20VC Why Fund Sizes Should Be Smaller, Should Founders Also Have Their Own Funds, Is Emerging Markets Investing Gone, Is Fintech Investing Dead & Who Will Be The Winners and Losers in VC in the Next 10 Years with Sheel Mohnot, CoFounder @ BTV

Summary Notes


In a candid conversation with Harry Stebbings on "20 vc," Sheil Maniar, co-founder of Better Tomorrow Ventures (BTV), a $225 million fund, delves into the nuances of venture capital, fund sizes, and founder dynamics. Sheil, an experienced founder and VC, emphasizes the importance of appropriate fund sizing, cautioning against the industry's trend towards larger funds which may dilute focus on returns. He argues for smaller fund sizes to maintain investment discipline, citing the prisoner's dilemma situation where an influx of capital into ventures inflates valuations and expectations. Sheil also discusses the challenges of secondary sales, advocating for taking chips off the table judiciously. The conversation touches on the strategic mistakes of multi-stage funds dabbling in seed investments and the potential pitfalls of founders running side funds. Lastly, Sheil shares his personal experience with an unconventional wedding in the Taco Bell metaverse, highlighting the evolving intersection of personal life and technology.

Summary Notes

Venture Capital Fund Sizes and Returns

  • The venture capital industry is facing a prisoner's dilemma with regard to fund sizes.
  • Increasing fund sizes necessitates a higher return from the industry, which may not be achievable.
  • Reducing fund sizes could lead to lower valuations and potentially better outcomes for everyone.

"We are operating in a crazy prisoner's dilemma situation. There's a bunch of capital that wants to go into ventures still, and if you increase fund sizes, the industry as a whole needs to return a lot more than it probably will."

This quote emphasizes the dilemma faced by venture capital funds: if all funds increase in size, the overall industry must achieve higher returns, which may not be realistic. A prisoner's dilemma situation arises as each fund decides whether to increase size without a coordinated effort to maintain manageable fund sizes for sustainable returns.

Sheil Manot's Background and Foray into Venture Capital

  • Sheil Manot has a history of entrepreneurship and business interest from a young age.
  • He transitioned from the corporate world to startups, with two successful company exits before moving into venture capital.
  • Manot's experience as a founder influenced his perspective on venture capital, initially believing VCs had an advantage, but later recognizing the intelligence of founders.

"Then I ended up starting a company that we sold in 2015. And then at that point, I thought, I've really loved what I've seen on the other side of the table. I've loved what I've seen from VCs interacting just when I was fundraising. And aren't they the smart ones? Is sort of what I was thinking. And of course, now I know better."

Manot reflects on his journey from being a founder to entering the venture capital space. He shares his initial perception of VCs as being the "smart ones" but later realizes the intelligence and importance of founders in the startup ecosystem.

The Uncertainty in Venture Capital Decision-Making

  • Venture capitalists do not always know the best investment strategies.
  • Even successful and experienced VCs like Bill Gurley have debates and uncertainties about investment decisions.
  • There are various successful strategies in venture capital, and there is no single right way to invest.

"They actually had been talking about something I tweeted, and he said they had a rigorous internal debate about what was correct, and they don't know."

This quote illustrates that even among seasoned VCs, there is often rigorous debate and uncertainty about the correct investment decisions, underscoring the complexity and unpredictability of the venture capital industry.

Fund Size Discipline and Industry Impact

  • There is a debate about whether venture capital funds should decrease their sizes to achieve better returns.
  • Larger fund sizes can lead to price agnosticism due to the pressure to deploy more capital.
  • Some funds, like Founders Fund, have reduced their fund sizes to focus on returns rather than management fees.

"I think we are operating in a crazy prisoner's dilemma situation where there's a bunch of capital that wants to go into ventures still. And if you increase fund sizes, the industry as a whole needs to return a lot more than it probably will."

Manot discusses the industry-wide implications of increasing fund sizes, suggesting that a collective decrease in fund sizes could be beneficial for the venture capital industry as it could lead to more sustainable investment valuations and returns.

  • LPs (Limited Partners) have become more cautious in their investments, with some withdrawing from the market.
  • There is a perceived hypocrisy among investors who previously shunned certain sources of capital but are now actively seeking it due to market conditions.

"I think it is very hypocritical that all these folks who were anti saudi money are now over there just praising everything."

Manot points out the inconsistency in behavior among some investors who once avoided certain funds but are now pursuing them, reflecting the changing dynamics and opportunism in the venture capital fundraising environment.

