Podcast Transcript: Sheel Mohnot, Better Tomorrow Ventures, on 20VC w Harry Stebbings

14^th July 2023 | Link to podcast

Good fun chat between fintech investor Sheel Mohnot, also one of the more colourful personalities on startup twitter, and 20VC host Harry Stebbings. Sheel is forthright with his takes and perspectives covering topics such as why he thinks there is no right way in venture (many paths work per him), why the venture industry would be better off with reduced fund sizes across the board, why he belies multistage investors investing at seed stage has corrupted the seed market, why not following on is a wrong strategy, why emerging markets investing is dead, why the cardinal mistake of investing in emerging markets is overpaying, why he thinks VC value add (beyond hiring help) is bullshit, his single biggest investing mistake (not exiting more positions via secondaries) and why GP commits are a big source of misalignment between LPs and GPs. Phew!

One of my favourite sections is where Sheel describes how they raised their funds, going into arcana such as the timing of the first close, how to put pressure on LPs to commit, LP concentration etc. Delighted to see more and more fund managers such as Tom Tunguz, Rob Go, and Sheel open up about the intricacies of and specifics around fund raising.

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Harry: Welcome back. This is 20 VC with me Harry Stebbings, and this was such a fantastic fly on the wall discussion with a guest that I was thrilled to welcome to our studio in person in London, Sheel Mohnot. Now Sheel is the co-founder at Better Tomorrow Ventures, a $225m fund that leads rounds in pre-seed and seed stage Fintech companies. Sheel and Jake Gibson, his co-founder invested for many years together before founding BTV into companies like Mercury, Flexport, Ramp and Hippo Insurance. As for Sheel before BTV, he ran 500 Fintech for close to seven years and before that was a founder himself founding two companies, both of which were acquired.

Sheel, I am so excited of this. We got to do this in person.

Sheel: It’s amazing. I’m stoked.

“No one in venture knows what they are doing”

Harry: I mean listen, you are so much better looking in person, but first I want to start with a little bit on you and for those that missed our first show, how did you make the foray into Venture in a very succinct two to three minutes?

Sheel: Yeah, sure. I had always wanted to be in business. For those Indian people, I’m a Rajasthani, and I didn’t know what to do but I always was tinkering with ideas as a kid. Always had a bunch of small businesses. Then I went into the corporate world, I was a management consultant. Then a buddy of mine was leaving to start a company and I joined him and then we sold that company in 2012. 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 when I was fundraising and the smart ones is sort of what I was thinking [sic] and of course now I know better now it’s the other side of the table, it’s the founders that are the smart ones but it’s possibly just like anyone across the table from me is smarter than me.

Harry: I’d love to hear if you could go back and call yourself the night before your first day as a VC and say you should know this going in, what would you say to yourself on that call?

Sheel: I would say no one knows what they’re doing and say.

Harry: Do you believe that?

Sheel: I do. I feel like the more I’ve gotten into it, the more I’ve learned there’s no right way to do it. There are so many different strategies that can be successful. People can be very prescriptive and say this is the only way to do it or this is the only way to do it. You see that in so many different arguments. We were talking about the remote work argument. So, you can say the only way to do it is five days a week in person and if you don’t do that you can’t be successful. But there are clearly companies that are successful that are remote and now it is actually my preference that companies are in person but I can’t mandate it. I don’t mandate it because we’ve seen too many success stories that aren’t all in person.

Harry: I didn’t really sit down with your Bill Gurleys of the world or your Pat Grady at Sequoia. Yeah and you’re like they really fucking know what they’re doing. They do. I’ve kind of pushed back on that because I think it’s an easy trope to be like, oh no one knows what they’re doing and it makes us feel better. But no, they do and actually that’s often why they continuously have the best returns.

Sheel: So, I’ll push back on that. So, with Bill Gurley in particular, let’s say Pat I haven’t spent much time with recently but with Bill, I was talking to another one of his partners about their meetings. 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, they couldn’t come to a conclusion about what was right. It’s like there are ways that you can invest but actually knowing what to invest in or what a mode is [sic], people are still figuring it out and even if you look at the greats, they have a bunch of misses and they have a bunch of companies that you say, why did you do that? It didn’t make sense. In hindsight…

Fund sizes should get smaller

Harry: I mentioned Bill Gurley, and Benchmark is kind of famed for their discipline on fund size. Totally. You said before that fund sizes should get smaller.

Sheel: Yeah, I think we are operating in a crazy prisoner’s dilemma situation where there’s a bunch of capital that wants to go into venture still and if you increase fund sizes, the industry as a whole needs to return a lot more than it probably will. And so if everybody reduced fund sizes then we would probably be operating at a different level. We would be investing at lower valuations and it would probably be better for everyone. Instead, we’ve got this continual upward march of fund sizes. When you have a bigger fund size you become relatively agnostic about the price you pay.

Harry:  So, if we just break that down before we can move further in that argument, do you think that actually, LPs are still in the market? And you hear continuously about funds that are struggling to raise whether it’s the large $20 billion PE firms or actually it’s much more micro firms across the spectrum. People are saying LPs have withdrawn or retreating in the last year?

Sheel: Yeah, I think there are LPs that have withdrawn quite a bit but then you see everybody’s in Saudi Arabia right now. I have no strong viewpoint about whether you should take money from there or not. We haven’t, but I think it is very hypocritical that all these folks who are anti-Saudi money are now over there just praising everything.

Harry: So, we have that on the LP side. Agreed. We do have funds that are starting to reflect what you say. Founders fund halved theirs. Yeah, exactly. Do you think we’ll see more?

