20VC Why Financial Models at Seed, $5M Seed Rounds & The Fear of Signalling Risk is all BS Why MultiStage Firms Have Destroyed Seed & Who Wins and Who Loses in the Next 10 Years of Venture with Adam Besvinick, Founding Partner @ Looking Glass Capital

Summary Notes


In the episode of "20 VC" hosted by Harry Stebbings, Adam Besvinick, founder of Looking Glass Capital, shares insights into the venture capital industry and his approach to investing. Adam emphasizes the importance of maintaining a good reputation with founders and other investors, as it compounds over time and leads to better deal flow. He discusses the challenges of raising funds, particularly at the $20 million mark, which he chose for its incremental increase from his first fund. Adam also highlights the value of thematic investing in sourcing deals and building credibility with founders. Additionally, he critiques the rapid and undisciplined investment pace of 2021, advocating for more transparency and consistency in the fundraising process for entrepreneurs. Adam's goal for Looking Glass Capital is to remain a solo GP, focusing on small, iterative steps and maintaining a portfolio of 27 to 30 companies, with a thematic approach to investing in healthcare, climate, education, or small business sectors.

Summary Notes

Venture Capital Fundraising Challenges

  • Raising a significant amount of capital can create high expectations and pressure on a startup.
  • Having a 24-month cash runway is crucial for finding product-market fit.
  • Discipline in the use of funds is essential, especially when the amount raised is substantial.

"When you raise 5 million at 25, you have a target on your back before you've even written a single line of code."

This quote emphasizes the scrutiny and expectations placed on startups that secure large investments early on, highlighting the potential pressure to perform.

Introduction to Adam Bezvanig and Looking Glass Capital

  • Harry Stebbings introduces Adam Bezvanig, founder of Looking Glass Capital.
  • Looking Glass Capital focuses on pre-seed investments and was started in 2020.
  • Adam Bezvanig has experience from deep fork Capital and Anchorage Capital.
  • Adam's portfolio includes Big ID, Transfix, Nom Nom, and Hone Health.

"And joining me in the hot seat is Adam Bezvanig, founder of Looking Glass Capital, a pre-seed focused firm started in 2020."

This quote introduces the guest and his venture firm, which specializes in very early-stage investments.

The Role of Tigas and Secureframe in Investment Research and Compliance

  • Tigas offers a vast collection of transcripts and financial data for investment research.
  • Secureframe provides a platform for automated security and privacy compliance.
  • Both services aim to streamline and improve the efficiency of their respective domains.

"Tigas curates expert insights, analysis and financial data to give you powerful perspective for your investment decisions."

This quote highlights the importance of having access to high-quality research and data when making investment decisions.

Adam Bezvanig's Entry into Venture Capital

  • Adam Bezvanig's venture career began by engaging with VCs on Twitter and cold emailing investors.
  • He transitioned from traditional finance to venture by working with Chris Saka at lowercase capital during business school.

"I just started following dozens and dozens of VCs on that platform, going back and forth with them when I had like 200 followers and used that as a platform for essentially cold emailing hundreds of investors."

This quote explains how Adam Bezvanig utilized social media and networking to break into the venture capital industry.

Learning from Chris Saka

  • Adam Bezvanig learned the importance of respecting founders and maintaining a good reputation as an investor from Chris Saka.
  • A VC's reputation can lead to better deal flow and opportunities to invest in top founders.

"The number one thing that I learned from Chris was his deference for founders, the absolute respect that he has for entrepreneurs, and how that translates to your reputation as an investor."

This quote conveys the lesson on the significance of respecting entrepreneurs and building a good reputation in the VC world.

Reputation in Venture Capital

  • Reputation with founders is critical and should be prioritized.
  • A good reputation with other investors can also be beneficial for deal flow and collaboration.

"Your reputation with founders needs to be sterling. Your reputation with other investors. Ultimately, I think some people take different tax as to how they appreciate that one way or another."

This quote distinguishes between the importance of reputation with founders versus with other investors.

Venture Capital Mindset

  • Initially, Adam Bezvanig found it surprising that VCs would rather see a great company and pass than never see it at all.
  • Over time, he came to understand the value of being in the flow and having the opportunity to evaluate potential billion-dollar companies.

"You would much rather be in the flow, you would much rather have seen the multibillion dollar outcome and passed on it than have never seen it at all."

This quote reflects the mindset shift in understanding the value of deal flow exposure in venture capital.

Thematic Style of Investing

  • Adam Bezvanig supports a thematic style of investing, which involves focusing on specific themes or sectors.
  • This approach can help investors be more targeted and efficient in their deal selection.

