We really look for at the end of the day is is a flywheel. You know, what is it about the investing behavior of the manager such that as they have more success, they're likely to get more success? And I think that comes in a variety of different forms. You know, one form is just specialization. If you have access to a particular network, you know, like SpaceX founders or aerospace founders, etcetera, you're gonna develop an expertise and a network that's very beneficial to the next founder.
There's definitely a huge bifurcation in the market in terms of, like, super high quality and the rest. It really starts with access. Because if you're able to detect and really understand what does a great founder look like, that's a repetitive motion that will compound. I use a baseball analogy where you have single a, which is the lowest league, double a, triple a, and then you have major leagues.
And a player could be very good at single a or double a and can be completely crushed at the major league in terms of fund size and round. And writing at 25 or a 100 or 250 k pre seed check is very different than trying to lead a series a where you're competing against the multistage firms. I think the most interesting for a fund to funds investor that's focused also on co investing is Albert, I've been excited to chat. Welcome to the Tonnex Capital podcast. Thank you for having me.
Thanks for jumping on. So you are cofounder of Level VC. What is Level VC? Level VC is a next generation fund to funds. We focus on building a platform for emerging VCs, which, for us, means funds in our early iterations focused on funds 1, 2, 3 mostly. Funds are all pre seed and seed, typically under a 100,000,000 fund target sizes. So we have a strategy of fund the funds that invests and backs those managers.
Then we also have a co invest strategy that invests with managers in breakout companies as they get to Series B and beyond. You guys have a pretty substantive data set. What does your data set say in regards to investing in GPs? Yeah. So we have a you know, we collect data from a lot of different sources. We look at private market data. We have our own data sources that we get as well. We have millions of profiles of people, you know, business filings.
We have scientific journals, a few other different sources. And we try to really understand are the networks that are forming and evolving within Venture. We believe a lot of the quality and centrality of GPs in their relative networks is a strong indicator of future performance.
And given that, you know, these networks are so dynamic, really trying to understand where managers are positioned enables us to to have a view on whether the manager will be, in a place where they'll, you know, sort of outperform. And since the part of the market that we're operating in, you know, typically, fund manager is a sort of high dispersion of performance, you know, and and sort of smaller funds are riskier in a way, but there's the potential for outlier performance.
And so what we try to really, you know, predict and understand is who being the top decile or top, you know, ventile or performance, you know, leveraging data, but also a lot of qualitative work that we do on top of that. When you look at these networks, are you focused on depth? Are you focused on breadth?
What we do is we reconstruct the networks based on the data that we're getting, whether it's deal streams, essentially transactions between investors, or whether it's talent investments into founders' talent joining the company. And really, there's a lot of ways to succeed with networks. What we do find is that having social capital and having long, durable relationships within the right circles is is actually a strong indicator of performance.
And what we try to understand is, like, how that behavior takes place given the deal streams that we're seeing. In our networks, you know, there's not only just the relationship between people, but there's also the notion of direction and the notion of strength. And it's continuously changing based on the data that comes in when we see, you know, terabytes of data. Say social capital, how does a manager go about building social capital?
You know, it's what we find, interestingly enough, especially as a young manager, that you can you can tell a lot by the first few investments that they make. And, of course, like, a priority, we don't know if we don't have data. But, you know, as we start to see the investing behavior unfold, we can quickly get a sense for, where they're situated in the network.
It's not to say that's the only thing that matters, but it's it's a really strong indicator retroactively in terms of what they're what they're doing and where they're sort of placed in the network. And so we use that information to then, you know, essentially get a sense for where they're gonna be in the future performance. As you go on venture, things are very path dependent.
And so where you start on the network, whether, let's say, you're an operator that spun out to build a business and you have a network there, or whether you're an angel turned sort of fund manager, or whether you're a GP at a large firm. And so a lot is already embedded in in what you've been doing and the networks you have. And so we just try to understand what's actually happening under underneath the surface. You could tell a lot from the first couple of investments.
