E149: From $0 to $1B in 3 Years: Fin Capital's Meteoric Rise in Fintech Investing

Speaker 1 There's a professor at Stanford named Ilyas Drubalev who was one of my professors while I was at GSB and he's spent a lot of time on this.

Speaker 1 He produced a book called The Venture Mindset and that was coming out of a lot of his research and he started his research by looking at what do unicorns have in common.

Speaker 1 And he started doing that research when I was there in 2012, 2013. And I kind of laughed.
I was like, well, that's a fun academic exercise, but that's not how you make money.

Speaker 1 How you make money is figuring out what they had in common at the seed stage, which was really two things.

Speaker 1 One was effectively who the founders were and their backgrounds, and then two was the business model.

Speaker 1 And for us, we believe, and certainly the flights of quality has demonstrated this, that software investing is where you drive capital returns within venture and then growth equity in late stage.

Speaker 1 The data is pretty demonstrable within FinTech specifically that repeat founders dramatically outperformed. There is an 80-plus percent correlation between over a billion-dollar outcome.

Speaker 2 When we last caught up in New York, you mentioned that your AI can predict startup success to 90% certainty at the seed and series stage. How is that possible?

Speaker 1 We are still obviously testing and refining the model. We have a pretty incredible Gen AI-driven predictive model for effectively evaluating founder DNA.

Speaker 1 Gen AI has changed not only what we invest in, but how we invest.

Speaker 1 And we have a director of AI at the firm, and he and I and the rest of the team have been refining this model. We invest strictly in repeat founders and seasoned entrepreneurs.

Speaker 1 So how do you evaluate them and score them ABC from the attributes that we've assigned, which are about 35 weighted criteria.

Speaker 1 And from there, we want to predict, is this the type of founder that's going to generate a 5 to 10x net outcome at the earliest stages. DB Insight stack ranks the top 250 fintechs every year.

Speaker 1 There's a couple of other Fortune 50, et cetera. They all have these ranking lists or these lists of the top 50, top 250.
So we've done back testing against those.

Speaker 1 We've also done back testing against our own portfolio, and we found a number of interesting signals from that.

Speaker 1 With the Gen AI teaching the model, it's refining our percentages, refining our weightings. That started with kind of multiple basis points, like three to five percent changes in weightings.

Speaker 1 Now it's down to, you know, small basis point tweaks. So we really feel like we're at a point now where we just keep feeding it more and more data.

Speaker 1 And it'll on the margins, obviously, continue to refine it.

Speaker 1 So we've looked at in training data sets, YC data, we've looked at a pitch book data, we've looked at companies that have exited for over a billion dollars, companies that have exited over $500 million.

Speaker 1 And we've also looked at in terms of how much money have these companies have been able to raise as a proxy of success. And we've used all those training data sets to refine our model.

Speaker 2 You mentioned 35 factors behind the founder DNA. Unpack some of the most surprising factors that you didn't think should really drive company performance.

Speaker 1 You know, there's a professor at Stanford named Ilyas Drubalev, who was one of my professors while I was at GSB. And he spent a lot of time on this.
He produced a book called The Venture Mindset.

Speaker 1 And that was

Speaker 1 coming out of a lot of his research. And he started his research by looking at what do unicorns have in common.
And he started doing that research when I was there in 2012, 2013.

Speaker 1 And I kind of laughed. I was like, well, that's a fun academic exercise, but that's not how you make money.

Speaker 1 How you make money is figuring out what they had in common at the seed stage, which was really two things. One was effectively who the founders were and their backgrounds.

Speaker 1 And then two was the business model.

Speaker 1 We believe, and certainly the Flight to Quality has demonstrated this, that software investing is where you drive capital returns within venture and then growth equity and late stage. Number one.

Speaker 1 Number two, the data is pretty demonstrable within fintech specifically that repeat founders dramatically outperform.

Speaker 1 There is an 80 plus percent correlation between over a billion dollar outcome, and this is just pitch book data that we analyzed, and repeat founder in fintech inception to date.

Speaker 1 That's a pretty good hit rate. You're going to miss some in the long tail, in the 20%.
I always hear arguments from people, well, these founders were first-time founders.

Speaker 1 And I'm like, I got that from somebody about Max Levschkin at PayPal. It's like, well, no, actually, Max had a company that completely failed before that.
And he talks about it.

Speaker 1 And we look for those founders that are EP founders that are serial in nature, that you can very much tell are builders and are trying to solve big problems and aren't doing it for the wealth at this point.

Speaker 1 And that's the types of founders we back, do it from the pre-seed through to pre-IPO across our platform. Other surprising things, university doesn't really matter.

Speaker 1 If you go back and you look at university data and ILIA has a chart that shows this, Stanford, Cal, Harvard, MIT, you know, those names certainly appear repeatedly.