Sheel: I think we’ll see more. I think we have to.

Harry: Why would managers do it if you think for them it’s a loss of fees? it’s not in their interests.

Sheel: It depends. If you’re fully returns focused, it could be in your interest. A lot of the large funds have gotten so large that they’re really more management fee focused than they are returns focused. But for the returns focused funds and if you talk to Founders’ Fund, that’s what they say was the reason they did it. They felt like $1.8b was too big, they wanted to go to 900 because they wanted to stay focused on returns and they felt like that was a better size.

Harry: Do you think we’ll see funds give back funds?

Sheel: I don’t know. I don’t think so. I know that that’s happened in the past. I just don’t see it happening this cycle and probably if it were to happen it would’ve already happened.

Portfolio construction math at BTV

Harry: So, now how big is the latest BTV fund?

Sheel: So, we’re a $150 million seed fund in a $75 million opportunity fund.

Harry: I was with an LP last night and they said that when you do outcome scenario planning on a $150 million seed fund, but I actually did $125 million and they were like way too big. Way too big. How did you feel about your fund sizing on that?

Sheel: We went from $75m to $150m. I think for us it was more about how many cheques do we want to write, what’s the size of those cheques and what’s our follow on strategy. Now we raised over a year ago, and part of the reason we increased was that in fund one, pretty much every one of our companies raised a follow on round quickly after we invested and we were almost forced to do that follow on round. If you lead the seed round and somebody good is following on, you kind of have to follow on. So, our first check to follow on strategy was totally out of whack because we didn’t have enough data, but you have a great fund leading the next round at a huge markup.

Harry: Do you not do the strategy of, hey, you know what we lead and then we’re totally aligned to you and want the best for you, but we don’t actually write anything beyond our first cheque.

Sheel: You can do that. For a fund like ours it doesn’t really make sense. For a lead investor it doesn’t really make sense because what ends up happening is some companies need more capital, not the ones that are killing it. The ones that are killing it are able to raise easily, but there are other companies that are doing well but need a little bit more capital and you have to put more money into them doing well but not well enough to raise the next round. And we’ve had companies like that that ended up being super successful. One of the companies recently we led a seed, we put a little bit more money in six months ago then they just raised at a $100m valuation from Andreessen. We’re really fortunate that we put that a little bit more money in. If you don’t do the follow-ons, if your strategy is just to do one check but you have to do some follow-ons, then you end up not following under your best companies, you end up following on when you have to, which can be your worst companies.

Harry: I think follow-ons is actually just an inherently hard strategy because it assumes that you can essentially predict your winner so much sooner than I think you actually can. I think me and you both been in this long enough were actually my winners are ones which I would not have put as winners first and my winners are definitely not winners.

Sheel: So, that’s true, but you do know your losers, so I know companies that I don’t want to invest more into because the founder doesn’t have a sense of urgency.

Harry: But actually the losers are the same as the slow burners that go nowhere to a north of 0.5x to a 1x.

Sheel: I would say there are companies that I’ve had where I just know there’s very little chance I’m going to put more capital into it.

Harry: Do you tell ’em then? But it’s hard. You don’t want to burst the bubble of confidence and hey, by the way, you are struggling and I’m not going to give you any more money. Oh thanks Sheel.

Sheel: No, I wouldn’t. So, it’s not necessarily that. Sometimes it’s like the market hasn’t developed the way we thought it was developing. There’s an opportunity to pivot and sometimes they take that opportunity and sometimes it works, but if they don’t do that, then there’s little chance that I think the market hast developed the way we thought it originally was. So, for example, we invested in a company in Southeast Asia that we were betting on the fintech market in Southeast Asia getting much bigger in a way that hasn’t really developed. So, then we have to think about, okay, unless they pivot into serving a different type of customer, we can’t continue to support them.

Investing in emerging markets

Harry: I totally get you mentioned Southeast Asia there. We both did forays into emerging markets. Yeah, you we’ve spoken a little bit before on emAIl [sic] actually before this about the death of Fintech. I think first it’s like the death of emerging markets in a macro downturn, everyone pulls back totally more than ever before. It’s emerging markets investing is pretty much dead.

Sheel: It’s struggling for sure and the more emerging you go, the tougher it gets. So, in a low interest rate environment, money’s free and you’re searching for more risk and you go to emerging markets and a lot of people invested in a lot of places that they’d never been, didn’t know much about. Now people are coming way closer to home, but I still think there’s opportunities in emerging markets and we still continue invest in emerging markets but probably less than really far out.

Harry: What was some really far out, just so I understand that.

Sheel: I think people have invested a lot in Pakistan, Bangladesh, parts of Africa, they will continue to, there are still good companies in these markets. They are great companies & will continue to raise money, but I think what had happened was there are a handful of great companies; a lot of people who had never invested in these markets before started investing and then instead of just putting money into the handful of great companies, the hundred companies after them that weren’t that great also raised money.

Harry: But even the handful of great companies, if you do not have a liquidity mechanism can’t get cash out if they work out. Go to Pakistan, go to Bangladesh, where are you going to go public totally. You going to come to the Nasdaq? I don’t think so. It was a real lesson for me. We spoke about what you wish you’d called yourself when you started or whatever that shit question was. I asked, I’d changed slaughter as an interview [sic] but I wish I’d really, really actually listened to people when they told me that when I invested in Pakistan. How do you think about that lack of liquidity mechanism?

Sheel: Yeah, I think first of all I think it can’t happen. It’s tough, but for a true company there’s always going to be an option.

