On the podcast: The venture ecosystem's fundraising shakeup

PitchBook’s head of Emerging Technology Research, Paul Condra, shares insights from our latest Emerging Technology Indicator report before Alexander Davis chats with Samir Kaji, a veteran Silicon Valley VC fundraising adviser and co-founder of Allocate. Kaji breaks down how venture capitalists increasingly are opening up their fundraising beyond big institutional partners to family offices, individuals and independent asset managers. This episode is sponsored by Vanta.

Listen to all of Season 4 and subscribe to get future episodes of "In Visible Capital" on Apple Podcasts, Spotify, Google Podcasts or wherever you listen. For inquiries, please contact us at podcast@pitchbook.com. Transcript Alec Davis: Welcome, Samir Kaji. It's great to speak with you.

Samir Kaji: Alec, thanks for having me on. Looking forward to it.

Alec: Samir, let's get right into one of the big high-level issues that you're involved in. You've commented frequently about the so-called fragmentation of the venture capital asset class and about fundraising friction in the LP, GP environment, [the] friction that has come with this trend. Can you talk about what you mean by the fragmented nature of the market and what strikes you about this trend?

Samir: When we think about fragmentation, I want to maybe take a step back and look at what's happened over the last 11, 12 years. The key trend that we saw during the 2000s was the reduced cost of starting a company in the early 2000s, late '90s, when you have launched a company, you have to buy servers and that drove up costs to get a product to launch.

In fact, to get a product to launch, it was $5 million to $10 million. Meaning that if you were a venture firm, you had to write checks that were large enough to get that company to the next level of milestone, get that product launch. As things like AWS open-source came into play, that drove the cost down of what it took to start a company.

By 2009, the cost of starting a company was down to $500,000, if you had a couple of smart engineers. What that gave rise to was a new era of venture capitalists. Now you could raise a $10 million or $20 million or $30 million fund, write a check that was not $5 million or $10 million, but a check that was maybe $500,000 to $1 million. That usually provided enough runway for an entrepreneur to get a product to market, and then attract that follow-on financing.

What you had is this lower barrier of entry to become a venture capitalist. That was around 2006, 2007 when the seed environment started. At the end of 2009 when we were coming out of the global financial crisis, there was still only a small cottage industry of seed managers, maybe 30 or 40. There was a very clear trend of people that had certain backgrounds, either operational backgrounds, angel backgrounds, or people that were leaving large firms that were starting these funds, [that] were anywhere between 10 and 50 million.

Now within that, you had people that had expertise in a certain region, in a certain sector, and because of that, we started to see real decentralization of the asset category. Over the last 12 years, we've seen a massive proliferation of brand-new firms. The venture industry very much is a barbell right now. On one side, you have these big aircraft carriers, these are the Lightspeeds, the Andreessens, the Sequoias.

On the left side of the barbell, you have massive amounts of seed funds, Series A funds, and on the right, you have Fund I to Fund V. Today that number is well over 2,000, and that makes it a really confusing place to invest in when you have so many managers. It's really hard to assess these managers in terms of investability when there isn't a 10- or 20-year track record. Highly fragmented on the fund manager side now.

Alec: Then the friction side of things, the LP-GP fundraising friction, what do you mean by that? Where are you seeing it most up close in your world?

Samir: I think you have to bifurcate by types of LPs. There are two types of LPs, broad categories. One is institutions, and these are foundations, fund-of-funds, endowments. The key to understanding them, first of all—let's just isolate that group first—that group primarily has historically invested in established managers [and] often has mature venture portfolios. For them having the time to go out and discover and find and access brand-new managers is really, really tough.

If you think about the check size that they need to write, oftentimes they exceed what a small fund can take. A pension fund might need to write a $30 million or $40 million or $50 million check that doesn't really work if the underlying venture fund that's looking for capital is raising $30 million or $40 million or $50 million.

The other thing that I think plagues a lot of these institutional investors, which is a finite group, is not a new pension and a new endowment popping up every single day, [it] is the speed and velocity of their existing portfolio coming back to market. I remember a time been 15 years ago where fund managers used to come back to market every three, maybe even four years. Now that's truncated to two years.

Often, even more than that, is many of these firms have multiple products across mandates. Andreessen has a crypto fund; Lightspeed has multiple geographic funds. You have someone like Sequoia that has a seed fund, and they have a growth fund. That really sucks out a lot of the oxygen for a lot of these fund managers to attract capital from institutions.

