The Hot Mic: Should You Start a Venture Fund?

Hey friends I hope you’re enjoying season 14 as much as Lisa and I have enjoyed making it! We’ll be back with the season 14 finale next week!

But today, I’ve got something different for you. We’re hosting our first listener Q&A. Where listeners get to ask questions of the VCs on the show. Not just submit questions, they actually got to sit in the chair and ask five VCs their burning question.

I’m so excited about this, because if you all enjoy this episode and find it valuable! I’d love to host another listener Q&A at our next event. 

So enjoy the conversation that follows, where three listeners get their questions answered by the VCs.

Should I start a venture fund?

What do you look for in a pitch?

And what is the one company you regret passing on the most?

Then at the end of the episode, you’ll get a chance to submit your question for the next edition of “the hot mic”.

The first question, is coming up, after this.

Mac: Hot mics. 

Paige: Mike is hot

Mac: I always get scared of hot mics. 

Paige: Hot. 

Elizabeth: Do you have any hot takes?

Cyan: you got any hot takes for the hot mic?

Mac: I got tons of hot takes. I, I don't know if they're appropriate for the pitch, but I got tons of hot takes. 

Josh: Let me bring in the first listener

Charles: Oh my. Alright. 

Mac: Uhhhh 

Cyan: you're rightfully afraid of the hot mic.

Mac: Well, most of my stories are just stories about companies doing stupid stuff. 

Josh: Alright, why don't you introduce yourself real quick and then, uh, ask your question. 

Jared: All right. My name's Jared Johnson. Basically if there was one thing that you could kind of hone in on, on a pitch that kind of clicks with you and makes you want to invest in them, is there something that you could share that would do that?

Cyan: For me, it's whether they know something that nobody else seems to know. Like do they have a insight or a moat or some sort of intelligence that they're on to something. 

Mac: For me, you know, I think very heavily about customer acquisition, but if I think about like, what's the thing that makes me wanna invest, it's usually these moments with the founder, right? Where it's like, oh, you are 19, but you're the smartest person that I've ever heard talk to me about crypto in a very different way. That's unique, or, oh, you have a growing business that's killing it, but you spent the weekend in your warehouse rearranging it to make it more efficient, and somehow you got 10 other people to do it with you for just beer and pizza. Sometimes for me, it's like these moments with these founders where it's like these, these unique profiles of people that you don't see every day, where it's like, okay, you're the kind of person that's gonna do something nobody's ever done before. I wanna help you. 

Jared: So less about the product or the service and more about the individual.

Mac: Yeah. But I will also say there's more of a function of the stage I invest in. Because I invest so early, from the time I invest within three years, the company's most likely gonna be something different. And so I'm looking for people to navigate all the pitfalls over that time period.

Jared: That makes sense. 

Charles: I think for me it's a lot like what Cyan said, but I would probably, even be slightly more specific. I'm looking to be surprised by an insight in a meeting and that insight could be a business model innovation. Someone says, Hey, everyone else is charging a lot of money for this. I found a way to make it free. I'm like, oh, that's pretty disruptive. Or everyone else thinks the market's going this way. I have a hypothesis that it's going this different way. Or I'd say in half the times I meet founders that we invest in, like, this is a market that you don't know much about 'cause nobody knows much about it 'cause it doesn't really exist yet.

And let me tell you why everything is aligned now for it to become a thing. And those are the ones where I end up paying the most attention and saying yes. It's like they're teaching me something about a problem that I didn't know or I thought I understood and they're giving me some new way to think about how it could be solved. 

Jared: Makes sense. 

Paige: I have three specific things I look for and founders. The first is a really great storyteller. The second thing I look for is a mission. I believe that a mission is magnetic. Like Mac said, you can have people in working on the weekend. There was a founder on The Pitch that I invested in, Dhaval Patel from Lotus, who had a nine people working full-time with no salary for a year. 

Which is like crazy. And then the third thing I look for is high execution velocity. How is this founder navigated, like challenging obstacles, and then how quickly do they execute when they've figured out the right goal or priority? So those are the three things I look for. And I feel like they're implicit in the way that the founder talks about themselves and the business. 

Jared: So do you typically need all three to kind of hit it for 

Paige: Yeah. 

Paige: Okay. 

Paige: I found that's like my sweet spot for investing or what gets me to conviction. 

Jared: Cool. 

Elizabeth: I actually think, and many VCs will disagree with me on this, is. The idea matters more than the founder, but if we're just talking about the founder, per our name, hustle fund, I really like hustle, and to me hustle kind of echoing Paige's description is speed of execution. I think what's baked into that is a lot of tenacity and resourcefulness, because often founders at the earliest stages have nothing, and you have to be able to do a lot with nothing. 

