20VC Sarah Kunst on Why There Is Plenty Of Investor Money Still Available, The Megan Markle Effect and How It Impacts Hiring and Talent & Whether GP Commits Prevent Diversity and Inclusion

In a dynamic conversation on "20 Minutes VC," host Harry Stebbings interviews Sarah Kunst, the founder and managing director of Cleo Capital. Kunst shares her journey from working at Apple and in marketing at Chanel, to navigating the 2008 financial crisis and entering the tech startup world. She discusses her roles at Bumble and as a contributing editor at Marie Claire, highlighting her recognition as an innovator by Vanity Fair and a top woman in VC by the Wall Street Journal. Kunst emphasizes the importance of diversity in venture capital, the resilience of founders, and the current investment landscape amid the pandemic. She also provides insights on how startups can navigate these challenging times, touching on the significance of valuations, reserve allocations, and the talent market. The episode concludes with Kunst's latest investment in Planet Forward, a regenerative agriculture company, showcasing her commitment to impactful entrepreneurship and climate solutions.

• Sarah Kunst is the founder and managing director of Cleo Capital.
• She has a diverse portfolio including StyleSeat, Globar, and Platejoy.
• Sarah previously worked as a senior advisor at Bumble and on the board of the Michigan State University Foundation Endowment.
• She is a contributing editor at Marie Claire magazine.
• Recognized as a future innovator by Vanity Fair and a top woman in VC by Wall Street Journal.

"And Sarah is the found and managing director at Cleo Capital with a portfolio including the likes of Style, Seat, Globar and Platejoy, to name a few."

This quote introduces Sarah Kunst and highlights her role at Cleo Capital and some companies in her investment portfolio.

• Sarah is from Michigan and attended Michigan State University.
• She worked for Apple as a campus rep, which introduced her to Silicon Valley.
• Moved to New York in 2008, worked in marketing at Chanel during the financial crisis.
• Transitioned into technology, working for the Winklevoss twins at an early media startup.
• Had early exposure to cryptocurrency through this role.
• Worked for a Y Combinator backed startup, then transitioned to venture capital.
• Worked at Mohr Davidow Ventures, which faced challenges during the financial crisis.
• Founded a fitness and sports company called Proday, which was eventually shut down.
• Served as a scout for Sequoia and as a limited partner at Michigan State University.
• Noted a lack of female scout investors and founded Cleo Capital to address this.

"So I ended up at more David Ow Ventures and was there, and it was a super interesting experience."

This quote explains Sarah's career progression from working in marketing to entering the venture capital world at Mohr Davidow Ventures.

• Venture capital funds are a "black box" of capital to investors.
• VCs work hard to raise money, but once raised, investors can't withdraw like with other asset classes.
• During financial crises, it's rare for investors to refuse capital allocations unless they go bankrupt.
• VCs are currently not seeing a reduction in available funds.
• Funds typically invest for three years after they close, meaning a 2018 fund invests through 2021, and a 2019 fund through 2022.
• Pandemics historically last around a year to a year and a half, implying an end to the current situation.
• VCs still have money to invest and will likely focus on supporting their winners.
• The challenge for founders is to persuade VCs to invest in their businesses during this time.

"But for vcs, they're one of the only places right now that isn't going to see a huge reduction in their amount of money, they will struggle likely, we will all struggle likely in the coming year to raise more money. But the money they have now, and the way to think about it is investors usually invest for at least three years after they close a fund."

This quote explains the resilience of venture capital funding in times of financial crisis and the investment timeline of VC funds.

• Founders fear VC retrenchment, but many VCs claim to be "open for business."
• The question is whether "open for business" is a true reflection of the willingness to invest.
• The book "Venture Deals" is recommended for understanding the VC perspective.
• The current downturn may be similar to 2008/2009, where funds invested during downturns were among the best performing.
• It's difficult to predict future returns, but historically, investing when valuations are lower can lead to better outcomes.

