20VC What Does It Take To Raise A Venture Fund Today, An Analysis of The Explosion of Seed Financing & Why IRR No Longer Takes Centre Stage with Samir Kaji, Senior Managing Director @ First Republic Bank



In this episode of the 20 minutes VC, host Harry Stebbings interviews Samir Kaji, a seasoned expert in seed stage and micro VC financing. With 18 years in venture capital, Samir has advised over 700 companies and 300 VC funds, totaling over $4 billion in capital commitments. Currently the Senior Managing Director at First Republic Bank, Samir shares insights from his transition from selling vacuum cleaners to becoming a VC during the Internet bubble, emphasizing the lessons learned from capital influx and market downturns. The conversation pivots to the current state of micro VC, where Samir notes the proliferation of funds, the challenges of raising capital, and the importance of building a venture franchise versus merely managing a fund. The discussion also touches on LP responses to market changes, the nuances of fundraising, and the future of micro VC, predicting consolidation and specialization in the field.

Summary Notes

Harry Stebbings' Introduction

  • Harry Stebbings hosts the 20 minutes VC podcast with a self-described "terrible British accent."
  • He invites audience suggestions for future guests, preferring those who are contrarian and charismatic.
  • Harry introduces the guest, Samir Kaji, noting his previous appearance and his expertise in seed stage and micro VC financing.

"You are listening to the 20 minutes VC with the terrible british accent that is me, Harry Stebings at H stepbings with two B's on Snapchat."

This quote is Harry introducing himself and his podcast, highlighting his British accent and presence on social media.

"But to the show today and on Monday, we had the legend of micro VC Michael Dearing on the show. If you haven't checked that one out, then it really is a must."

Harry is referencing a previous episode with Michael Dearing, suggesting it is highly recommended listening.

"But today we're going to another side of the table as we welcome Samir."

Harry transitions to introducing the current episode's guest, Samir Kaji.

Samir Kaji's Background

  • Samir Kaji has over 18 years of experience in VC, advising over 700 companies and 300 VC funds.
  • He has been involved in tech financing transactions totaling over $4 billion in capital.
  • Samir is the senior managing director at First Republic Bank, leading the technology banking team.
  • He joined First Republic Bank in 2013 after being a managing director at Silicon Valley Bank.

"Now, Samir is what one might call a master of all things seed stage and micro VC financing."

Harry describes Samir's expertise in the venture capital industry, particularly in seed stage and micro VC financing.

"Over his 18 years in VC, Samir has assisted or advised over 700 companies and 300 VC funds, and has completed tech financing transactions totaling over $4 billion in capital committed."

Harry provides an overview of Samir's extensive experience and accomplishments in the venture capital space.

"Today, Samir is the senior managing director at First Republic bank, where he leads the technology banking team managing VC and startup company relations."

This quote details Samir's current role and responsibilities at First Republic Bank.

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Samir's Entry into Venture Capital

  • Samir's entry into the venture world was not planned; he transitioned from selling vacuum cleaners to working at Silicon Valley Bank during the Internet bubble.
  • He gained experience in lending to early-stage software and Internet companies, providing him with valuable insights into the venture capital industry.

"Yeah, so I'd love to say that my entry into the venture world was well planned and strategic, but in reality, I made the very obvious and logical transition from selling vacuum cleaners."

Samir humorously recounts his unconventional path into the venture capital industry.

"And at the time, my alma mater, San Jose State actually is where I went. Had a position opening at Silicon Valley bank, which I applied for."

Samir explains how he started his career in venture capital by seizing an opportunity at Silicon Valley Bank.

Observations from the Dot-com Bubble

  • Samir witnessed the effects of excessive capital during the dot-com bubble, including negative behaviors and the consequences of a market downturn.
  • His experience through two market downturns has informed his perspective on the venture capital industry.

"I was very fortunate to be part of that because I saw what happens when a lot of capital goes to work and some of the bad behavior that ensues from it, and what happens when things don't always go up and to the right."

Samir reflects on the lessons learned from observing the venture capital market during the dot-com bubble.