Speaker 1 That hasn't really factored in in terms of our model meaningfully. Whether they've been CEO before is a huge factor.

Speaker 1 I think a lot of people think, well, they ran a large PL and they've never been CEO before. This is their first CEO seat.
You know, they should be able to do that job.

Speaker 1 Turns out, if you haven't been CEO before, backing a first-time CEO is a huge risk. How long they were in that CEO seat, massively important.

Speaker 1 One of the most surprising factors is you would assume that there's this trail of success and that if their first startup was successful, their second startup must have been successful.

Speaker 1 That's definitely not true. In fact, some of our best performers completely failed in their first startup and they didn't get it right until their second or their third one.

Speaker 1 So you can't look at past successes or outcomes or track record of being a founder. It's really time and seat and experience that are the biggest drivers ultimately in the model.

Speaker 2 What's the intuition behind that?

Speaker 1 Pattern recognition. Can they build and ship product? And do they have the experience of taking that and selling it into the enterprise? That sales process tends to be lengthy.

Speaker 1 If you haven't haven't done it before and you don't have those relationships, it's even longer. Number one risk to a startup is running out of cash.
So have they raised money before?

Speaker 1 Have they gone through that process? Do they understand what a fundraise looks like? Do they know the VCs in the space? All those are massive unlocks. It's always funny to me when I get

Speaker 1 questioned about why we don't back first timers. And I'm like, well, here's all the things that they've never done before that they're going to do for the first time.

Speaker 1 And we're going to have to train them how to do that. And I don't really want to train people on my time.

Speaker 2 Where else at Thin

Speaker 2 are you utilizing AI and in what way?

Speaker 1 There's a few really interesting AI applications around personality testing.

Speaker 1 We've started to play with that a little bit just in terms of what types of personalities ultimately correlate to the best leaders.

Speaker 1 There's been quite a bit of research done on this and there's a few companies that provide personality scores based on LinkedIn social and other publicly available data.

Speaker 1 Not perfect, but it's interesting signal. And there's a few personality types that we've worked with historically that just have not worked well.

Speaker 2 Give me an example of one or two founder or CEO archetypes that you believe are successful.

Speaker 3 Thank you for listening. To join our community and to make sure you do not miss any future episodes, please click the follow button above to subscribe.

Speaker 1 The best archetypes we've seen

Speaker 1 are repeat founders who had either a really terrible outcome in their first company and where it was an Aqua hire or it went to zero or two, they had kind of a middling outcome and they learned, learned in both cases they learned a lot from it they have to have a deep passion expertise in our world for fintech in other word worlds that might be health tech or biotech or the like so domain expertise obviously is critical tend to come from products and engineering backgrounds but i would say skews product oriented

Speaker 1 because product at least you're you're sitting in between the sales and go-to-market function, the marketing function and the engineering function.

Speaker 1 You're the one person that speaks all the languages in the Tower of Babel, so to speak. Average age of our CEOs is 43.

Speaker 1 They tend to be in their early 40s and they're not in their 20s trying to move fast and break things. They are deeply focused on a platform play versus a feature or a product.

Speaker 1 They are just very clear that this is going to be a platform and they want it to be the category leader. They're deeply competitive.

Speaker 1 They want to win and they're very aggressive and they move with incredible urgency.

Speaker 1 When you talk to other VCs or even when I I still talk to some of the older generation in the GP world, they talk about, you know, the gut.

Speaker 1 They'll meet with a founder and within the first five minutes, they'll know whether they're going to write them a check or not. A lot of that is gone.

Speaker 1 There's certainly some EQ aspects to this business now. Absolutely.
You got to be able to have a judgment about the integrity and the work ethic and so forth of somebody.

Speaker 1 But the quantitative, data-driven approach is absolutely superior, and I think will continue to be. And that comes from a place of the top funnel and the vastness of the opportunity set these days.

Speaker 1 Like I can't beat with every single CEO who's in our funnel.

Speaker 2 How important is a founder or CEO's passion for a specific space? Does that play into the success rate?

Speaker 1 It does because this is such a grind.

Speaker 1 You wake up every single day as a founder and everybody on my team has been an operator. So I've been an operator as well.
And you're running through brick walls every single day.

Speaker 1 So if you're not passionate about the subject, you probably should be working on something else.

Speaker 2 You really go after stealth companies. Why do you care about companies and stealth?

Speaker 1 You go on LinkedIn right now, you type in the word stealth, there's roughly 90,000 founders in stealth. We want to get to founders before anybody else does.

Speaker 1 We think that identifying them while they're in stealth mode or

Speaker 1 is the best time to do it. We track people leaving Stripe and other companies we care about for sure, right?

Speaker 1 And so the minute somebody leaves Stripe, we get a notification and that gets added to our top of funnel and that person gets scored immediately.