"You're feeding my argument for my thematic style of investing."

This quote suggests that a thematic investment approach aligns with the speaker's strategy for selecting deals.

Naming of Looking Glass Capital

  • The name "Looking Glass" is inspired by "Alice in Wonderland" and represents the fantastical and speculative nature of investing in early-stage startups.
  • The name reflects the necessary suspension of disbelief and optimism required for pre-product, pre-revenue investments.

"There's definitely an illusion here to Lewis Carroll and Alice in Wonderland and sort of through the looking glass."

This quote explains the inspiration behind the name of Looking Glass Capital, emphasizing the visionary aspect of venture investing.

Looking Glass Fund Size and Strategy

  • The fund size of $20 million was chosen as an incremental step up from the first fund of $8.5 million.
  • The fund focuses on pre-seed and early seed rounds, aiming for high ownership to ensure significant returns on successful investments.

"The fund that I'm currently investing out of now is a $20 million target."

This quote states the current fund size for Looking Glass Capital, indicating the growth from the first fund.

Fundraising for a $20 Million Venture Fund

  • Raising a $20 million fund is challenging due to not fitting neatly into the typical investment thresholds for many institutional investors.
  • The fund targets smaller fund-of-funds, family offices, and high net worth individuals.

"20 is definitely not the easiest fund size to raise for, I'll put it that way."

This quote acknowledges the difficulties associated with raising a venture fund of this particular size.## Fundraising Documentation Preparedness

  • Importance of having documents ready before fundraising conversations.
  • The value of a detailed data room with investment memos for LPs.
  • Writing transparent and regular updates to LPs.
  • Necessity of legal documents and a comprehensive deck with an appendix.

"I err on the side of formality in terms of data room and materials, and I write an investment memo for every single investment I make, even though it's just me reading them."

This quote emphasizes the speaker's meticulous approach to documentation, ensuring that every investment has a formal memo for potential LPs to review.

"Every LP update I've sent out, I write a very lengthy letter every eight weeks that's very transparent on every company in the portfolio to LPs."

This quote highlights the speaker's commitment to transparency and regular communication with LPs through detailed updates on portfolio companies.

Founder Advice on Documentation

  • Concerns about overwhelming LPs with too much documentation.
  • Encouraging founders to provide comprehensive information upfront.
  • Avoiding the drip-feeding of information to potential investors.

"I do sometimes wonder if there's like paralysis by analysis."

This quote reflects the speaker's awareness of the potential downside of providing too much information, which could lead to decision-making paralysis for LPs.

"Just throw it all at me and I'll pour through it."

The speaker prefers to have all the information available at once, rather than receiving it piecemeal, which could hinder the evaluation process.

Investor Presentation Strategy

  • The speaker's stance on not walking through a deck during investor calls.
  • The belief that certain visual aids like revenue charts are less necessary for VCs compared to founders.

"I've never walked through a deck on a call. I don't think that's really necessary as an investor."

This quote indicates the speaker's belief that walking through a presentation deck is not a critical part of an investor's pitch process.

Expectations of Financial Models from Founders

  • Understanding that financial models are likely to change and are not the main focus.
  • Insight into the founder's thought process on business drivers and levers.

"I am fully aware that what I'm underwriting is 100% going to change and not occur as it was."

The speaker acknowledges the fluid nature of early-stage startups and the expectation that financial projections will evolve.

LP Acquisition Strategy

  • Personal connections as the primary source of LPs in the first fund.
  • The importance of introductions from existing LPs for expanding investor base.

"Every single LP in fund one is someone that I knew personally over my prior years and years in and around the early stage tech ecosystem."

This quote illustrates the reliance on personal networks for the initial LP acquisition in the speaker's first fund.

LP Composition and Engagement

  • Diverse LP base, from individuals to family offices and fund-to-fund investors.
  • The surprising nature of investment decisions and commitment sizes from individuals.
  • The necessity for LPs to appreciate the nuances of venture capital to engage with the fund.

"It's generally indicated to me that you can't come close to sizing up, at least on an individual LP, like a high net worth individual LP, you can't handicap what their check size is going to be unless they explicitly tell you."

This quote conveys the unpredictability of investment amounts from individual LPs, emphasizing the difficulty in anticipating their financial commitment.

Minimum Check Size and Exceptions

  • Setting minimum check sizes for funds to maintain certain investment standards.
  • Willingness to break minimums for individuals with beneficial networks or skills.

"Yeah, it was 100 on fund one and 250 on fund two."