Evolution of Venture Capital

  • Samir discusses the evolution of venture capital, noting the poor performance of many venture funds from 1999 to 2009 and the decrease in the cost of starting a company.
  • He highlights the emergence of seed funds and his interest in them due to their entrepreneurial nature.
  • Samir's move to First Republic Bank was motivated by a desire to focus on the next 20 years of venture, particularly on disruptive firms in their early stages.

"The other part that we saw, the cost of capital for starting a company, has come way down almost a factor of 100 x from 99 to 2009."

Samir points out the significant reduction in the cost of starting a company, which contributed to the rise of seed funds.

"So, looking at firms that were perhaps fund one, fund two, or fund three, that were looking to disrupt the traditional venture market, either by focusing on a certain sector, a certain stage, or creating a different way of doing things."

Samir explains his focus on supporting early-stage venture firms that aim to innovate within the industry.

Episode Structure

  • Harry Stebbings outlines the episode's structure, which will include three segments: the current state of the market, a discussion on limited partners (LPs) and fundraising, and the future of seed stage investing.

"So we've got three differing segments that I want to carve it up into. So first, we've got the meta view of where we are today. Then we're going to do a discussion on all things lps and fundraising, and then the future of seed."

Harry explains the planned segments for the interview with Samir, providing a roadmap for the conversation.

Market Evolution and Current State

  • Samir acknowledges that while some aspects of the venture capital market have changed over the years, others have remained the same.

"There's things that have changed, and there's things that have stayed the same."

Samir sets the stage for discussing the dynamic nature of the venture capital market, indicating that some elements persist despite changes in the industry.## Micro VC Formation

  • Micro VC is defined as a fund under $100 million, mainly investing in seed stage, with one to four general partners (GPs).
  • Growth in micro VC firms has continued, with over 450 in the US and about 700 globally.
  • The pace of new micro VC firms forming has not slowed, with 130 to 150 new managers expected in 2017.
  • Fundraising is increasingly difficult for first-time funds due to market saturation and difficulty in differentiation.
  • Many new funds are raising less than $15 million, termed as 'nano funds', due to challenges in attracting institutional capital.

"Two years ago, if you had asked me the question of where do I see the pace going, I thought the pace would have slowed in 2015 and 16, and it hasn't."

This quote emphasizes that the expected slowdown in micro VC formation did not occur, contrary to predictions.

"It's become increasingly harder for first time funds to raise."

The quote highlights the challenges new funds face in raising capital due to a saturated market and the importance of differentiation for success.

Impact on the Ecosystem

  • The increase in micro VC funds is seen as both positive and negative for the ecosystem.
  • Pros include more diverse capital sources for entrepreneurs and increased diversity in venture capital, with more female VCs in decision-making roles.
  • Cons involve the concentration of returns in a few deals, making it difficult for limited partners (LPs) to pick successful funds, and valuation inflation at the seed stage.
  • There is concern about the dilution of talent in the VC space and the potential negative impact on entrepreneurs during a market downturn.

"The cons though, with anything in venture, there's only a few deals each year in a handful that really drive fundamental returns."

This quote points out that despite the large number of micro VC funds, only a few deals drive significant returns, indicating a potential inefficiency in the market.

"The vast majority of the micro funds are going to have a tough time returning the type of capital that lps require, which is a minimum three x net."

The quote underscores the performance pressures micro VC funds face, with many unlikely to meet the expected return thresholds set by LPs.

LP Reactions and Strategies

  • Institutional LPs, such as endowments and foundations, are more selective and less likely to invest in first-time funds without a track record.
  • High net worth individuals and family offices continue to invest in micro VC due to the low yield environment and the appeal of tech investments.
  • There is a trend of co-investing among family offices, which seek direct investing opportunities in addition to fund investments.

"The number of allocations from institutionals are much, much lower than they were before."

This quote indicates a significant shift in institutional LP investment behavior, with a decrease in allocations to micro VC funds.

"High net worth individuals family offices are still allocating, and that's largely a function of the low yield environment."

The quote explains the continued investment by high net worth individuals and family offices, driven by the current low yield environment and the search for higher returns through alternative assets.

Signaling and Co-Investment Rights

  • The speaker expresses skepticism about the strategy of family offices seeking co-investment rights and getting involved in deals alongside micro VCs.
  • The implication is that there may be negative consequences or inefficiencies associated with this approach.

