Accessing_Venture_Capital_Funds
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai.
00:00:03.280 | And in this episode, I want to talk about how I started investing in private funds,
00:00:07.920 | specifically venture debt and venture capital.
00:00:12.080 | Because I published a post called "How I'd Invest $1 Million Today."
00:00:16.520 | And I think you should take a look at it, because I've gone through a series of how
00:00:19.200 | I'd invest $100,000, how I'd invest $250,000, and now how I'd invest $1 million.
00:00:27.560 | And I know not too many folks have a million dollars to invest, but I thought it was a
00:00:33.240 | good exercise to go through, given we're in this interesting time in the stock market,
00:00:38.720 | the real estate market, and alternative investments.
00:00:43.040 | But onto the topic of how I started investing in venture capital and venture debt.
00:00:49.240 | It all comes down to relationships.
00:00:51.960 | It really does.
00:00:53.620 | My first venture debt investing was, I would say, 10 years ago now.
00:01:00.080 | And the reason why I started investing in venture debt was because my business school
00:01:04.520 | classmate decided to go into venture debt after business school.
00:01:09.120 | And then he was at a large venture debt company for, I think, five years.
00:01:13.720 | And then he started to start his own.
00:01:16.400 | He wanted to start his own venture debt business.
00:01:19.320 | And because we were friends, I said, OK, well, let me invest in your initial fund.
00:01:25.520 | And that was a leap of faith on my part, because he'd never run a fund before.
00:01:30.840 | He had the experience working in venture debt.
00:01:33.720 | I knew he was smart, because he went to UC Berkeley's Haas School of Business.
00:01:38.580 | And I liked him, because I've known him for years.
00:01:41.440 | And so I invested in his first fund, which I think ended up doing OK.
00:01:46.960 | It was only like 8%.
00:01:49.320 | It was nothing spectacular.
00:01:51.040 | He had a couple of misses.
00:01:52.620 | But overall, it returned capital to initial shareholders.
00:01:57.780 | And then, because of that, he was able to launch a second fund, and a third fund, and
00:02:01.640 | a fourth fund.
00:02:03.160 | And with the fourth fund, he started getting significant institutional investors.
00:02:08.640 | So the fourth fund, I think, was over $250 million in size, whereas the first fund was,
00:02:14.520 | I think it was something like $50 million in size.
00:02:17.920 | So the fund sizes started going up, and the opportunities started going up based on his
00:02:22.680 | track record.
00:02:24.120 | So now, the venture debt fund is in good shape.
00:02:28.340 | And so for those who started with him in the beginning, they will always have a look, because
00:02:33.600 | there is a lot of demand-- or at least there was a lot of demand before 2022, because they
00:02:38.400 | haven't raised a new fund, a fifth fund, since the bear market yet.
00:02:41.980 | And so for those who've been with the fund since the beginning, they'll always get a
00:02:45.580 | first look, because a lot of demand comes from institutional investors now.
00:02:50.880 | And for folks writing a $250,000 check, it's not going to move the difference in a $500
00:02:57.480 | million fund, let's say.
00:02:59.320 | They want to get an institutional investor who invests $50 million, $100 million, a family
00:03:05.600 | office, those type of folks.
00:03:07.200 | It's just a different level of business now.
00:03:09.360 | In terms of investing in a venture capital fund, now, this is also due to relationships.
00:03:16.440 | I have a 10-plus-year-long friend who has been an angel investor and an investor in
00:03:22.600 | different venture capital funds over the years.
00:03:26.400 | And due to his network, he invited me along and said, hey, I have an old co-worker who
00:03:30.840 | started a fund or a second fund.
00:03:33.720 | Would you like to invest?
00:03:34.720 | And I took a look, and I said, yeah, why not?
00:03:37.280 | Let's invest.
00:03:38.280 | And so I was actually at one of the parties of a venture capital fund hosted at the San
00:03:43.600 | Francisco Giants game the other night.
00:03:46.120 | And there, there were probably 70, 80 people-- entrepreneurs, limited partners, and the general
00:03:53.360 | partners.
00:03:54.360 | And from there, you just talk to people.
00:03:56.280 | I learned about a new AI investment they had invested in.
