🎧🍌 How Semil Shah Built Haystack
Living paycheck to paycheck, investing in Instacart, DoorDash, and Hashicorp's Seed rounds, the struggles of raising his first four funds, how LPs evaluate VCs, and advice for emerging fund managers
Stream on:
👉 Apple
👉 Spotify
The episode is brought to you by Mercury
Mercury is banking for ambitious companies.
Its a modern partner that says goodbye to the friction that comes with traditional banking. Mercury moves at the speed of startups - from a seamless onboarding, to wiring money and providing you with connections and a network, everything is just a few clicks away.
I use Mercury personally and, whether you’re a team of two or two thousand, I recommend it to every startup and venture capital firm looking for something better.
Join more than 100,000 startups and venture capital firms on Mercury, the powerful and intuitive way for ambitious companies to bank.
Sign-up now for free at Mercury.com
Disclaimer: Mercury is a financial technology company, not a bank. Banking services are provided by Choice Financial Group and Evolve Bank & Trust; Members FDIC.
To inquire about sponsorship opportunities in future episodes, click here.
Semil Shah is the Founder of Haystack, a venture capital backing outlier founders at the earliest stages. Semil started Haystack in 2013, and has since invested in 16 unicorns like DoorDash, Instacart, Figma, HashiCorp, Ironclad, Carta, Applied Intuition, Opendoor, and more.
This conversation goes behind the scenes of Semil’s two decade journey building Haystack from scratch. We’ll dive into how he raised and deployed each of the first six Haystack funds, including all the mistakes made along the way, plus the details around Haystack’s new $75 million and $25 million funds announced the date this episode was published.
Read Haystack’s announcement here.
This episode dropped on Sunday, and it’s already our seventh most listened to episode on Spotify, with over 26k unique streams across Twitter, YouTube, and all the podcast platforms.
Topics covered include:
Juggling multiple jobs while living paycheck to paycheck his first eight years in Silicon Valley
Failing to get his first job in venture three times
Investing in the Seed rounds of unicorns DoorDash, Instacart, Hashicorp, and Envoy within the first six months of starting Haystack
Why he initially thought Haystack would be a short-term thing
Turning down multiple lucrative job offers two years in
How the best LPs evaluate VC funds on the “Entry Ownership to Fund Size” ratio
Semil’s strategy of “crawl, walk, run” to increase Haystack’s check sizes over time
The pain he felt failing to hit his target fund size on the first four fundraises and how he handled it
Why everyone should “pre-market” a fundraise, and how to do it
The things most founders don’t appreciate about raising a venture fund
Fighting to invest in Ironclad’s Seed round before he had his next fund raised
How LPs reference VCs, and how a VC can become referenceable
Why Haystack Fund IV was the scariest fund to raise
How Semil builds relationships with LPs
The hardest questions he faced raising each fund and what other VCs should anticipate while raising their own fund
How LP investment committees make decisions
What’s going on behind the scenes at most large venture LPs today
Why the traditional advice of “finding an anchor LP” makes no sense
Spilling his secret on the best quarter to fundraise
Why VCs should fundraise with a hard cap on fund size
Why every VC should appreciate and remember how LPs supported them through the pandemic
All the details on Haystack’s new $75 million and $25 million funds
Semil’s plan for the next 10 years
Three pieces of advice for emerging fund managers
Follow Semil on Twitter and LinkedIn
👉 Find the episode on Apple and Spotify
🙏 Thanks to Zac and Xavier at Supermix for help with production and distribution.
Transcript
Find transcripts of all prior episodes here.
Turner Novak: I'm here with Semil Shah. He's the founder of Haystack. Haystack is, in my opinion, one of the top early stage funds. He’s an early investor in companies like DoorDash, Instacart, HashiCorp, these have all IPO’d, Figma, which is a real business worth a lot of money. Semil has a really interesting story that we're gonna talk through today.
I'll let you jump in. How did it get started? What was the moment you first come up with the idea for Haystack?
Semil Shah: Yeah, and, and thanks for having me on. I agreed to do this too 'cause I think you're gonna get into the meat and guts of it, which I'm really happy to talk about.