On the other case, which is the non-institutional investors, which primarily are individuals and family offices, that group has increased pretty dramatically. There's 11,000 family offices [and] over 15 million accredited investors, for them the friction points of finding the right investors to invest in or the fund managers to invest in is discoverability. How do you boil the ocean where there's 4,000 active US firms and 7,000 global? Number two, how do you assess them when it's not your full-time job?

Even some of the institutions don't have cores of team members that are only looking at venture capital, and so the time to assess these managers often just can't happen. The next is access. How do you access the names that you want to get into? Because as these funds become more successful and attractive, it's harder and harder to get it in, really across two dimensions. You have to write a bigger check to get in a lot of funds that are $100 [million] to $200 million. The minimum check to get in is $5 million, maybe even $10 million.

Then as an LP, you have to have an established relationship with that GP to actually gain access. For the fund managers the problem with going after these non-institutional investors is, where do you find it? Family offices do not hang a shingle and say, "We're open for business." They don't say, "This is what my mandate is." There's no list that you have to—and so efficiently finding the right investors that really match up with your funds thesis is like a needle in the haystack. How do you find these people? How do you scale?

Alec: Just pausing there for a second, because you have firsthand experience for years working in that space. Can you talk a little bit about the advisory role you played? A little bit about what your typical family office was looking for and what help they needed?

Samir: I think it's dangerous to say typical family office because there's an old adage that says, "If you met one family office, you've met one." Because the course of how they think about investing is wildly different.

That said there are themes that they look for. Number one, obviously they're looking for non-correlated exposure into an asset category that can truly bring alpha. Some families look for businesses or funds that are investing in a thesis that are complementary to what the family's business was or is. Co-investment opportunities are a big part of a lot of family offices and how they assess the suitability of a particular manager. I will say that in the 200 or 300 families that we've worked with over the last 12 years, it does range; it tends to be fairly volatile quarter by quarter what they're actually looking for.

Alec: Can you just fill people in on what you mean by the work you did over the past 12 years where you were doing this, and how these family offices found you and brought you into the mix?

Samir: Yes. In 2012 we had a thesis at the organization I was at really focused on this next era of venture capital. Looking at these firms that are Fund I, Fund II, Fund III that we believed had not only staying power, but the ability to drive real alpha. We knew that, in order to help a lot of these managers, there was education that we had to do for the fund manager as it related to fundraising, as it related to portfolio construction.

We started building communities that were between fund managers and these LPs that were increasing their demand for these types of assets but had a tough time understanding how to assess those assets, how to find those assets. We acted as [a] helpful intermediary between those two groups, simply as somebody that wanted to help build that community and actually reduce some of the friction points that related to either capital allocation or capital formation.

Alec: There's an industry out there of specialists that act as this go between LPs and GPs. You're looking to shake that up a little bit or bring an innovative model to that, which I want to tee up for you a little bit to talk about. How do GPs court LPs—especially the smaller ones—if they do that at all? How would your platform change that kind of arrangement that is the standard in the market right now?

Samir: It depends on the GP. There are GPs that have come from established firms that have some institutional context. They typically do a look to invest in, or at least get investment from, some of the institutional LPs. The vast majority ... is really looking at their direct network of individuals, family offices, asking for introductions, working with other GPs and LPs that can be advocates, and [helping] build that top of the funnel that then could hopefully get to a point where they can get to a close.

The problem is some of these fundraisings are really inefficient. The average fundraise for a first-time fund and even a Fund II ranges between 12 and 18 months. That means that that manager is spending disproportionate time raising capital versus helping companies and investing in companies that comes at the detriment of potential returns, because of the time spent on noncreative activities that actually help bring value to the LPs that are investing.

What we observed, and this is several years ago, we observed that there was this growing population of people that were non-institutional, that were ... getting younger and younger, that grew up in a digital age, that were looking for asset allocation strategies that were not this typical 60/40 public equities and fixed income. In fact, they were looking to replace fixed income with private investing and alternatives—to be completely clear, so these are hedge funds, venture funds, private equity, crypto.

The problem with these different asset categories is the private markets are less accessible than your traditional bond market or your traditional public equities market. What we identified is that there was several of these friction points, which we covered earlier, that prevented this massive supply of demand capital, from actually participating and finding ways to invest in the asset category. What we do as a company is we remove those friction points through [our] platform. The discovery function, the function of manager, assessment and selection, we do diligence. We take them through investment committee.

