20VC How Fundraising For Funds Has Changed in The World of COVID, The Benefits of Managers Selling Part of Their GP & How To Think Through Your “Minimum Viable Fund Size” with Lo Toney, Founding Managing Partner @ Plexo Capital



In this episode of "20 Minutes VC," host Harry Stebbings interviews Lo Toney, founding managing partner at Plexo Capital, a unique venture firm making both direct investments and fund investments. Toney's background includes roles at GV (Google Ventures) and Comcast Ventures, as well as operational experience at companies like Zynga, Nike, and eBay. The conversation delves into the challenges of venture investing, the importance of getting into the VC industry early, and the value of operational experience for early-stage investing. Toney emphasizes the significance of transparent communication with LPs, especially regarding fund size and risk-reward profiles. Additionally, they discuss the barriers to entry for diverse emerging managers due to traditional GP commit expectations. The episode also touches on Plexo Capital's investment strategy, which includes LP and direct investing, secondary opportunities, and taking stakes in management companies. Finally, Toney highlights a recent investment in PlayVS, which offers infrastructure for high school esports, showcasing the potential for growth in the esports sector.

Summary Notes

Introduction to Plexo Capital and Lo Toney's Background

  • Plexo Capital is unique in its approach to venture investing, engaging in both direct investments and fund investments.
  • Lo Toney is the founding managing partner at Plexo Capital.
  • Plexo Capital has invested in various funds such as Precursor, Boldstart, Female Founders Fund, and Workbench.
  • On the direct investment side, Plexo has invested in companies like PlayVS, Replicated, and Starseed.
  • Lo Toney's previous roles include partner at GV (Google Ventures) and Comcast Ventures, where he led the Catalyst Fund.
  • Toney has also held executive roles at Zynga, Nike, and eBay.

"And so I'm thrilled to welcome Low Tony, founding managing partner at Plexo Capital. As I said, a very unique firm making both direct investments and fund investments."

This quote introduces Lo Toney and Plexo Capital, highlighting the firm's distinctive strategy in the venture capital space.

Venture Capital Pathways and Entry

  • Lo Toney shares his journey into venture capital, beginning with his MBA at Cal during the exciting time of Netscape's IPO.
  • Toney was exposed to the venture and entrepreneurial community through classes specific to venture capital and entrepreneurship.
  • He initially wanted to go into investment banking but shifted his interest to venture capital for its early involvement in company growth.
  • Toney sought advice from venture capitalists and was advised to gain operating experience and, if possible, to become a CEO.
  • He modeled his venture path through product management and managing a P&L, eventually becoming a "hired gun CEO."

"And the common feedback I heard was to have some operating experience if there was interest in the early stage and if you can go be a CEO."

This quote reflects the advice Toney received on the importance of operational experience for a career in early-stage venture capital.

Advice for Aspiring Venture Capitalists

  • Harry Stebbings expresses his view that there is no set path to becoming a venture capitalist and encourages just doing it.
  • Lo Toney agrees there is no one-size-fits-all path to venture capital and emphasizes the importance of context when receiving advice.
  • Toney believes understanding product management is beneficial at the early stage due to similarities in the required skill set.
  • Toney also values the ability to empathize with startup CEOs, which can be enhanced by having operational experience.

"Whenever I give someone feedback, I always tell them, when someone gives you feedback, think about the context that they're giving it to you."

This quote emphasizes the importance of considering the context in which advice is given, as different successful individuals may have varying perspectives.

Fundraising Challenges During COVID-19

  • Toney discusses the impact of COVID-19 on fundraising, emphasizing factors like whether it is a first-time fund or a subsequent fund, fund size, geographic location, and focus areas.
  • He advises general partners (GPs) in the middle of fundraising to expect extended timelines due to the transition to working from home.
  • Toney suggests that if a GP has completed a first close of at least a third to half of the target, they are in a good position, though timelines will be extended.
  • Institutional LPs with pre-approved budgets and plans are likely to complete their commitments.
  • For first-time fund managers, Toney advises understanding the minimum viable fund size and developing scenarios between that and the target close.