Follow-On Investment Strategy

  • Follow-on investment strategy is complex and requires careful consideration of which companies to continue supporting.
  • It is often necessary for lead investors to participate in follow-on rounds, particularly for companies that are performing well.
  • Identifying companies that are unlikely to receive additional investment is also part of the strategy.

"If you lead the seed round and somebody good is following on, you kind of have to follow on."

This quote captures the expectation that lead investors will often participate in follow-on rounds, especially when other reputable investors are involved, as it signals confidence in the company's trajectory.

Emerging Markets and Investment Challenges

  • Investing in emerging markets is becoming more challenging in the current economic climate.
  • Investors are retreating to safer, closer-to-home markets, and there is a reduction in capital flowing to more distant emerging markets.
  • The ability to exit investments in emerging markets is a significant concern for VCs.

"The more emerging you go, the tougher it gets. So in a low interest rate environment, money's free and you're like searching for more risk and you go to emerging markets."

Manot discusses the challenges faced by venture capitalists when investing in emerging markets, particularly in a macroeconomic downturn where risk appetites and liquidity mechanisms are constrained.## Liquidity Mechanisms in Emerging Markets

  • Lack of liquidity can be challenging, but there are always options for a strong company.
  • Examples include African companies going public on the Nasdaq and successful companies in La Tam, like Nubank.
  • Importance of entering at the right price to account for potential path to liquidity.
  • Overpayment in emerging markets can be problematic, as seen with seed rounds at $20 million valuations.

"If it's going to be a really tough path, but you have an exceptional founder. There's going to be a path to liquidity at some point, but you have to get in at the right price to account for that."

The quote emphasizes the need for careful investment valuation, especially in challenging markets, to ensure a feasible path to liquidity for companies with strong leadership.

Investment Valuations in Emerging Markets

  • In 2021, investors paid prices similar to developed markets without accounting for additional risks.
  • High valuations for seed rounds in difficult markets are considered unwise.
  • Notable companies like D Local faced valuation drops after short seller reports.

"People started paying seed rounds at $20 million valuations in a market. That's going to be a really tough path to get to a billion dollar plus exit. And that was a shame."

This quote highlights the issue of inflated seed round valuations in emerging markets, which could hinder the path to significant exits.

Shift in Investment Focus

  • There's a strategic shift towards investing more in the US market compared to two years prior.
  • The conversation touches on the trend of pivoting to AI and AR in the tech industry.
  • The sentiment towards fintech has shifted, with less competition for capital and companies.

"Yeah, I think there is some of that. And I think we're probably more focused on the US now than we were two years ago."

The quote indicates a strategic pivot towards the US market, reflecting a change in investment focus over time.

  • Large funds face challenges in achieving returns on substantial AUMs.
  • The shift in LP class from family offices to sovereign wealth funds.
  • Some funds may need to shrink to maintain a focus on returns.
  • The speaker's own fund returns part of the management fees to focus on investment returns.

"Well, right now, it seems like we have these super big funds, right? We talked about Andreessen, general Catalyst, all these other guys. Those guys seem to be in the AUM accumulation game, and it's a tough business to have."

This quote discusses the challenges faced by large venture capital funds in generating returns due to the focus on accumulating assets under management (AUM).

Venture Capital Value Add Services

  • The debate over whether value add services in venture capital truly provide benefits.
  • Anecdotal evidence of value add services helping portfolio companies with talent acquisition.
  • Venture capital is perceived as an easy job, but it can be challenging, especially for new managers.

"We recently won a hotly competitive deal and a big part of it was actually like, we've landed several high quality candidates into our portfolio, and they were like, this is the hardest thing."

This quote provides a specific example where value add services in venture capital were instrumental in winning a deal by assisting with talent acquisition, a critical challenge for companies.

Fundraising and Investor Relations

  • The process of raising a venture fund without an anchor investor.
  • The reliance on friends and ecosystem connections for the initial fundraise.
  • The impact of COVID-19 on fundraising efforts and the need to adapt strategies.
  • The eventual success of the fund due to lower interest rates and renewed investor interest.
  • The importance of hitting over half the target to ease the fundraising process.

"No, we had no anchor. So there was fund zero, my $15 million fund, then fund 175, and we had no anchor in the $75 million fund."

This quote reveals the speaker's experience of raising a venture fund without an anchor investor, highlighting the challenges and reliance on personal networks for initial capital.

Fundraising Strategies and Challenges

  • The importance of a first close to gain credibility and seriousness among LPs.
  • The difficulty in instilling a sense of urgency in LPs during fundraising.
  • The experience of fundraising for a second fund with a better reputation and faster commitment from investors.