What are what are you looking for in the first couple of investments? Even with the first couple of investments, we we'll have a strong indicator as to the access to both, you know, the co investor pools. Are they creating signal for other co investors? Or what are the co investors either before them or sort of in the same syndicate? But, also, what is the access to to talent networks that they have? It's a signal for us. You know, of course, like, as we have more data, we have more certainty.
But if you're trying to, essentially, find managers, discover things before others or maybe things that others have not seen, it's important for us to get an early signal as soon as possible in the dataset. And we can do that with a few investments. How do you look at follow on? How should emerging managers look at follow on their portfolio? Yeah. So we we get that question a lot. And I think, most people have an answer, like, oh, we should do this much follow on or this many reserves.
I actually believe it's dependent on time and where we are in the market. And there are markets where, you know, the time between financing is slow and you need to allow your companies to mature a bit. And there's the ability to take more ownership in companies preemptively before there's a financing or before they hit sort of a milestone that that's sort of you got proper price discovery. So I actually think it depends on the market and then sort of what's happening.
These days, given that the time between financings is increasing and sort of the graduation rates have declined so much, I think it's important for, you know, for managers to have a good amount of reserves because a lot of times, companies just need more time to to hit milestones. And since managers have such an asymmetry of information, they can kinda get a sense for, you know, for who can break out relative to the progress that they have.
So I think it really depends on the environment, the market environment, and whether you wanna be sort of more offensive or defensive. But in this environment, I think it's important to have a good amount of reserves. So there's a macro factor in terms of follow on. Is there a macro factor as it relates to portfolio construction? I think so.
I mean, we we like, sort of our preference for portfolio construction is we don't want a portfolio that's too concentrated, and we don't want one that's, sort of, too market beta. So we think there's an optimal size between somewhere between 20 40 companies depending on the strategy.
I think what really matters though is, just given the outlier nature of outcomes in venture, you want to make sure that the relative ownership that you have in the companies is such that, you know, obviously, should 1 b break out, you get multiples of performance on the fund, multiple turns of the fund. And so there is, like, an optimal ratio between ownership and, sort of, fund size that needs to be maintained.
And of course, in environments where there's, you know, better valuations, you can spread out a little bit wider and have more bets. But what we've seen in seed and pre seed is, like, valuations have maintained they're pretty healthy, and they stay pretty healthy even though deal counts have gone down sufficiently.
And so I I I think you just need to have a portfolio that's sort of wide enough that you have enough, you know, shots at bat and not too concentrated that you're, sort of, you know, overexposed to just uncertainty. In terms of the relationship of ownership versus fund size, give me specifics on what you're looking for. It's more of a rule rule of thumb.
We wanna make sure that should a company in the portfolio, a single company, become a breakout, you know, let's say over a 1,000,000,000 or so in valuation, you know, also given what we expect to have, you know, in terms of dilution, either a pre seed receipt, we have some dilution expectations, etcetera, that it should return at least, you know, 1 and a half x 1 to 1 and a half x of the fund, you know, with some notion of recycling, which actually is a is a very high bar.
And so you you wanna make sure that that the ownership is is there in the companies. And I think in order to have really good ownership, you either need to be, you know, be there first and lock in price and sort of not get out for selection, or you have to be very disciplined just generally in the market. And there's a lot to say about you know, when we look at the fund managers, whether they've had pricing power over time. It's one of the metrics that we track.
You know, whether, like, over time, there's been sort of a notion of pricing power or whether it's just been sort of market beta. Do you fall into the camp that one should be very disciplined at seed, or are you more like a hot company? If it's a good company, you should pay up. There's a brand value to being part of really great company stories, and I think that that sort of translates into recurring social in that space.