"I think that gps in the middle of fundraising, number one, need to understand that in this unprecedented time where people are now working from home, think about an extended timeline for fundraising."

This quote highlights the immediate impact of the COVID-19 pandemic on the fundraising process, particularly the need to adjust timelines and expectations.

Fund Size Considerations and Portfolio Construction

  • Evaluating fund size in relation to operating expenses and personal salary.
  • Analyzing how a smaller fund size impacts portfolio construction and risk-reward modeling.
  • Considering the number of investments and the size of checks in relation to fund size.
  • Anticipating potential changes in market conditions such as valuation declines and round sizes.

"nd size, will it provide me with an operating plan for expenses and my salary where I can actually survive, especially given the level of uncertainty that we have?"

This quote emphasizes the need for a fund manager to ensure that the fund size is sufficient to cover operational costs and personal livelihood, especially in uncertain market conditions.

"Do I need to think about my risk reward that I've modeled out based on my target fund size, should that be different?"

The quote reflects the necessity for a fund manager to revisit and possibly adjust their risk-reward expectations when faced with a smaller than anticipated fund size.

Communicating Changes to Limited Partners (LPs)

  • Addressing the challenge of altered fund dynamics when the actual fund size is smaller than initially planned.
  • Explaining the necessity of modifying the fund's risk-reward profile to LPs.
  • Importance of clear, transparent communication with LPs regarding changes in portfolio construction and strategy.
  • Balancing LP expectations with revised fund strategies and maintaining trust.

"The challenge that a GP will face is that they have sold a certain risk reward profile to the initial lps that are now in that first close, or whatever number of closes have happened prior to this crisis."

This quote highlights the difficulty a General Partner (GP) faces when the fund's risk-reward profile changes from what was initially presented to LPs, requiring careful communication and strategy adjustments.

"It is critical to have clear, crisp, transparent communication with the lps and the ability to be able to go back to the lps and explain how the risk reward profile might change given that the portfolio construction model might need to be revised in the event that there's a smaller raise."

The quote underscores the importance of open and clear communication with LPs about any necessary changes to the fund's model due to a smaller capital raise.

Closing Strategies for Fundraising

  • Previously recommended taking funds from LPs whenever possible.
  • Considering the impact of crisis on closing strategies, including negotiating flexibility in the Limited Partner Agreement (LPA).
  • The importance of demonstrating closed LP commitments as a positive signal in the current environment.
  • Adjusting closing strategies to account for the possibility of not reaching the target fund size.

"If a GP has the ability to close with an LP, if an LP wants to give a GP money, take the money."

This quote suggests that, under normal circumstances, it is advisable for GPs to accept funds from LPs when offered, rather than waiting for larger closing amounts.

"If there is a threshold stated in the LPA that's required for the first close to go back to the lps, and if the GP knows they're not going to be able to meet that, understand what the close is looking like, what the timing is looking like, and if there are lps that are ready to close, I would talk to the anchor and see if there's any flexibility in that."

The quote advises GPs to communicate with anchor LPs and seek flexibility in closing thresholds, especially when the full target size may not be met due to market conditions.

Management Company Investment Considerations

  • Discussing the practice of investors taking stakes in the management company.
  • The investment could facilitate leadership transitions, cover GP commitments, or enable business expansion.
  • Evaluating the benefits and implications of accepting investments into the management company.
  • Understanding the valuation and ownership percentage structures typical in private equity.

"It's actually something that I'm glad we're covering. I've spent a lot of time over the past year doing some deep analysis on GP stakes at the private equity level."

This quote introduces the topic of investment into the management company, highlighting the speaker's expertise and the importance of understanding the nuances of such investments.

"It could be an LP, or it could even be a separate entity that is not an LP that is looking to make an investment into the management company of a GP."

The quote clarifies that investments into the management company can come from LPs or other entities, and it's crucial for GPs to consider the reasons and terms of such investments.