Once they're on the platform, we allow investors to invest through our feeder vehicles at dollar amounts that are substantially smaller than what the underlying manager would have as a minimum. An example would be if there's a $100 million fund, we feel it's suitable for the platform, and it's a great investment. We secure an allocation, create a feeder vehicle and investors can invest $100,000, $75,000 $200,000, we aggregate the capital, and then make an ultimate investment in the underlying fund or company.

For the fund manager it's great, because they efficiently get to tap into this massive $50 trillion-plus non-institutional market without having 50 conversations with the wealth managers or 100 conversations with family offices, but rather one conversation, one LP to manage, and one direct relationship.

Alec: That relationship is with you and your team, not each one of the investors or family offices, say, that you might have 20 or more family offices bucketed together in this special vehicle that was created for your allocation, right?

Samir: Yes. That would be, I would say, the typical case or maybe situations where the fund manager actually does want to meet the LPs or the LPs can add some strategic value to the GPs. Opportunistically, those introductions could be made between the underlying LPs over feeder vehicles and those GPs, it really is a case by case. At the end of the day, we believe community engagement between GPs and LPs is needed. That's how education happens. That's how people truly understand the asset category.

It's hard for me to say that there's only going to be one way we do it. Ultimately, we do want engagement between the two groups, but we will do it in a way that doesn't cause friction for either side.

Alec: You're talking about funding rounds that are what? Like seed on up, how late-stage are you thinking of going with this?

Samir: We don't have the specific stages that we're focusing on in terms of the funds or companies we bring on. Companies really are co-investments that are SPVs offered by some of our fund managers. At the end of the day, what we want to do is provide LPs with a curated personalized experience that provides them a menu of items based on their investment objectives.

I don't really ascribe to having 100 different products on the platform that everyone sees; rather, Alec, if you are looking for late-stage exposure, you are going to see late-stage exposure. If you want early-stage [or] seed, that's what you'll see. As you think about the LP universe, people are looking to fill different parts of their own portfolios with different types of assets. It's our job to provide them those assets that are pre-vetted but really aligned with whatever investment objective that they have as their mandate.

Alec: Could you compare this arrangement to, say, like a syndicate that is formed on a platform like AngelList, which, of course, is really designed for angel funding, in other words, way earlier in the lifecycle? I feel like there are some analogies that can be made across both an AngelList and an Allocate kind of platform?

Samir: We think AngelList has done a fantastic job and really capitalizing that angel market, using things like syndicates and rolling funds, to allow people to be full-time funders—or at least part-time funders in certain cases—and capitalized companies at the early stage as individuals. Another corollary could be something like AI Capital, which today, I think announced a raise of $440 million-- $4 billion valuation, who focuses on private equity.

The core thesis that AI Capital had, was to democratize access into private equity funds, like the KKR or Silver Lake or Blackstone, and ultimately built a very successful model. I would say that we fit in somewhere in that ecosystem, we're focusing on institutional grade managers, and people that want to invest in venture funds and co-invest on a very programmatic basis.

Alec: From the standpoint of what's good for innovation and the ecosystem, can you talk a little bit about how the smaller investors, the people who have been shut out of the venture ecosystem traditionally? How might their involvement make a difference on innovation and the kind of texture of the VC ecosystem, specifically, like the kinds of companies that are getting funded and the kinds of founders that are out there and prospering?

Samir: I think the best way to think about this is if you look at who is getting capital from non-institutional investors, it really does range the gamut. We looked at a study, I think it was back in 2018, where fund ones that were not in Silicon Valley and were not people that had previous experience working at a firm, 90% of their capital was coming from non-institutional investors—so individuals, family offices.

What unlocking the non-institutional class does is it allows people with different backgrounds to start funds, and to efficiently create funds that they otherwise might not have because they don't have the networks, they don't have the backgrounds, the typical traditional institutions having.

To have managers that are diverse and backgrounds—whether their socio-economic background, their cultural background, where they invest out of—so looking at different markets, if we can create a more efficient capital market that allows these people to get funded, what you're also getting is that downstream or upstream effect of those managers then investing in diverse founders investing in ecosystems that are not Silicon Valley, New York, Los Angeles. We think that, by doing this, you're actually creating a healthier capital ecosystem, that creates more diversity and different types of founders getting funded.

Alec: Do you have that desire? Do you have that vision in mind when you think about which GPs you want to work with? In other words, are you evaluating GP opportunities for the platform along those kinds of concerns?

