Samir Kaji’s Post

"~80% of Floodgate's returns were from companies that had some type of significant pivot", including Twitch that was over a 80x from a company that original was called Justin.TV founded by Justin Kan as a way to stream his life. Mike Maples, Jr joined me on a special podcast to do a deep dive on the observations that led to his release of his book Pattern Breakers (avaialble everywhere as of this week so check it out!). Venture is a power law industry, and the best companies often have founders that see into the future and build things that may seem silly at first. Instead of backing incrementalist companies, Mike talks about the core thesis around Pattern Breakers, including "Founder Future" fit and the need for investors to understand inflection points and unique insights in companies they look at. Full interview in the comments:

🎉 Today is a 𝐁𝐈𝐆 day as Allocate turns 3! 🎉 Below is a picture taken just one week after we closed our seed round. When we started Allocate, it was based on a decade long observation of the broken nature of private markets for investors. Our goal was to build a private market engine that drove the transparency, ease, liquidity, and access historically seen only in the public markets. It’s still early days, and like all startups, we've learned a lot from our customers, partners, investors, and each other along the way. Solving difficult problems is hard, and building a startup is an all-consuming experience—you wake up and go to sleep thinking about it EVERY DAY. Days blend into each other, highs and lows are the daily price of admission, and things usually take longer than you’d like. But these are all things you start to embrace, loving the thrill of building something that could positively impact many people. After 22 years working in the corporate world at organizations that, despite being excellent, I couldn’t imagine not working at a startup ever again. We’re excited to announce new products soon, and to date, we've been fortunate to grow with the support of: • 46 full-time employees • Over $33MM in funding, including M13 SignalFire Basis Set Fika Ventures INTERA Investments Broadhaven Capital Partners Gopher Asset Urban Innovation Fund Tusk Venture Partners Ulu Ventures Anthemis Group Bedrock Unshackled Ventures and so many others. • Nearly $750MM in capital deployed by users through Allocate (AUM/AUA) • Partnerships with over 65 unbelievably high-quality venture capital firms since inception As we move into our 4th year, we know the real hard work is just beginning and there will be lots of challenges ahead. We sincerely appreciate everyone who has supported us, especially those who were there at the beginning like in the picture below.

🎙 Excited to share the latest episode of Venture Unlocked! This week, I had the pleasure of speaking with TX Zhuo , co-founder and general partner of Fika Ventures I've always enjoyed the humility and hustle that he and the team have brought, and was so pleased that we finally got to record the pod together given his authenticity and openness to discuss hard things, including: 1) How it was so hard to raise their first fund, and what they learned from that experience (he came from Karlin which was backed by a single SFO) 2) Evolving decision making frameworks as a VC, and his thoughts behind consensus and non-consensus driven partnerships. 3) What does founder first mean to Fika, and how they strive to live this, not just say it. Tune in the comments to check out the latest (and if you like the content I have please subcribe to my newsletter)