This quote specifies the minimum check sizes for the speaker's first and second funds, indicating a strategy to attract more substantial investments over time.

Fundraising Urgency and Momentum

  • The challenge of creating a sense of urgency among LPs without bluffing.
  • Building momentum through consistent updates and sharing progress with LPs.

"That compounding of updates and progress, to me is the best way to demonstrate less of a sense of urgency and more that I'm putting 1ft in front of the other every single day."

The speaker believes in showing continuous progress to LPs as a way to encourage their commitment, rather than imposing artificial deadlines.

Approach to Fund Closes

  • Learning from the first fund to not delay the first close.
  • Advising other managers to close at 50% of the minimum viable fund size.

"I think I was trying to get to at least 50% to 60% of the fund before doing that first close."

The quote reveals the speaker's initial hesitation to close the first fund too early, which was later adjusted in their approach for subsequent funds.

Fundraising Insights

  • The importance of identifying the right LP 'phenotype' for one's fund.
  • Comparing the process of LP acquisition to founders finding the right VC.

"I would say you need to figure out the phenotype of your LP quickly, figure out who the LP is that's going to understand your business."

This quote underscores the necessity of targeting LPs who are aligned with the fund's business strategy and can grasp its value proposition.

Investment Strategy and Discipline

  • Pursuing a precede investment strategy with an institutional approach.
  • Maintaining strict investment criteria without deviation.
  • Learning from credit investment experience to apply discipline in VC.

"I just don't deviate from the strategy that I'm pursuing at all. I don't make any compromises around it."

The speaker emphasizes their commitment to a consistent investment strategy, avoiding any deviations that could dilute their approach.

Adverse Selection and Rule Exceptions

  • Recognizing that strict rules make exceptions more impactful and justifiable.
  • Being open to flexibility when an opportunity warrants an exception.

"The more constraints you put in place, the fact that when you do want to or need to make an exception, it means that it's reached some level that you thought might be previously unattainable."

This quote reflects the speaker's belief that having a structured set of investment criteria allows for meaningful exceptions when extraordinary opportunities arise.## Investment Strategy and Philosophy

  • The speaker emphasizes the importance of not compromising on valuation rules.
  • Confidence in being selected by founders for investment is crucial.
  • The strategy includes being the first to say yes, setting terms, committing early, and then helping to bring in the rest of the money.
  • A lead investor is defined not just by the size of the check but by their ability to catalyze a round, set terms, and support the entrepreneur.

"Yes. If I believe that I'm getting adversely selected because I'm getting my allocation, then I should probably just quit doing this job."

Explanation: The speaker is expressing that if they felt they were only getting investment opportunities because no one else was interested, it would indicate a failure in their investment strategy.

"My philosophy has been be a first yes lead around, set the terms, commit early, and then basically put on my investment banker hat and become placement agent."

Explanation: The speaker describes their proactive approach to investing, which involves leading rounds and actively participating in the fundraising process beyond just providing capital.

Definition of a Lead Investor

  • The concept of a lead investor varies; it can mean the investor who writes the next check or the one who helps catalyze a round.
  • The speaker believes in the broader definition of a lead investor, focusing on support and engagement with the entrepreneur.

"Like I saw Jason Lemkin tweet the other day, like a lead investor is the investor who writes the next check when nobody else will."

Explanation: The speaker references a tweet by Jason Lemkin to discuss the different interpretations of what it means to be a lead investor.

"To me, the definition of a lead is one that helps catalyze arrays."

Explanation: The speaker provides their personal definition of a lead investor, emphasizing the role of a catalyst and supporter in the investment process.

Check Size and Round Participation

  • The speaker has not found their check size to be an issue and has been able to secure desired investment amounts.
  • Check sizes are tailored to the rounds, with flexibility to be a part of rounds with existing leads.

"I haven't found it to be a challenging check size."

Explanation: The speaker indicates that the size of their investment checks has not hindered their ability to participate in funding rounds.

"A quintessential round for me would be one and a half to $2 million at a six to ten post down the middle of a fairway structure."

Explanation: The speaker outlines their typical investment round size and structure, indicating a preference for moderate valuations and stakes.

Thematic Investing and Sourcing

  • Thematic investing is a key component of the speaker's sourcing strategy.
  • It allows for immediate credibility with founders and top-of-mind awareness among other investors.
  • The speaker actively engages with founders and provides introductions to other relevant investors.

"The thematic investing that I do is the fundamental driver of all of my sourcing."

Explanation: The speaker credits thematic investing as the core of their investment sourcing, which helps them focus and be recognized in specific areas.

