Unlocking Venture Capital through Private Wealth w/ Samir Kaji, Allocate

SCS (Intro):

This week's guest is Samir Kaji, one of the most prolific writers on venture capital and emerging managers you'll find online. Samir is CEO and co-founder of Allocate, a private markets technology company that pairs origination with portfolio management tools to allow investors to efficiently construct and manage the alternatives portfolios. Prior to Allocate, Samir spent 22 years adventure banking between SPV and First Republic Bank and closely worked with and advice over 700 venture capital and private equity firms.

During this time, he completed over $12 billion and structured debt transactions and has invested personally in over 75 funds and companies, including investments into Carta, FanDuel, Reddit, Alto Pharmacy, Carbon Health as well as funds from Lux Capital, Bullpen and more. Today's conversation covers everything from the scale of private wealth funding, venture capital to the explosion of emerging managers and why the track record trap is one we need to be mindful of. Whether you are a GP, LP, or founder tuning in, trust me, this is full of gems.

Samir Kaji:

I was born in Canada. So my parents immigrated from India to the US in 1972. They moved to Canada right after that, we actually moved around a lot. So I moved around from New Jersey to Virginia beach, to Ann Arbor, Michigan, to Chicago, ultimately to the Bay area.

My dad was actually in commercial real estate development. And when I graduated college 25 years ago, I had the opportunity to work with my dad in commercial real estate. But if you remember in the late nineties, the internet was in full swing in terms of the explosion. So many companies being formed, companies going public, and after I graduated, I really wanted to be part of the tech world.

So I had this opportunity to join Silicon Valley Bank, which we'll talk about a little bit later, in 1999. And at the time, this was the height of the dot com bubble. And I just saw all these really interesting entrepreneurs creating these companies. Some companies were, companies like the Googles and the Amazons.

Got the job and worked there for 13 years. And it was a great experience. Got to work with some amazing companies and funds. And then left Silicon Valley Bank in 2012 to go to First Republic. Another bank that I'm sure we'll talk about a little bit during this conversation was a private bank and a private wealth management institution that was really looking to expand within the commercial banking space.

So I came on to start a group focused on working with venture funds and startups. It was a great experience. Spent eight years there and through some of the observations that I saw in terms of high net worth individuals looking to invest responsibly into venture. Saw some of the gaps that really created these barriers.

So left first Republic at the end of 2020 and in July of 2021, started a company called Allocate, which is a venture backed startup.

SCS:

Banker operator turned founder, really an interesting trajectory. There tell us a little bit though, you sort of breezed over this, but of course, the bank run was top of mind this year question to you as a veteran of industry.

Now that we're moving into 2024 with a very different interest rate environment, where capital arguably this year was a little bit dry. What the outlook like, how are banks different moving forward compared to, I guess, the beginning of 2023?

Samir Kaji:

Yeah, I mean, obviously, if you had told me at the beginning of 2023, Credit Suisse, Signature Bank, Silicon Valley Bank, Silver Gates, First Republic would all be out of business in some capacity, I would never have believed you.

And so, at the beginning of this year, March, April in particular, it was a tough time. So my wife works at Silicon Valley Bank, still now a division of First Citizens. And then, I have a lot of friends that work at First Republic Bank. So just, I felt like I was part of it, even not being within those banks.

Felt it every single day, obviously a very tragic ending for both institutions. They were quite important for the startup and venture industries. They were the two banks that fundamentally were the big market share leaders when it came to fund banking and SVB certainly in the startup banking.

And so it left a big gap right after the banks imploded. Today, two things have changed and I'm glad you brought up the interest rates. So number one, the banking industry itself is much more fragmented. So more banks that are now doing this. So a lot of the FRB people went to Citizens Bank. A lot of SVB people went to banks like MUFG, Stiefel, and Silicon Valley Bank actually still exists as a division of First Citizens and is actually quite active.

I know this because my wife, I hear how busy she is every single day doing loans. In some ways, this is a better outcome for people in the long term. So more competition, more opportunities to work with different people. So most startups are getting multiple term sheets, whereas maybe at the beginning of the year for venture debt, they might have gotten one from Silicon Valley Bank.

So I do think competition is actually very good. for consumers of banking and for things like loans. So I think that's good. Now, the loan side is a little bit different today. So obviously interest rates have risen dramatically over the last two years. So the cost of debt is much higher. But what's also happening is, banks during the ZIRP period benefited from one thing, which is zero interest rates.