Management Fee and Carry Stake Investment

  • GP (General Partner) can receive early working capital through stake investment.
  • Investors get a percentage of the management fee and carry.
  • The percentage from carry might not be equal to that of the management fee.
  • This investment allows GPs to hire personnel and build infrastructure without personal expense.
  • GPs should plan for two years without income.
  • LPs (Limited Partners) should be open to separate stake investments from LP commitments.
  • Stake investments should not affect preferred economics for LPs.
  • Management fee is the least aligned with business success, hence a safe investment area for LPs.
  • Stake investment can alleviate financial pressure for emerging managers and help with GP commit.

So if it's a 10% stake, the investor receives 10% of the management fee, and then it also can apply to the carry as well.

This quote explains that an investor who takes a 10% stake in a management company would receive 10% of both the management fee and potentially the carry, although the carry percentage may vary.

That way what you're doing is you're actually. If it's focused on the management fee as the portion being delivered to the person making the entity making the investment, if you think about it, the management fee is the least aligned piece of the economics for the business.

This quote emphasizes that the management fee is the least aligned with the success of the business, making it a safer investment for the stakeholder and less impactful on the GP's potential success.

I'm a big fan of it.

Lo Toney expresses strong support for the practice of stake investment in management companies, highlighting its benefits for GPs in terms of financial support and infrastructure development.

GP Commit and Industry Standards

  • The industry standard GP commit is often cited as 3%.
  • This standard can prevent diversity by favoring those with significant liquidity.
  • GP commit should be relative to the GP's financial situation.
  • The alignment of interests is questionable when the GP commit is not significant for the investor.
  • There is a need for data to prove the necessity of wealth for VC success.

Because a lot of lps that we came across were like, oh, the standard is 3%.

Harry Stebbings points out that many LPs expect a 3% GP commit as a standard, which he finds problematic for diversity and inclusion in the industry.

Someone needs to show me the data, right? And I'm not talking anything that's correlated. I'm talking about causal data that if you're not rich, that you can't be a successful VC, because I don't think that data exists.

Lo Toney challenges the notion that wealth is a prerequisite for becoming a successful VC, calling for data to support or disprove this belief.

Diversity and Inclusion in Venture Capital

  • Flexo Capital focuses on women and people of color with non-traditional paths into VC.
  • The strategy of inclusion has been adopted by several firms to access additional deal flow.
  • LP and GP commitments should consider the individual's financial background.
  • Anecdotes show the struggle of diverse individuals to meet standard GP commits.

I'm going to start by saying that at Flexo Capital, our thesis is around the fact that women and people of color have this non traditional path into venture capital.

Lo Toney introduces Flexo Capital's thesis, which supports the inclusion of women and people of color in venture capital through non-traditional paths.

Hybridization of LP and GP

  • Hybridization involves LPs taking on some GP-like investment activities.
  • It provides leverage and access to a curated set of deals.
  • Flexo Capital aims to be a capital allocator across the entire ecosystem.
  • Future plans include LP investing, direct company investments, secondaries, and GP stake investments.
  • The model seeks to increase returns while maintaining risk-adjusted LP investing.

For us, it's really about leverage.

Lo Toney explains that hybridization is about leveraging their position to access and curate deals, which increases their potential for returns.

The list just goes on and on. And the ability to be able to have gps that are building world class franchises, well respected and known in the entrepreneurial and venture community, looking at a bunch of deals and curating that down to their portfolio.

This quote highlights the advantage of working with respected GPs who can filter through numerous deals to select those with the most potential, providing value to LPs like Flexo Capital.

We like the dynamics of, if correctly structured, being able to provide not only an investment to help the GP with working capital requirements and GP commit, but also the ability to offer our knowledge an introduction into our LP base, and also the ability to offer some services as well to make the fundraising process and fund management more efficient.

Lo Toney outlines the benefits of their investment model, which includes providing working capital, sharing knowledge, introducing GPs to their LP base, and offering services to streamline fundraising and fund management.

Allocation Challenges in Transparent Markets

  • The venture capital market is increasingly transparent, with aggressive moves by large players.
  • It's difficult for smaller funds to secure allocations in the best companies.
  • Large multistage, multibillion AUM firms are very aggressive in gaining ownership.
  • Disciplined investment and portfolio construction are necessary to succeed.
  • The power law model in venture capital means a few outliers significantly impact average returns.