Speaker 1 The other thing we do that I'd love to see other VCs do that's become a big differentiator for us

Speaker 1 is we have produced a reverse pitch deck. I still haven't found another VC that does this.
I have no idea why nobody else does this, but I'm giving away some secret sauce here.

Speaker 1 So we put together a deck of high Finn. Like, why should you work with us and take our term sheet over the hundreds of other VCs out there?

Speaker 1 We made made an incredible pitch deck that basically makes that super, super clear. We think that is something that in positioning ourselves in the market is why we win so often.

Speaker 2 You also do reverse reference calls. In other words, having founders in your portfolio reach out and talk to you about that.

Speaker 1 All the time.

Speaker 1 We took net promoter scores up until we became an RIA. And that was we just literally surveyed our founders every year and we said, hey, would you recommend us to another founder at zero through 10?

Speaker 1 And we had great numbers. And then when we started registering, the compliance council was like, hey guys, unless you can get 100%

Speaker 1 response rate,

Speaker 1 you shouldn't be doing that because it just is cherry-picking. You know, we had some marketing

Speaker 1 compliance issues around it. I wish we could still do it.

Speaker 1 And I wish I could get 100% compliance and people responding to it. People are busy.
And we have 130 portfolio companies.

Speaker 1 So I would say the reverse has been, you know, we have advocates within the founders that we work with.

Speaker 1 Even if we've had to have hard conversations with those founders, we still have a high degree of respect for each other, and they'll serve as references.

Speaker 1 The best founders should be asking their prospective VC partners for references, and you should be having 15, 30-minute calls with those CEOs because you're going to learn something about either their business.

Speaker 1 They could be a commercial partner. You're going to learn something about their fundraising and what they did and how they succeeded.
And you're going to learn something about the VCs.

Speaker 1 And that's super valuable inputs and data.

Speaker 2 In addition to asking for reference, they should primarily focus on off-list references.

Speaker 2 Maybe even use the list that the VC gives as the list of not to call and call the rest of the founders and find out what happens when the company doesn't 10X or 100X.

Speaker 2 And how does the VC treat you during good and bad times?

Speaker 1 Agreed. I never asked for references.
It's a waste of time on our end.

Speaker 1 We can get to former colleagues, former VCs that have invested with them. And obviously we're asking them, you know, the good, the bad, the ugly.
They should do the same.

Speaker 1 But you should also, as a VC, be ready to provide references. And you can, we actually have references where we say, hey, in this case, it was smooth sailing up into the right.

Speaker 1 In this case, it was super bumpy and we had to have a lot of hard conversations. We're thankfully stable now, but you should still talk to them.
And that's super helpful.

Speaker 1 You have to be humble about how you're positioning yourself because we're imperfect.

Speaker 2 You invest at Series A, Series B, hyper-competitive rounds. You're competing against the very top firms like an Andreessen Horowitz.

Speaker 2 How do you compete head to head with a firm like an Andreessen Horowitz?

Speaker 1 Our flagship fund invests from pre-seed to B, but our sweet spot is seed and A. How we out-compete the generalists, which we do every day,

Speaker 1 is through that reverse pitch, through our reputation in the market for delivering value beyond capital.

Speaker 1 But two big things, these are our two superpowers, business development and corporate development. On the business development side, Stephanie Perez, who's fantastic, leads that effort for us.

Speaker 1 And we're helping our companies connect into our strategic LPs, of which we have a large number. And we're also helping them connect into our broader network.

Speaker 1 And we know all the end customers they're going to care about in terms of banks, assets and wealth managers, insurers, fintechs, and corporates, who are the five end customers that use the software we invest in.

Speaker 1 And then we have a very unique function, which is corporate development, which is run by Matthew Mann out of New York, who's terrific as well.

Speaker 1 And Matthew is helping our companies raise equity and debt. He is helping them with inbound and outbound MA, and he is helping them with pre-IPO work.

Speaker 1 We know all the potential acquirers in this space. We know all the bio players who play in this space, and we know all the equity analysts and public equity investors that play in this space.

Speaker 1 Specialization matters at every single step of the process. Being able to differentiate on adding active value there is huge in terms of winning rounds.

Speaker 1 A couple other things, our founders get access to a version of Lighthouse. What are they using Lighthouse for? They get access to our Rolodex of Business Development Relationships.

Speaker 1 So that integrates with our CRM. It integrates with our LinkedIn.
So they can look up, you know, who does Logan know at this bank or who does Finn know at this bank more broadly.

Speaker 1 Two, they get access to our list of investors, co-investors, and people that are investing in the space at every stage.

Speaker 1 And then three, they get access to actual hands-on operating playbooks and video content we've put together on everything from go-to-market to how to pay your sales team to board decks.

Speaker 1 So that's kind of the how-to guide or the best practices. And with repeat founders, they really know a lot of the basics, obviously, at this point.
So, this is higher-level materials.