And companies and people were keeping money in checking accounts, earning nothing that reduced the cost of capital to effectively nothing. You can get a great margin by pricing your loans often at 4 or 5%. Today, that funding model is gone. So after the banks imploded, most companies are unwilling to keep money in a simple checking account because number one the risk of what if this bank goes away so you have to have things in FDIC insured deposits and treasuries. And when people put money in different sort of accounts, what people are looking for is some yield today the three-month treasury is north of 5.5% so why would I keep my money in an account that's not yielding anything.

That really raises the cost of capital for banks because now you have to pay for deposits and now you have to price your loans even higher. So from a banking standpoint, the funding model is just so much more difficult because your cost of capital has gone up by a factor of over 10x.

SCS:

This is an interesting time for folks to be thinking about banking options, I mean, I understand there are new checks, new term sheets, and more options for startups and for fund managers. But how should they be thinking about risk? I mean, back in the day, the idea was you have a smaller bank that is focused on venture, whereas the big banks typically would not want to service the smaller clients, right? How do you think about this and how are you advising your stakeholders?

Samir Kaji:

Yeah, I think that's still generally true. I don't see the big, big banks wanting to delve into small startup banking and lending. I mean, I think that still is the niche, artisanal type of banks, whether it's SVB, which was a midsize bank.

You could say it was getting to big bank status for sure. But certainly not at the size and scale of the biggest banks in the world, JPMorgan and others. So the banks that people are now looking at are usually one of two things.

One is somebody like an SVB, somebody like a Stifel, somebody like a Citizen's Bank that has people that really understand and it's very relationship oriented, lending oriented. On the other hand, there are a lot of neo banks, people like Brex and Mercury that have made big inroads within the startup environment.

By providing a seamless digital experience, right? Where you can track everything. The experience from a digital standpoint is significantly better than 99. 9% of the banks. Banks are not known for building the greatest technology. And so as a startup entrepreneur, you have to really determine what's most important to you. And fortunately, you do have a lot of options today.

SCS:

Interesting reflection on the time that we're in a very different indeed with the banks and a lot of considerations actually for funders and founders as they're making the big decisions for 2024.

But now you're in a very interesting chapter yourself and it seems two and a half years have just passed by just like that now tell us.

Allocate. Why allocate? Why now? And why do you think you would be a different proposition the stakeholders that you're reaching out to?

Samir Kaji:

There's a few things to unpack there. I mentioned at the beginning of this podcast, my history and my dad's history.

My dad was a first-generation immigrant, borrowed $2000 to get to the U.S. Created a really successful real estate company. But in the early days when he first immigrated to the U.S. And then ultimately Canada. He was a civil engineer, he really wanted to get into real estate and there weren't a lot of people that were giving him as the opportunities.

He didn't come from the same circles. He wasn't able to have the same networks as people until somebody gave him a chance. What I've really realized is that giving people opportunities and evening the playing field is something that has always been embedded in me.

How do you give opportunities to people? And we see in the U.S. right now, there is a massive divide between the top 1% and really the evaporating middle class. And one of the things that I've seen is that there aren't enough people that can access the private markets responsibly. Think about venture capital, for example, investing in VC.

Still, is a very inclusive industry. You have to know the right people. You have to write a big enough check. You have to be able to have the expertise and the time. And I saw this when I was at First Republic Bank, when we had so many people on the wealth management side that were looking to invest in the private markets but didn't really have a directional way of doing so.

And so what we do at Allocate is really solve two problems.

Number one is providing the private markets to people by providing these curated opportunities; where we go and find opportunities, get access, diligence them and as a fiduciary bring it to people on the platform, where now people can invest in some of the very best opportunities and funds for as little as $100, $1000, whereas the minimums, if you went directly to those managers would be $10, $20, $30 million in some cases.

The second thing is, I truly believe that the future of the industry is more people on the high network side will be able to invest with more visibility and transparency. And so we have a set of tools that allow people to not only find the opportunities on our platform. That are actually personalized for them, but also be able to manage their entire portfolio through one pane of glass.

When I've invested in 57 funds and I remember, I didn't really have a lot of visibility of what's happening in my portfolio because I'd get 10 different admin portals. I'd have to log into each one of them. And then there's these static PDFs and I would have to literally take information and plug it into my Google sheets to even figure out how are these funds doing? How much do I have uncalled? How much do I have called?

So now we have a software tool that allows people to have a single interface where they have all their documents in one place, either for Allocate investments or non-Allocate investments, as well as clear visibility into performance, capital calls, cash flows. And also the underlying portfolio companies in a single place.

So digitizing the experience so that people can really build private portfolios and manage private portfolios like institutions, even if they're high net worth individuals. And so that is our long-term mission, which is making the private innovation market more accessible and transparent for people.

We've been around for two and a half years, over $530 million has been now deployed through the platform. We have over 600 clients and 45 employees.