There's a lot of benefits that are not necessarily returns benefits to being into really great companies. And I think that has to be considered, especially in a fund one. And we've seen that many, many times, and I think it's it's very useful. I do think there's a point at which valuations are no longer feasible, and there's prospective returns that are just gonna damage your ability to raise capital downstream.
When we have a $151 pre money valuation or a $100,000,000 pre money valuation, you know, the story is no longer accessed. It's more about, you know, you got into a deal at a very high price. It doesn't really tell the story. But I think there's there's benefit. There's social capital benefit to getting into really great companies early that may be a little bit more high priced. But generally speaking, the returns come from, you know, sort of good discipline in investing.
You want your fund managers to be offensive when it comes to seed extension, a bit of a contrarian view. Why is that? Most of what we do here in in the firm is is focused around technical risk versus go to market risk. So they sent out a lot of the dollars go to r and d and sort of executing, against sort of r and d milestones. And typically, we're in markets that are really, really, really large.
And so it it happens, you know, generally speaking with, you know, more complex businesses that it takes you know, it's hard to predict when certain technical milestones will be hit. But there's an asymmetry of information that the manager has as to what it'll take, you know, as the company progresses to hit those milestones.
And so, you know, if if you believe that, you know, it's it's a 6 month or or 1 year time frame that they need, then there's a benefit to taking more ownership at at typically a similar price before, sort of, a big inflection. And that's what I mean by by being more offensive. And, of course, there's situations where companies break out and, you know, there's price discovery. And there, you just wanna, kind of, like, maintain your your ownership.
But the offensive situations are ones in which you can really have asymmetric returns. How do you add value to your GPs? We're focused on technology as as the value add. We've, you know, collected a very, very large scale dataset, which, you know, is is complex to do because, you know, you have to take in very noisy datasets that are very heterogeneous and be able to map them, map entities and things like that. And these are very hard problems that I guess few people have solved.
And so with that, we do a lot of analytics on top of it and just try to understand talent, you know, trying to understand investors. And so what we've been doing with, with GPs is, you know, either they'll send us like an ad hoc data request, like we want to track this company, what are the best engineers that are leaving? We get those all the time. Or we can enrich existing workflows that they have.
So if, for example, they're getting a lot of inbound and, you know, in in their pipeline and they wanna be able to, you know, understand what's high quality in that sort of inbound, then we can do, like, that kind of enrichment.
And then there's a slew of other things that we can provide for them including, like, tracking, like, open source, GitHub repositories for interesting projects that are taking off or maybe research labs that are that are sort of developing interesting highly cited research. So it depends on what they need. But what we try to do at the onset is understand the infrastructure they have, where they are in their journey of, like, it's sort of being data driven.
And then we have a process by which we, we sort of unpack that and see where we can add value. How has your value add evolved since you started in Jan 2021? Yeah. I just think, you know, when we first started, we were new to the business. We had to learn a lot as well ourselves, and sort of understand the nuances of what, you know, GPs need and and where we can differentiate.
You know, at the end of the day, like, we wanna be able to get access to constrained opportunities in the best GPs, you know, in the top quintile of of ECs. And so we've evolved over time as to that. But what we found was, like, the we wanna align our own investing process instead of what we build in terms of the capabilities and value that we have for ourselves with what we can offer others.
And so a lot of that has been just ex exploring, things around data and ways in which we can give, managers, an opportunity to augment and to have a sense for things that they may not see. If they needed our help sourcing, that's obviously adverse selection. But what we can do is given a particular sourcing motion, you know, how do we unlock or or give them enough coverage such that they can see they can see everything?
The best LPs have a sandbox that they like to play and know exactly what kind of fund they're looking for. What are you exactly looking for? Everything we do is typically under a 100,000,000 in fund target sizes. So I think the the small fund itself is a big thing. You know, like, your fund size is your strategy sort of mantra. I think that's important to us. We do believe in small funds generally. We we like early VCs, young ones, in terms of, like, where they're on their life cycle.
