20VC Portfolio Construction, Optimising SPVs, Opportunity Investing Between Rounds, Being DistributionCentric Over ProductCentric and Capital Concentration Within Funds With Sumeet Gajri, Chief Strategy Officer @ Carta



In this episode of "20 Minutes VC," host Harry Stebbings interviews Sumit Gadri, Chief Strategy Officer at Carta and Managing Partner at Original Capital. Gadri shares insights from his multifaceted career as an operator, investor, and LP, detailing his journey from managing a family business dispute to breaking into venture capital and ultimately shaping the strategy at Carta—a company that has raised over $485 million. He emphasizes the importance of building relationships with founders and investors well before fundraising, crafting compelling narratives, and making non-consensus decisions. Gadri also discusses the evolution of Carta from a single-product company to a multi-product suite, the significance of distribution-led growth, and offers advice to emerging fund managers on differentiating their value proposition. Additionally, he touches on the impact of compressed fundraising timelines on founder-investor relationships and the considerations around founder secondaries in early rounds.

Summary Notes

Introduction to Sumeet Gajri

  • Sumeet Gajri is the Chief Strategy Officer at Carta and a Managing Partner at Original Capital.
  • He is also an LP in leading firms such as USV and Valar Ventures.
  • Sumeet has experience across the value chain as an operator, investor, and LP.
  • Carta has raised over $485 million from prominent VC firms.
  • Original Capital has partnered with companies like Front, Tonal, Instabase, Everlywell, and Cockroach Labs.

"I'm thrilled to welcome Sumeet Gajri, Chief Strategy Officer at Carta, the startup that helps companies and investors manage their cap tables, valuations, investments, and equity plans."

The quote introduces Sumeet Gajri and outlines his role and the services provided by Carta, which is significant for understanding Sumeet's expertise in startup operations and venture capital.

Sumeet's Path into Venture Capital

  • Sumeet's entry into venture capital was a journey of discovering what he didn't want to do.
  • He managed a dispute on behalf of his parents against a bank during the financial crisis.
  • His avoidance of banking led him to discover an opportunity in growth equity and venture capital.
  • Sumeet's passion for the industry drove him to learn everything about it to secure a job.

"My entry into venture capital came from a process of figuring out what I didn't want to do versus knowing what I'd wanted to do."

The quote explains Sumeet's unconventional path into venture capital, which was informed by his personal experiences and decisions during a time of financial crisis.

Transition from Investor to Operator

  • Sumeet moved from growth equity in New York to working with founders in the Bay Area.
  • His operational involvement with companies was a strategic choice to build expertise and relationships.
  • Sumeet's approach involved solving operational problems for companies in exchange for investment opportunities.
  • The belief that the best investors are those founders want to work with guided his strategy.

"I decided I wanted to move to the bay so I could be closer to a lot of these companies that I was talking to."

This quote signifies Sumeet's strategic decision to relocate to the Bay Area to be closer to startup companies and founders, which was a pivotal moment in his career transition from investor to operator.

Building Trust with Founders

  • Sumeet emphasizes empathy and the desire to solve founders' problems as key to building trust.
  • He believes in long-term interactions, ensuring positive experiences even if immediate partnerships don't form.
  • Sumeet's approach has led to successful partnerships based on prior positive interactions.

"I always try and make decisions in anything I do in life as if 70 years in the future, if I were to look back, I wouldn't regret the decision."

The quote reflects Sumeet's philosophy of making long-term, thoughtful decisions, which is directly relevant to how he builds lasting relationships with founders.

Original Capital's Investment Philosophy

  • Original Capital aims to be the highest returning venture capital fund in the world.
  • The fund is similar in size to other micro funds but is stage-agnostic and makes concentrated bets.
  • Sumeet focuses on companies solving intense pain points and with potential for significant valuation increases.
  • Original Capital's investment criteria involve assessing whether a company can increase its valuation by 10x or even 25x.

"We have a very simple objective, be the highest returning venture capital fund in the world."

This quote expresses the ambitious goal of Original Capital and sets the stage for the fund's unique investment strategy.

Portfolio Construction

  • Original Capital's portfolio construction is designed to identify and invest in a few companies with outlier potential.
  • Sumeet's approach involves deep research and building relationships over time to earn a place on a company's cap table.
  • He often partners with founders outside of formal fundraising rounds, which distinguishes his method from traditional VC firms.