Harry:  Is there an example of that?

Sheel: In Africa we’ve had liquidity. We’ve had companies that went public and…

Harry: On the Nasdaq or?

Sheel: I think we’ve had companies that went public on the Nasdaq from Africa you could always have made that claim about LATAM and then we had companies, we have Nubank, super successful company. You could have made these claims about different markets that ended up maturing and building a robust market. Now what happened that I think was totally shitty in 2021 was you weren’t getting an appropriate discount. 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…

Harry: …and we were paying prices that were akin to developed markets.

Sheel: 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.

Harry: You said back home, Nubank, that’s kind of it. That’s the local [sic], which is like a $7 billion company.

Sheel: Well now, it’s probably a lot lower after that. There was a short seller report. I think it’s a few billion now.

Harry: We had ______ on the show so maybe I want to be nice but wherever they are, if _______ fantastic but there’s like two or three [examples of emerging market firms that went public or gave liquidity].

Sheel: Yeah, there aren’t that many.

Harry: To build a firm on the back of that for sure would be a tough sell. Totally. Like for you, when you and Jake sit down, do you guys go, shit, we’re going to have a lot of hungry mouths to feed in emerging markets?

Sheel: 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.

Fintech is getting back to sanity

Harry: Okay, so we mentioned geography; obviously BTV has a big fintech focus. It’s not AI, is it? I mean that’s just being honest.

Sheel: Should everybody just pivot to AI now?

Harry: Why not? I feel this is happening.

Sheel: Running this ………

Harry: My favourite is the way we shit on these companies Facebook so far and Google. So, Google with AI so far behind who are these guys release bar? [sic] Everyone’s like, I knew they were coming, I knew they were coming. But same with Apple and AI, it’s like what are Apple innovating on? They do it. It’s like AI question for you though, how do you think about the negativity towards Fintech today and respond to that.

Sheel: Yeah, sure. So I’d say from 2016 to 2021 there was this crazy upward slope of trajectory of fintech companies. If I’m being honest, 2020 and 2021 were just like over-hyped that upward trajectory, that chart of e-commerce, like it went up and then it went crazy hockey stick and then it went down. But it’s still continuing on that same trajectory. I don’t think fintech’s dead. I think we’re just back to where we were a few years ago.

Harry: Is it better for you now because there’s much less competition?

Sheel: I think so, yeah. So, less competition for capital but also less competition for companies. In 2020 – 2021 every company we funded, there were five companies just like it. Also with great founders, with great investors. So, what ended up happening is a bunch of capital went into these companies, five companies serving the same customer set. That’s a lot of competitive pressure and nobody makes money because you’re all price competitive and you’re all serving the same customer set that now is comparing against others. Now we’re in a much better place and the people, that incremental founder that was building in Fintech because it was cool, is now building a gen AI tool and that’s great.

Harry: On the venture side there. When we think about next 10 years of venture, how do we think it changes? We mentioned Andreesseen and earlier we mentioned Benchmark. How do we think about what venture looks like in the longer term and who the winners and who the losers are?

Fund sizing, management fees and platform services

Sheel: Well right now it seems like we have these super big funds. 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, if you think about these huge funds, just getting returns on these huge funds is really tough. You’re really only shooting for $10 billion plus outcomes and then I don’t know how many of those there are going to be.

Harry: But if you actually project that your _______ NEA’s [sic] as well at $3 billion you have a $10 billion outcome and you have 10%, which is pretty good.

Sheel: Pretty good, but does it return your fund?

Harry: Fine, but that’s a third.

Sheel: Yeah, I don’t know how many $10 billion outcomes there’re going to be like if we’re honest. In 2021 it looked like there were a tonne of them and now those companies aren’t looking so hot so I don’t know how often there’s going to be a $10 billion outcome.

Harry: So, what happens with those funds?

Sheel: I think it’s tough. I think they have to shrink if they want to be returns focused.

Harry: Do they or actually do they just move into a different class of LP because now they’ve moved away from your family offices, your universities, it’s now like the biggest of the biggest sovereign wealth funds.

Sheel: Totally, yeah. But those guys also at some point want returns. So, in that vein we actually don’t pay ourselves as much as we could. We actually don’t even take full management fees.

Harry: What do you mean you don’t take full management fees.

Sheel: So, now we have $300 million AUM, we could take 2%, which is $6 million to run our business. We actually take a much smaller amount and return it to LPs. We just wanted to be returns focused and the more money we have to invest the better.

Harry: So, I would argue, and I’m being deliberately divisive here, but I would argue that is shortsighted because you can invest in your firm at a much more efficient rate that will deliver outsized returns with that $6 million.

Sheel: So, we think we’re investing as much as we want. We like the lean team, we have seven people and we think we’re doing everything we want. The reality is most other managers, it’s not actually investing in their firms. It’s like if we wanted to, we could take a $2 million salary each and have that’s 4 million bucks, then we still have 2 million to invest in building the firm and that’s actually a lot of money. So, instead we don’t want to be fat and lazy is basically what it comes down to.

Harry: I think a lot also spend money on VC value added services, which then they can use and sell to get subsequent LPs. Do you believe that these venture value add platforms actually add any value?

Sheel: I’ll say we recently won a highly competitive deal and a big part of it was actually we’ve landed several high quality candidates into our portfolio and they were like this is the hardest thing and these guys have helped us with the hardest thing that we have to do find talent. But generally I’ve heard the same thing where people say it’s all bullshit.

Harry: What do you think are the biggest misconceptions about venture?