"It's on me to sell them on why I should have that much of the remaining 750k."

Explanation: The speaker acknowledges their responsibility to convince founders to allocate a significant portion of the investment round to them.

Loss Ratio Expectations

  • Acceptance of a high loss ratio is part of the investment strategy.
  • The speaker is comfortable with a significant portion of the portfolio yielding zero or less than one x returns.
  • Most returns are expected to come from a small percentage of the portfolio.

"It's not a home run game, it's a grand slam game."

Explanation: The speaker conveys that the goal is to achieve outsized returns from a few investments, accepting that many will not succeed.

"I'm comfortable with the inevitable zero or less than one x."

Explanation: The speaker expresses comfort with the reality that some investments will not generate positive returns.

Risk Assessment and Mitigation

  • The speaker includes a risks and mitigants section in every investment memo.
  • They acknowledge risks at the time of investment, hoping they can be mitigated over time.
  • The speaker revisits these risks when a company is not performing well to assess their initial judgment.

"With every investment memo, the last slide of it is a risks and mitigants section."

Explanation: The speaker details their process of evaluating and documenting potential risks and their countermeasures in investment memos.

"The things that are keeping me up at night are things that I was aware of at the time of investment."

Explanation: The speaker reflects on the challenges they anticipated at the time of investment, which are now causing concern due to a lack of mitigation.

Round Composition and Founder Mistakes

  • Founders often make the mistake of being too narrow in their investor outreach.
  • There is a lack of awareness about niche investors who could add strategic value.
  • The individual partner at a fund can significantly impact the founder's experience.

"They're too narrow with who they go out to."

Explanation: The speaker criticizes founders for not considering a wide enough range of potential investors.

"The individual partner that you get introduced to really matters."

Explanation: The speaker highlights the importance of the relationship between founders and individual partners within investment funds.

The State of Seed Rounds

  • The definition of seed rounds has become ambiguous, with large amounts being raised.
  • The speaker notes the difference between pedigree founders and others in terms of raising capital.
  • Discipline in capital raising and spending is key to navigating the current market.

"I don't know how you define seed these days."

Explanation: The speaker points out the confusion surrounding the definition of seed rounds in the current investment landscape.

"But raising one and a half to two at something high, maybe twelve, they're taking less dilution."

Explanation: The speaker discusses the strategic advantage of raising funds at sensible valuations, especially in a challenging market.

Discipline in Fundraising and Spending

  • Discipline is crucial for founders when raising and spending capital.
  • The speaker prefers founders who raise modest amounts and operate efficiently.
  • A minimum of 24 months of cash burn is recommended when raising a round.

"It's easier said than done to, say, raise five and operate like you have one and a half."

Explanation: The speaker expresses skepticism about a founder's ability to maintain discipline when they have access to a large amount of capital.

"My general rule of thumb is you need to have at least 24 months of cash gross burn, not net burn."

Explanation: The speaker advises founders to secure enough funding to cover at least two years of operations to ensure sustainability.## Venture Capital Fund Trends

  • Expectation of overspending in startups and the importance of finding product-market fit within a disciplined timeframe.
  • Discussion about the future of venture capital, with a trend towards smaller, specialized funds.
  • Anticipation of a bifurcation in the VC industry between small, specialized funds and large behemoths.
  • The challenge for mid-sized funds to stand out without a distinct offering.

"If you can't find product market fit by being that disciplined over a two year period, you probably didn't deserve to raise more than two and a half or two or whatever the number was in the first place."

This quote emphasizes the importance of startups finding product-market fit within a specific timeframe and being disciplined with their capital.

"The way I think it's trending is hopefully smaller funds, more specialized funds."

The speaker predicts a future trend in venture capital towards smaller, more specialized funds.

"And if you're just in the middle, it's very tough to stand out."

The speaker suggests that mid-sized VC funds may struggle to differentiate themselves in the market.

Winners and Losers in Venture Capital

  • Winners are adaptable and offer something distinct to compel founders.
  • Losers lack distinct offerings and may struggle to attract investments from founders.
  • The middle ground in venture capital is seen as challenging without a unique value proposition.

"I think the winners are the ones who are willing to adapt."

Adaptability is highlighted as a key characteristic of successful players in the venture capital industry.

"And the losers are people that have nothing distinct to offer when it comes to compelling a founder to take their investment."

The quote indicates that lack of distinct value offerings will be detrimental to venture capitalists in attracting founders.

