Alchemist Accelerator's Head of Investor Relations and a LP's LP, David Zhou, on The Challenges of Early-Stage Funds - D.F.A., or Please Do... #17
Plus, how to cut 20 weeks of wasted time from your next fundraise!
When I think of who I would want to sit down any aspiring LP for my venture fund with for a cup of coffee, the answer is easy - David Zhou. His perspectives on the segment of the market that I invest in are easy to understand, smart and they make you look beyond the stuff you’re already reading and grow your skill set as an investor. Sometimes David’s interview answers can be a little bit dense but this one is a real goldmine. There is so much in here. This is going to be one of the interviews that especially venture capital investors come back to in the D.F.A. newsletter again and again. I really hope you enjoy this one, as well as the time-saving article at the end of the newsletter. We have a ton of great investor interviews lined up for the rest of the year, too. Also, David’s blog is a must-read - it’s one of the few LP blogs that I devour every post from.
1. Early-Stage Funds Focus: Since your insights are tailored to early-stage funds, what unique challenges and opportunities do these funds present in attracting LPs? How do you advise leveraging these aspects to build a compelling fund narrative?
I want to preface that I’m still early on in my own learnings about the world of early DPI/TVPI tracking. But I’m lucky enough to be surrounded by really smart and experienced investors to be able to come to these conclusions. And also that this is just one person’s opinion, and your mileage may vary.
Challenges:
Logo “shopping” – I’ll give three kinds, but the first two aren’t necessarily bad, it’s just that they’re not as unique as an emerging manager would expect.
Strong co-investors are table stakes. Unfortunately, that does mean, that is the slide, as LPs, we skim through the quickest on the deck, as long as you have those logos. As an early-stage venture fund, you’re betting on outsiders who will eventually become insiders. Not on outsiders who stay outsiders forever. So naturally, there will be increasing strong investor interest as your portcos progress.
Admittedly, there are certain individual LPs who are phenomenal brand names as GPs, and are serial LPs. Not a bad sign, and still great validation, but their names/checks may not hold as much weight as an emerging GP may suspect.
The biggest yellow flag (red flag for others) in the world of logo shopping is really including logos of off-thesis deals in the fund pitch. That could be the wrong industry, wrong stage, or just that you were part of a syndicate/SPV investment and that the founders don’t know who you are. Because you can trust that LPs will backchannel your deals. And the worst thing is if we ping the founder you’re referencing and they don’t know who you are or how you helped.
But additionally, the greatest vote of confidence you can get is if a founder you backed who went on to succeed becomes an LP in your fund.
Portability of track record – Not all of one’s angel/syndicate/VC track record is portable. For instance, if you’re building a marketplace pre-seed fund, your angel investment in Uber’s Series A round or your pre-seed investment in Stripe hold little weight. So, to close LPs, I’ve seen many emerging managers warehouse on-thesis deals from their angel track record into the fund to de-risk it for LPs.
Lifespan of track record – This matters less for a $10M fund, but more so for a $40M+ fund. As you’re pitching to larger LPs who write north of 7-figure checks, how long you’ve been an investor to see the effects of compounding matter. For larger LPs, usually been seeing them ask for at least 5-6 years of being an investor on the thesis you’re raising a fund on.
Pre-emptive mark downs – Anyone with a 50%+ IRR who claims that’s sustainable needs a reality check. 2019-2021 times have inflated our expectations of compounding, and we’re going to see a lot more down rounds, flat rounds, and folks closing shop. The sage advice in 2021-2022 was to have founders extend their runways to 24-36 months. And so we’re likely not going to see a lot of over-priced companies go back to market until late 2024 to 2025. Across multi-cycle investors, I’ve seen them preemptively mark their portfolio down by 30-50%.
Opportunities
Emerging managers regularly outperform. My suspicion is that emerging managers have that chip on their shoulder [Checks out - ed.]. They have something to prove to the world. They’ll hustle for deals. When founders pick who they want on the cap table, they want people who care about them and their space. Founders love to see the same voracity in learning and in curiosity in others just like in themselves. It’s why when I was a part of the On Deck Angels team, we saw so many operator angels/Fund I’s and Fund II’s win deals that larger investors lost out on. Although I will caveat that, the smaller one’s check is, the more collaborative people are. The larger it is, by definition, you’ll have to squeeze folks out of the round.