Sheel: Oh man. A lot of people think it’s a very easy cushy job, but I think especially when you’re starting out it can be very tough and I think there’s a big divergence among managers. It can be an easy cushy job at some of these big funds, but for the manager that’s just starting out, it can be tough. You can be investing more into it and not getting paid for quite a while before you end up.

Raising the first BTV fund, and then Fund II

Harry: Well talk to me on the first fund, did you have an anchor?

Sheel: No, we had no anchor. So, there was fund ‘0’ my $15 million fund then fund ‘1’- $75m, and we had no anchor in the $75 million fund.

Harry: How did you know about that man? Was it friends and family first? Was it institutions first?

Sheel: Yeah, so our first close mainly friends, like people who knew us in the Fintech ecosystem who were willing to back us just because they’d seen us in the ecosystem and then we had one institution of Cendana.

Harry: What does that get you to the friends and family still there.

Sheel: So, it got us to 18 million and it’s no family, families have no money.

Harry: …so, they took you to 18. It was good but it’s not near enough.

Sheel: Not near enough, but we had Cendana in the first close, which was wonderful.

Harry: Do they help a lot having an institution like them or?

Sheel: I think it gave some credibility. Yeah, I think also just having a first close gave a lot of credibility and we’d done our first investment we were investing, we’d had a first close.

Harry: How big did you do for the first close? $18m. That is a really early first close.

Sheel: Yes. An early first close now part reason why we did the first close is we had a company that we had to invest in. We had committed to this company in September. We said we’re going to lead your seed round, but we actually didn’t have a fund at that point and so we had to close as soon as possible so we could fund that company. The company was Unit. A banking as service co. Yeah, it was amazing because that company has been super successful. I think the winner in this banking as a service space.

Harry: Okay, so you closed on $17-18m, there was that right in hindsight, would you advise managers just close as soon?

Sheel: Just close as soon as possible. Then LPs can take you seriously because you have a fund and you’re investing.

Harry: But true. But then how much was that first check into Unit? Because if you close on $10m and you want to do $75m, if you come to lead a seed round with one or one point five, you’re putting 15% of what you’ve raised out the door in the first go.

Sheel: Yeah, I think we did a first call of 10%, which is a lot, but it was fine. And then once you do a first capital call of 10%, we were able to get a line of credit so then you can take more on the line of credit.

Harry: Totally get you. Okay, so you do the first close is on 17-18? Yeah. What happens then?

Sheel: So, then we were feeling pretty good. It was December of 2019 and so we’re like, alright, we’re going to do a second close. We decided March of 2020 and we felt like we had a bunch of folks committed. We did one road trip, we went out to the east coast from San Francisco. Jake and I went out the second week of March, 2020. When we flew out there, things were fine. All of a sudden everyone cancelled all the meetings, Covid started, the NBA shut down. Everything happened and it was basically a totally wasted trip and we came back on a completely empty flight. There were 10 people on a flight that would hold 200 people and this close that we were supposed to do in March, everyone who had already committed, including people who had signed, backed out. So, we were like, shit, we don’t have a fund. The world is melting, the world is falling apart, the stock market is going strictly downwards. People were like, I can’t invest in your fund. I don’t know how much money I have. I dunno what’s going on in the world. Totally get it.

Harry: So what do you do? Then you get back and you’re like shit.

Sheel: So, we’re at that point we were shooting for $60 million fund. We sent a letter to LPs saying, you know what, we’re going to go for 30 to 40. We said all these things that in hindsight were wrong, which is we thought valuations were going to come down, which at the time it seemed like that was going to happen. Of course, actually, the opposite happened. So, we said we’re going to do a smaller fund and then what happened was, in May interest rates go down, money printer goes burr, everyone came back and even folks that had said no to us came back and said, Hey actually we were looking at the managers that we spoke to, we’d like to talk to you again. And several of the folks that said no to us actually came back and came into the fund and we ended up with a pretty institutional fund.

Harry: Did it get easier? Everyone was always like, oh, when you get to halfway, people really get around the table.

Sheel: It did get easier.

Harry: It did? At what point?

Sheel: And so our target was $60m, we ended up going to $75m and even at the $75m we had to push people down from what they wanted to invest.

Harry: When did it get easier? Was there a tipping point?

Sheel: I think it was when we were over half. We got a few of these institutions in.

Harry: Do you find names helped?

Sheel: I think names probably helped some of them. We have I think several of the very good fund of funds that invested in us and we have a university endowment and others and I think all of that helps.

Harry: What was the single best LP in ______

Sheel: Fund II we raised in December 2021, the whole process only took a month. For fund two, we had a bunch of folks who knew us by reputation, they talked to other managers about us, they knew companies in our portfolio well, they tried to invest in them or whatever. So, there were folks who were literally just checking the box by talking to us and in a 20 minute meeting they’re willing to commit large sums of money. So, double digit millions because they knew us and I get where they’re coming from. They know us by reputation. They’ve spoken to other managers who sit on boards with us or whatever. What more do you need?

Harry: How did you instil a sense of urgency in the fundraise where it was a case of really committing to a closed date and getting LPs to move in unison?  

Sheel: So, in fund one we tried to do it and frankly it didn’t work.

Harry: Hard. It’s hard.

Sheel: Yeah, it was really hard.

Harry: You also, it’s really hard cause you don’t want to force them to a no, but you also don’t want to say a month where it looks like you’ve got too much time and then they don’t move to it.