00:04:00.920 | It has to do with making new types of music by combining different types of music into
00:04:05.560 | one to create a new song or a new melody.
00:04:08.340 | And I thought that was really interesting.
00:04:09.840 | And the fund that I'm investing in invested in that.
00:04:13.120 | And so did Diplo and the Chainsmokers.
00:04:15.160 | Oh, that's pretty interesting.
00:04:16.840 | So there was the founder there.
00:04:18.200 | Get to talk to him.
00:04:19.560 | And then talk to other investors who have been investing in other types of businesses.
00:04:24.240 | And you basically just build relationships.
00:04:27.360 | You be a good person.
00:04:28.440 | You trade information.
00:04:29.440 | And you just keep in touch.
00:04:31.860 | Another example of networking is that I was at a tennis tournament a couple months ago.
00:04:36.600 | And several of the people who showed up were VCs.
00:04:39.800 | So I showed interest in what they were investing in-- new technologies, new trends, what's
00:04:45.880 | going on, what's the hardest thing about being a VC.
00:04:48.840 | And by showing interest in what someone is doing, they show interest back.
00:04:53.100 | And then they ask, what you're doing?
00:04:54.100 | And I say, oh, I run this site called Financial Samurai.
00:04:57.600 | It has a platform.
00:04:58.600 | And they're like, oh, really?
00:04:59.600 | Well, we have these people who are called scouts who have these large social media followings
00:05:04.360 | who try to find deals.
00:05:05.600 | And if they bring a deal to us and we invest in those deals, they will earn some carry.
00:05:11.860 | And that carry will pay out if the company is successful.
00:05:15.200 | And that's how these things happen.
00:05:17.560 | And then finally, another example of networking is that I met a dad who started a fintech
00:05:23.960 | company-- I think it was like 10, 12 years ago.
00:05:27.720 | And they sold it.
00:05:28.720 | They sold it to a large financial institution that we've all heard of.
00:05:32.800 | And their incubator is a very famous incubator here in the San Francisco Bay Area.
00:05:37.600 | So he gets to invest in a lot of the private companies the incubator invests in, as well
00:05:43.280 | as the funds of the incubator.
00:05:46.640 | Not only that, because he is an accomplished entrepreneur, he gets looks in the fintech
00:05:51.760 | space, in artificial intelligence, in health tech, in all sorts of different areas that
00:05:57.120 | he's interested in and that he has an experience in all across the country.
00:06:02.240 | So if you want to invest in top venture debt or venture capital or private equity funds,
00:06:08.720 | it's really about networking.
00:06:10.280 | It's about being a good person.
00:06:11.720 | It's about adding value somehow.
00:06:14.360 | Because capital, there's a lot of capital out there.
00:06:17.120 | And there's not a lot of space.
00:06:20.580 | The funds can only raise so much because they say, look, I'm going to target raising a billion
00:06:25.720 | dollar fund.
00:06:26.920 | They can't just say, OK, there's $3 billion in demand.
00:06:29.960 | Let's raise that.
00:06:30.960 | I mean, they can obviously raise the amount higher than the initial target.
00:06:36.040 | But there has to be some discipline here.
00:06:37.760 | Because if the fund gets too large, then it's harder to put as much capital to work and
00:06:42.600 | get a positive return.
00:06:44.640 | I also want to emphasize being able to add value.
00:06:48.040 | I think about this a lot because I think about recently college admissions.
00:06:52.400 | A lot of people have top test scores, top GPAs.
00:06:56.280 | So what's unique about them?
00:06:58.180 | You have to have something that stands out.
00:07:00.180 | So if there's so much demand trying to get into one of the top funds, you need to offer
00:07:04.780 | something of value.
00:07:06.320 | So for example, if you are a successful entrepreneur who's been through seed to exit, I mean, that's
00:07:12.320 | phenomenal.
00:07:13.320 | And you probably have the experience to consult and provide guidance for some of the companies
00:07:19.680 | in the portfolio.
00:07:21.100 | That adds value.
00:07:22.680 | Let's say you have a huge social media following and can help amplify the message of one of
00:07:28.000 | the companies the fund invested in.
00:07:30.740 | That has huge value.