"Close as soon as possible. Then LPs can take you seriously because you have a fund and you're investing."

The quote advises on the strategic move to close a fund early in the fundraising process to demonstrate seriousness and commitment, which can help in attracting further investment from limited partners (LPs).## Fundraising Timing and LP Relations

  • December 2021 was considered a good time to raise funds, leading to a quick closing of the fund.
  • Miscommunication with some university endowments about the fundraising timeline resulted in missed opportunities to include them in the fund.

"it was December 2021 was a good time to raise them. So we ended up closing pretty quickly. Some of these folks that we actually would really like to have in our fund, some like university endowments that we have a great relationship with, and we told them that they had more time than they did, so that didn't really work out."

The quote explains that the fund closed quickly due to favorable conditions in December 2021, but there was a miscommunication with university endowments which led to their exclusion from the fund.

Capital Concentration and LP Diversification

  • All LPs in the fund are capped at 10% or less to maintain fund stability and flexibility.
  • By limiting LPs to a maximum of 10%, the fund mitigates risk associated with any single LP's change in circumstances.

"All of our lps are 10% or less of our fund. It makes us feel good now in a market where if any one lp doesn't come into our next fund because circumstances changed, it's fine for us. We have other folks who want to fill those gaps. We actually pushed folks down to the 10%."

The quote highlights the strategy of capping LP contributions to 10% or less to ensure the fund's resilience to changes in individual LP circumstances.

LP Advisory Committee (LPAC)

  • The LPAC consists of five of the largest investors, including one family office and fund of funds.
  • The LPAC is used sparingly, mainly for conflict resolution and major strategic decisions such as launching an accelerator.

"We do, yeah. Five of our biggest investors, one family office, and then the others are fund of funds. I would say we don't use it that much. We use it for conflicts or."

The quote describes the composition of the LPAC and indicates that it is not frequently utilized, serving specific functions like addressing conflicts.

Decision to Launch an Accelerator

  • The accelerator was launched in response to demand for a hands-on, fintech-focused program.
  • Previous experience running an accelerator from 2016 to 2018 showed positive results and demand from founders.
  • The accelerator aims to provide specialized support in fintech, unlike more generalized programs like YC (Y Combinator).

"We launched this accelerator recently launched the accelerator. We said, hey, we should get their approval. And so we talked to them, why."

The quote indicates the recent launch of a fintech accelerator and the decision to seek LPAC approval for this strategic move.

DPI (Distributed to Paid-In) and Market Timing

  • Selling portfolio positions at the right time is crucial to achieving DPI and satisfying LP expectations.
  • The market conditions from 2021 to 2022 required timely sales to secure returns.

"I think. That's right. You had to see the market and say, we should sell here. So we did in some cases. Now, of course, we didn't sell nearly enough. We should have sold more. And we had opportunities, too. And we did."

The quote reflects on the necessity of market timing to sell positions and achieve DPI, acknowledging that more sales could have been made.

Advising on Selling Positions

  • Selling entire positions is rare; easing out of positions to secure fund returns while maintaining upside is preferred.
  • Achieving 1x DPI while retaining equity for further growth is ideal.

"I generally think in one case, we sold our entire position to a later stage investor, but that's unusual for us. I think, generally speaking, we'd like to just ease our position."

The quote suggests a cautious approach to selling positions, typically favoring partial sales to secure initial returns while still participating in potential future growth.

Biggest Investing Mistake

  • Not taking enough cash out when the opportunity arises can lead to missed chances for significant returns.
  • Market volatility can quickly change the value proposition of a sale.

"For me, it was not taking enough cash out. I had the opportunity. I could have returned multiples on the fund, and I didn't."

The quote reveals a personal investing mistake of not liquidating enough positions when there was a chance to secure substantial returns for the fund.

Investing Behind the Wrong Founder

  • Investors may get too excited about an idea and back the wrong founder, leading to poor outcomes.
  • The best strategy is to invest in the leading company within a sector, not second or third choices.

"People can get too excited about an idea and invest behind the wrong founder. Just in that idea. In our case, banking as a service. We talked about unit. So unit is a banking as a service company."

The quote discusses the risk of getting caught up in an exciting idea and consequently backing a suboptimal founder, using the example of the banking as a service sector.

Founder vs. Market Dynamics

  • Investing at early stages is predominantly about the founder's capabilities.
  • A strong founder can succeed even in challenging markets, as demonstrated by historical examples.

"So we invest at super early stages. It's all about the founder. Three of my top five companies were pivots."