SCS:

What traction and in such a short amount of time. So tell me, based on your observations and perhaps without naming names here, I've seen different, pitches from different folks who are also trying to be, I guess, the Carta's of the world, trying to do sort of portfolio construction for different LPs in different ways, fund to funds, being the product themselves, being the platform themselves, how is yours seeking to be different?

Is it through the vertical that you're focused on or is it through the all in one service? Tell us a little bit about the business model and sort of the big vision play here.

Samir Kaji:

Yeah, I mean, I think our big vision play is really being sort of the middleware for the GP, LP world within the private markets; making it easy for GPs to tap a greater pool of investors, not just institutions, but non institutions without the normal inefficient process that exists today and to be able to manage those LPs in a more digital experience where things aren't done through email and PDFs. And for the LPs, being able to now access a greater pool of opportunities and being able to manage it.

So, if you think about the GP, LP world, historically for venture capital funds or even private equity funds, going back really to the beginning, the GP, LP interface was fund manager and institutional LP. Today, non-institutional LPs hold as much AUM as the institutions. By the way, there's now a new endowment, foundation, pension fund forming every single day.

So as the private markets have grown, fund managers really need to access private wealth at scale to be able to continue to grow. Our expectation is by 2030, roughly 30 percent of capital going into funds is going to come from the private wealth sector, not institutions. And that's a really exciting thing for both sides, because on the LP side, you have the opportunity, if done right, to create wealth creation, like some of the institutions have done.

And for fund managers, more efficient and more effective fund raises. With people, by the way, that can actually be strategic to them. So you think about the family office market. Family offices right now are going through the biggest intergenerational wealth transfer of all time. The next generation, Gen 2, Gen 3, Gen 4, grew up in the digital age.

They have unique sort of backgrounds, maybe they're in certain industries that can help the fund manager. So I also think about the aspect of not just capital, but many of these families, high net worth individuals that actually can be strategic players for the fund managers with different industries that these individuals play in.

So I'm excited about it. It's our job to really create that and to do it at scale using the technology that we've built so far.

SCS:

And I'm curious, would you be sticking to venture or do you see yourself being just that bridge for LPs and GPs across private equity and perhaps even beyond?

Samir Kaji:

It's a great question. We'd like to stay focused right now. So right now it is venture primarily, but it's really, if you think about what we do, it's the broader private innovation market. So very possible we have a secondary fund, a credit fund.

We're already doing those type of things. In the future, we will make the determination, but at the end of the day, the long-term vision is being the middle road between GPs and LPs. So I think it's a natural extension to start moving to other asset classes. We want to be comfortable, first solving for one thing that we still think is a massive pain point, which is the world of venture.

SCS:

Speaking of the world of venture, that's a great segue into some commentary here from you on what's changed in the world of venture.

Certainly, as we mentioned top of the line there, zero interest rates is no longer the case, which really is affecting a lot of people in terms of cost of capital and how are they thinking about their allocations.

What trends are you seeing on the ground here with regard to venture? And particularly also, I think you and I have commented on certain threads on the misinformation on performance of funds. Talk to us a little bit about that.

Samir Kaji:

Yeah, there's a lot to unpack there. So let's just talk about what happens in 2022. Of course, the world changes from an interest rate standpoint. And what we saw in terms of the extreme euphoria of 2020 and 2021 evaporated almost overnight. And I think we should all recognize the fact that 2021 was essentially a fairy tale. It didn't exist.

Like we should put that out of our mind because there's too much capital that was flushing around the ecosystem. And ultimately because of the low rates and the amount of liquidity. People forgot about risk. Everything was about speculation. We saw that in the public markets. We saw it in crypto, and we also saw it in the private markets where there was so much capital going into the funds who were deploying very quickly.

So right now, and in what happened in ‘22 and ‘23 is LPs pulled back dramatically. They had so much going in the market change, their liquidity profiles changed for big institutions, they have set allocations that they typically have for different asset classes. And what happened in ‘22 when the stock market went down so dramatically was that they were over allocated to the private markets, right?

So if I have 100 and 60 is public markets, but now that 60 goes down to 40. Now my private markets, which have private market investments, which haven't remarked are now a bigger percentage over my overall pool. So they face something called the denominator effect. couldn't make any new allocations.

As a high nett worth investor, you probably deployed pretty heavily in ‘20 and ‘21 and in ‘22, you look at your brokerage and your stock market positions have gone down. The fixed income market had gone down because of the interest rate reset and you've made a lot of capital calls and no liquidity was coming back because the exit markets.