Speaker 1 And all of those things go into our value proposition.

Speaker 1 But the biggest drivers, I would say, are our deep domain expertise. So, we know exactly what industry they're playing in, what types of tech they're building, and we speak their language.

Speaker 1 And then, coverage. So, we're going to be at 25 now.
We'll be at 30 plus. I love Andreessen, but they have three people, give or take, that are working on FinTech.

Speaker 1 Our scale of support for our founders is just dramatically 10x bigger. And you can look at every generalist and say the same, Lightspeed, Bay, et cetera.

Speaker 1 They all have a finite number of partners that are focused exclusively on FinTech. And they do not have dedicated platform teams that are exclusively focused on this industry.

Speaker 1 They have generalist platform teams and they have predominantly generalist investors.

Speaker 1 And that leads to a lack of understanding on the domain side, a lack of understanding on the business development and partnership side, and then obviously a lack of support on the corporate development side if they even have a corporate development function.

Speaker 1 So that's how we went and it's worked incredibly well and we continue to invest in that platform function where we have five people today.

Speaker 2 You've really leaned into your focus and fintech, which is very idiosyncratic to your earlier point. You don't necessarily see somebody going from a consumer founder to fintech founder.

Speaker 2 very often with success. So you're really focusing on that ecosystem and building this economies of scale within a very specific sector.

Speaker 1 Absolutely. And you have to have a growth mindset.
We describe ourselves as fintech nerds with capital. So we really lean into that, as you said.

Speaker 1 But there's something new happening in FinTech that you have to get your arms around, whether that's on the regulatory side, particularly important today, whether that's on the bank pain points or innovation objectives or new technologies, right?

Speaker 1 So we started investing in AI in 2018 within our portfolio. Really started building it for ourselves around that time going into 2021 when we hired a head of AI.

Speaker 1 We were one of the first to hire a head of AI. There's all these new technologies you have to get smart on.
There's new applications you have to get smart on.

Speaker 1 One example of that is we have a sub-sector you'll see on our website called Vertical FinTech.

Speaker 1 And this is the gift that keeps on giving in terms of growing knowledge because this is fintech and other industries. So we've had to get smart on healthcare.
We've done a lot.

Speaker 1 We've had to get smart on energy tech. We've had to get smart on real estate, legal tech, transportation, logistics, and supply chain.

Speaker 1 And the nuances of how payments and other fintech verticals are going to get applied in those industries and the legacy infrastructure that they typically have and how that's going to evolve.

Speaker 1 And so that's really exciting to us.

Speaker 2 Tell me more about your head of AI. What were you looking for from a head of AI being so new for this industry? And secondly, what did his first 90 days at Finn really consist of?

Speaker 2 What was the problem set and unpack that for me?

Speaker 1 He's on our website, FanWen. He was working at plug and play as an investor, but had an engineering background and was building technology off to the side for himself.

Speaker 1 And I was talking to a number of different people about how I was using AI. I was working with a consultant at that time that was outsourced and had this founder DNA model.

Speaker 1 And I wanted to figure out how to refine it and really put some significant data science and data sets behind it. And his name came up a couple different times.

Speaker 1 And so I reached out to him and had him come by our first office in Jackson Square on a Friday afternoon. And he showed me what he had built just on the side.

Speaker 1 And he said, you know, I've been building this because I'm lazy and I want to find tools to automate all this stuff. And he's a very humble, really brilliant guy.
And I said, okay,

Speaker 1 that's really interesting and phenomenal. Here's what I've been building.
And we realized we had been kind of parallel processing. And so I made him an offer on the spot.

Speaker 1 Honestly, it was more of me knowing that this was going to be something we needed to build. leverage AI and our own solutions.
We had been investing in AI and been spending a lot of time on it.

Speaker 1 I learned first about the power of AI when I was at SoFi because we were leveraging AI and machine learning in our underwriting models and got to spend time with the data science team on a day-to-day basis while I was running SoFi ventures.

Speaker 1 Understood how powerful it was going to be, and it was incredibly important that we have a capability because I knew it was going to transform our industry and that we were investing in the space.

Speaker 1 His first 90 days were really productizing what we had built. We knew we wanted to make it full value chain, not just screening and sourcing.

Speaker 1 All of our investment memos, models, materials, notes, et cetera, all are going into Lighthouse. And then third, on the monitoring side, monitoring for GPs is still a very manual process.

Speaker 1 You've got great companies like Standard Metrics out there, which is a portfolio company, but it's still very difficult to get portfolio companies to give you data.

Speaker 1 And so we wanted to create automation and scraping and other things around that to take a lot of the guesswork and lift off of our portfolio companies and then be able to utilize that to create signal on both asymmetric growth and companies that are breaking out, as well as companies that might be struggling relative to cash burn or other dynamics so that we can get out ahead of that.

