not as much as I should have."

Harry expresses his lesson learned about the importance of taking profits when possible, while Sheel agrees, emphasizing the value of selling shares at the right time. This conversation serves as a cautionary tale about the balance between belief in an investment and the practicality of realizing financial gains.

• Sheel Mohnot discusses the "index approach" to venture capital, where funds invest smaller amounts in a large number of companies.
• He explains that Better Tomorrow Ventures focuses on fintech and provides hands-on investment, limiting their ability to invest widely.
• Better Tomorrow Ventures opts for a more concentrated portfolio compared to index funds, with about 30 companies per fund.

"The index approach, and there are funds that do that out here. Soma capital, liquid two, I think, are taking the index approach of writing, I think, 100 to 500k checks in a lot of companies that they see." "We couldn't put money into every company, is we are hands on investors and we invest in category fintech."

Sheel describes the strategy of certain venture capital funds that take an index-like approach, investing in a broad range of companies. He contrasts this with Better Tomorrow Ventures' strategy, which involves a more focused and hands-on investment approach within the fintech sector.

• Better Tomorrow Ventures has increased their reserve allocation for follow-on investments in their second fund.
• Sheel explains that their hands-on approach and assistance in introducing founders to Series A and B investors have allowed them to maintain their pro rata rights.
• The discussion highlights the importance of planning for follow-on investments and the ability to support portfolio companies through multiple funding rounds.

"In fund one, 150 percent reserves, in fund two, we have actually 60% reserves, so we're reserving more for follow ons." "We want the ability to follow on into our winners and also be able to support companies that need the money."

Sheel details the fund's strategy for reserving capital for follow-on investments, noting the increase in reserved funds from their first to second fund. The conversation underscores the significance of having sufficient reserves to continue supporting successful companies and those in need of additional funds.

• Sheel Mohnot emphasizes the goal of securing 10-15% ownership with the initial investment check.
• He notes that despite market downturns, seed valuations in fintech have remained high.
• Sheel also discusses their strategy of being price-sensitive on entry but committed to the company afterward.

"In fund one, our average first check was a million bucks for about 10% ownership." "Our strategy is to be very sensitive on entry price, and like I said, we will negotiate hard on entry price, very hard, and get the price we want and the founders we want to work with."

Sheel explains that Better Tomorrow Ventures aims for a significant ownership stake with their initial investments and is willing to negotiate firmly to achieve a favorable entry price. This strategy is indicative of their commitment to both securing value for the fund and supporting the founders they believe in.

• Sheel Mohnot shares success stories of investments that have significantly increased in valuation.
• He attributes these successful entry points to not fishing in the same pond as everyone else and being both a price taker and a price maker.
• The discussion highlights the importance of deal sourcing and the ability to negotiate favorable terms with founders.

"From fund one, I'll just tell you our top four companies, their entry point, where we invested and what they're worth today." "If you fish in the same pond as everyone else, then things may end up getting priced up."

Sheel shares examples of investments that have grown considerably in value, illustrating the effectiveness of their investment approach. He also explains their strategy of sourcing deals and setting terms, which has contributed to their success.

• Sheel Mohnot disagrees with Harry Stebbings' view that venture capital has become less collaborative.
• He cites examples of multistage funds lowering ownership thresholds to be more inclusive of early-stage investors.
• The conversation explores the dynamics of collaboration in the venture capital industry and how it impacts investment strategies.

"I don't agree with you. Actually, I think you're wrong." "A lot of the multistage funds historically are leading series A's. They used to have an ownership threshold of 20% minimum, and now they have a lower ownership threshold, 15."

Sheel challenges Harry's perspective on the collaborative nature of venture capital, providing evidence of increased inclusivity among multistage funds. This exchange delves into the evolving practices of venture funds and the implications for early-stage investors.

• Venture capital firms often prioritize founder belief and support over purely financial metrics.
• Firms may participate in funding rounds even at high valuations if they have confidence in the founder.
• Supporting founders includes guiding them through the fundraising process and providing financial backing.

"And if we believe in that founder, we will do our full pro Adda." "We've got pretty good ownership up front, we can support them in this next round."

The quotes highlight the venture capital firm's commitment to founders they believe in, indicating a focus on long-term potential and support beyond just capital investment. The firm's approach is holistic, considering both ownership stakes and the founder's vision.

• It is too early to judge investments that have raised substantial funds without corresponding traction.
• Time in venture capital teaches that early apparent success does not guarantee long-term victory.

"You can't say, oh, I shouldn't have invested every cent in it because it's too early to know whether it's going to work."

This quote reflects the uncertainty inherent in venture capital investments, particularly when companies raise large amounts of money early on without clear indicators of success. It underscores the patience required to see if an investment will ultimately succeed.

• Cashback and multiple perspectives are two ways to measure investment success.
• Capital efficiency is a key factor in determining the success of a venture investment.
• Even exits considered modest by venture standards can be significant wins if the investment was made at a low valuation.

"So for me it was an outstanding win, investing from two and a half to 230,000,000 quickly, and I was able to show DPI immediately in my fund."

The quote exemplifies how a venture capital investment can be highly successful despite not achieving a multi-billion-dollar exit, by emphasizing capital efficiency and the initial low valuation at the time of investment.

• Missing out on successful companies can be a learning experience.
• It's important to recognize the unique aspects of successful companies, even if they operate in a familiar market segment.
• Past failures in a certain model do not necessarily predict future outcomes.

"I think what I missed was like they did things differently, they had a few different things."