"It is really difficult, and the ability to be opportunistic and to really make those bets and to really think about reserves, to be able to get to a level of ownership where the reserve likely won't be enough, to be able to cover Prorata, let alone buy up, I think is spot on."

This quote highlights the challenge of securing enough ownership in a startup when competing with larger funds that can more easily increase their stakes in later funding rounds. It emphasizes the need for strategic thinking and reserves management.

Signaling Risk and Entrepreneur Perspectives

  • Signaling risk is a concern, particularly for first-time entrepreneurs.
  • Second-time entrepreneurs may be less concerned with signaling risk.
  • Larger funds can overshadow smaller ones, impacting their ability to invest.

"Maybe for a first time entrepreneur, they might care more. Second time entrepreneur, not so sure. They care so much about signaling risk."

Lo Toney suggests that the concern over signaling risk, which is the perceived endorsement or lack thereof from investors, may vary between first-time and seasoned entrepreneurs.

Venture Capital Investment Strategies

  • Successful venture capital investing requires identifying the best companies early.
  • Portfolio construction and ownership levels are critical in a power law market.
  • It's important to source and secure the best deals through a strong network of GPs.

"The ability to be disciplined, have the right portfolio construction model, recognize that you need to get as much ownership on the front end as possible because you're not going to be able to buy up."

Lo Toney stresses the importance of disciplined investment strategies, including securing significant ownership early on due to the inability to increase stakes later.

Favorite Book and Its Impact

  • Lo Toney's favorite book is "Why Should White Guys Have All the Fun?" by Reginald Lewis.
  • The book is inspirational and covers historical events in the financial industry.
  • Lewis's story is particularly influential to Toney and other African Americans.

"It's a book about Reginald Lewis, who was a lawyer turned lbo person way, way back in the he bought Beatrice International, which is a diversified food holdings company, and it was the first billion dollar transaction done by an African american."

The quote explains why "Why Should White Guys Have All the Fun?" is Lo Toney's favorite book, highlighting Reginald Lewis's significant achievements and influence.

Challenges as a GP at Plexo Capital

  • Saying no to many great GPs is a significant challenge.
  • Plexo Capital has a specific investment profile, leading to many rejections.
  • The goal is to provide quick, productive feedback and help where possible.

"The biggest challenge that I have is saying no to so many great gps."

Lo Toney describes the difficulty in turning down potential investment opportunities due to Plexo Capital's specific criteria for investment.

Advice for Aspiring Venture Capitalists

  • Starting early in the venture capital industry is beneficial.
  • Early successes are important for negotiating better economics in future funds.
  • It's a long-term industry, requiring patience and consistent performance.

"The best piece of advice that I would give is get into the venture business as early as possible."

Lo Toney advises newcomers to the venture capital field to start early to gain experience and establish a track record for future negotiations and success.

Observations of Effective Board Members

  • Tyson Clark at GV is highlighted as an effective board member.
  • His diverse background provides valuable insights to enterprise CEOs.
  • Clark's experience in product management, corporate development, and public markets is beneficial.

"He actually provides so much value to enterprise ceos because he has good product sense."

The quote summarizes Tyson Clark's valuable contribution to boards due to his extensive experience and ability to provide strategic guidance.

Excitement About Recent Investments

  • PlayVS, led by CEO Delane, is Plexo Capital's recent exciting investment.
  • The company provides infrastructure for high school esports.
  • PlayVS's vision and team, along with the growing esports market, are compelling reasons for investment.

"It's a company based in Los Angeles that provides the infrastructure for high school esports."

Lo Toney explains the rationale behind Plexo Capital's investment in PlayVS, emphasizing the company's role in the burgeoning esports sector and its potential for growth.

Venture Capital as a Long Game

  • Venture capital is recognized as a long-term commitment.
  • Patience and a long-term perspective are key to success in the industry.

"This is like a very long game. This is like a 20-year game, at least."

Harry Stebbings reflects on the advice given to him about the long-term nature of venture capital, reinforcing the need for a strategic, patient approach to investing.

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