Speaker 1 Asking companies for that data on a biannual or annual basis does you no good. You have to be looking at it every week.

Speaker 2 You've really been thoughtful about your LP base. Talk to me about your LP base.
Why is it strategic? How did you come about building it?

Speaker 1 We're about 80% institutional, 20% family office. We have our share of foundations, pensions, endowments, but we've really leaned into this notion of how do we derive signal from the market

Speaker 1 in terms of our thematic thesis building? How do we de-risk diligence and work with companies and validate their technology works and it is going to be adopted?

Speaker 1 And then, third, how do we drive meaningful commercial adoption?

Speaker 1 So, I thought about it initially on those three elements, and those are still the three elements that we think about with our strategic LPs. And those include large banks all around the world.

Speaker 1 It includes large asset managers, large wealth managers, large insurers, and then corporates. Corporates are largely public fintechs for us.

Speaker 1 And the signal we get from them in terms of, hey, here are my innovation goals for the next three, five years. Here are my massive pain points across my front, middle, and back office.

Speaker 1 Here are the RFPs that I have coming up.

Speaker 1 And by the way, here's access to our technology team and our business line leaders if you need to pick their brain on specific themes or specific companies or get them to engage in some kind of proof of concept.

Speaker 1 So our mode of going to through diligence is: here, we're going to introduce you to all these

Speaker 1 prospective customers. The CEOs love it because these are shots on goal for customers.

Speaker 1 We love it because it's a massive signal on the diligence side for how they're going to go to market, how they're going to engage. And we'll often join those meetings.

Speaker 1 And so, this is another way we win term sheet battles.

Speaker 1 And it gives us incredible signal in terms of their pitch, their demo, what the reactions are, what the questions are, what the friction looks like. And if that goes incredibly well, that's

Speaker 1 a really nice thing to lean into in terms of having more conviction and leading that round. So the strategic LP base is fundamental.

Speaker 1 We've done a really good job of helping them get win-wins, both in terms of financial return, obviously, but also in terms of RD and research, in terms of commercial, digital adoption, in terms of commercial wins, so deposit growth, lending growth, investment banking business, and so forth.

Speaker 1 And then lastly, in terms of demo days, events, content, beyond that, all through Lighthouse. For any specialist manager, having strategics is incredibly important.
It's that flywheel effect.

Speaker 1 You have to add value to them beyond just the return if they're going to be re-up long-term partners for you.

Speaker 2 One of the most underrated aspects of dealing with in these complex sales, whether it's to large banks or to large institutions, is actually getting feedback. It's not even just access.

Speaker 2 They'll take meetings with a lot of people, but what are they actually seeing? What do they want? What do they wish you were building? These kind of things are very difficult to really extract.

Speaker 1 We meet with management teams and boards consistently, but it's the layers down that are really doing that work to your point.

Speaker 1 And what do they see missing on in terms of the product roadmap, in terms of the functionality? What other solutions have they been looking at in the market?

Speaker 1 And we will often get vendor lists from LPs where they're like, here's all the vendors we're using for these different functions.

Speaker 1 And they're a great source of deal flow too, because they're out in the market. They're getting inbound all the time from startups and software companies that are selling into them.

Speaker 1 The other nuance there is competitive tension vis-a-vis existing players. So I talked about building platforms over products or features.

Speaker 1 If a service now, I'll use them as an example because they're a terrific business, is building something or they've got an offering in market, we will usually get signal on that from our LP base before it becomes obvious.

Speaker 1 I've been on calls with public teams, obviously, who are building their own products and adding features to their capabilities.

Speaker 1 And if you hear that they're leaning into something, they're adding it and they've got a massive install base. And then you go meet with a startup and they're like, well, I'm building this.

Speaker 1 And you say, well, I think you should figure out a different angle. It's really important to be full stack from pre-seed to pre-IPO because you just get that visibility.

Speaker 1 You have to be engaging with public teams and customers because they're often often building something and you can get run over pretty quickly if you're not keeping a pulse.

Speaker 1 on those competitive dynamics.

Speaker 2 You have a lot of LPs. You have institutional LPs.
You have family offices. You have different products.

Speaker 2 Talk me through your investor relations strategy and how have you evolved investor relations over Finn's lifetime?

Speaker 1 One of the biggest challenges for GPs is feeling like they can somehow get out of the IR process. I'm still the head of IR, lead all of our fundraising, I should say.

Speaker 1 I've met with a lot of GPs who say, well, I really hate meeting with LPs and I hate fundraising. I love fundraising.
I love meeting with LPs.

Speaker 1 That is one of the best parts of my day in addition to meeting with with founders because those are our clients. Those are our stakeholders in every respect.

Speaker 1 And particularly when you start working with large institutional LPs where you see the pensioners, you see the endowments, that gives you just more to play for and you want to win on their behalf.