The quote emphasizes the importance of the founder's role in early-stage investing and the potential for success even when pivots are necessary.

Founder's Ability to Sell vs. Operate

  • Some believe there is an inverse correlation between a founder's selling ability and operational skills.
  • However, there are founders capable of excelling at both, and they can lead companies to success despite less fundraising prowess.

"I don't think that's exactly true. I think there are founders who can do both, but many of our top ones, they had a competitor that was raising more and more money than they were."

The quote challenges the idea that founders cannot be both good sellers and operators, citing examples from successful companies in their portfolio.

Great Founders in Bad Markets

  • Even great founders can fail to find product-market fit or pivot too late.
  • VC guidance can be valuable in encouraging founders to consider pivots when necessary.

"First of all, you can fail to find product market fit, even if you're a great founder and you can get stuck behind your idea, not pivot early enough."

The quote acknowledges that great founders might still struggle with product-market fit and the importance of timely pivots.

Runway Length and Founder Urgency

  • There is a concern that a long financial runway might reduce a founder's sense of urgency.
  • Great founders maintain urgency and roadmap focus regardless of the amount of money raised.

"I think bad founders raise a ton of money and spend it. Great founders raise a ton of money and still have the same sense of urgency, still are on the same roadmap as if they'd raise a much smaller."

The quote contrasts the behaviors of bad and great founders in relation to fundraising and spending, highlighting the importance of maintaining urgency.

Oversized Seed Rounds

  • Large seed rounds can lead to inflated salaries and attract individuals better suited for large companies.
  • Oversized seed rounds can create a less scrappy, less hardworking startup culture.

"And I agree with you completely. Like, raising big rounds makes people cushy. You end up attracting people with salaries that they could have gone into a big company, and actually, they belong at a big company."

The quote criticizes large seed rounds for potentially creating a comfortable environment that may not be conducive to the scrappy nature of startups.

Multistage Funds in Seed Investing

  • Multistage funds investing small checks in many companies can lead to conflicts and missed opportunities.
  • Multi-stage funds should be cautious about investing in seed rounds, especially in competitive sectors.

"A lot of the multistage stuff is quite dumb. A lot of these folks have invested like, million dollar checks to kind of a lot of folks and letting their junior team invest million dollar checks in anyone."

The quote expresses skepticism about multistage funds' strategies in seed investing, pointing out the pitfalls of spreading investments too thinly across many companies.

Tension Between VCs and Founders

  • VCs can be overly prescriptive, causing tension with founders who prefer recommendations over directives.
  • Boards are not always helpful, as they can be too structured and prescriptive.

"I've seen it in some of our portfolio companies. Like a lot of vcs are very prescriptive on how to do things. We try to not be that. We try to be supportive, but not too prescriptive."

The quote highlights the potential for tension between VCs and founders when VCs are too directive in their approach to advising companies.## Board Member Experience

  • Sheil Manot has sat on boards with Jeff Horing, the founder of Insight, and David Lawye, former CMO of Google.
  • Both Horing and Lawye speak infrequently, but their contributions are particularly insightful and often correct.
  • Their experience is undervalued by younger individuals but is considered incredibly valuable due to their long-term industry perspective.

"I have a board with Jeff Horing, the founder of Insight. He doesn't speak that much, but when he does, it's like, oh, he's absolutely. And like, I can look back a couple times about what he said. He was like, absolutely right."

This quote highlights Jeff Horing's impactful contributions despite being less vocal, emphasizing the value of his insights on the board.

"One of my other companies we had, David Lawye, who was CMO of Google, same thing, didn't speak that much, but when he did, he was absolutely right."

Similar to Jeff Horing, David Lawye's infrequent but accurate inputs on the board are noted, reinforcing the theme of experience and wisdom in board member contributions.

Tension Between LPs and GPs

  • General Partners (GPs) faced tension with Limited Partners (LPs) in 2021, with LPs likely unhappy about certain GP actions.
  • Sheil believes that LPs are content when GPs do as they promised.
  • High GP commitments can lead to financial strain and potential conflicts of interest, such as prematurely selling positions to recoup personal investments.

"Oh, yeah, a lot of gps went a little crazy in 2021. Lps were probably unhappy about that. I think if you do what you say you're going to do, lps are happy."

This quote reflects on the tensions in 2021 and suggests that adhering to commitments can maintain LP satisfaction.

"If the GP commit is too high, you can be financially strapped and you can say, oh, I'm going to sell my position in this company in the series B because I need to return that capital to myself and that can be a misalignment."