Jared: All right, cool. 

We’ll be right back.

John: Hi. 

Charles: Hello. 

Paige: Hello. 

Charles: Wow, welcome. 

John: Thanks for having me. It's a fun surprise. Uh, my name's John Armbrust. So as quick context, in my real life, I've done some startups. I currently run a startup school that I founded from scratch. I'm very interested in possibly doing my own little friends and family fund to invest in startups. So I'm really curious as to like what y'all's thought process was in that journey. Like what are some of the things to keep in mind? 'cause I'm like super early stages. I would not be ready to pitch anyone to give me any money. But where do you even start? 

Elizabeth: Can I ask you why you wanna do this? 

[laughter]

Charles: I was gonna ask the same, I think it’s the essential question. 

Elizabeth: Yeah. 

Paige: Yeah. 

Elizabeth: Because that informs the rest in my opinion. 

John: I mean, I feel like startup type stuff is in my DNA, I feel like I've always gravitate towards startup. I think I have a pretty decent track record of success. And through the ventures I have kind of gone into, I've built up a very strong following of people who are investor types, more like non-profit investing. 'cause that's kind of been my sweet spot. But I don't know, I feel like I have some people who've always said, John, like, you could have gone to Wall Street, you could have done all these things with finances, but you did the stuff in schools and education. So maybe it's just like kinda scratching that itch that I've never really scratched and I feel like I would be good at it. Although I, I want y'all to push back and maybe doubt that for a second. I'd be curious. 

Elizabeth: Well, the reason I ask is I, I've just had a number of friends think that they wanted to start a fund and then were disappointed that, that that wasn't actually what they wanted to do. Because I think building a fund is actually very different from say, angel investing. And you can actually angel invest and get more scale on that through running deal by deal syndicates. And that's maybe I'm putting a thousand dollars or $5,000 and having my friends co-invest with me. 

John: So that, that resonates more. So if that's more the direction, what would be the better language to be asking y'all? Like angel investing syndicate versus a fund. 

Elizabeth: Yeah. 

John: Okay. That clarifies everything I'm saying because that, that, that better describes what I'm talking about for sure. 

Charles: Yeah. I was gonna ask like what the motivate, I mean, I find that generally speaking, there's a couple of things when I talk to people who wanna start funds that are motivation. One is there's some set of people that you see that should be getting access to capital but aren't, and you've got a point of view on that. Another one is you just have access to a lot of great people who are already fundable and they're willing to take your money, which is also a perfectly legitimate reason to start a fund. The third one is you're trying to catalyze something that like just isn't happening. From what I hear you saying, it sounds more like you're kind of in a network and flow where you’re already seeing interesting stuff and this is an opportunity for you to kind of capitalize on that. So I'm kind of in the Elizabeth camp, it's easier to become more institutional and more complicated as opposed to starting off with sort of the most complicated thing, which is a venture fund that you have to make your full time endeavor.

John: Yeah. 

Charles: You have to spend a lot of time on it. Build all this infrastructure. I would start small and simple. 

John: Yeah. 

Charles: If you're gonna do deals and your friends want to co-invest alongside you. Try that for a while. It doesn't lock you in if you only find a couple things. If it turns out you don't like it, it is much easier to tweak and walk away from something that's a little bit less structured. Once you start a venture fund, you're pretty much committed for 10 to 12 years. 

John: Yeah. 

Charles: To managing that thing, whether, whether you enjoy it or not. 

Elizabeth: Well, I think the other thing that I was kind of getting at is, if you ask us to break down how we spend our time, I don't actually spend that much time investing as a fund manager.

John: Huh

Elizabeth: I spend time fundraising, I spend time with my LPs. I spend a lot of time on marketing. I spend a lot of time with my portfolio. Those are the investments I've already made. So you know, you're actually least incentivized to spend time investing. You know, probably if I had to stack rank what's most important, it's like making sure your existing investments go well, making sure your LPs are happy. And then marketing's really important and so. I think that's very different from Elizabeth as the angel. It's like, actually as an angel, I spend all of my time investing, right? I don't track my portfolio. I certainly don't have an audit on my own angel investments, right? I don't spend time on legal. I don't wanna say they're opposite, but actually they're very different. Even though people tend to think they're quite similar. 

Mac: It's like a lot of founders become CEOs 'cause they like building and then as the company grows, they realize they don't build anymore.

Elizabeth: Yeah. 

Mac: It's very much so the same thing as when you're building a firm, you're an investor, but then you're also a CEO of this company that you're building that you have to manage. And as that company grows, you get further and further away from the investing part. 