Sheel: So, there’s no easy way. I think you give them a date and then odds are they’re going to be okay. I know that date doesn’t matter because if I want to invest, I’m going to be able to invest. And so that’s what happened in fund one. It took a while, so it took us about a year from start to finish; and fund two was very different. There really was much more demand than we had space. We told our existing LPs in fund one to commit to us by this date. All of them came back and committed by that date. We were actually kind of surprised.

Harry: By them sizing up.

Sheel: We didn’t know that that was going to happen and it actually caught us by surprise and screwed us up a little bit in some ways. We had intended on running a process and we’d spoken to a bunch of LPs and actually told these LPs, you have plenty of time. And for some LPs like university endowments, it just takes time. It takes a few months. They have a different IC process and we told them like, yeah, we’re meeting now, but don’t worry, we’re going to raise in Q1 and you can commit to us by March. What ended up happening was we closed everything in December and we did it all pretty quickly. Part of 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 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.

Harry: How would do you advise managers on capital concentration on a per LP basis?

Sheel: 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%, so some folks had wanted to do larger cheques and we pushed them down.

Harry: Do you have an LPAC?

Sheel: We do, yeah.

Harry: Who’s on the LPAC?

Sheel: 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 we launched this accelerator recently when we launch the accelerator, we said, hey, we should get their approval and so we talked to them.

Harry: Why did you launch an accelerator? This seems like the worst time to do an accelerator. Respectfully.

Sheel: I think it’s the best time to do an accelerator number one. So, I ran an accelerator from 2016 to 2018 and that fund has incredible performance. More important than that, founders that we backed back then in the accelerator said, Hey, my friends are starting a company, what’s the closest thing to what we had? Which was in person, super hands on. So, we had experts in growth marketing, recruiting available to them. The answer was there’s nothing like it. YC is a totally different beast, but it’s really built for scale. Some of our portfolio companies that went through YC said they didn’t really get the support in fintech that they needed. They have a generalist mentor who doesn’t know anything about fintech and so they would be asking these questions and they had no idea what to do. So we felt like, oh, there’s an opportunity here. Once again, people are asking for a Fintech solution and we can give them that. In 2016 to 2018, I did it five cohorts. I was investing two and a half million dollar then and we have five companies that are more than 70 x. So, we did five cohorts of six to 10 companies. Out of all those, so say it’s like 40 companies in total. We have five companies that are delivering more than 70 x return. We have DPI, we have returned the full fund.

On DPI (Distributed to Paid In Capital, or how much of LP money you have returned to them)

Harry: How do you think about DPI? Again, I’ve spent some time with different LPs over the last few days and they’re like any manager who had the chance to return DPI and didn’t over the last few years, you’re in trouble.

Sheel: 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 to and we did. But we did sell. We did sell, yeah.

Harry: How do you advise on selling, in terms of take 30% off the table and just protect your initial position but ride the upside, or take the majority off, take all off.

Sheel: 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 and if you can return an entire fund, there’s something about having 1x DPI that’s quite nice. If you can get to a point where you can return 1x DPI and still have upside in the company, that’s great. Ideally, if you’re still excited about the company, you want to keep half of your capital or half of your equity still in the company.

Harry: What would you say is your single biggest investing mistake?

Sheel: 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.

Harry: And why did you not?

Sheel: There’s one company I’m thinking of that could have returned multiples on the fund and in between when I had started to discuss taking money off the table and when we had finally the documents, it took a few months and during that time this company grew so much and they were like, you know what? I wouldn’t sell at that price. They told me, we’ll get this through for you, but I wouldn’t sell at that price given how much we’ve increased in value. And they were like, we’ll probably do another round in the next couple months. You might want to wait. I talked to the founders and they were like, you might want to make wait. We might be worth double what you’re selling at. And so I did that and then of course they never were able to, this is beginning of 2022, the market started tanking and they were never able to get that round done that they thought would be a double.

Harry: Do you find it difficult? It’s quite a tough conversation. Hey, I love you, I love you, I love you. I want to sell my whole position in your company.

Sheel: We haven’t found it difficult in the selling. Well, we said we’re at a point where we’ve invested for so many years in this company, we want to start reducing our position and founders get it. It’s not a big deal, especially back then when there was way too much demand for every round of the company.

Harry: Okay, so that’s your one mistake. When you look back at the last 24 months, what’s the biggest mistake you’ve seen other investors make in the industry?

Sheel: 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, units of banking as a service company. A lot of folks looked at that company and sai, we love this company, but they couldn’t invest. They ended up investing in another company in the same space and that was just a mistake. Invest in the best company, not in number two or number three. And a lot of those haven’t have shaken out to not work out that well.

How Sheel thinks about early stage picking

Harry: Founder, product, market, how do you weigh them up?

Sheel: So, we invest at super early stages. It’s all about the founder. Three of my top five companies were pivots.

Harry: I had a guest on the show the other day and they said there’s an inverse correlation between a founder’s ability to sell the vision, sell to customers, whatever, and their ability to operate and build.

Sheel: 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. And then in the end, that competitor tanked. Our build [sic] guy who never was a great fundraiser ended up doing well. One thing about this founder versus market, there’s a Warren Buffet quote that everybody likes to reference, which is when a great founder meets a bad market, the market wins. And so he says that, but one of my favourite stories is Rose Blumkin. So, there was this woman who came over from Belarus.

Harry: This is one that doesn’t speak a word of English?