It's essentially stopped in ‘22 and ‘23, and you have this entire uncertainty of global wars. You have the interest rate environment, all these things known as making investments. When I say no one, I mean the velocity of money going into the private markets that affect effectively went to a standstill.

So we're starting to see a little bit of signs of a rebound. Right now in the private markets, the most, I would say, interesting place for people to put money is the private credit market. And that's because the yields are higher. Of course, interest rates have gone up. It's a safe haven. It's income producing.

Venture, you know, intuitively is actually a better place to want to invest today. Valuations are down. Operating and investing discipline are much better. And it's corresponding and intersecting. With what likely is going to be the next massive super cycle in AI. So if you think about it, the best times to invest in venture, historically, there's no guarantee of this have been when you have the intersection of a major platform, whether it's the internet, mobile and cloud, along with a downturn that has completely reset everything, flushed away the tourists.

And reset the behavior that's happening in the market toward the fundamentals that actually matter. Like, do you have a business model that can make more per unit that you sell than you spend? Do you have a path where you can actually build a sustainable business over a 10, 15, 20 year period? Are your revenues actually sustainable?

And so everything has now reverted to the way I think it should be. So it's a very, very good time. But it's going to take some time for the markets to rebound. I think individuals have to look at their own liquidity profiles. And it's going to be a slow slog as we get into ‘24, the Fed has already said that they likely will start to reduce rates, but we're not going back to a zero rate environment.

We're just not. And so we have to think about. Cost of capital and opportunity costs, treasuries, private credit are all things that LPs need to think about when allocating across different private asset classes.

SCS:

Yeah, which then brings me to the question on performance, right? And perhaps, there's two questions in this, but how should LPs be thinking about DPIs in this cycle?

What mistakes should they avoid in this time frame? In particular, I think, you and I have been on multiple threads together where we've seen people spreading all sorts of information or misinformation about the performance from venture.

Samir Kaji:

If you look at venture as an asset class, number one, it is more liquid than the other ask classes for sure. So you should get a premium. Second, there is a little bit more embedded risk depending on the type of fund you're investing in. Obviously a seed fund in theory will have much more risk than a growth fund.

Just based on the entry point in terms of when they're coming into companies and certainly the time to liquidity. So what is the expected return and how should people think about it?

I think people got spoiled by the ZIRP period and they saw all these funds at 10X. And it felt easy to get those numbers now, of course, that was the byproduct of really just crazy unrealistic valuations that were given really as a function of the amount of capital that was being deployed in ’21.

So if you look at long term venture returns, long term venture returns in terms of top quartile, and this is using, I forget if this is Cambridge or PitchBook, one of those two benchmarks, the long term venture top quartile, about 2.38X, about 25% net IR, top decile about a 3.06. So when people were saying, oh, I should get a 5X in venture, I think that's unrealistic going forward.

Now, that said, a 25% return, if you can get that in your venture portfolio, It's still 1,500 basis points over the long term S&P and around 1,300 basis points over the long term NASDAQ rate, which is probably a better comp or something like QQQ, which is slightly 10,000 basis points over.

So I think that a lot of people got a little bit confused in terms of what venture returns could be. From a DPI standpoint, DPI takes a long time. We saw in the late nineties, the DPI was happening really quickly. And even in 2021, we saw massive liquidity cycle, DPI typically for venture funds, doesn't start until year five, six, and seven.

And if you're a seed or early-stage fund, the bulk of your distributions are kind of eight years, eight to twelve. And I think that continues as the private markets elongate in terms of how long companies stay private versus going public or even getting acquired.

SCS:

With the benefit now of what you, did you say you have about 600 clients now that you work with through Allocate?

Samir Kaji:

That's 600, yeah. A little over 600 right now.

SCS:

Yeah. So over 600 clients that you've worked with, having in mind this exact conversation that we just had with how venture is changing rapidly, how are these LPs that you're working with thinking about their portfolio construction?

How are they feeling connected still to venture? I guess with this performance, which is very different, I guess, a narrative that LPs had in the past, where exits were clear, a little bit faster, perhaps in a time frame. How are they thinking about it? Are they thinking about it as a way to create impact or what's the appeal for them and how are they thinking about their portfolio construction?

Samir Kaji:

Well, to be clear, I mean, the returns are still very good. It's just that it's skewed toward the top, right? And what you don't want is median venture performance.

So that's the area that you really underperform. And where investing in venture probably isn't worth the squeeze. Meaning that long-term median returns on venture about 13%. 13% is not enough, especially when you look at alternatives, private equity, private credit, and even with the more liquid public equities market, which a buy and hold will probably get you between 10% and 12%.