2023 and 2024 vintages are going to be awesome. Valuations, outside of Gen AI companies, are back to more realistic benchmarks. Reminiscent of 2015-2016 numbers. There is a hesitation from many investors to be investing, but it’s important to remember that the market you’re investing into is not the market you’re exiting into. And that holds for both bull and bear markets.
Many LPs (not all) see venture as a means to diversify across asset classes. Naturally they think a lot about funds investing in secular trends where there is little to no overlap in the underlying asset. So if you’re a fund manager fishing in a pond that others don’t fish in (i.e. geographic advantage, industry advantage, demographic advantage, or purely just betting on founders others aren’t), you may have a channel of deal flow that would be interesting to an LP. For example, everyone loves Stripe, but as an LP, you really only want to be in one, max two funds, who were investors in Stripe.
At the end of the day, it’s all about story. Are you the best $10M fund to return $30-40M? Is your strategy repeatable and consistent? Are you in the VC game for the long haul (i.e. 20 years, aka 3 funds -ish worth) or is this just a passion project? And what does your fund strategy grow into? Does it scale with check size? Will there be network effects?
As an emerging manager, just like a pre-product market fit founder, you don’t have many metrics going for you. So it’s about how you can tell a compelling narrative of the metrics you do have. I.e. graduation rate, quality of business, industry vision, are you seeing things others are not or are underestimating?
2. DPI Locking Strategy: How do you advise fund managers, especially emerging ones, to approach locking in DPI? What are the key indicators or thresholds that signal the right time to lock in, and how does this align with attracting LPs?
There’s no silver bullet here. There are multiple ways to make money. Even among LPs, we debate and disagree with what the right DPI model looks like. I will say my recent blogpost here covers a good proportion of what a GP might want to consider (i.e. overvaluation of asset, underlying asset growth rate, regret minimization framework, discipline of relative selection, etc). I will also stand by the fact that I am very willing to be proven wrong if there are facts/strong logic to support otherwise.
DPI is really an honest conversation you have with your LPs. How early do they want to see liquidity? What does their deployment schedule look like? How are they thinking about taxation and are they willing to sacrifice taxable gains for early distributions?
One last thing, I can see a case for emerging managers booking early DPI to help raise their next fund. Had a great set of conversations with Shawn at Parade and Ratan at Fort Ross about that topic as well which I transcribed into another blogpost.
3. Balancing Growth and Selling: Your insights on not selling fast-growing winners early, except in certain scenarios, are intriguing. How can fund managers communicate this strategy to potential LPs to build trust and alignment?
Realistically, I don’t think LPs are the problem. As long as you preemptively tell them that is the strategy of the fund, I don’t think most will mind. And even better, if you tell them from the very beginning before they invest, you’ll get alignment early. If there’s a strategy drift, it sometimes helps to have an LPAC to communicate that decision to the rest of the LP base.
As GPs, you need to agree with LPs early on, ideally before their commitment, of what your recycling period will be, and how they like to think about DPI. Some will choose not to take it for tax reasons and that they’ll need to find another asset compounding as well as your fund if they do get early distributions.
The bigger problem is with signaling risk.. It’s a conversation that you need to have openly with both founders and downstream investors. If you’ve lost all your conviction in the company, and plan to sell 100% of your position, there’s no way around it. It’ll be obvious. But if it’s not, and you’re only selling a minority of your shares, and this is a few rounds after you put the initial check, most investors understand that at the end of the day, you need to return capital to your LPs.
4. Conviction and Market Valuation: When considering selling a position due to overpricing or loss of conviction, what specific guidance do you provide to ensure that these decisions align with the fund's overall goals and LP expectations?
5. Adaptation to Market Dynamics: Given that investment decisions should be made in context with other moving variables, how do you advise fund managers to adapt their strategies in response to market changes? How does this flexibility resonate with LPs?
So I understand that it’s hard to predict the future, and there might be outlier scenarios all the time. But when setting fund strategy, I’m a firm believer that you need to have conviction in the market/thesis you’re investing in for the next 7-10 years, not just the next 1-2 years. Early stage investors, because they’re an illiquid asset class, must be betting on much longer time horizons than other asset classes. And because of that, changing fund strategies just as markets change doesn’t build much trust with LPs. Especially that in your strategy drift, you may end up overlapping in where you fish with another fund they’ve invested in. And if that’s the case, the likelihood of LPs re-upping may be slim if the other fund outperforms / stays more disciplined than you are.