Sheel: Doesn’t speak English when she comes over, she starts a furniture store in Nebraska, Omaha. Originally in their basement, then it grows and grows and grows. She didn’t even go to school, she never even went to kindergarten, but she’s just got such a mind for business. She continues to grow this thing incredibly. He eventually buys it, 90% of it for like $60 million bucks or something. It was actually the largest acquisition that Berkshire had made at that point. Her kids end up kind of pushing her out the business. She’s 95 years old at this point. And actually what’s really funny is they pushed her out of the business in part because they were fighting over the control of the carpet department. She said, I never want to let go of the carpet department that’s going to be my thing still. And they were like, no, you should get out of here and they pushed her out, her kids. And then what she does is six months later she opens a place across the street from them, literally a furniture store competing with them across the street. It’s called Mrs. B’s Furniture Clearance Market or something like that across the street from the Nebraska Furniture Mart. And then eventually Warren Buffett has to buy that one too. And then he puts a non-compete clause in there that whatever, 96 years old is not going to compete with him again.

Harry: And to your point is her.

Sheel: And what he said about her was he said I would back her in anything she did, any business she wanted to go into, she would be successful. And so it is actually a counter. It’s a great founder. She would be successful at anything she did.

Harry: Have you ever had a really not good founder win?

Sheel: Yes, but it was an interim win. It was a too-early win. I’ve seen in my Angel Portfolio, a founder that I thought was just okay, ended up getting to an exit and I think if they’d continued on the business it wouldn’t have been that successful. And that happens all the time. You have companies that are successful up to a certain point. The worst company gets an acquisition, the better company sticks around and then they go public and then totally tank. It’s happened many times in the past few years.

Harry: What are the biggest reasons for you why great founders fail?

Sheel: 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. Yeah, I think you have to come to a point, and this is actually where VCs actually can be very value additive, is to say we should think about a different business and make a plan. So, actually I have this going on with one of my portfolio companies, now we have a plan and if we don’t get to that plan in the next two months, we’re going to think about a different company. We’re going to pivot. We have years of runway. But the current thing, it’s working a little bit. There’s signs that it’s working, but we worry that even if it’s working, it’s not going to get to a huge business. We’re going to test this out for a few months and we’re staying close on it as investors and if it doesn’t work, we’re going to pivot.

Harry: Do you worry about the length of runway some companies have, I have some companies and they’re like, they’ve got 60 months and it’s like we do. Yeah, honest urgencies, but do you worry about that and what happens?

Sheel: I think bad founders raise a tonne of money and spend it. Great founders raise a tonne of money and still have the same sense of urgency. Still are on the same roadmap as if they’d raised a much smaller amount.

Multistage funds and the seed market

Harry: So, I say always on Twitter, honestly, there’s so much hate and it’s probably why Andresseen hates me, but $5m on $25m ($5m round on $25m post) I think has destroyed much of the seedings totally. But everyone goes, if you get great founders, I’ll raise 5 on 25 and spend like they have 2. And I’m like, it’s so lovely idea. I love it. Yeah, you are right. And if you do that then I promise you are right.

Sheel: Yeah, it’s actually almost impossible because what happens is if you raise five, the expectations people have for salaries are different than if you raise two. It’s basically impossible to have the same mentality as if you raise two. Absolutely. And I agree with you completely. Raising big rounds makes people cushy. You end up attracting people with salaries that they could have gone into a big company. Actually they belong at a big company.

Harry: Yeah, they do not belong in your startup.

Sheel: They do not belong at a hard scrap, hardworking, scrappy startup. I completely agree with you.

Harry: Do we see them continue or do they go back? We could always see multi-stage come in and out of seed. Are they here to stay?

Sheel: A lot of the multi-stage stuff is quite dumb. A lot of these folks have invested like million dollar cheques and letting their junior team invest million dollar cheques in anyone.

Harry: It’s a learning cheque.

Sheel: It’s a learning cheque. But what happens is my portfolio company that is working is raising a series A or series B. They don’t want to talk to that investor because that investor invested in a million dollar in their competitor. That competitor is almost dead anyway, but they’re like, fuck them, I’m not going to talk to that guy. They invested a million dollars in my competitor and so they missed the opportunity to invest a hundred million dollars in a great company that is winning the category because they invested a million dollars in their competitor. So, I just don’t think it makes sense for a multi-stage fund to do it, especially in a category where there are multiple competitors. Why would you invest when you know that you might have invested in the wrong one and that prevent you from investing in the good one?

Harry: When you think about the multi-stage strategies coming into seed, who do you think has done at the best?

Sheel: I can’t think of any multi-stage fund that I feel, has done a great job at Seed.

Harry: I always think Founders Funds are pretty good at seed actually.

Sheel: They do a lot of seeds and they have had good success. My friends at Accel have done a pretty good job. I think the folks that have done the spray and pray approach is very bad and people go in and out of it. So, Andreesseen did a lot of it early on in Andreesseen Horowitz’s tenure, and then they stopped doing it and they started doing it again and I would guess they stopped doing it now.

Harry: We’ve seen also large seed funds. I think True Ventures is the seed fund was 700 million. Yeah, maybe split across some, but

Sheel: I think it’s half and half. I think it’s like….

Harry: But it’s still like $400 – 500m. They initialised this 500.

Sheel: Yeah, I think they’s too big.

Harry: Any shade on it? Are they too big?

Sheel: I think they’re too big. They’re both doing what I would call Series A’s as well. They are writing $10 million cheques and I don’t think of that as a seed round, but I think it’s too big. And I think as you get bigger, you’re more open to doing these 5 on 25 deals that actually aren’t good for the founders either. You’re like, oh yeah, it doesn’t matter to me as your fund size increases.

Harry: And actually I need to put the dollars out the door.

Sheel: You need put the dollars out the door. Yeah, exactly.

Harry: One of the biggest sources of tension between VCs and founders.