Hard to know what that is going forward. Maybe that's not the case, but certainly over a longer period of time we've observed it. So people still look at venture as a way to generate alpha. Again, this is the caveat, you have to be in that top 25 to maybe even the top 10% fairly consistently.

And so people still look at it as a way to generate alpha as a way to diversify their portfolio because it's uncorrelated. So if you look at the correlation of venture to the public markets is about 0.37. If you look at the correlation of venture to private equity, it's about 0.02. So just by including venture in their overall portfolios, you have the opportunity to significantly outperform if you get it right. If you get it right.

And then second is the low correlation to the rest of your portfolio. But there is this element of venture is investing in the future. So our belief is we are right in the middle of the biggest transformation that is going to be driven by technology. So if you look at the past, we had these massive industrial revolutions that lasted 50 to 100 years, depending on sort of the timeframe over the last 40 years, technology has reshaped everything we do at the consumer level, at the enterprise level, and every single industry in the world has been affected.

Been this constant growth of innovation. So we went from the PC to the Internet, to now mobile, to now AI. These things keep adding on to each other and each cycle becomes bigger in terms of the potential impact it has. So I look at the future and whether it's climate or healthcare, general consumer and enterprise.

The next 20 years will be reshaped at a speed and pace that we've never seen before. So in many ways, I think people should be excited about venture as the only asset category that is backing companies at the early stage that are investing in companies that could reshape our future.

In a way that we can't even fathom, I mean, 20 years ago, who thought there would be an affordable mass marketed electric car SpaceX, for example, existing? Who thought we couldn't get something like a vaccination out within a year, right? So all of these things are due to technology and so I think people look at it and say, this is the way to invest in the future.

These companies, by the way, that are venture back 25 years ago used to be public companies by the time they got to the series C or series D. The only way you can participate in the early value capture these companies is going in the private markets, which venture is the asset class that finances these companies.

SCS:

Yeah, very exciting. And of course, the lens of impact is one that I care about deeply. And interestingly, you use this word to describe venture before that it's inclusive. Perhaps you meant close knit, right? If you get into the industry and you get a referral in the banking ecosystem, you do well, but it's a double edged sword.

But we know it is not exactly inclusive. Women as fund managers, people of color as fund managers, the AUM that's controlled by women and people of color, something like 1.4 percent still of all assets that are managed, based on the recent report by Knight Foundation.

Let me ask you this question. Because you're advising LPs that are thinking about generating alpha and also I know you care about this, about diversifying our networks and where the capital is allocated, how are you advising LPs to, I guess, diversify with regard to, patterns of success, right?

I suppose that we are not only investing to the same old, same old, but also into a class of emerging managers that could be the next Sequoias of the Horowitz's of the world. How are your LPs thinking about investing into a new patterns of success that may not look like that 10 year track record or so and so forth?

Samir Kaji:

Yeah, I'm so glad you brought this up because this is a massive area of passion for me. It's going back to really the early part of the 2010 decade. As I mentioned during this conversation, like my dad, it was kind of like an emerging manager within the real estate space. In fact, when he started his company, he was one of the few immigrants that had started a real estate company in the place that it, which is Virginia beach.

So it has been something that I've really focused on and you're right on the exclusive nature more broadly. Inclusive when it comes to the people that are already in the market, right? Like people that have the networks, people that have the ability to grow up in in the right places, go to the same schools.

So if you think about the emerging manager market, this really started around 2009, 2010, when we had the ability for companies to start, and get to some level of scale without the same cost structure before. So you had smaller funds that could now come to the market. That created a whole new universe of GPs that had different backgrounds.

You had people that came from nontraditional industries. You had people that were at big firms that left to start their own that otherwise would have never been able to raise historically $200, $300 million funds, but were able to raise $10 million, $20 million. So important. So number one, it creates a level of diversity within the ranks.

And if you think about diversity, so diverse managers. If statistically will back more diverse entrepreneurs who, by the way, employ more diverse employees. And what you have is basically a more leveling of the playing field. So more people being able to participate in an asset class that has so much opportunity.

Calendly is a great example, led by an African American. Was able to have now an opportunity to create, he didn't have to raise 20 million upfront. I don't know that he could have. And so opportunities like that are really, really important. And a lot of that comes from the emerging manager ranks. So if you look at the, you mentioned the amount of female participation at the GP ranks.

So 15 years ago, if you had looked at all the big firms, it would have been less than way less than 4%, way less than 4%. But if you look at the GP ranks within emerging managers, there have been so many female led firms, so many people of color led firms, and it's because the barrier to get in has been lower than what we, historically had seen in terms of starting a new firm.