Samir: There's equivalent mandates. One mandate is we do look at the GPs from the standpoint of investability, which does take into account things like, where do they fit into the ecosystem? Do they have a comparative advantage in terms of what they're going after? Do they have a unique model with what they're doing? Oftentimes those things do align.

The second part is even for managers that are not actually on the platform we are doing a lot of work in terms of education, research, events to really create a community aspect, to give people the support and advice necessary to be successful investors and have the opportunities to either get capitalized or at least understand what it takes to be an institutional manager.

Alec: Fair enough. What kind of negative effects do you see of only having mainstream large LPs as the sources of venture funding? I guess the flip side of the question I just asked you before this. What are the deleterious effects that you see of the homogenous big LP-dominated marketplace?

Samir: There's a few. I don't know that I would take it to the level where these are necessarily terrible things, but I do think there's some drawbacks. One, you do have a finite world of these folks, and managers do take some risk by having large LPs who may have a change in CIO or may decide to sit on the sidelines because their other assets have gone down in value. There is some risk that managers take in terms of not having a diversified base.

More importantly, from my standpoint, I've always been a big proponent in more people participating and not the same people benefiting from the same system. I've seen the investors in a lot of these funds, and you see the same names over and over, and they fall into one or two buckets. They fall into big institutions or people that are individuals that are either highly networked and can get into anything, or are incredibly wealthy and have the ability to write big checks.
It's always struck me that for an asset class that is so innovative and an asset class that has produced these alpha returns, that such few people that are qualified can actually participate. I never thought that was a good way to operate a marketplace

Alec: Samir, let's talk about technology for a sec before we wrap up. What role do you see technology playing in platforms like yours for bringing a solution that's more efficient and more equitable?

Samir: Technology is a key. For us, software is the main driver of how we think about actually delivering our solution, not only from the element of curation and having people be able to see these opportunities invest, but the cost of actually private investing is really high right now when you look at the friction points that exist.

If I want to invest into a public stock, I can open up a Robinhood account and seven minutes later, I'm making my first trade to invest in a private fund, to invest in an SPV. You get a 33-page subscription agreement, which is confusing at best and almost impossible to fill out at worst. Those friction points actually prevent people from executing these things efficiently. Whether it's subscription agreement, whether it's performance tracking, these things can only happen if you implement better ways to create infrastructure that makes it easier for people to invest in these assets.

For us, we're taking a very software-forward approach of how do we make it easier for somebody to invest? How do you make that transaction layer easy? How do you make the reporting layer easy, and how do you allow this marketplace to truly be efficient? Given the size of the private markets, we're starting to see that momentum, and we're looking to extend that momentum.

Alec: Have you employed engineers and gotten pretty high-tech about it, or do you have more basic platforms within your platform that you're relying on?

Samir: It's a combination, but 63% of our team, so five out of eight people, are technical in nature. We have a VP of engineering, a head of product, a head of UI, two full-stack engineers. That was a conscious decision made early to have a DNA of a software company that happens to deliver financial products.

Alec: Last question I have for you is about the funding round that you just announced just a few days before this recording was made. You've got venture investors backing your startup. Did you already have any relationship with those investors on your platform?

Samir: Not on our platform, but we've had these relationships with many of these investors for years and years and years, stemming back to my prior two organizations. Their investment philosophy was really based on us as a fintech that could scale by building great software.

Our software primarily is infrastructure that accompanies these financial products. A lot of the spend that we have with the round—which is a $5 million round—will go really toward two aspects. One is the production of the product. The second is, as a financial services company, we ourselves will be regulated by things that require costs, whether it's registering as a registered investment adviser at some point once we reach a certain AUM, it's things like KYC, AML—it's all the things that we have to be compliant with, which do cost money. That was the decision for us to raise capital.

Again, they're viewing us as any other venture-backed company. They are underwriting to us scaling to a massive company that could return their funds.

Alec: Samir Kaji, co-founder of Allocate, thanks very much for being on the pod and best of luck.

Samir: Alec, thank you. In this episode

Samir Kaji
Founder and CEO of Allocate

Samir Kaji is the founder and CEO of Allocate. Prior to Allocate, Samir spent 22 years in venture banking between SVB and First Republic Bank and closely worked with and advised over 700 venture capital and private equity firms. During this time, he completed over $12B in structured debt transactions and invested personally in over 60 funds and companies. Samir completed a finance undergraduate degree at San Jose State University, a MBA from Santa Clara University, and completed the prestigious Kauffman Fellows venture program. He is also an active writer on venture capital, and is the host of a top venture podcast called "Venture Unlocked."