Sheel: I’ve seen it in some of our portfolio companies, 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. I think you can get into a mistake being too prescriptive, telling founders what to do rather than recommending what to do. And I’ve seen that even from good investors that I’ve been alongside on the board. I’ve had founders call me after a board meeting saying like, Hey, what the fuck was that? I’m doing everything I was supposed to do. Why is this VC telling me what to do?

Harry: Do you find boards very helpful?

Sheel: No, I want to be supportive to a founder and be there when they need me. And that can happen in a board relationship, but usually that’s not what happens to the board. And so I’m meeting with the founder every week or every couple weeks anyway. And the board is a totally different beast that’s structured. A board can be helpful for the founders to sit back and reflect on their business once a quarter and it’s very effective for that.

Harry: Who’s the single best board member you’ve sat on the board with?

Sheel: I have a board with Jeff Horing, the founder of Insight Partners. He doesn’t speak that much, but when he does it’s like, oh, he’s absolutely right. And I can look back a couple of times about what he said he was like, absolutely right. In one of my other companies we had David Lamoio [sic] who was the CMO of Google, same thing didn’t speak that much, but when he did, he was absolutely right. He had a story about Google and it was really good. Their experience is right and I think a lot of younger guys can discount that experience, but it’s really valuable and the same shit happens time and time again. And you realise that them having seen it over the past 20 years is incredibly valuable.

LP-GP relationship

Harry: What about tension between LPs and GPs?

Sheel: 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.

Harry: So, I think the GP commits are actually an area of misalignment, not alignment in the way that a lot of them will be like, Hey, we need 3%. And you’re like, well shit, my fund’s 140 million. Totally. I have not been working for years and years. This is like $4m plus. Yeah, I’m going to have to borrow and beg and steal. Not literally, but do you know what I mean? That’s totally good.

Sheel: And I’ll tell you what can happen 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.

Harry: When you take it out of fees, which then is not invested into the firm where it should be. Totally. And then also just bluntly, we want diversity and amazing ecosystem.

Sheel: I think that’s true, but I think the way things are, a couple percent, one to 2%. If you can’t do it, it’s probably fine, but I actually don’t think we need a hundred new managers or thousands of new managers every year.

Harry: Do you think we see way less?

Sheel: Yeah. It’s just so hard to raise a fund now. And you have wonderful people.

Harry: I’m still seeing a lot raised though.

Sheel: I’m seeing it too.

Harry: Well, not well, not raised, but comfort [sic] trying to, telling me they’re racing.

Sheel: Same. I haven’t seen much of a slowdown.

Harry: No, I haven’t at all. A lot of operators that doing the three to five million fund, I’m not against at all.

Sheel: I think for a really hard business, if you’re running a tiny fund, it’s really hard. Many of these folks are going to continue on their fund 2, fund 3’s are going to be really tough.

Harry: What do you think of founders who have funds on the side?

Sheel: There are founders who have funds on the side who lead deals, and that is crazy to me. If you think about, especially now when we have a bunch of companies that are struggling, we had the SVB crisis. You need to be there for your founders and if you’re there for your founders, you’re not there for your company and that is a problem. So, founders with investing cheques on the side occasionally is fine, or if it’s strategic, it’s fine. But there are founders who are leading rounds and I think that’s bonkers. We have a company going through some shit right now. I’m there for them any time of the day or night. And if I was running my own company and this wasn’t all I was doing, I wouldn’t be able to do that. I don’t know how you square that. How can you be operating a fund and running a company? What do you think?

Harry: I think the biggest challenge that I just struggled to get over, and I’m not throwing say, but I struggled to get over it, which is like when you take external capital, that is an incredible responsibility. Totally. And when you take external capital for a second thing on top of something that you’ve already raised significant millions of dollars for the first one, if I’m in the first one, I’m like, that is disrespectful to my money. I gave you money to do this. And that’s like I’m thrilled to do it, but do what you said you were going to do. Totally. And so I don’t have a problem with founders angel investing, but LP management, suddenly you have 50 LPs.

Sheel: You just think about how I am doing this job round the clock? I just can’t imagine having another full-time job.

Sheel’s Taco Bell metaverse wedding

Harry: Final, final one. Your wedding was like, it was in the metaverse. Yeah. So, how did the fuck go?

Sheel: Okay, so it was in the Taco Bell, it was an Indian wedding, Taco Bell in the metaverse. And you’re like, why the fuck would you do that? And credit to my wife Amrita, because she went along with all this crazy shit. You know me, I say yes to a lot of stupid stuff. And this was just another one in a long line of those examples. In this case, Taco Bell had a contest about getting married in the Taco Bell metaverse, and I’m a fan of Taco Bell, people on my Twitter know that. So, when they came out with this, a lot of folks tagged me. They were like, Sheel this is for you. They saw that I just gotten engaged and they were like, this is perfect for you. You should do it. I was with my wife driving on a road trip and I mentioned to her, I was like, Hey, look at this casually like, Hey, look at this. Wouldn’t it be fun?

And to my surprise, she said, yeah, all right, let’s make the video, it would be fun. It’d be like a fun exercise. So, we took 20 minutes and thought about what we would say and we stopped and recorded it. We only recorded it twice. We didn’t think that much about it because we just thought it’s a fun thing to do, but we’re probably not going to actually submit it. And if we submit it, we’re not going to win. If we win, we’re not going to do it. So, what happens? We get back from the trip and I’m just like, lemme just submit it, whatever. And then we get notified by Taco Bell, we’ve won. And then we kind of pushed back and said, Hey, I don’t know if this is for us. We don’t want to get married in this Taco Bell metaverse. And then they were like, Hey, just get on a Zoom call with us. So, we get on a Zoom call with them, they convince us, they say, it’s going to be your wedding, we’re going to do whatever you want. It can be Indian, we’ll design it for you. You’re going to be part of the Taco Bell family. They said, you’re going to be part of the Taco Bell family. And I was like, that’s what I’ve always wanted. We eventually did it. It was really fun. It was in February.