This is really important because number one, you're going to have different type of industries being affected because if I'm somebody that lives in Kansas, starts a fund, I'm actually not probably looking to always invest in companies that are solving for the 1 percent on the coastal cities.

But looking at opportunities that are actually solving for that mid America middle class. I really, really think this area is important. There's been about 2,400 firms that have been formed since 2009, of the 62 firms we've backed, 24 of them have been emerging managers on the platform fund one fund to fund three.

And that area, number one, has the opportunity to substantially outperform on a cash-on-cash basis, smaller funds, one company can have a disproportionate outcome on the overall return of the fund. Second, we think many of these people are going to be the stars of the future.

And so getting in early, and having them back, entrepreneurs that aren't like everybody else didn't go to Stanford, didn't go to Harvard, I think is just such an important part for our society going forward, given the importance of technology in enhancing society and technology either creates more of a divide between the 1% or 99% or we have the opportunity actually bridging the gap by eradicating most of the middle class by allowing more of the middle class to participate either as an employee and investor or a founder in the technology market.

SCS:

Definitely aligned there with everything that you said, I was just nodding my head the whole way through you were selling to the sold here, but a question I always get pushed back from, I guess more institutional type investors as well.

And I know you, you work both, private who are more family offices, high net worth versus the institutional. And you're starting to do more of that as well. But for them, of course, especially the pension fund, so and so forth, they have certain requirements. Including past legacy structures, where it literally asks in a form for that 10-year track record, how do you advise your LPs to then evaluate these new managers that look frankly very, very different?

Samir Kaji:

Yeah. So track record, I think I wrote something around it. I think people overrate it. Here's the problem with track record. Number one, it's backward looking. A lot of things can change. So if I had a great fund back in 2012, there's no guarantee that all the what led to my success in 2012. It still exists today.

The competitive landscape changes. My fund sizes have probably changed. Maybe my team has changed. Maybe, the industry that I focused on is very different than it was before. So I think people overrate the track records. I think what you're really looking for when I tell people you're making a decision on the future, your probability indexing on why is a certain manager going to perform in the future and what we look at is track record really as a.

As a data point and as a clue to ask questions, okay, you know, why did you do this deal? How did you think about follow on? I'm, we're really looking for patterns on behaviors versus net, like you're at 2.8X versus a 2.6X. I really don't care. What I do care about is where are you today? What is your comparative advantage?

We talked about this a lot internally, which is this notion of GP business model fit. So if you're a general partner, what are you focusing on? Why are you uniquely positioned to win at what you're doing? So, if you start an AI fund, for example, is it because it's hot or is it because you've had this long term thesis of artificial intelligence that goes back?

Do you have the network? Do you have the domain expertise? And then ultimately, do you have a fund size? That really fits where you are as a person or as a team to be able to win deals. So, we look at GP business model fit more than track record.

I think this whole thing, you have to have a 10-year track record. It has some degree of understanding, like I can understand why it's institutional because it takes 10 years to know if anyone's any good, probably more than that. But at the end of the day, track records either are too new to evaluate or they're too old to Really provide any credence to. So when we ever talked, when we talked about LPs and say, okay, if somebody doesn't have a tenure track record, tell me what might make them succeed in the future.

And then we really dig into those things. Venture is about sourcing, winning and picking. So what do they have? That really maps back to their thesis that is going to allow them. and sometimes I feel like I'm shouting into the wind on this, but you do not overrate track record.

And there are so many great fund managers, like had you only focused on track record, you would have never invested in firms like Lowercase or IA Ventures or Forerunner Ventures. You just wouldn't have done those because they don't have 10-year track records. And you would have missed out on some of the best performing firms and some of the most talented managers of all time.

SCS:

Yeah, I mean, I was just listening to your episode, actually, with Pejman from Pear VC and who knew a rug salesman could become, this guy who now has, what, 800 million assets under management?

Samir Kaji:

I mean, amazing story, right? What a story. But it shows this level of tenacity. So, I love people with chips on the shoulder. I love people that came from nothing, and Pejman was a great example.

He was an immigrant from Iran, got this job at the personal record store, which by the way, the guy didn't even want to give him the job. So he kept on being persistent, did it, and then use that as the opportunity to be curious, learn from a lot of the VCs and founders, and then created this incredible organization.

So it does show that if you have the right DNA coupled with self awareness of where you should play, you can build an amazing organization.

SCS:

Yeah, absolutely. But that brings me to a question. Beezer Clarkson is a common friend of ours, and she wrote recently, this data point about how 50%, only 50% of Fund 1 actually make it into Fund 2.

And only one in five made to Fund 4. Talk to us a little bit about, thinking about an enduring franchise. What makes a winner and a loser? What do emerging managers get wrong in their journey?