So funds 1, 2, 3 versus sort of, you know, sort of more established firms Within that bucket, what we really look for at the end of the day is is a flywheel. You know, what is it about the, investing behavior of the managers such that as they make more investments, they're more likely to, you know, to make better investments? Meaning that, you know, as as they have more success, they're likely to get more success. And I think that comes in a variety of different forms.
You know, one form is just specialization. If you have access to a particular network, you know, like SpaceX founders or, you know, aerospace founders, etcetera, you're gonna develop an expertise that's in a network that's very beneficial to the next founder. There's others. You know, there's sometimes it's just community centric.
You know, you have, a community of individuals that are maybe, like, top engineers or you have sort of next you know, sort of a way of accessing, a set of people that's unique, that sort of scales over time. And We have that with some of our funds. But we look for that flywheel because what we don't want is just, you know, you've done these deals, but then you can't replicate the same activity in the next, you know, cohort of deals.
And so that's something that we look for sort of intuitively in the firms. And then on top of that, you know, we do a lot of work on studying the portfolios that they've been investing in, studying the the founder set, studying the philosophy. You know, we do want to make sure that the GPs have an investment philosophy. Because a lot of them do deals, but not all of them have an overarching philosophy. Because you can't always determine success by outcomes. It's really by process.
And so we do a lot of work on understanding, like, you know, the philosophy and how they think about underwriting and markets and thematic areas if they have original thought. You mentioned the flywheel in funds. Just to unpack that, you're essentially saying that to use your example, you have a former SpaceX engineer. He or she spends all of his time in space technology. He or she gets deal flow from space technology, which makes them better investors and continues.
That's the flywheel that you're talking about. It goes back to to networks. You know, typically, in networks, generally speaking, and in economies, there's this there's notion of increasing return. And there's these positive feedback loops that occur in the economy, which is why you have these sort of extreme behaviors in terms of market prices and things like that. And networks form in a similar fashion. So you you have this this notion of sort of the rich get richer over time.
And what we look for in that flywheel is if if you're able to access a network that as you access that network, you're more likely to access that network even deeper. That's what we're looking for is that sort of behavior. It's it's somewhat nuanced. But at the end of the day, we're looking for this sort of increasing returns as they start investing versus just having, you know, a bunch of deals that don't they don't look like there's an order to them.
Yeah. Something that I see over and over, the most successful, the top 0.01%. They just continue to compound their benefits. Exactly. And it's Yeah. It's a company benefits. And it's one of those things that sounds easy, but is a difficult in practice, and you have to say no to a lot of things as well. Congratulations, 10X Capital podcast listeners. We have officially cracked the top 10 rankings in the United States for investing.
Please help this podcast continue climbing up in the rankings by clicking the follow button above. This helps our podcast rank higher, which brings more revenue to the show and helps us bring in the very highest quality guests and to produce the very highest quality content. Thank you for your support. You spent four and a half years at Coda Capital. What learnings do you bring to your position at Levels? Coda was was an amazing experience for me.
It was actually my first experience investing institutionally as a as a VC. We had a methodology for investing, a philosophy for investing that I, you know, I sort of hold in my head, in terms of being able to really understand, you know, a product, a team, a market.
But I think just from an ecosystem perspective, you know, one of the things that that was challenging was really just keeping a tab on on the ecosystem and really understanding when, you know, where should we build relationships and how should we source, and what's what's happening. And what are the trends that are happening? What are the niches that are forming? And that takes a lot of work. And also, it's very difficult to do because it's a very opaque industry.
And so that was something that I that I realized was, you know, how do you build a systematic way to source the best opportunities and understand where the best opportunities are and develop thematic focus areas that make sense within some period some time frame. And that challenge was it resonated with me. And so when we started Level, we we wanted to be in a situation where it was more about picking than sourcing.