"I think it's a bad idea, to be honest with you."

This quote succinctly captures the speaker's opinion on family offices and LPs seeking co-investment rights, suggesting that they might not be well-advised to pursue such a strategy.## Complexity of Venture Investing

  • Venture investing is challenging and not as easy as some perceive.
  • Success in venture funds is not consistent across multiple funds.
  • High net worth individuals and family offices may face risks in direct investments.
  • Micro funds often raise money from family offices with promises of co-invest rights, but this can be problematic.

"I think too many people think that investing in venture is easy. It's not."

This quote emphasizes the misconception about the ease of venture investing and sets the stage for discussing its complexities.

"And so when I see family offices that are putting a lot of money in direct investments without a lot of background, it does scare me."

Samir Kaji expresses concern about family offices making direct investments without sufficient expertise, highlighting the risks involved.

Fundraising for Potential Fund Managers

  • Different expectations for first-time managers versus experienced managers raising a new fund.
  • Realistic fund sizes vary based on experience and track record.
  • Portfolio construction and market conditions influence the appropriate fund size.
  • Larger fund sizes require demonstrated success and a consistent investment hypothesis.

"If you are a first time manager, it is very unlikely that the market is going to bear a fund that's more than about $20 million."

Samir Kaji sets realistic expectations for first-time managers regarding the potential size of their initial fund.

"If you are a first time fund but not a first time manager, the market will likely bear something a little bit north of that."

This quote differentiates between first-time fund managers and experienced managers starting a new fund, with the latter being able to raise more capital.

Fundraising Timelines

  • Average fundraising duration is currently around 18 months.
  • Timelines vary depending on the manager's experience and existing LP relationships.
  • Fundraising is quicker for those with a strong track record or who are leaving top-tier firms.

"The average right now is 18 months."

Samir Kaji provides the current average timeframe for raising a venture fund.

"If you're a first time fund, but have a preexisting track record, it's probably going to be closer to six to twelve months."

This quote suggests that having a solid track record can significantly reduce fundraising time.

Strategy for Fund Closes

  • Multiple closes are standard in fund raising.
  • A first close should be a significant portion of the target to signal viability.
  • Soft commitments can help achieve an effective first close.

"Typically speaking, we're seeing managers do anywhere between two and five closes before they get to the final close."

Samir Kaji explains the norm of multiple closes in the fundraising process.

"The first close should be at minimum 30% to 40% of the fund raising."

This quote advises on the minimum percentage for a first close to demonstrate confidence in the fund's potential success.

Role of Early Performance in Subsequent Fundraising

  • Early fund performance is less impactful in the current market.
  • LPs assess whether the manager has executed on their investment hypothesis.
  • Fund size progression from first to second to third funds may not be as significant as before.

"Right now, quite candidly, it's a little bit meaningless and it's more qualitative in function."

Samir Kaji downplays the importance of early IRR multiples and emphasizes qualitative factors in LP assessments.

"I think a lot of people think you raise a small fund and it easily translates to a bigger fund too. I don't think that's the case anymore."

This quote indicates that scaling fund size from the first to the second fund is more challenging than it used to be, due to changing LP priorities.

Building a Venture Franchise

  • There is a distinction between raising a single fund and building a long-term venture franchise.

"And you stated there's a difference between raising a fund and starting a firm and building a franchise."

Harry Stebbings acknowledges the concept introduced by Samir Kaji that there is more to venture investing than just raising a fund; it involves building a sustainable venture franchise.## Raising a Venture Fund vs. Venture Franchise

  • Individuals often express a desire to help startups through investing, citing their unique value add.
  • Raising a venture franchise is a long-term commitment of 20-25 years, aiming to create a brand and something compelling for stakeholders (entrepreneurs and LPs).
  • Many who want to raise a fund do not fully comprehend the long-term commitment and the complexities involved in running a venture firm over an extended period.
  • There is a significant difference between merely investing in companies and running a successful venture franchise.

"Raising a venture franchise means you want to do this for the next 20 and 20 to 25 years. You want to create a brand, you want to actually create something that is incredibly compelling for your stakeholders, which are both your entrepreneurs and your lps."

This quote emphasizes the long-term nature of creating a venture franchise, highlighting the importance of commitment and building a brand that appeals to both entrepreneurs and limited partners (LPs).