The speaker acknowledges that overlooking the unique approach of successful companies, like Robinhood and Chime, was a mistake. This quote highlights the importance of evaluating each opportunity on its own merits, even when it appears similar to past investments.

• Price discipline is crucial for venture capital funds, especially during market fluctuations.
• Fund managers should consider portfolio construction, reserve strategy, and investing more in winners.
• Overly large GP commits can lead to conflicts of interest and affect fund management.

"You can't invest at a seed company at a $50 million valuation and expect to make money."

This quote warns against the lack of price discipline, which can lead to unsustainable investment practices and poor returns.

• Having significant ownership in a company is beneficial for venture capital firms.
• Founders may prefer having fewer, more supportive investors on their cap table.
• Venture capital firms aim to increase their average ownership percentage in companies.

"I wish we owned more. We averaged 10% and in this fund we're hoping to average closer to 15."

This quote expresses the desire to hold larger ownership stakes in portfolio companies, which can lead to greater influence and potential returns.

• There is concern about retrenchment from emerging markets in the current macroeconomic climate.
• Some markets have developed strong local ecosystems that can support startups from seed to later stages.
• Markets without strong local support systems may face challenges in attracting capital.

"I think there are markets now that have a homegrown ecosystem. India is one. There's so much capital in India by itself and they have great local funds."

This quote indicates that despite a general pullback from emerging markets, certain regions with robust local ecosystems, like India and Latin America, may continue to thrive due to local support and capital availability.

• The conversation begins with an acknowledgment of the challenges in running a business in the current market, with a specific focus on Latin America (LATAM).
• There is a discussion about the lifecycle funding in LATAM, with doubts raised about its sufficiency.
• Mention of Kazakh as a key player in LATAM funding, but with limitations in their capacity to finance the entire ecosystem.
• Local funds like monashes and canary are highlighted, but their focus is not on growth capital.
• General Atlantic and NAsPA are mentioned as investors in LATAM, but their investments are split across various regions.
• A significant gap in the market is identified due to SoftBank pulling out, leaving a void in the funding landscape.
• Despite the challenges, there is still interest from US investors in LATAM, exemplified by the success of Newbank.

"I don't know if we have the lifecycle funding in LATAM that we think we do."

This quote expresses doubt about the sufficiency of funding for startups throughout their growth stages in LATAM, suggesting that while there are some key players, there may not be enough to support the ecosystem fully.

"Softbank pulling out of the market is a big hole."

The withdrawal of SoftBank from the LATAM market is recognized as a significant loss, indicating that their presence was a substantial part of the funding landscape.

• The focus shifts to advising companies in emerging markets during challenging times.
• The advice given is to aim for free cash flow positivity as quickly as possible.
• There is an acknowledgment of the shift in guidance, as previous years did not emphasize sustainability.
• A specific example is provided of a company that drastically reduced its cash burn to approach free cash flow positivity in a short period.

"It's about getting to free cash flow positive as soon as possible."

This quote emphasizes the importance of financial sustainability for companies in emerging markets, especially in a challenging economic environment.

• The conversation touches on the difficulty of changing a company's growth mindset to one focused on risk management and financial sustainability.
• It is noted that teams ingrained with aggressive growth strategies may struggle to adapt to a more conservative approach.
• The ability of some founders to quickly pivot and manage these changes effectively is highlighted.

"When you suddenly say, free cash flow positive tomorrow, please. It takes a very significant lag in time for the team to embrace the mindset."

This quote reflects the inherent challenge in shifting a company's operational strategy from aggressive growth to a focus on achieving free cash flow positivity.

• The discussion moves to memorable first meetings with founders.
• Ryan Peterson at Flexport and EtAi at unit are mentioned as founders who are passionate about learning and teaching about their industries.
• The trait of being eager to learn and share knowledge is praised as a valuable quality for founders.

"My favorite founders all love learning, and they love learning something and then teaching me about it."

This quote underscores the appreciation for founders who are not only knowledgeable but also enthusiastic about educating others, including investors, about their industry.

• The conversation becomes more personal, discussing reading habits, strengths and weaknesses, and favorite foods.
• A confession is made about not reading books for over a dozen years, preferring articles and podcasts.
• The speaker's biggest strength is identified as a willingness to try anything, with the corresponding weakness being a propensity to attempt foolish things.
• There is a mention of a failed business venture in the vitamin industry as an example of a willingness to experiment.

"I don't read books. I haven't read a book in a dozen years."

This quote reveals a personal preference for consuming information through articles and podcasts rather than traditional books.

• The difficulty of saying no to founders is discussed as one of the hardest parts of working in venture capital.
• There is a desire expressed to see more people solving hard problems and the need for funding in those areas.
• The conversation ends with thoughts on the future of BTV and personal aspirations, with a goal to be recognized as the top choice for fintech startups.

"Saying no to founders without question is just so hard."

This quote highlights the emotional challenge venture capitalists face when they have to decline investment opportunities from passionate founders.

• The interview concludes with a series of light-hearted questions about pizza preferences, the placement of chocolate in the fridge, and personal quirks discussed on dates.
• Opinions on food preferences lead to a discussion on the importance of texture versus flavor.
• The final question asks about the future plans for BTV and the interviewee personally, with aspirations to build a fund that founders would choose first and to continue enjoying life's adventures.

"What's the hardest element of your role with BTV today?"

This question prompts a reflection on the emotional difficulty of venture capital work, particularly when it involves rejecting founders' proposals.