Samir Kaji:

Yeah, I mean, a lot of things are true. I wasn't actually that surprised, believe it or not, that only one in five gets to a Fund 4. It's really hard. The average venture fund will last 14 years in terms of day one to full liquidation.

When you're starting a firm, you're starting a firm, not just a fund, you're doing a series of funds, which means you're probably signing up. If you did four funds for about 20 to 25 years of doing that for a lot of people, people jumped into the venture industry thinking, hey, this is going to be really interesting. This is going to be fun. It seems pretty easy to do.

And they get into it and they realize it's actually really hard. I have to think about how do I build a brand? How do I bring on talent? How do I execute? How do I create a culture?

It is building a company alongside of investing. And so I think a lot of people that were raising funds after Fund 1 or Fund 2 decide, hey, do I really want to do this? Is this what my next 20 years are going to look like? Or should I do something, maybe start a company, maybe work at a company.

And so that's why a lot of people do not get to Fund 3 or Fund 4. And in some cases, they realize they're not very good or people realize maybe they weren't good investors. They were just throwing money around. It was placing bets. And by Fund 3, five years later, you can look at somebody's portfolio and say, is there something unique about this individual?

And have they made decisions that showed them as a great fiduciary to their LPs? And if the answer is no, that person is going to have that person or that team is going to have a very tough time raising, especially in markets like this, where there is so much competition for those dollars.

So if you're starting a firm, fundamentally realize you're starting a company. It is a startup. It is going to go through ups and downs. Investing is going to be a smaller part of what you think you're going to do than what actually happens. Running the firm, managing the firm, branding, all the things that may not be that interesting or things that you're going to have to nail to build a sustainable organization and the best organizations in the world have done it over decades. And it is hard.

SCS:

So if you look at Kirsten, because you mentioned Forerunner earlier, and I absolutely love how she had built. I think you and I know the story, but not many of our listeners do. But she started with like multiple SPVs. It was a little messy at first. And then she built this firm that's now, one of leading firms for consumer.

Talk to us a little bit about using her as a case study, how she really carved a niche for herself.

Samir Kaji:

Well, I think Kirsten really understood where there was a gap. So think about the consumer market. If you saw people that were investing in consumer companies, there were largely GPs that were men and guess who the most active buyer within the consumer market is.

It's actually women. So really understanding that as does it really make sense for men making decisions on companies that are selling largely to women? And she knew that she had this great background. And obviously she was. Very deep as an analyst and did a lot of these SPVs were actually quite successful.

But I remember when we met Kirsten in the early days when they're starting Fund 1, which I think was like $40, $40-ish million dollars, very clear what they wanted to build and why they were building it and that clarity of thought came through so brightly in here's what we're gonna build. Here's why we're gonna build it. Here's what it's gonna look like 5, 10, 15 years from now, and here's why we're uniquely positioned and everything was built around that corpus of how do I now bring the right people? How do I execute on my firm vision?

And she did just a phenomenal job. And I would agree with you. I think forerunner has become if not one of the best commerce consumer firms out there.

SCS:

Yeah. And talking about women, it will be remiss for me not to bring this up as we're reflecting on 2023. But one of the big things that, I guess was in our headlines was that diversity programs, anti-woke, anti ESG movement is definitely on the rise here.

What are your thoughts here?

Samir Kaji:

Well, I mean, I think anything that drives more diversity is important, as somebody that's an immigrant, I think as long as it's authentic and I do think during post George Floyd, a lot of people were putting their name out there and saying, oh, we're going to support this more diversity, but it wasn't really authentic and sincere and there wasn't actually a lot of action that was happening.

And so right now there's a fundamentally big problem in terms of the delta between people saying things and people acting and doing things that are actually impactful. The way I look at it from the LP ranks is, are you actually writing checks into underrepresented and managers consistently? Is this part of your long term thesis?

And if the answer is no, it's okay. Like, I'm not going to judge. But I do think that, we need people to actually take more action versus simply using verbal ways of helping. I think there's a certain element of like, yes, you can support and influential people, but at the end of the day, capital is needed and action is needed.

And so I really do think some of that has actually gone away a little bit, to be honest with you. And if you look at it peaked, a few weeks after George Floyd, and now has started to go to the wayside, especially as the markets change. But it is critical that we start to see more capital.

There are some great programs out there. Which I'm definitely encouraged by. And it's something that we look at pretty closely as well.

SCS:

And so very quickly now shifting over to the crystal ball that you may have, as a veteran in industry, you've been looking at this market way, way longer than any one of us.