Paige: would push, I think there's like some fund models that don't make it so that you have to like build a large organization though. Say you do a fund one, you really like it, then you wanna build like an institutional venture firm, then you are raising from institutions who will likely require that you get audited. You’re building out a team, but there's also a world in which you keep a really small fund size. You have high net worth LPs who trust you. You don't get audited. So if your motivation is to like scale your angel, investing with your friends. Um, I ran four syndicate deals before I started our first fund. And one of the differences that I noticed was when you are pitching a syndicate deal, you're really pitching the underlying asset. So it's the, the company specifically. So you might have friends and family that wanna invest in like one area, but might not be so hot on the other area. And I think that the, the difference that I saw was that when you raise a fund, those LPs have not blind trust in you, but they have trust in your taste in deals. So it might allow you to do things that are a little bit more outside of their comfort zone and things that you want to invest in. So that, that would be like my pushback on the syndicate versus fund. 

John: Well, thanks for the, uh, time. Thank you. We really appreciate it.

Cyan: Thank you 

We’ll be right back.

Josh: Are you ready for this? 

Mac: No. 

Josh: David Sawyer asks, what is the company you most regret passing on? 

Cyan: Well, for me, that'd be Udemy 

Jesse: Mm. 

Cyan: I regret it. I had the chance to do the first check in. I hate to throw my husband under the bus, but it was one of those rare. Uh, times that he vetoed me.

Josh: No. 

Cyan: Yeah, really rare. He was like, oh, YouTube's gonna do this. And at the time he was convinced that, that it wasn't a thing. And I was like, no, it's a thing. And anyway, 

Josh: You wanted to do it.

Cyan: I did it once to him too. So we're even 

Jesse: What was that one? 

Cyan: Um, that one was Genie, which became Yammer.

Charles: Yeah, yeah, yeah. 

Cyan: And I, I was against family members getting put into a situation where they were suddenly having to talk to other family members they didn't want to. 

Charles: Yeah

Cyan: Because it was a social network where you would kind of build like Ancestry. 

Jesse: Yep. Yep. 

Cyan: And I was just like, this is gonna create so much drama in the world. I was like, no. But then it became Yammer. 

Josh: Mm-hmm. 

Cyan: Yeah. I was like, eh. 

Josh: Charles or Mac? 

Charles: Square

Cyan: Ooh

Charles: Square at 40 for like the first like institutional round. And my partner and I were like $40 million for like a payments company that like hasn't really processed that. And they only had the little dongle at the time. And I’m just like four like Jack's pretty impressive, but like 40 that, and we put in a bid on Gusto at 10 post and it cleared at 20 post and we're just like 20 post for a payroll processer. And almost all the clients at the time were YC batch mates. 

Jesse: Yeah. 

Charles: And we're just like, that's a lot of money for a company that basically is running payroll for YC. And it turned out, in the grand scheme of things, it was actually not a lot of money. So. Those two always will stick out for me. 

Mac: There's one that like I think about a lot, it's a company called Pay Hippo. They do, um, small business lending in Africa, and we saw them early on. I loved them in the first pitch and I brought them in to meet the team. The CEO was almost too deferential to the rest of the team, but the rest of the team was in Africa with spotty internet. So it made for a really bad experience. Ended up passing. Like two months later, they get into YC and every time I get one of their updates, I'm just like, this company's probably gonna be a good one. 

Josh: How about you, Jesse? 

Jesse: The two that come to mind. One of them is electric.ai. It was gonna be a service company that basically provided like AI powered IT support for massive companies. I came from that background, so I was like, bought into, I think you can automate all the roles that I used to do in my jobs. We didn't get there as, as a team and the company's gone on to be quite, quite massive. The other one was a company called Keeps, which is now, I wanna say it's called like 30 Madison, 

Charles: 20 

Jesse: or 20 something something. It's a number Madison, it's a direct to consumer healthcare company, ex Google guys. And it was just, you know, great idea. Not sure if there was a big enough moat, you know, if it was gonna scale. Turns out I was wrong. It's a billion dollar company today. And uh, it's taught me a little bit around just trusting my instinct on founders. 

Josh: Yeah 

Jesse: Don't worry about most of the rest, like if they're incredible sometimes you just gotta bet on them. They're gonna figure it out. 

Mac: This is why I only invest in dope founders. 

Charles: Yeah

I hope you enjoyed “the hot mic” - if you have a question for our VCs. Take a quick moment to submit your question at pitch.show/hotmic - that’s right, pitch.show/hotmic

We’ll be back next Wednesday with the season finale.