LPs also understand that you’re likely to bet off-thesis every so often. And that’s okay. As long as it doesn’t exceed 10% of your portfolio. If it does, you need to communicate that ahead of time.
That said, if you are ever to change fund strategies, do communicate it preemptively and get your LPAC to be your champion.
11 Investment Firms! (It used to be 8!)
Lead Zeppelin now manages outreach for 11 investment firms! Some are VC, some are wealth management, some are private equity - we even work with a REIT.
The way investment firms work with Lead Zeppelin is simple. Clients choose a plan, and then every day they receive somewhere between .6 and 1.8 leads. These leads are typically LPs or family offices. The investment firms typically do a brief intake call to get to know the potential investor, and if it’s a good mutual fit, they continue the conversation.
To learn more, feel free to check out Lead Zeppelin’s pricing page or book an intake call.
Fundraising Reimagined: How Outsourcing Initial Outreach Can Gift You 20 More Work Weeks On Every Fundraise
Fundraising’s a critical yet often slow process for investment firms. The traditional model of fundraising involves lots of costs and inefficiencies that can drain time and resources. What if there was a better way? In this post, we'll explore how outsourcing your initial outreach can not only save you money but also gift you back precious time—equivalent to 20 more work weeks every year.
The Traditional Model: A Costly Affair
The conventional approach to fundraising is laden with expenses that go beyond the obvious. Here are the four main culprits:
1. Salary of the SDR (Sales Development Representative): An in-house SDR can cost anywhere from $46k to $92k per year, including bonuses and benefits. One year of this, with an SDR producing 45 meetings per month by month 4, comes out to a total of roughly 390 leads per year.
2. Salary of the SDR's Manager: Overseeing the SDRs is another salaried position, adding another layer of cost to the equation. The cost to oversee an SDR is roughly $36.8k per year.
3. Software Stack for Outreach: From email automation to data analytics, the software required for effective outreach can add up quickly. Typical software stack here is $1k-2k per month.
4. CRM Infrastructure and Dashboards: Building and maintaining a CRM system is not only expensive but also time-consuming. To do this properly with a good CRM consultant costs about $5k-7k.
5. Your marketing budget: Most investment firms put 7-12% of their revenue towards marketing. We’re seeing budgets of about $30k-200k per firm. Assuming that 50% of this is allocated towards LP acquisition, that’s a variable cost of roughly $39 to $256 per new meeting.
6. Total Costs: We’re seeing firms spending somewhere between 5% and 7% of their total budget to do this in-house
When you add it all up, the cost per investor meeting can range from $800 to $1200. That's a steep price to pay for a process that's essential yet fraught with inefficiencies.
The New Model: Efficient and Flexible
Enter our model—a streamlined, cost-effective approach to fundraising. We've eliminated or significantly reduced the four main costs associated with the traditional model. The result? You can secure an investor meeting for as low as $150 to $300. That's a fraction of the cost you'd incur with the conventional approach.
No Software Purchase Required
One of the standout features of our model is that it doesn't require you to purchase any software. We handle all the tech on our end, which means you save on software licenses, setup time, and IT overhead.
Contract Flexibility and Robust SLAs
We understand that fundraising is not a one-size-fits-all endeavor. That's why we offer contract flexibility, including a unique "pause clause." If you're highly successful in the first few months, you can freeze the project and restart it within 18 months. Plus, we never charge for overages. If we promise 12 leads a month and deliver 16, you're not billed for the extra. Our robust SLA also allows you to contest any lead, same business day, for any reason.
Seamless CRM Integration and Data Ownership
Our team integrates natively with popular CRMs like Salesforce and Hubspot. Plus, you own all your data and can take it with you whenever you wish. Check out our dashboard [here] for real-time insights.
---
Native CRM Integration: Salesforce, Hubspot, and More
In today's fast-paced business environment, seamless integration is not just a luxury; it's a necessity. That's why our team at Lead-Zeppelin.com is committed to ensuring that our services integrate effortlessly with popular Customer Relationship Management (CRM) systems like Salesforce and Hubspot.
Why is this a game-changer? Imagine having all your investor meetings, lead data, and communication history automatically synced with your existing CRM. No manual data entry, no fuss. This level of integration not only saves you time but also ensures that your data is always up-to-date, allowing you to make informed decisions quickly.