Harry: What does that mean? So you sit in a room?

Sheel: Yeah. So, you’re sitting in a room with some of our friends were there too. And we’re on camera and there’s this metaverse, it’s in Decentraland. It was actually really cool for a while I was pretty sceptical about it. I’ve never spent any time in the metaverse, but it was actually really, really cool. I wrote [sic] it on an elephant. People from around the world were there. My family in India was attending. They have their avatars. It was actually really cool. It sounds really stupid actually. The day of, I was thinking, this is cool.

Harry: And you say your vows through it?

Sheel: Say our vows through it did everything. It was a legal wedding. We were legally married in the metaverse.

Harry: Was it quite emotional.

Sheel: It was very emotional. Yeah.

Harry: Did your wife like it?

Sheel: Yeah, she loved it.

Harry: Do you get like Taco Bell credits?

Sheel: We do. We have a lot of Taco Bell credits.

Harry: How many credits do you get?

Sheel: I don’t know. They gave me 500 bucks for my birthday in Taco Bell credits, which actually Taco Bell gets you pretty far. They also paid for our honeymoon 25 K, which is pretty nice. And they’ve been great.

Quickfire round

Harry: I mean that is amazing. I saw this and I was like, what the fuck has he got it now? It’s crazy. Yeah. Listen, I want to do a quick-fire answer. So, I say a short statement, you give me your immediate thoughts. Okay. What one seed firm other than BTV would you invest in?

Sheel: Think the best ones have now retired and only they’re investing their own money, so that’s Homebrew and IA.

Harry: Your Founder Collective as well at ______.

Sheel: Oh yeah. Super good.

Harry: What Series A firm would you most invest in?

Sheel: We’ve invested a lot with Accel. I think they do a really good job in the spirit of keeping fund size small, it’s hard to beat Benchmark.

Harry: Yeah, you can do a multi-stage firm. Now we’re getting kind of growth slash multi-stage. Who would you go for?

Sheel: Because Founders’ Fund shrunk their fund size, I’m going to go with Founders’ Fund.

Harry: Greenaoks I really like, yeah, I really like Addition. All good. Really like Ribbit.

Sheel: They’re all good.

Harry: What have you changed your mind on in the last 12 months?

Sheel: 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.

Harry: What do you advise founders on taking secondary?

Sheel: 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 (?). Just think about it. It makes sense, right? If you’re building a real business, I don’t mind if you take chips off the table, but you’ve got to be building a real business.

Harry: But do you blame the founders who took off a lot of money?

Sheel: No, a lot of times it was like VCs pressure them to do it.

Harry: And they’re getting so much hate now from the media and it’s like they should get hate.

Sheel: I don’t hate the founders at all for doing it, but if you did an index of companies where founders took a lot more than that, what I described like one x ARR off the table, you have a very negative returning fund.

Harry: Yeah. What would you most like to change about the world of venture?

Sheel: Fewer douche bags who think they know it all? I think there’s a lot of insecure folks who just put down other people. We don’t need that.

Harry: What do you see that you don’t think enough people are spending time on?

Sheel: Tough question. I think there’s this overhang of valuations and we haven’t yet seen the drop that is going to come and it’s going to be so severe. All these growth round investors that had Go Pipe [sic] IPO and then fall, they haven’t made any investments. What we’re not seeing in some of these companies that have raised more money is just the immense amount of structure that’s going into them.

Harry: What happens to Tiger and SoftBank?

Sheel: They recently led a Series A of one of our portfolio companies and they actually in contrast to their investments in 2021, in which John Curtius and others were writing a lot of cheques and sometimes very quickly. This one, they led our series A. They did a tonne of work and they’ve actually been super helpful to the company. It’s a very different Tiger than the one of 2021. They’re doing a really good job now. I think it’s going to be a much smaller fund and like you said, it’s going to be a tonne of their own GP money. I think they’re, they’re good actors.

Harry: Is there a return for SoftBank?

Sheel: SoftBank I think is just really tough. They made just a tonne of incredibly poor decisions, poured a tonne of money into bad companies and we talked about 5 on 25. For them it’s more like $500m on $2.5b for a company that was nowhere near ready to accept that kind of money.

Harry: That’s unfair. I thought Wag was a brilliant dog on demand.

Sheel: What about Zoom the pizza company?

Harry: Oh, It was exactly. I was surprised to beat that one. You went to that and you’re like, wasn’t that a surprise.

Sheel: No, literally from day one. So, okay, on that company I met a guy who invested in that company relatively early. It was a data driven VC. I was like, what data do you have for this company? And he was like, we have all this data on number of shares on Facebook of this video about them. And I was like, why the fuck would you invest off of a shares on Facebook shares on a pizza company? Like people were sharing this video about this pizza company on Zoom cause like a robotic pizza company and they used as input to invest and I was like, that’s crazy.

Harry: Final one, my friend BTV in five years time, where do you want to be then?

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

Harry: My friend. I’ve loved doing it. It’s so much nice to do it in person. So great. Thank you so much for coming and I’ve loved it.

Sheel: So fun. Loved it.

Harry: You the man.