The Adverse Selection effect in VC is a problem. Why am I seeing this deal? This is a question that family offices and individuals should always ask when they are sent VC dealflow Why? Well, adverse selection is a big risk in venture capital investing. As most know, the asset class has the highest dispersion of returns of any asset class. The difference between top quartile and bottom quartile has ranged from a difference of 15%-30% IRR over the last two decades. The “problem” is that VC still is still primarily insular. The best opportunities are still shopped in the circles of insiders (of course exceptions remain, and it’s dangerous to use absolutes, but it’s generally true). The firms and LPs that see the the highest quality deals consistently put in significant effort to ensure this. The problem that I’ve seen over the last 12 years working within HNW/FO circles, is that, especially with those that don’t have dedicated teams, strong networks, or an emphasis on VC, is that the quality of deal flow is nowhere near where necessary to get top quartile results consistently (w/o massive amounts of luck). During times like ZIRP where everything is working, VC may seem easy, but it in truth it's an incredibly difficult business to win. Quality deal flow, diligence, access, and proper portfolio construction are key to success. I can’t begin to count how many emails have been forwarded to me by FO/HNW about a direct deal SPV or a Fund opportunity that are anxiety inducing, and unfortunately there are many people that look to take advantage of investors. Some red flags to look out for: - Promises returns of (Insert some crazy number) - This person went to (Insert Ivy League school) and worked at (company), and therefore they are great.  - A bunch of logos/name dropping. I just received an email from someone that say “I have a hot opportunity with fund x, that’s backed by (names a bunch of individuals with big names” or Firm x has invested previously in (brand name companies). But when looking under the hood, they put in 10K in an angelist SPV or some secondary.  - Outlandish claims. “Firm performance is in the top 1% of all funds, and is looking for a [10x] return, and has proprietary deal flow.  - Rush to move quickly. “Need to get in quickly as its  getting over subscribed” Crazy fees. I just had a HNW send me a deal where the person was charging 2/20 for an SPV into another fund(!) - Generic charts of how VC outperforms other assets classes. In 2022-2023, I saw a bit less as many of these players started to retreat, but with the rise of AI and the public markets bouncing back, I’m seeing more of this. Getting quality deal flow in VC requires time. Time to build networks, time to diligence, and time to understand the asset class. It’s hard, and expectations should be tempered. Most importantly, be aware of the adverse selection effect. 

Fundraising tip for fund managers looking to raise in the middle east. Over the last couple of years, I have talked to countless fund managers who have gone to the Middle East to raise (Dubai, Abu Dhabi, Riyadh) given the amount of capital there. While there is plenty of capital, managers need to be aware of the realities. 1) Everyone has had the same idea and competition for capital has been sky high, especially during 22-23 when US institutions pulled back. Most of the top-tier firms have been out there many times or even have offices there. 2) Its not a place to fly into just when you need capital. You need to commit to being in the region and be there frequently and over a very long period of time. People are very much about in person relationships and building true, meaningful relationships that are authentic come first. This requires time and committment to the region. If you're not willing to do that consistently, then don't expect it to be a key area for you.

A big mistake LPs make when assessing GP commitment %’s The GP commitment is often a key heuristic in evaluating fund managers alignment. Occasionally, it serves as a key reason for a pass/go (it shouldn’t be the key reason, but that's for another day). The way GP commits are typically presented are as a % of a fund. I.e. a 2% GP commitment of a $100MM fund is $2MM. The higher the number, the more alignment the GP has, in theory. However, a more refined lens is needed. The % of GP to the Fund size is fairly irrelevant. What's more critical is the commitment to the GP net worth. Of course, that’s not something you can just easily get by asking, but a quick search on work history, past track, etc. can help with a general estimation. For example, I know an emerging manager whose GP commit was 0.5% and was raising a $15MM fund (Full time).  LPs pushed back heavily. The person came from no money and had little liquidity, had limited work experience, and was hiring a team member to help. $15MM * 2.5% (funds often have a higher fee during the investment period and drop off later) is $375K/year. Let’s say the team member makes $125K. That leaves $250K for the GP, any other management company expenses (Accounting, Space, filings, etc.). Let’s say that leaves the GP $200K before tax, or ~$150K after tax. With a 0.5% GP commit ($75,000) called over 4 years, it would have dropped the annual net cash income to the GP to about $130K. This person also had plenty of opportunities to join other funds or companies and could have made 2-3x the take home pay. Looking a the GP commit only as a view of misalignment would have been incorrect, and prevented someone with a different background from starting. On the other hand, let’s say a fund with 3 partners has a 5% GP commit on a $200MM. Great. However, one of the partners had a huge exit in the past and is likely worth more than $500MM. This partner is also 90% of the GP commitment (the other two partners are $1MM in total). Additionally, they use a fee waiver at 80%. This means that 80% of the GP commitment can be contributed on a pre-tax basis by a reduction of management fee collected (they will pay LT tax gains upon liquidity events). Who would you think has higher economic alignment? Finally, the GP commit is just one data point and should be used as such, however analyzing it correctly is key to creating relevance for the data point. Also, the illustration for above is for a Fund I, but later on, the analysis can be more complex.