"I spend all of my time trying to figure out, hey, what are the ten to 20 companies of this generation that are going to matter?"

The quote summarizes Sumeet's focused and selective approach to portfolio construction, which is central to Original Capital's strategy for achieving high returns.

Differentiation of Investment Model

  • Sumeet Gajri discusses his unique investment approach, which involves building relationships with founders and investing in companies between traditional funding rounds.
  • He emphasizes the importance of adding value and having conviction in the potential of the companies he invests in.
  • His model allows for concentrated investments by working closely with companies and doubling down on investments during traditional funding rounds if he has already demonstrated value.

"I've done multiple rounds in between traditional venture financing rounds to get a placeholder in these companies and start working with those founders more closely."

This quote outlines Sumeet's strategy of engaging with companies outside of the typical investment cycle, allowing him to establish a foothold and collaborate closely with founders before making more substantial investments.

Founder Picking Framework

  • Sumeet Gajri is market-first when it comes to investing, inspired by Don Valentine's emphasis on the importance of markets.
  • He looks for markets with significant potential and pain points he is convinced will be important in the future.
  • Sumeet seeks founders with clarity of thought, knowledge of market secrets, and innovative approaches to both product and distribution.

"Is this a pain point that I have a lot of conviction over? Is this a market which is going to matter in the future?"

This quote reflects Sumeet's primary criteria for considering an investment opportunity, focusing on the market's potential and the presence of a significant pain point that he believes in.

Market Size Considerations

  • Sumeet believes market size is both significant and insignificant depending on the context.
  • A small market size can be beneficial for dominating early and laying the groundwork for future growth.
  • The limitation of market size matters only if the founder lacks a clear vision for expansion beyond the initial market.

"Market size only matters negatively if you don't have the ability to go beyond it. And it doesn't matter if there is that clarity of vision as to what's next."

This quote highlights the nuanced view that while market size is a consideration, the founder's vision to transcend the initial market is what truly determines the potential for significant returns.

Diversification Versus Concentration

  • Sumeet challenges the conventional wisdom of diversification in venture capital.
  • He argues for the benefits of concentration, explaining that his close work with founders prior to investment allows him to derisk opportunities.
  • He believes that by helping companies with go-to-market strategies, scaling, and fundraising, he can justify making concentrated bets.

"The places where I place the majority of my capital are not founders I met last week."

This quote emphasizes Sumeet's approach of investing significant capital in founders with whom he has established a strong, working relationship, as opposed to making quick investment decisions based on brief interactions.

Reserve Allocation Strategy

  • Sumeet's fund does not have a traditional reserve policy due to their unique investment approach.
  • They prefer making concentrated bets and investing as much as possible in a company early on, rather than saving reserves for follow-on investments.
  • If further investment is needed beyond a certain threshold, they utilize SPVs (Special Purpose Vehicles) to continue supporting the company.

"If we have a winner and keeps fitting our ten and 25 x thresholds, the LPs have opportunities to come back it back and over time and put more money in through SPV."

This quote explains the strategy of using SPVs to continue investing in successful companies once the initial fund's allocation limits are reached, allowing for continued support without a traditional reserve policy.

Advice for Emerging Fund Managers

  • Sumeet advises emerging fund managers to have a unique value proposition to differentiate themselves in a capital-rich ecosystem.
  • He emphasizes the importance of explaining to LPs (Limited Partners) the competitive advantage that will help the fund manager access deals and drive top-tier fund performance.
  • Persistence in finding aligned LPs and having a clear differentiation strategy is key to raising capital successfully.

"If you have an eloquent explanation as to why you have an advantage there, LPs are going to want to partner with you."

This quote underscores the necessity for fund managers to articulate their unique advantage to LPs in order to secure partnerships and investment.

Distribution Versus Product

  • Sumeet discusses the shift in Silicon Valley from business-oriented CEOs to founder-CEOs with product engineering backgrounds.
  • He assists founders in focusing on distribution strategies to complement their product innovation.
  • The goal is to leverage initial product market fit to gain market share and then build a strong distribution system for future products.

"The general model for successful tech companies is that they become distribution centric rather than product centric."