It started because maybe on three different attempts over a three year period trying to “get into venture”. It was a tale of two cities in one sense, where I knew a lot of VCs personally, and I was even a consultant with a bunch of VCs, so I spent a lot of time with them and I had a lot of friendships built up, and they helped me a ton.
So it was all like, very positive. Where it came up short was like, you know, in the end of some competitive processes, or I didn't have the traditional background, and I don't blame anyone for this, but people would say “I like you. I wanna work with you. But I don't know how to fit you in here.”
Turner Novak: Were you sending deal flow? And were they investing in the companies that you were getting them in front of?
Semil Shah: Oh, a lot. For years. And I wasn't coin operated about it. I was like, Hey, I was just trying to help people on both sides. So, most of the consulting work I was doing was not deal related.
It was helping a few partners on projects
Turner Novak: Portfolio company work, or firm-level?
Semil Shah: I would say 60-70% firm level. And these were all Sand Hill Road type funds + General Catalyst. And they were all great to me. But that third sort of campaign to get a role, it didn't happen, sort of down to like two people. I think it was like Thanksgiving, 2012. So I was at that point, married, no kids yet, but my wife was pregnant.
I've told this part of the story, but two of my good industry friends, Nakul Mandan, who used to be a partner at Battery and Lightspeed, now started this fund called Audacious. And then Gautam Gupta, who was one of those wonderkids that started at GC when he was 17, he's now a partner at TCV Technology Crossover Ventures. They pulled me aside and were like (and this is a key line) “Hey, stop looking for a job and just start a small fund and use it as kind of your rap sheet if you will.”
Turner Novak: So did you think you were just gonna have this small fund and then go get a job at one of these bigger funds or?
Semil Shah: Absolutely. The first two years, the first check went out of haystack officially, March of 2013. My first kid, my daughter was born in April of 2013. in May of 2013, I invested in HashiCorp and Instacart and in October of 2013, I invested in Envoy and DoorDash.
I had no idea at the time how consequential that year would be.
Turner Novak: That’s a big year! That was probably one of the biggest years anyone would've ever had in early stage venture.
Semil Shah: Yeah, and I think the goal, to answer your original question, was to make investments to show that of the flow that I was sending to some of these folks. I could participate in some of the flow.
Turner Novak: When you invested in those companies, did you help connect the founders to other people that joined the cap table? People that they hired? Helping with the product? How did that all play out?
Semil Shah: Of course. I don't want to overstate the amount of help, but I would say just like what you would do.
Turner Novak: Sort of the basic stuff? Just whatever needs to be done kind of a thing?
Semil Shah: Yeah. I wouldn't say it was backbreaking. I think these were just people I had known for a little bit. I'd known Mitchell [Hashicorp] for about a year and we had a close mutual friend. His mentor and boss was a close friend of mine.
Tony [Doordash] I met through Saar Gur, who I have to give a shout out to who, you know, Saar’s been amazing. Just a person who shares and is like super deep. Shared Tony with me. So that was a great connection. And then Larry, I had known from a previous startup job.
Turner Novak: So why do you think these founders took your money?
Semil Shah: Well they were small checks.
Turner Novak: In terms of the check size fitting into the round, you say it's a small check.
Were they raising like, $500k - $1 million a million dollars and you put in 10k, $100k.
Semil Shah: I can walk through just those four examples, right?
Instacart, Apoorva let me invest on a note because he had known me and I told him that I used a product. I really love the company. I'm gonna start a fund. I'd love to invest. And I met him for a beer and he talked to me for half an hour and just asked me a bunch of questions and was like, okay.
Mike Maples has a great line about this. It's often times the founders that help people like you and I get into some things.
Mitchell I had known for a year was helping him and it was very difficult for him to raise his round because it was just one dude. He was 21, super young.
Turner Novak: Mitchell… which company is this?
Semil Shah: HashiCorp. Mitchell Hashimoto, I met him when he was 20.
Turner Novak: That's hard to raise money. 20.
Semil Shah: And also he had an open source project. People didn't really understand the gravity of what it would be. But I had some asymmetric information on Mitchell because his boss was a very close friend and was like, hey, he's really exceptional. Can you help him out?