Quick Fire Round

  • A short, rapid exchange of questions and answers to gain immediate thoughts on various topics.
  • The format is five questions in five minutes.

"But I'd love to dive into a quick firearound. So I say a short statement, as you know, you give me your immediate thoughts. Five in five minutes. How does that sound?"

This quote introduces the quick fire round segment, setting the expectation for a swift and concise discussion.

Favorite Book for CEOs

  • Ben Horowitz's book is highly recommended for CEOs.
  • It is considered one of the most insightful books on management and running a startup.

"I think any CEO out there should be reading that book, and I think it is one of the most insightful books around. Management and running a startup."

The quote suggests Ben Horowitz's book as a critical read for CEOs, emphasizing its valuable insights into management and startup operations.

Placement Agents for Micro VC Firms

  • Generally not in favor of using placement agents for micro VC firms.
  • Belief that managers should be able to sell their own story and pitch to LPs as a fundamental aspect of running a firm.

"I'm generally not in favor of a placement agent. With respect to micro VC firms, I think managers should be able to sell their own story."

This quote expresses a preference against the use of placement agents by micro VC firms, advocating for the importance of personal storytelling and direct engagement with LPs.

Common Mistakes by First-Time Fund Managers

  • Underestimating the difficulty of running a successful venture franchise and returning capital.
  • Overly optimistic projections without understanding the mathematical challenges involved.
  • It is crucial to understand the mechanics of running a franchise and set realistic expectations for returns.

"They underestimate the difficulty it is to actually run a successful venture franchise and return capital."

The quote highlights a common error among new fund managers, which is not fully grasping the challenges of managing a venture franchise and generating returns for investors.

Essential Reading for Venture Capitalists

  • Enjoys reading works by Mark Suster, Fortune's Term Sheet, and StrictlyVC.
  • Prefers content that is transparent, candid, and concise due to limited reading time.

"My daily reading is always the term sheet. It's fortune and it's strictly VC."

This quote lists the daily must-reads for the speaker, indicating a preference for resources that offer transparency and brevity in the venture capital industry.

Impressions of First-Time Fund Managers in Fundraising

  • Importance of constructing a fundraising strategy that aligns with the manager's identity and goals.
  • Homebrew's successful fundraising in 2013 is highlighted as an impressive example due to its speed and high-profile LPs.
  • Advises managers to be realistic about fundraising amounts and to target appropriate LPs for their first fund.

"I think homebrew did an incredible job. I mean, they raised their first fund in 2013 in less than 100 days, and they raised it from some very, very high profile and very reputable lps."

The quote provides an example of a first-time fund manager who successfully executed a fundraising strategy that resonated with high-profile LPs and was completed swiftly.

Future of Micro VC

  • Specialization has become necessary due to the difficulty of being a generalist in a competitive environment.
  • The gap between angel financing and traditional Series A financing has been filled, leading to the need for specialization.
  • Anticipates consolidation in the industry, with a significant reduction in the number of active seed funds.

"I think consolidation is the future. I don't see a lot of first time or second time funds raising their next fund, and it may not be a function of who they are, but rather a very different macro environment."

This quote predicts a future trend of consolidation within the micro VC industry, driven by changes in the market and the realization that there is an oversupply of seed funds.

Appreciation and Support

  • Expresses gratitude for the support and advice received from Samir Kaji.
  • Encourages following on social media for additional insights and behind-the-scenes content.

"And as I said earlier, Samir has been an incredible support and advisor to me. So I'd like to say a huge thank you to him for that and for giving up the time today to come on the show."

This quote conveys appreciation for the guidance provided by Samir Kaji and acknowledges the value of his contribution to the discussion.

Importance of People Operations for Founders

  • People operations, which include hiring, developing managers, and retaining talent, are critical for founders and operators.
  • Lattice is recommended as the top performance management solution for growing companies.
  • Recurly is noted as a key subscription management platform for increasing revenue and reducing churn.

"If you're a founder or operator, your most important job is people operations, whether that be hiring execs, developing managers, or retaining top talent."

The quote underlines the significance of people operations in a company's success and introduces Lattice as a tool to aid in these efforts.

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