This quote suggests that successful tech companies prioritize building strong distribution channels over solely focusing on product innovation, which is a key area where Sumeet provides guidance to founders.

Ownership of Distribution Channels

  • Sumeet argues that the most successful companies do not rely on external distribution channels but become the channels themselves.
  • He believes owning distribution channels is a hallmark of generational businesses and is critical for enduring success.
  • Companies like Salesforce exemplify this by selling additional products to their customer base and cross-selling across product lines.

"They don't rely on those channels very much. In fact, they do become those channels."

This quote points out that the most impactful and long-lasting companies are those that control their own distribution channels rather than depending on external platforms, which is a strategic advantage Sumeet highlights.

Customer Acquisition and Growth

  • Companies with uncontrollable burn rates are heavily reliant on external customer acquisition channels, which are expensive and not fully within their control.
  • Growth becomes costly due to dependency on paid channels for customer acquisition.
  • In contrast, companies that leverage existing customer relationships to sell additional products can significantly reduce customer acquisition costs.

"Because the only way that they are growing is spending money on customer acquisition channels that they don't actually have a lot of control over."

This quote emphasizes the precarious position of companies that depend on external channels for growth, highlighting the lack of control and high costs associated with such a strategy.

Multi-Product Expansion

  • Transitioning from a single product to a multi-product company requires leveraging existing distribution and understanding customer needs.
  • The importance of having the right people, including domain experts and those who understand the company's distribution advantages and customers, is crucial.
  • The blend of domain expertise and company-specific knowledge is key to successful product expansion.

"So actually learning how you build distribution, how you leverage a company's existing distribution in order to a figure out what the next products that you should build are, but then also to get adoption."

This quote underscores the lesson learned about the importance of distribution in expanding product lines and ensuring adoption of new products within a company's existing customer base.

Fresh Perspectives vs. Industry Experience

  • The value of fresh perspectives versus deep industry experience in a new venture is debated.
  • Novel insights can come from both industry newcomers and veterans.
  • The right approach depends on the unique insights the individual brings to the company, regardless of their experience level.

"So I think it really depends on does this person have some novel insights which other people don't have?"

This quote illustrates the idea that the value of a team member is not solely determined by their experience level but by the unique insights they can provide to the company.

Investor-Founder Relationships

  • The compression of fundraising timelines may hinder the development of meaningful relationships between investors and founders.
  • Founders should engage with investors outside of fundraising cycles to build relationships and understand the investor landscape.
  • Transparency with metrics and data should be tailored to the company's stage.

"I think the concerns really do stem from founders outside of fundraising cycles are not investing the time in building relationships with people."

This quote expresses concern that founders may not be dedicating enough time to cultivate relationships with potential investors outside of active fundraising periods, which could be detrimental in the long run.

Fundraising Strategy

  • Successful fundraising involves early engagement with potential investors and crafting a compelling narrative.
  • The fundraising process should start 6-9 months before going to market, identifying ideal investors and refining the company's story.
  • The amount to raise should be flexible, based on market conditions and investor interest.

"But when I start working with a founder on a fundraise, it's typically call it six to nine months before they actually want to go to market."

This quote highlights the strategic approach to fundraising, which involves a significant lead time before actively seeking investment to ensure the best possible outcomes.

Valuation Elasticity and Rationale

  • Valuations in the market can be concerning, with some companies receiving high valuations early on.
  • Investment decisions should be based on conviction in the founder and the business, even if valuations seem ahead of the market.
  • Founders should maintain rational expectations to avoid difficulties in future funding rounds.

"Dave, bluntly, I am worried about valuations that I'm seeing. One millionaire, companies going for 100 million, freeze. Honestly, it scares the shit out of me."

This quote reflects the speaker's concern about the current state of valuations in the market, indicating a potential disconnect between company value and investment amounts.

Valuation and Market Entry Timing

  • Sumeet Gajri discusses the importance of entering at the right valuation and market timing.
  • High valuations can still be justified if a company executes well and grows into its valuation in subsequent funding rounds.
  • Founders are advised to raise funds based on company worth and not just for the sake of raising capital.
  • Opportunistic rounds should only be considered if there's a significant change in valuation, such as a SaaS company's revenue multiples increasing substantially.
  • Founders should be cautious of raising funds without necessity, as it increases the hurdle to deliver returns to investors.