What are the predictions for 2024? Will there be a full recovery or will it still be a slog? How should all founders and funders that are tuning in be thinking about scaling their business?

Samir Kaji:

Yeah. So I think it'll continue to be a slog. I think 2024 will be another tough fundraising period for any company that's series B and beyond.

You can't raise a narrative. You need fundamentals. And you know, those fundamentals are what we used to see and it's very cyclical. Like the venture market goes from growth at all costs. And then when the markets change, what is your path to profitability, unit economics, and that's still going to be the case in ‘24.

We'll see the big year of the markdown, companies that raise in ‘21, we'll have to come back to market in ‘24. A lot of them and there'll be forced markdowns based on new valuations. You will see a lot of unicorns that effectively go away, whether quietly or not quietly. And while we will see a little bit of selling in the interest rate environment, I don't see an active exit environment until maybe Q3, Q4.

Big acquisitions are going to be under a lot of scrutiny. Of course, we saw Figma and Adobe. I do think there is an opportunity for bigger companies to go earlier in the stack and make more strategic acquisitions. Maybe at the series A, series B level, I hope that happens, bring some liquidity.

And I do think the other thing that will happen in 2024 is, we'll start to see the growth markets rebound in terms of people putting capital in at the vary kind of pre-IPO rounds, but it'll be into quality companies and for companies that are good, but not quite strong enough to get the highest valuations, it'll just be a massive remark of the last marks down rounds and certainly, in some cases, some structure around it.

Now, these are all healthy things. It happens. AI will somewhat be insulated, but you know, at the end of the day, I don't see it as being as hot as 2023 in terms of the overall valuation market we've seen. So I'd say ‘24 ostensibly is probably going to look very similar to 23 in some ways. But there probably is a little bit of light at the end of the tunnel as we get into the second half of the year.

SCS:

Well, Samir is always keeping us grounded. With the fundamentals, I want to go to the fundamentals of Samir Kaji as a leader. And we do this through the rapid fire of billion dollar questions.

Are you ready, Samir? What was most unexpected about your journey to leadership?

Samir Kaji:

It's just hard. you learn so much and you always feel like you're failing, to be honest, even to this day, you think you have it and then you realize there are so many things you don't get.

I used to think, oh, to be a leader, you just, you know, you get to a certain period of life and you're a leader and you know everything. The reality of being a leader is you're constantly changing and adapting, and it's a very humbling experience.

And so I didn't take into account how much of a continuous learning journey it would be. And I feel in some ways, my path to being a leader is no different than it was 15 years ago.

SCS:

Describe your leadership style in one word.

Samir Kaji:

Intense. Like, I just really have a lot of passion for things I do. And so, you know, in some ways, I believe in being very kind to people, doing right by people, but at the same time pushing and making sure that if we're going to build something, we are all doing what we can at the highest level.

And so it is a little bit demanding. But you have to be kind to people. So it's like kind but demanding.

SCS:

Kind but demanding. I love it. And he's changing the rules along the way because they said one word and he changed it. I love it. I love it. Okay. Your guilty pleasure to like ease off the intensity, what do you do?

Samir Kaji:

So I love taking walks. Just me getting out in the fresh air, it changes my entire mood. Now, during the winter, it's a little bit harder to do. You still can do it. But just taking a one hour walk is so therapeutic. Sometimes I don't even have any headphones on. I'm just thinking and it really grounds me back into being much more self-aware.

SCS:

Yeah, a crucible moment in childhood that still shapes you today.

Samir Kaji:

That’s a tough one. It's probably the fact that we moved around so much and I had to adapt new friends, new schools, and it was constant shifting.

And those things were really hard at the time, but I learned a lot about just being open to change and open to different ways of doing things. And so that was, I moved five times in four years.

SCS:

Wow. Your biggest insecurity?

Samir Kaji:

My biggest insecurity is, is still imposter syndrome. No matter how successful, I still feel like, why am I here? Why am I in these rooms? And, you know, that is probably sourced from the fact that, I never was given the same opportunities as other people. I always have this chip on my shoulder.

So it's probably my biggest insecurity of always feeling like, do I really belong in this room?

SCS:

And final I guess call to action to anyone who's tuning in who's typically a funder or founder. What is your call to action to them?

Samir Kaji:

Yeah, I mean, follow me on LinkedIn or Twitter and subscribe to my sub stack which is Venture Unlocked where we talk about everything venture. And we also interviewed some incredible guests like the Pejman of the world. So that's my call to action.

SCS:

All right. Samir, thank you so much for your time. And I'm so excited for this chapter of allocate and hopefully a fundamentally driven grounded 2024 year.

Samir Kaji:

We're looking forward to it. Thanks for having me on.