"The thing to keep in mind, right, there's a book that I love, although it's not exactly the most exciting reading, but it's incredibly, incredibly informative, called venture deals."

This quote suggests that the book "Venture Deals" is a valuable resource for understanding venture capital economics and decision-making.

"So, look, if I had a crystal ball, I would buy lotto tickets and I would not be a VC, I would just be an angel investor, right? So the short answer is, who knows?"

This quote acknowledges the uncertainty in predicting which venture fund vintages will perform best, similar to the unpredictability of lottery outcomes.

• Investing early in startups during economic downturns can lead to higher returns.
• Market forces have shifted from high entry valuations to potentially lower ones.
• The concept of "moneyball" in investing emphasizes buying low and selling high.
• Previous years saw investors buying high with the hope of selling even higher.

"So if you invested in a Y combinator company post demo day, three demo days ago... and now, six months from now, you can invest in a similar company, maybe at an $8 million cap or valuation."

This quote highlights the difference in investment valuations over time, suggesting that investing at a lower valuation could lead to greater profits if the company's trajectory and exit are similar to those with higher initial valuations.

• Price discipline is often overlooked in early-stage investing.
• Investing at a lower valuation can lead to disproportionate returns compared to a higher valuation.
• Sarah Kunst invests in very early stages, including pre-seed and friends and family rounds.

"Harry, if it's a $5 billion company, eight or 15 pre, it really doesn't matter. And it doesn't matter. You will still make a lot of money, but you will make disproportionately different amounts of money."

Sarah Kunst argues that while large future valuations may make early valuation differences seem trivial, disciplined investing at lower valuations can significantly impact the return on investment.

• Founders must balance not being overvalued to attract further investment and not undervalued to maintain motivation.
• Early dilution can discourage founders as they raise more capital.
• Sarah Kunst prefers investing in companies valued between $5 million and $10 million.
• Setting a valuation too high can lead to difficulty in raising funds and burned investor relationships.

"I don't want them to be priced so high that other investors aren't going to want to invest, and I don't want them to be priced so low that they sell so much of the company that they're not going to be excited to keep building it two years from now."

Sarah Kunst emphasizes the importance of setting an appropriate valuation for early-stage startups to ensure founders retain enough equity to stay motivated and to attract future investment.

• Founders' resilience and character are tested during challenging times, such as economic downturns.
• The pandemic has been a litmus test for founder commitment and adaptability.
• Historical ease of raising capital for certain demographics doesn't imply universal ease.

"But I do think that for a lot of founders, showing their resilience, their integrity, their grit, that's been something that's always happened."

Sarah Kunst points out that while some founders have always faced challenges, economic crises like the pandemic reveal the true tenacity and character of entrepreneurs.

• Entrepreneurship is sometimes seen as a checkbox in a career path rather than a serious commitment.
• The current economic situation might filter out "tourist" entrepreneurs from those genuinely dedicated.
• Founding a company is challenging and not suited for everyone.

"And now when the going gets tough, the tough get going, right? And these are people who've been going."

This quote discusses how the pandemic is distinguishing committed founders from those who treated entrepreneurship as a temporary venture or a career stepping stone.

• Sarah Kunst categorizes portfolio companies into two groups: those severely affected by the pandemic and those less impacted.
• Companies that rely on in-person or travel-related activities are facing significant challenges.
• The key advice varies depending on the company's industry and how it's affected by the pandemic.

"So I think there's two different categories right now. There are categories where you're just sort of screwed, and that's terrible."

Sarah Kunst acknowledges the varying degrees of impact the pandemic has on different types of businesses and suggests that the advice given to CEOs must be tailored to their unique situations.