Speaker 1 You will never get out of that seat. I tell every GP that.
I say, I love it. You need to learn to love it if you don't.
And you need to figure out how you do it repeatedly.

Speaker 1 I'm having thousands of LP conversations every year. Two, you got to have help.
So we today have two IR team members, a director of IR and then an associate.

Speaker 1 We're adding a senior associate, which we'll be announcing here at the end of the month, who's terrific. All three of them sit in New York.

Speaker 1 They work very closely with me on top of the funnel, so net new opportunities, making sure that we're deepening our existing relationships and then running processes.

Speaker 1 You have to have really good hygiene, very clean, solid CRM,

Speaker 1 clear cadence, a clear process, great materials, great data room, and so forth. That has to be married on our end in particular as an RIA with with terrific regulatory.

Speaker 1 The NRIA for us was about kind of table stakes, social infrastructure and compliance. I just think it's the right thing to do.
And I think long-term a lot of GPs will recognize that.

Speaker 1 They'll just registered after 44 years in business or thereabout.

Speaker 1 As listeners may know, they have a 20% cap as an ERA on your secondary allocation. That's a pretty meaningful constraint.
We don't have that cap, so we can do as much secondary as we want.

Speaker 1 And then the third piece is how long you hold public equities. So as an ERA, you got to sell the minute you can after the lockup.

Speaker 1 We can hold those public stocks within our private funds for as long as we see fit to maximize returns. So, it is a significant amount of work and a lot of infrastructure and overhead.

Speaker 1 But to at least us in terms of our long-term strategy, it was very critical.

Speaker 2 Why would you hold shares past the lockup? What competitive advantage do you have in these companies? And walk me through that, the decision-making on whether to sell or to continue to hold.

Speaker 1 We create a trading plan for every IPO. We assess based on a bear base and bull case how many shares from what tax lot effectively vis-a-vis the cost basis we're going to sell and when.

Speaker 1 And that is incredibly important to have a discipline around and have it forecasted and share that with your LPAC and the LP base.

Speaker 1 I hear too many LPs and rightly complaining that their GPs create a black box scenario when companies go public.

Speaker 1 They're like, we don't get any insight in terms of when they're going to sell that company. In some cases, that's an ERA.
They're going to sell immediately.

Speaker 1 In other cases, they might be an RIA and they have more flexibility.

Speaker 1 And certainly, you know, Sequoia has talked a lot about this in terms of leaving money on the table vis-a-vis companies that have gone public and selling too early.

Speaker 1 Our view is that we're just re-underwriting that asset effectively on a constant basis.

Speaker 1 We're working with the bankers, working with the equity researchers who on the sell side who we know extraordinarily well.

Speaker 1 And then we hire third-party valuation experts who come in and also look at the asset and give a third-party view on it as well.

Speaker 1 The important thing to do is provide transparency, provide a forecast, and then execute against that forecast with the view that you're operating within a fund life constraint and you're trying to maximize returns.

Speaker 1 The worst time in the history of that stock, most likely, to sell that asset is typically the day after it gets unlocked, which is when most VCs are forced to sell.

Speaker 1 That hasn't always been the case, right? There's some outliers there, but predominantly the best time to look at selling is actually six months thereafter, right?

Speaker 1 That means the volatility has has been taken out of the stock. The unload from those that have to sell has been done.
You don't have downward pressure on the stock.

Speaker 1 And so that is, you know, what we think about. So we're looking at it kind of in six, 12 months.
I've heard from many GPs that they will just programmatically sell.

Speaker 1 They won't even think about the price.

Speaker 1 They'll just sell at the, you know, a bit of the unlock, one, one slug a year after, and then another slug 18 to 24 months after if they have that luxury as an RIA.

Speaker 1 I think that's too random and arbitrary. So we really want to re-underwrite.
We have deep expertise on the company. We've known the company in many cases for longer than anybody else.

Speaker 1 We can really confer with the management team and others that have a view. And it also is incredibly important for board dynamics, right?

Speaker 1 So, I'm on several companies that are looking to go boards that are going public this year.

Speaker 1 Resigning from the board the day after the IPO and creating like some meaningful governance issues in that business is also a bad look.

Speaker 1 And frankly, for our growth equity and late stage portfolio, where we're trying to do more secondaries and own more of the business, If we're going to the management team and saying, Hey, we want to own more of the business, and they're like, Well, you're not going to be on the board after we go public.

Speaker 1 If you can say, Yes, actually, I will be, and I'll be very thoughtful about how we transition that process. That's a much better position.

Speaker 2 You had one of the fastest starts to a venture fund. You went from zero to a billion dollars in AUM in three years.

Speaker 2 Tell me about how you went about executing this, and what were your learnings from the first three years of founding FinCapital?