So I'd help him out on something a year before that, and I'd met him a couple times and it was extremely evident that he was not a normal 20 year old. So I stayed very close. And when I was helping him, I didn't know I would raise the fund. So when he was raising, I was begging him to invest. What little did I know, it was impossible for him to raise the round. So he only raised $575,000. It was me, his boss who was my friend, and then Puneet Agarwal from True. That was a very good decision by Puneet.
Turner Novak: Do you know the numbers on that one for, for you or for them?
Semil Shah: People can back into it, it's a public company now. The round was $575,000 at 3.75 million post-money. There were not a lot of other people wanting to invest. It was just Mitchell, and Puneet did the majority of that round, a $500k slug.
Turner Novak: So what happened next? You'd done these four -
Semil Shah: So where I was going with that is, I thought in a year or two, like Gautham was telling me, I would take that track record back to the funds I knew.
Turner Novak: Did you, what did they say?
Semil Shah: So that was 2013. In 2015, I got a number of, I would say, “Junior partner” offers or principal offers, whatever the term would be.
So they were like, okay, we see the track record - because we had an insane number of markups in the first two funds. This markup hit rate - I just didn't even actually know that it was a good thing.
Turner Novak: What did you think?
Semil Shah: I just had no idea. Like, I would get a call ike “oh, so-and-so's looking at this and they’re gonna mark it up” and I'm like “what does that mean?”
[Both laughing]
Turner Novak: So, what did you do with that information?
Semil Shah: Nothing.
I got the offers and then, I credit Glenn Solomon from GGV who I had known for a while.
And a lot of the people who invested in those first two funds were a lot of the VCs or managing directors or founders of other funds you would recognize. I had access to all those people and they were very supportive of me. So I was grateful.
But Glenn pulled me aside and said “Hey, your little thing is working. Turn over some more cards, don't just give it up. And if you want, come sit with us as a venture partner” because those first two years I was sitting with Paul Martino at Bullpen.
When I first started doing the fund, I had to consolidate a lot of that consulting work, so I asked Paul “can I be a venture partner with you?” And he was like “yeah”. Paul’s amazing.
Turner Novak: So what does that mean, you're a venture partner? Partner! It sounds like you're part of the fund. How does that work?
Semil Shah: It's different at every fund. So Paul is very open, loyal, transparent. They had their partner meetings on Friday’s. So I would always go meet them on Friday
Turner Novak: In the Bay Area somewhere?
Semil Shah: It was either in San Francisco or mostly on Sandhill Road. They had an office there. And they were just really open. So I'd go there, hang out every Friday morning into the early afternoon, get lunch, you know, it was great. And the 10 years, and we can talk about this, I've been sitting in other partner meetings for 10 years.
So the first two years was with Bullpen with Duncan, Rich, and Paul. Then Glenn made that very generous overture. So I sat in the GGV meetings for three years, as a venture partner there during Haystack funds three and four.
When I started doing haystack five, it’s a longer story, but the folks at Lightspeed who, some of the founders had been investors in the fund and had known me.
There were multiple times where people have come to me, 2015 and then after, for a full-time role or leadership role. But the short answer, which is the personal answer, and the most honest answer, is that I really wrestled with that.
Financially it would've been immediately rewarding and game changing. We're talking counting zeros. But by that point, when those offers got more serious after 2015, I had already become acclimated to doing my own thing, making my own decisions, structuring my day the way I want to. And when you go into some of these places, you don't really have that ability because you have to work with everybody else. So I kind of just decided not to do it, even though the zeros were there. And by the way, in 2015, my wife was pregnant with twins.
Turner Novak: How many kids do you have now?
Semil Shah: I have three.
Turner Novak: Okay. Personal things going on too.
Semil Shah: Yeah. So until 2018, I was literally, living month to month until
Turner Novak: 2018?!?
Semil Shah: Until 2018.
Turner Novak: Okay. know what some people do is they don't charge management fees on small early funds. How did you survive?
Semil Shah: I hope we can really get into this topic because I think there's a lot of philosophical lessons in here. So, pre that first Haystack check in March of 2013. I was hustling hard. I was collecting multiple paychecks as a consultant per month, and scrambling.