"We'd rather pull the trigger and go in in this round, because at the end of the day, if this works and more of a market buys into this company being successful, next valuation is going to go up a lot."

This quote highlights the strategic decision to invest early in a company before its valuation potentially increases significantly in the future.

"I'll advise founders that this may be a good opportunity for you to go out and reprice your stock, because right now you're giving out too cheaply in the form of options, you're giving out too cheaply in the form of acquisitions that you may be looking to make."

Sumeet Gajri emphasizes the importance of timing in fundraising, suggesting that a substantial increase in valuation is a good reason for a company to raise capital and adjust its stock price.

Founder Secondaries

  • Founder secondaries are becoming more common as early as Series A and B rounds.
  • The decision for founders to sell shares is personal and context-dependent.
  • Selling a small portion of ownership for personal financial security can be healthy.
  • Concerns arise when founders sell large percentages of their ownership early, as it may indicate misaligned long-term incentives.
  • Equal treatment of employees in terms of liquidity opportunities is also a consideration.

"I think it's a very personal decision for the founders to be making."

Sumeet Gajri acknowledges the personal nature of the decision for founders to sell their shares and the varying circumstances that influence it.

"I get concerned when founders are doing something which we're not opening up to, for example, their employees."

This quote expresses concern over fairness and alignment of incentives when founders take liquidity options that are not available to their employees.

Seed Funding and Investment Strategy

  • Founders are increasingly bypassing traditional seed rounds and seed firms.
  • The time between seed rounds and Series A is compressing.
  • Founders may opt for early-stage funds that participate in both seed and Series A/B rounds.
  • Dedicated seed funds are recommended for their focus and potential for meaningful partnerships.
  • Larger funds that demonstrate commitment at all stages can also be beneficial for founders.

"I'm seeing more of that in the market than I am with companies just completely avoiding seed stage runs."

Sumeet Gajri observes a trend where founders choose investors who can support them from seed stage through later rounds rather than bypassing seed rounds entirely.

"It's much better to go with a dedicated seed stage or pre seed stage fund."

The advice given here is to choose dedicated seed funds for their specialized attention and support, unless a larger fund has proven its dedication to early-stage investments.

Literature Influences on Company Building and Investing

  • Sumeet Gajri shares two influential pieces of literature: "Zero to One" by Peter Thiel and a memo by Howard Marks.
  • Thiel's book challenges conventional wisdom and emphasizes the importance of courage and optimism.
  • Marks' memo discusses the necessity of making non-consensus decisions to achieve above-market returns.
  • Non-consensus events often cannot be predicted using historical data and require a leap of faith.

"Zero to one does a really good job in terms of taking away a lot of conventional wisdom you may have."

This quote highlights the impact of Peter Thiel's book on challenging established beliefs and encouraging bold, optimistic action.

"The only way to have above market returns is to make non consensus decisions and be right."

Sumeet Gajri summarizes Howard Marks' perspective on the importance of making unique investment decisions that go against the grain to achieve exceptional returns.

Contrarian Opinion on Lifespan

  • Sumeet Gajri holds a contrarian opinion that people should make decisions as if death is not a possibility.
  • Historical underestimation of lifespan has led to widespread issues in government and business.
  • A long-term perspective can influence how individuals interact with others and make decisions.

"You should make decisions in life as if death is not a possibility."

This quote encapsulates Sumeet Gajri's contrarian belief that planning for a long life can change decision-making processes and interactions with others.

Handling Crisis Situations

  • In moments of crisis, it is crucial to remain calm and gather as much information and perspective as possible.
  • Decisions need to be evaluated based on their reversibility and urgency.
  • Being a calming force can help move beyond initial panic and towards resolution.

"It is my role to be the one that stays calm."

Sumeet Gajri emphasizes the importance of maintaining composure during crises to effectively guide companies through challenging situations.

Future Plans

  • Sumeet Gajri's primary focus is to continue supporting founders and maintaining the privilege of his current role.
  • He avoids distractions and remains dedicated to his work, hoping to still be doing the same in five years.

"The only grand plan I have is to continue to fight like heck every day for these founders."

This quote reflects Sumeet Gajri's commitment to his role and to the founders he partners with, indicating his long-term dedication to his work.

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