Sheil points out the danger of high GP commitments leading to decisions that are not aligned with the best interests of the investment.

Venture Capital Ecosystem

  • Sheil observes that raising a fund is currently challenging, with a noted difficulty for funds to progress beyond their initial stages.
  • Despite many operators claiming to be raising funds, Sheil has not seen a significant slowdown in this activity.
  • There is a belief that the venture capital industry does not need a large influx of new managers each year.

"It's just so hard to raise a fund now. And you have wonderful."

This quote speaks to the difficulties faced in raising a fund in the current economic climate.

"I haven't seen much of a slowdown."

Despite the challenges, Sheil acknowledges that the fundraising environment appears to be active, with no noticeable decline.

Founders with Side Funds

  • Sheil criticizes founders who lead investment rounds while also managing their own companies, especially during times of crisis.
  • He argues that founders should focus on their companies, as dividing attention can lead to neglecting responsibilities.
  • The discussion raises questions about the ethics and practicality of operating a fund and a company simultaneously.

"There are founders who have funds on the side who lead deals. And that is crazy to me."

Sheil expresses strong disapproval of founders who lead investment deals while also running their own companies, highlighting a potential conflict of interest.

"We have a company going through some shit right now. I'm there for them at any time of the day or night."

This quote illustrates Sheil's commitment to supporting companies he is involved with, emphasizing the level of dedication he believes is necessary and often lacking when founders split their focus.

Metaverse Wedding

  • Sheil Manot describes his wedding in the Taco Bell metaverse, a unique event that occurred after winning a contest.
  • The wedding was attended by friends and family in avatar form and was legally binding.
  • The event was emotional and well-received by both Sheil and his wife, Amrita.

"It was in the Taco Bell metaverse. It was an indian wedding taco bell in the metaverse."

Sheil recounts the unconventional setting of his wedding, showcasing the merging of cultural traditions with modern virtual platforms.

"We were legally married in this metaverse."

This quote confirms the legal status of the metaverse wedding, highlighting the novel concept of legal ceremonies in virtual environments.

Venture Capital Investment Preferences

  • Sheil discusses his investment preferences across different stages of venture capital firms.
  • He mentions Homebrew and IA as seed firms he would invest in and praises Benchmark for keeping fund sizes small.
  • For multi-stage firms, Sheil recommends Founders Fund due to their reduced fund size, and he acknowledges other firms like Addition and Ribbon.

"We've invested a lot with excel. I think they do a really good job in the spirit of keeping fund size small it's hard to beat benchmark."

Sheil expresses his preference for investing with Excel and Benchmark, emphasizing the importance of maintaining small fund sizes.

"Because founders fund shrunk their fund size. I'm going to go with Founders Fund Green Oats."

This quote reveals Sheil's approval of Founders Fund's decision to reduce their fund size, aligning with his investment philosophy.

  • Sheil has become more open to the idea of secondary sales, allowing founders to take some liquidity earlier in the company's growth.
  • He proposes a guideline where founders can take secondary equal to their company's ARR at series B and beyond.
  • Sheil criticizes the negative impact of founders who took excessive secondary, which often correlates with underperforming companies.

"We talked about secondary a bunch I think I'm much more likely to do to take some chips off the table earlier than I was before."

Sheil reflects on his changing stance regarding secondary sales, indicating a more flexible approach to founder liquidity.

"My rule that I like to live by is at the series b and beyond you can take as much secondary as you have in ARR."

The quote presents Sheil's rule of thumb for secondary sales, linking them to the company's annual recurring revenue as a measure of business legitimacy.

Criticism of Venture Capital Practices

  • Sheil criticizes certain venture capitalists who act arrogantly and look down on others, calling for fewer such individuals in the industry.
  • He anticipates a significant drop in valuations and notes the lack of investments by growth round investors due to previous poor performance.
  • Sheil comments on the changes in Tiger's investment approach and expresses skepticism about Softbank's future due to past investment errors.

"Fewer douchebags who think they know it all."

Sheil calls for a change in the venture capital culture, advocating for more humility and less arrogance among venture capitalists.

"It's a very different tiger than the one of 2021. They're doing a really good job now."

This quote acknowledges the improvement in Tiger's investment approach, contrasting it with their previous practices.

BTV's Future Vision

  • In five years, Sheil wants BTV to be recognized globally as the top choice for founders building fintech companies.

"I think we want to be cemented our reputation as the first choice of founders building a fintech company globally."

Sheil expresses his ambition for BTV to become the go-to venture capital firm for fintech entrepreneurs worldwide.

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