Speaker 1 I was a solo GP from June of 2018 to June of 2020. I didn't mean to be solo for that long.
It was just this thing called COVID that made it really hard to hire.

Speaker 1 I then started bringing on my initial team members on a full-time basis. It was incredibly difficult early days to raise capital as a first-time GP, new company.
Nobody had heard of us.

Speaker 1 And so we effectively laid out a strategy. I laid out a strategy that said, here's what I want to build.
I think this is going to be differentiated in the market.

Speaker 1 I think it's going to be sustainable and repeatable from an investment process and generating alpha consistently. I'm going to have a platform team.
I'm going to have an investment team.

Speaker 1 And I just laid it out. And I believe that you have to show a plan and then execute against it.
I encourage all emerging managers to do this.

Speaker 1 And I actually, I'm an LP in a number of emerging managers. I love supporting emerging managers.

Speaker 1 And I just went, I went to a lot of LPs and I got to them through other GPs, through cold outreach, through my network. And I said, hey, we're not ready for you yet, but I want you to hear the story.

Speaker 1 I'm going to take 15 to 30 minutes of your time. Here's my presentation.
Here's my data room. Here's what we're building.
And I'm going to come back to you in two to three years.

Speaker 1 And hopefully, we'll have succeeded in building a lot of this stuff. And if we have, I'd really appreciate a look.
LPs will take that call a lot.

Speaker 1 I'm not going to say 100% of the time, but it's a big number because they appreciate you coming from a place naturally of humility because you're a small

Speaker 1 single GP shop who hasn't really built anything yet, who has, you know, sub 100 million in AUM.

Speaker 1 And so you have to be able to be thoughtful about looking to the future and building those relationships for the long term.

Speaker 1 And I always tell LPs, this is a lifetime perpetual relationship that I want to maintain with you. LPs will make decisions to re-up and support you for, I think, really a couple of different reasons.

Speaker 1 One is obviously your performance and what have you done for them lately. That has to be, it has to be on the merits and that's very much appreciated.

Speaker 1 Two, though, it's how you treated them and the relationship and the communications that you had with them. For strategics, that's even higher bar.

Speaker 1 For traditional endowment foundation, pension world, that is, you know, did they give us transparency? What was the level of their reporting? What was the level of access? Did they come see me?

Speaker 1 Those types of questions. So the nature and the strength of the relationship.
I think inherent in that also is how much co-investment access did I get?

Speaker 1 Did I feel like I got looks and shots on goal and very high quality co-invest? And what did that process look like? And then third, obviously, is their own asset allocation constraints.

Speaker 1 And right now that is a lack of DPI.

Speaker 1 That might be some denominator effect issues, meaning their public portfolio is drawn down meaningfully and therefore their private market portfolio is a higher percentage than they'd like.

Speaker 1 And then third is just liquidity in terms of operating budgets.

Speaker 1 And if they're coming out of a corporate or they're coming out of endowment, what capital have they been given on a net new basis to deploy? That third category is outside of your control.

Speaker 2 don't worry about it like so you got to control the first two it's so interesting that you mentioned that you pitch and you say that you're not ready for a couple of years.

Speaker 2 Great LPs, just like great VCs, like to see progress over time. They're not necessarily looking at your metric today and saying, yes, I want to invest.
I've had LPs go on this very podcast say that

Speaker 2 there's 0% chance that they'll invest in the first year or two. Even they want to see progress.
I'm curious, A, were you on plan to what you said you were going to be in two to three years?

Speaker 2 And if not, where did you divert from that plan? And what were some of the learnings from that?

Speaker 1 We were thankfully on plan. For us, it was

Speaker 1 hiring is the hardest part of this business. And anybody who's been in a GP managing partner seat will tell you that.
We definitely made our fair share of mistakes on the hiring side.

Speaker 1 Thankfully we've had no regrettable attrition as a firm at the senior levels.

Speaker 1 And so for us it was about building the team in the right way for the long term that had shared alignment, shared passion for the space and really believed that being a multi-stage platform that also added a ton of operating value and only did one thing and one thing well was incredibly important.

Speaker 1 And there's a finite number of people that will sign up for that. And certainly I appreciated that.
Thankfully, yes, the vision we painted for LPs, I would say, has been executed on.

Speaker 1 And thankfully, we've had great re-up support. And so clearly, there's some agreement to that.

Speaker 1 But we also looked at and experimented with a few things that we very quickly shelved. So, for example, we like everybody had a SPAC in October of 2021.
We got a deal done on that SPAC.

Speaker 1 It was a med tech company, but it got done. And it was important to us to deliver to our shareholders on that proposition versus just, you know, shutting it down, which certainly many did.

Speaker 1 We issued so many LOIs, I lost count, and the market clearly shifted. And the sentiment on the structure completely changed, as we all know.

Speaker 1 SEC started to strongly dislike that structure, and there's a lot of good reasons for that. And so we basically said, hey, public equities, not for us.