And really, if you have a good understanding, of what's going on and you can sort of focus your your efforts and your network your networking, in areas where you think they'll be the most value, it's a much easier problem. Not that it's easy at all, but it's a much easier problem. We do believe that that starts with data. And, you know, the availability of data, has increased even since my time at Coda and before.
Like, there's really just been an exponential increase in the amount of data, both private markets, but just around sort of technical contribution communities and things like that. And we just feel like there's an opportunity to potentially get edge from that and to see things that maybe others don't see. That's, like, sort of the thing we believe and the ethos of the whole organization.
How much of being a good picker comes down to seeing what great is, meeting those first unicorn founders at the seed stage and having that standard of excellence early on? I I think it's the most it's the most critical thing. There's definitely a a a huge bifurcation in the market in terms of, like, super high quality and the rest. It really starts with access.
Because if you're able to detect and really understand what does a great founder look like, you know, that's a repetitive motion that will compound. It doesn't compound forever. Right? And so but it compounds for quite a while. And so that's what we look for. And we believe that that's you can get a sense for that very quickly in investing behavior.
But you couldn't do that unless you had a complete ecosystem view of where of what quality is and where where is it located, you know, and how to benchmark one quality firm against another around similar metrics. Quality is contextual not only on the entrepreneur level, but on the GP level. Probably every GP that you come across is certainly top 10, probably top 5% in society. But maybe if they're only in the top 5%, they're not investable. There's a context to that to that quality.
What do you wish you knew before you started at level? You know, I think when we first started, one thing is just is having more control or at least understanding where a fund manager's fund size will end up. You know, because sometimes what ends up happening is that it balloons, Especially, in the period of time when we started investing, there was a lot of ballooning of fund sizes, and we didn't have much control over that activity. And so I think that was that's one thing.
It's really just to have a GP that is very thoughtful about portfolio construction and sizing. Because the the really smart GPs understand that it's really it's really it should be all about carry and that there's an optimal construction relative to the strategy that they're pursuing and relative to their capabilities.
But sometimes, you know, obviously, it's appealing when you get a lot of capital coming your way to balloon the size with the expectation that you can maintain the same quality for the for a size that's much larger, which is very difficult to do. So I think that that was a big lesson for us. And we had a few funds that sort of balloon larger than we would have liked in that period of time. And, you know, in retrospect, we wouldn't, you know, we wouldn't have done that.
That's sort of one big one big learning as well. I mean, the other thing is just, you know, our our models have gotten better over time. We're very happy with our portfolio. We're happy with all the managers. You know, our models have gotten better over time. We have new ways of looking at things. I think we've we've refined our approach. We have much more of a brand presence, and, we get a lot of inbounds. Our quality over time is just getting better and better.
And then at the end of the day, we want to be the first call for new GPs. You need to really be associated with the best and being that first call. And that's something we, of course, want to keep working on so that we're seeing things before they go to market. The last thing is is really around the co investing. I think the most interesting for, you know, a fund to funds investor that's focused also on co investing is adverse selection.
You know, typically, you're you're gonna get opportunities in a very reactive way. And and if you're seeing it, the first question you asked is not what the company does, but, like, literally, why am I seeing it?
What we believe is that you need to have a really good understanding of the portfolios preemptively, have value that you bring to the GP, and value you know, essentially, it's also to the entrepreneurs over time such that you have a really good sense of what qualities before they go out to market, and you can preempt some of those situations. You know, that's something that we're we've been working on for for quite a while. How do you suss out whether a manager is gonna scale their AUM?
Most managers aren't gonna tell you. So what have you found best practices to predict this? We we literally just ask them. You know, one way we do it is just sort of ask them. You know, what what's your vision for the firm? What what will be the size of your next fund? How are you thinking about team composition? You know, how are you thinking about strategy moving forward? You can get a sense really quickly.