00:07:32.160 | And I was thinking about from my point of view, if you have a large personal finance
00:07:36.200 | site and you want to invest in a fund that has several fintech investments, hey, I could
00:07:42.340 | add value to that fund as well.
00:07:45.200 | My problem is that I don't have that hunger, that drive anymore to make a lot of money,
00:07:51.520 | which is part of the reason why I'm investing in these funds in the first place, because
00:07:54.920 | I want people who have that hunger, who have that competitive advantage and that network
00:07:59.920 | to find those deals for me, of course, and then in return, I just pay them their fee.
00:08:06.280 | You know, this hunger, this hunger to earn, to invest, to discover really takes, I think,
00:08:12.520 | a special someone.
00:08:14.080 | And your hunger to make more money is higher in your 20s and 30s than it is in your 40s,
00:08:20.240 | 50s, and 60s, because rationally, most people have less money right out of school and they
00:08:26.200 | want to make that money.
00:08:27.680 | And so this is something to think about as you invest going forward.
00:08:32.120 | Your desire to make money will probably fade as you have more money.
00:08:36.240 | And therefore, if you are a self-directed investor, maybe you'll start slacking off
00:08:41.320 | a little bit.
00:08:42.320 | Maybe you won't asset allocate as appropriately.
00:08:46.280 | Maybe you'll just get a little sloppy in terms of your risk exposure, right, which could
00:08:50.680 | be dangerous.
00:08:52.000 | And so that is a case as you get wealthier to outsource your wealth to people whose profession,
00:08:58.840 | whose day job 24/7, hopefully not 24/7, but at least 40 hours a week is to ensure that
00:09:04.800 | your capital is being optimized.
00:09:07.720 | Just the other day, instead of, I don't know, networking, doing business development, writing
00:09:12.660 | on Financial Samurai or podcasting, I spent three hours with my three and a half year
00:09:17.280 | old daughter at the zoo.
00:09:19.120 | We saw all the animals.
00:09:21.800 | We said hi to Norman, her favorite gorilla.
00:09:24.560 | We said hi to the giraffes.
00:09:26.480 | And then afterwards, we went to take the train, the little puffer train at the San Francisco
00:09:30.400 | Zoo.
00:09:31.400 | And it was just like a magical moment.
00:09:33.000 | It was just father, daughter, enjoying the breeze in our air and hearing the choo-choo
00:09:38.120 | and the steam on our face.
00:09:40.200 | It was great and we did it again.
00:09:42.840 | And then we went to the playground and played for an hour.
00:09:46.040 | And it's just like these moments, they're just so much more valuable than trying to
00:09:52.000 | look at my portfolio to optimize and make more money.
00:09:55.440 | So to be able to outsource your capital to the people who do this for a living, I think
00:10:00.720 | becomes more and more valuable as you get older and wealthier.
00:10:05.160 | There is one final point I want to make and that is our network, I think, is way stronger,
00:10:11.560 | way more powerful than we know.
00:10:14.000 | I'm looking at my own network.
00:10:15.680 | If tens of thousands of people listen to this podcast and a million people read Financial
00:10:20.000 | Samurai every single month, surely there are people in the venture capital, venture debt,
00:10:25.280 | and private equity space I could get to know.
00:10:28.280 | But I haven't reached out.
00:10:29.520 | I haven't asked any questions.
00:10:31.240 | I haven't asked for any help.
00:10:33.240 | But I'm sure if I did, someone is going to reach out and say, "Hey, I'd like to introduce
00:10:38.000 | you to XYZ.
00:10:39.320 | Hey, I have this fund.
00:10:41.760 | It's open.
00:10:42.760 | We're raising money.
00:10:43.880 | Would you be interested in investing in it?"
00:10:46.520 | Or "Hey, we're looking at this private company.
00:10:48.880 | I'd like for you to take a look and maybe you'd want to co-invest and talk about it."
00:10:54.160 | So if you really want something or you're really interested in something, go take a
00:10:58.380 | look in your own backyard, your own Rolodex, and see who is in that space you could talk
00:11:03.720 | to.
00:11:04.720 | I think you'll be surprised.
00:11:05.720 | All right, everybody.
00:11:06.720 | If you enjoyed this podcast, please share it, subscribe it, rate it.
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