Softbank and Tiger's Investment Activity

  • Observation of Softbank and Tiger's decreased activity in the current year.
  • A shift towards returning to core competencies and strengths.

"They've been quiet this year."

This quote notes the reduced investment activity of Softbank and Tiger in the current year.

"I think people are returning to what they're good at."

The speaker suggests that investors, including Softbank and Tiger, are focusing on their strengths and core competencies.

Venture Investment Recommendations

  • The speaker's preference for investing in specific venture firms at different stages.
  • Boldstart is favored for its discipline in pre-seed or seed investments.
  • Benchmark is respected for its consistent approach to Series A investments.
  • Lux's growth fund is commended for backing innovative companies and strong returns.

"I'd go with bold start."

The speaker endorses Boldstart for its disciplined investment approach.

"Benchmark? They're still the standard in my opinion."

Benchmark is recommended for its consistent and effective investment strategy.

"I take Lux's growth fund."

Lux's growth fund is praised for its investment in innovative companies and solid returns.

Changing Perspectives on Investment Signaling

  • Shift in the speaker's view on the signaling risk associated with multi-stage firms investing early.
  • Emphasis on raising capital from reputable sources with ethical standards and clean terms.
  • Signaling risk is now considered less relevant, with good execution being the key to overcoming it.

"What the last twelve months have shown me is raise capital from reputable, reliable sources that align with your ethical standards and that are providing clean terms."

The speaker emphasizes the importance of raising capital from reputable and ethical sources.

"But the signaling risk of certain investors being involved, in my mind, is completely out the window, because ultimately you can overcome that with good execution."

The quote suggests that the perceived signaling risk of certain investors is no longer a significant concern if the company can demonstrate good execution.

Venture Investment Fervor and Correction

  • The extreme pace of investment in 2020-2022 and the subsequent correction.
  • Current challenges for founders in raising seed and Series A rounds.
  • The shift in VC behavior, including fewer deals, increased diligence, and reserving funds for existing portfolio companies.
  • Advice for founders on extending runway and achieving profitability.

"The level of slow playing of funds now, just extreme whiplash for entrepreneurs."

This quote describes the sudden and drastic change in investment behavior, impacting founders.

"A lot of companies are going to struggle to raise, not because their businesses aren't doing well, but because there are so few people that are actually investing right now."

The speaker explains that despite company performance, the current investment climate is making fundraising difficult.

Founder Advice in the Current Market

  • The uncertain market requires founders to focus on extending their runway and growing revenue.
  • Founders are encouraged to aim for profitability and manage their burn rate.
  • The necessity for founders to have sufficient cash reserves until at least 2025.

"Founders should figure out, all right, how do we extend Runway? How do we grow revenue faster than expenses?"

The speaker advises founders on strategies to sustain their businesses in a challenging market.

"Make sure you have at least seven months of cash at that point."

This quote provides specific guidance on cash reserves for founders to aim for in their financial planning.

Seed Investment Climate

  • The belief that seed-stage investments remain relatively unaffected by the market changes.
  • Seed funds continue to invest, and seed pricing has remained stable.
  • A contrast is drawn between the seed stage and other stages, with Series D being particularly difficult.

"I think seed is actually immune."

The speaker expresses the opinion that seed-stage investment is insulated from broader market shifts.

"A has been preemptively aggressively done, where anything working has been aggressively taken out of market."

The quote discusses the aggressive investment behavior at the Series A stage, where promising companies are quickly funded.

Venture Industry Transparency

  • A desire for more transparency and consistency in the fundraising process for founders.
  • The opaque nature of capital raising and the need for systematic evaluation of companies and founders.
  • The long feedback loops in the venture industry make it hard to implement changes quickly.

"The process for raising capital as a founder is incredibly opaque, and it probably shouldn't be."

The speaker calls for greater transparency in the capital raising process for founders.

"If I could change anything, I wish that that dog and pony show, as I said before, wasn't as much of a dog and pony show."

This quote reflects the speaker's desire to reduce the performative aspects of the fundraising process.

Five-Year Vision for Looking Glass

  • The speaker's aspirations for his venture firm, Looking Glass, over the next five years.
  • Plans to invest out of a third fund and maintain a consistent investment strategy and portfolio size.
  • The importance of consistency and iterative improvement in the venture business.

"Probably in the midst of investing out of fund three."

The speaker outlines his goal for Looking Glass to be investing out of a third fund in five years.

"Still investing in the same themes, iterative, step up in check size, continuing to be consistent with how I operate."

The quote conveys the speaker's commitment to maintaining a consistent investment approach while gradually increasing check sizes.

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