• Some companies must enter a hibernation state due to the lack of an obvious pivot or current demand for their products.
• The expectation is to wait out the crisis with the hope that the economy recovers and demand accelerates to compensate for lost time.
• There are companies with products in high demand during the crisis, such as toilet paper, bidet companies, baby food delivery, towels, sheets, and face masks.
• Companies providing remote socializing tools, like Zoom, are experiencing unprecedented growth.
• Startups in high-demand areas should seize the opportunity to grow and attract investors, especially if they show increased user engagement during the crisis.

"They almost have to hibernate, because for a lot of them, if there's not an obvious pivot, then they're just going to have to wait it out and have faith that if they can wait it out, the economy will recover and people will want to buy what they're selling again, maybe even in an accelerated pace to make up for lost time."

This quote highlights the strategy for startups without immediate pivots to sustain themselves through the crisis by holding out for an eventual economic recovery and a resurgence in demand.

"One of the Bidet companies was doing a $500,000 a day in sales for a while during that, right? That's insane."

Sarah Kunst points out the extraordinary sales figures of bidet companies during the crisis, illustrating the surge in demand for certain products.

"If Zoom's daily average users went from 10 million to 200 million, right, which is a 20 x increase, I don't expect you to be at 200 million daily active users if you are a seed stage startup, but if you are a startup in a similar space and your daily active users were flat during this period, candidly, I'm not going to blame the market. I'm probably going to think that you missed something when it comes to understanding growth."

Sarah stresses the importance of capitalizing on market opportunities during the crisis, suggesting that startups in relevant sectors should be experiencing growth, and if not, they may be missing key growth strategies.

• Reserve allocation for small funds may not be a significant part of the model.
• Family offices, particularly overseas, have dry powder and are interested in Series B, Series C, SPVs, and buying secondaries.
• In the current climate, deals are still possible, albeit potentially slower and at less aggressive valuations.
• Startups should consider raising enough capital to survive, possibly at a flat or slightly lower valuation.
• Early-stage startups need to demonstrate growth, sales, and customer loyalty to attract investment.
• There is still money in the market, and some investors have been waiting for a market correction to deploy capital.

"So we're a small fund, and so for me, reserve allocation isn't a huge part of the model."

Sarah Kunst explains that reserve allocation is not a primary concern for her fund, which is relatively small.

"And so if you are a fund manager and you're thinking the people I normally go to for spvs are know at places like Uber and Lyft, and now they're in a world of hurt of their own and their stock price is down and they don't know if they're going to have a job long term, it doesn't mean that there's no money anywhere."

The quote emphasizes the need for fund managers to look beyond their usual contacts for SPVs, as many may be facing their own financial challenges.

"And then assuming that in two years for startups that we will be relatively close to back to normal 24 months from now, if you have twelve months of Runway in the bank, and that means that if you go out and raise another twelve months of Runway, right, or even six months of Runway, and then stretch that twelve months to 18, you're going to be pretty solid."

Sarah advises startups on financial planning during the crisis, suggesting they secure enough runway to last until the market normalizes.

• The current crisis has altered the talent and hiring landscape, making previously unattainable hires more accessible.
• Founders are encouraged to take bold steps in reaching out to their ideal candidates, taking advantage of the current uncertainty.
• Personalized outreach to potential hires can be effective, especially when demonstrating genuine interest and knowledge about the individual's career.

"Well, if there's one thing we've learned over the past month, is that clearly none of us have any idea how the world works anymore."

Sarah Kunst points out the unpredictability of the current situation, which has upended traditional hiring norms and created new opportunities.

"And so whatever sort of pie in the sky hire you've always dreamed about, shoot your shot, right, slide into somebody's dms on Twitter or on LinkedIn or Instagram and send them a really concise, hey, I'm Sarah."

The quote encourages founders to take initiative and directly contact potential hires they previously thought were out of reach, using the term "Meghan Markle effect" to describe the phenomenon of achieving seemingly unlikely outcomes.

• Running a venture fund remotely presents unique challenges.
• There is a desire to see more diversity among fund managers, as it is believed to drive better returns.