And most of them are are very honest on what their, you know, what their agenda is in terms of, like, growing and scaling the firm. There's many that we speak to, and they say, look. We really just wanna stay, you know, at a range that we think is is doable and feasible. And that's actually a very big criteria for us that they're very introspective and intellectually honest about whether they could compete, you know, as as the fund size gets larger. Because there is this quantum leap.
I don't know exactly what size it is. It's probably around maybe 40 or 50 where, you know, you have to start leading. And the game theory, of course, changes in the market in terms of your ability to actually compete and win allocation and not be adversely elected, especially when you're competing not only with peers, but also with large, you know, multistage firms that have big platforms. So, like, there has to be that intellectual honesty there.
The knowledge I use a baseball analogy where you have single a, which is the lowest league, double a, triple a, and then you have major leagues. And a player could be very good at single a or double a and could be completely crushed at the major league in terms of fund size and round. And, you know, having writing a 25 or a 100 or 250 k pre seed check is very different than trying to lead a series a where you're competing against the multistage firms.
What do you believe that other fund of funds do not believe? The biggest difference I think we've seen and we we collaborate it's it's it's sort of an interesting world is that you have a lot of people you collaborate with. You're not you're not often competing for, you know, for allocation against them.
And so we we spend a lot of time talking to other LPs, whether they're fund the funds or whether they're, you know, sort of institutional investors or even a lot of family offices that are investing in in this area. And we try to collaborate a lot, and help our funds raise as well. I think what makes us very different and why we get a lot of questions coming our way is really the data angle.
Typically, like, when you when you meet a manager for the first time, even if you look at their presentation and their traffic or, you know, which either is either not applicable or or not existent, is you have a very difficult time unpacking and understanding whether this is a good investment or not. And especially as you go earlier in this sort of fund life cycle, it's just almost impossible.
And there's a lot of studies that show there's just not even a correlation between the early IRR and sort of the, you know, asymptotic IRR firm. And so since we have an angle which helps us unpack the manager in a lot of different ways using sort of market based data, a lot of people come our way and ask us what do we think about this manager and what what does your data show. And that's sort of one piece of it, which I think is is critical.
And over time, we should also have our own flywheel in terms of getting more and more data, more network data. The other piece of it is the whole ethos that we have with GPs is quite different. We're not just treated, you know, only as an allocator, you know, because we're also builders.
It's a small nuance, but when they talk to us, we can, you know, go very deep into, you know, the nature of LLMs or or what we think about, you know, the market or the technology infrastructure with regards to, like, generative AI or other areas. And they really appreciate that lens and that angle. And when they look at our demo and our infrastructure, they they feel like there's a good, you know, synergy between us.
And I think this new generation of GPs, you know, they're it's a younger generation. You know, they're very switched on. They wanna see sort of a often another kind of LP around the table. Who are the most thoughtful institutional investors that invest in the venture asset class? I I think some of the endowments are are really good. I think they have a good sense for not not not all of them, but some of them are really, really good in terms of their investing behaviors.
Not not all of them go down to this level in terms of, like, the sizing of funds and all that. But we've seen some really good ones. There's actually a lot of very smart family offices, family office investors that we've seen as well. Whether it's family offices for some of the well known sort of large GPs that are very just in the know and have a good sense for talent and quality. I think those are really, really smart investors.
And then, you know, there's a slew of other groups that we've interacted with as well. And also on the fund to fund side that are are super sharp. And, you know, they have a good sense for what what's a quality manager. But we have a set of people that we just, like, interact with on a regular basis that we think are are really good. Albert, this has been a fascinating interview.
What would you like our listeners to know about you, about Level Ventures, or anything else you'd like to shine a light on? Yeah. We want well, we want to be the first call for emerging VCs, and we want to be the best at at what we do and really build an infrastructure that we think will be durable and and deliver returns for LPs and for and really just deliver value for GPs. So that's that's what we're trying to build here. We have no other agenda besides that.
So we're hoping that that that we can do that over the next few years. For more ideas on how to raise venture capital in this market, make sure to subscribe below.