Speaker 1 We're going to focus on private markets. And so you have to know what you're good at, that you have asymmetric information in, that you have sustainable edge in, and that you can do repeatedly.

Speaker 1 Because generating top quartile returns in one fund and then missing the mark in another fund means that your process is absolutely not repeatable.

Speaker 1 And it means that you're not going to have longevity in the business.

Speaker 2 You alluded to it earlier. You're an LP and 17 emerging managers.
What do you gain as a GP yourself from investing into emerging managers?

Speaker 1 It's probably close to 17. It's somewhere in the teens.
I would say there were three things for me.

Speaker 1 One is supporting other emerging managers, frankly, because I didn't get a lot of support from other GPs when I went out, at least on a capital basis.

Speaker 1 There are certainly GPs that I love and were incredibly supportive in giving me their time and advice.

Speaker 1 And so I wanted to support other emerging managers, wanted to coach them, wanted to help them avoid any mistakes that I might have made.

Speaker 1 That was really important to give back to the community because I think the health of our ecosystem is going to depend on emerging managers who are willing to take bets that established managers might not.

Speaker 1 That's a really important dynamic to the SBA, to certainly the ecosystem that is venture and private market investment. Two is exposure to areas that would be fundamentally important to Finn.

Speaker 1 So that could be a new geography. It could be a pre-seed seed manager that is very much earlier than we are and is going to be a great pipeline relationship for us.

Speaker 1 And being able to have this incredible cohort of managers that we work with, that's the biggest focus for us: you know, hey, is this manager relevant to us in terms of new domain?

Speaker 1 That could be blockchain, it could be quantum, it could be AI, or is this somebody who is, you know, really uniquely placed to get pre-seed deal flow? And/or is there a geographic reason?

Speaker 1 So we have a manager in Israel, for example. Third is the diversification mandate.
So I'm an investor in a biotech fund.

Speaker 1 I'm an investor in a few funds where it is completely non-correlated to fintech. And obviously, that's important.

Speaker 2 And it's good for a good night's sleep or a better night.

Speaker 1 That's right.

Speaker 2 How did your experience at SoFi dictate how you run Fin today?

Speaker 1 So at SoFi, during my time and before my time, the team had to raise three and a half billion of equity to make the business work, right? And that meant we had, you know, hundreds plus investors.

Speaker 1 And what I found was a couple of things.

Speaker 1 One is 90 plus percent, this isn't just SoFi, but it's certainly a lot of the companies I've been a part of, 90 plus percent of the investors on the cap table are passive capital.

Speaker 1 And I call passive capital dead capital as a founder or as an entrepreneur because you can get capital if you're good from anywhere.

Speaker 1 So you have to index on capital that's going to bring other elements. And so that was a big piece for me.
I said, never be passive capital.

Speaker 1 And I sat down at my kitchen table in March of 2018 and I wrote down all these first principles. And I think anybody who's starting anything should do this.
I wrote down a number of first principles.

Speaker 1 And one of my biggest first principles is never be passive capital.

Speaker 1 And we pass on any deal, even if it's a great founder, great business model, might even have some great investors on it, where if I don't feel like we can add value to that founder, I'm not going to invest because then we're wasting their time.

Speaker 1 We are not able to materially impact the outcome in an unfair way, so to speak. And that just doesn't work from my perspective.
Second is that we had to go to different investors at different stages.

Speaker 1 We had different investors we went to in the seed and then in the A and then on and on and on. There was no multi-stage fintech investor who could really support us from pre-C to pre-IPO.

Speaker 1 And I recognized the power law return dynamics, obviously, venture as an asset class, the ability to cherry pick and follow on your best performers, maintain parado rights, or deepen your ownership.

Speaker 1 I also had looked at and done, at Sophia, we did a tender process, so learned more about what secondary processes looks like. And there's a whole different set of investors for that.

Speaker 1 And so the ability to have all of these different tools to support founders throughout their life cycle was incredibly important to me.

Speaker 1 And then third, I recognized that none of the other fintech specialists out there were looking at fintech software. They were all chasing direct to consumer, direct to small business and crypto.

Speaker 1 And I was like, I really like this B2B FinTech software opportunity. I think it's underserved.
I'm meeting founders building it. And I don't see any specialists that are exclusively focusing on that.

Speaker 1 I'm going to go do that. And so those were the three things that I really took away from my SoFi experience.
My view is that fellow operators want to work with people who have been operators.

Speaker 1 So we're a firm, it's on our website, we're a firm built by operators for operators, and we want to be able to bring that empathy, the fact that we've walked thousands of miles in those shoes to those founders to be able to have deep credibility in working with them hands-on throughout that life cycle.

Speaker 4 Thanks for listening to my conversation with Logan. If you enjoyed this episode, please share with a friend.

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