"Well, it's a little bit hard to run a venture fund from your couch."

Sarah acknowledges the difficulty of managing a venture fund remotely, a situation many are facing due to the crisis.

"I'd like to see more diversity in fund managers. And the reason for that is simple. It drives better returns, and I'm an incredibly greedy person and I want to make more money."

This quote highlights Sarah's perspective on the importance of diversity in venture capital, linking it directly to the potential for increased returns.

• Certain investors may not initially invest due to structural reasons or lack of understanding regarding varying wealth levels.
• Endowments and pension funds have strict rules due to managing retirement accounts and may not be a fit for early-stage funds.
• Some potential investors may not grasp that not everyone is wealthy, impacting their expectations of a general partner (GP) commitment.
• Being upfront with limited partners (LPs) about one's financial status can avoid wasted time and ensure better alignment of interests.

"And I found that investors who don't understand that are probably not going to invest in your fund, they might be a good fit later down the road."

This quote highlights the importance of recognizing when an investor is not a current fit for a fund, suggesting that circumstances may change in the future.

"And those ones are not going to be a fit for you really early on."

Sarah Kunst points out that certain investors, like endowments and pension funds, are not suitable for early-stage funds due to their strict investment rules.

• Fund managers should be honest about their financial situation when discussing GP commitments with potential LPs.
• There is an expectation that fund managers will reinvest returns from the fund into their GP commitments over time.
• A fund manager's commitment to their fund can be questioned if they have significant returns but are unwilling to reinvest.
• Authenticity and transparency about one's financial capacity can build trust with potential LPs.

"I'm like, look, you're happy. Do you want to look at my tax returns? If you want to see something really sad, I am happy to show you my tax returns."

Sarah Kunst uses humor to convey her willingness to be transparent about her financial situation, emphasizing the importance of authenticity in GP commitment discussions.

• Fund managers often take significant risks compared to stable, high-paying jobs in established companies.
• Demonstrating commitment to a fund can be more about the sacrifices made rather than the financial contribution to the GP commit.
• Authentic conversations about commitment and risk can resonate with investors and build credibility.

"Do you really think that my very lovely friend, who just moved money from a trust into his fund for his GP commit? Do you think he's more committed than I am?"

This quote illustrates the idea that commitment to a fund is not solely measured by financial contributions but also by the personal and professional risks taken by the fund manager.

• Fund managers should value their time and avoid engaging excessively with investors who require numerous meetings for small commitments.
• Prioritizing investors who show genuine interest and respect for the fund manager's time can lead to more efficient fundraising.
• Being an "easy check" in angel investing means being decisive and respectful of both parties' time, not being indiscriminate or careless.

"Just because somebody has money on the other end of a transaction doesn't mean that your time isn't valuable and that they're the only person in the world you should be focusing on."

Sarah Kunst emphasizes the importance of valuing one's time in fundraising and not allowing potential investors to monopolize it without showing genuine interest or intent.

• Investing in companies that align with the fund manager's values and vision can lead to excitement and commitment.
• Supporting entrepreneurs with a proven track record and a clear vision for impactful ventures can be rewarding.
• Being the first to invest can attract other reputable and influential investors to the same venture.

"And it was exciting because after I invested, I told her, I was like, look, I don't know what you're doing next, but I'm in."

Sarah Kunst shares her enthusiasm for investing in a company led by an entrepreneur she trusts and believes in, highlighting the importance of the relationship and belief in the entrepreneur's vision.

• Authenticity in interactions with LPs and in managing a fund is crucial for building trust and long-term relationships.
• Being genuine about one's abilities and limitations can create a foundation of trust with investors.
• Authentic fund managers are likely to attract LPs who appreciate and align with their approach.

"They want to understand you. They want authenticity. They want to feel like they can trust you."

Sarah Kunst underscores the importance of authenticity in the relationship between fund managers and investors, as trust is a key element in investment decisions.