Key Takeaway: Our native CRM integration is designed to make your life easier, streamlining processes and enhancing efficiency. You focus on closing deals; we'll handle the rest.
---
Data Ownership: Your Data, Your Rules
We believe in transparency and control. All the data generated or used during our lead generation process is yours—no strings attached. Whether it's contact details of potential investors or communication logs, you have complete ownership.
What's more, exporting this data is a breeze. With just a few clicks, you can download all your data, giving you the freedom to use it however you see fit. This ensures you're not just renting your success from us; you own it.
Key Takeaway: Your data belongs to you, and we make it incredibly easy for you to take it wherever you go, ensuring full control and transparency.
---
Flexible Contract Structure: Designed for Your Success
We understand that the investment world is volatile and your needs can change rapidly. That's why we offer a unique "pause clause," allowing you to freeze and restart your project within an 18-month period.
Additionally, we have a no-overage charge policy. You won't find any hidden fees or surprise charges on your invoice. We also offer a monthly payment option to help you better manage your cash flow.
And let's not forget our "throw back" clause. If you're not satisfied with a lead, you can contest it on the same business day, as part of our Service Level Agreement (SLA).
Key Takeaway: Our contract structure is built around your success and flexibility, eliminating financial stress and making the process as smooth as possible.
---
Short-Term Commitment, Long-Term Gains
Our service contracts are designed with a 7-month period in mind. This short-term commitment offers a stark contrast to the long-term obligation of hiring an in-house Sales Development Representative (SDR).
For investment firms, this flexibility is invaluable. It allows you to test the waters without diving in headfirst. If you find that our services align with your goals, extending the contract is always an option.
Key Takeaway: With a 7-month contract, you get the best of both worlds—short-term commitment with the potential for long-term gains. It's a low-risk, high-reward scenario tailored for the dynamic needs of investment firms.
Absolutely, Adam! Let's wrap up this article with the remaining sections. Here's how they could look:
---
Robust SLA: A Safety Net You Won't Get In-House
When you partner with Lead Zeppelin, you're not just getting a service; you're getting a promise. Our Service Level Agreement (SLA) is designed to provide you with peace of mind. It covers everything from lead quality to response times, and yes, it includes the "throw back" clause. If a lead doesn't meet your criteria, you can contest it on the same business day.
Now, compare this with hiring in-house or freelancers from platforms like Upwork. While you may find talented individuals, the lack of a comprehensive SLA means you're essentially rolling the dice each time you bring someone on board.
Key Takeaway: Our robust SLA offers a safety net that you simply won't get with in-house hires or freelance platforms. It's a layer of security designed for your success.
---
Real-Time Insights: Your Personalized Dashboard
In the age of data, real-time insights are invaluable. That's why we offer a personalized dashboard, accessible [here]. This dashboard provides a real-time view into your outreach process, from lead generation to meeting schedules.
What does this mean for you? You're not just waiting for weekly or monthly reports. You can make data-driven decisions on the fly, optimizing your strategy as you go.
Key Takeaway: Our dashboard adds a layer of transparency and control, allowing you to monitor and adjust your outreach strategy in real-time.
---
The Time-Saving Aspect: 20 More Work Weeks
Let's talk numbers. By outsourcing your initial outreach to us, you could save approximately 20 work weeks per year. That's 800 hours that can be better spent on strategy development, due diligence, or even expanding your investment portfolio.
Key Takeaway: Time is money, especially in the investment world. Outsourcing your initial outreach frees up valuable time, allowing you to focus on what truly matters for your firm.
Conclusion
From seamless CRM integration and robust SLAs to real-time insights and time-saving benefits, outsourcing your initial outreach to Lead-Zeppelin.com offers a plethora of advantages. It's not just about generating leads; it's about creating a streamlined, efficient, and transparent process that sets you up for long-term success.
---
Ready to take your investment firm to the next level? Get in touch with us today to learn more about how our unique model can benefit you. Don't just chase leads; let us bring them to you.
Discover how outsourcing initial outreach with Lead-Zeppelin.com can save investment firms time and money. Our model offers seamless CRM integration, robust SLAs, and real-time insights, freeing up to 20 work weeks per year for strategic focus. Take control with flexible contracts and data ownership.