Turner Novak: Was your wife also working in some capacity?
Semil Shah: Yes.
Turner Novak: Did that stop with the kid? Because that wasn't for me personally, my wife wasn't working anymore. I had to figure things out.
Semil Shah: Well, I mean, that's jumping ahead to 2018. Okay. So she stopped working in 2018 when our oldest was entering kindergarten, and she really wanted to be the parent mom. Taking and picking up the kid from school and having that experience.
Turner Novak: Which is really important. That’s a big choice.
Semil Shah: It's a personal choice. And by that point though, I wasn't thinking month to month. But that only just happened, it’s almost celestial now as I think about it, the lineup of those things. But it wasn't planned.
Back to your original question of “How did you make money to live here?”
So 2010 to 2013 was a mix of consulting roles. I consulted with companies, worked at some companies. There were a couple of exits. This is not stuff you can bank on.
And then I was collecting small checks from VC funds every month. Very small. Like, I would say a token amount, but enough to keep the engine going.
Turner Novak: Yeah. You get a couple of those, you, it's enough to pay rent.
Semil Shah: Yeah, absolutely. and you know, if you go to enough VC events and networking events…. they have food there.
[Both laughing]
Turner Novak: Sometimes it's really good.
Semil Shah: Oh yeah. You go to a dinner at Tamarind. You're like… that was pretty good.
Turner Novak: Yeah. And well, now you're hosting some of those events and you'll invite me and I’m like “Man, that was a good meal! This was good food”.
Semil Shah: I've learned in doing events, my philosophy is if you have either one of the following, which is
really good food
really good company, or
a memorable location
People will be happy.
Turner Novak: What if you do all three? Is that the trifecta?
Semil Shah: All three is the trifecta. But would you really do that? Maybe you would. I don’t know.
Turner Novak: I feel like that's if you've got the fund size to support getting all those things checked..
Semil Shah: Yeah. Yeah.
So those first three years were just cobbled together.
2013 onward, I consolidated where I was a venture partner [at Bullepn), so I earned some consulting income there. That kept me afloat, basically. And I did not charge management fees in the first fund. I mean, it was a million dollar fund.
Turner Novak: It wouldn't have been a lot of money. It would have been $200k total? If you did the typical, and then that's over 10 years, like $20k a year?
Semil Shah: Yea. So there was no fee. And then the second fund was 3.2 million and I think the fee was really small. So again, it's the same issue.
Turner Novak: So how did LPs think about, you're starting to build this real institutional fund. Or maybe they didn't think of it that way, but you were starting to think about this as a serious thing now. How do they appreciate “why is he doing all these other jobs?”
Semil Shah: So, I don't know if I would accept the premise of that question. I would twist it a little bit, which is, Fund Three was the first time I thought I would go out to raise $20 million and talk to some family offices and people I know. And, you know, I had the slide in the slide deck, I can still can picture it for that Fund Three deck of all the VCs that invested in my funds. Like they would give a shit about -
Turner Novak: That's a classic slide.
Semil Shah: The classic slide. Like anyone would care, at the end of the day. So that was the first time, I wouldn't say I was trying to make it institutional, but I was trying to get some lumpy checks. But I wasn't trying to present as an institutional investor. That was not a goal.
I would say that timeframe was around 2015.
Turner Novak: So Haystack Fund One was $1 million. 2013 Vintage.
Semil Shah: Yes.
Turner Novak: And then you invested over what time period?
Semil Shah: It was about a year and a half. Then Fund 2 was about a year. It was really fast.
Turner Novak: Interesting. So it was like everybody in 21.
Semil Shah: Yeah. Except that this fund was a screamer.
Turner Novak: It was a screamer? What does that mean?
Semil Shah: Yes. It had a lot of things that popped. It had a lot of small cap, sub-billion dollar acquisitions to just pay back the principle. And then it had some asymmetric outcomes.
Turner Novak: Filecoin, I think you've mentioned, was in that one?
Semil Shah: Yes
Turner Novak: So that was 2014 ish? And it was a $3 million fund.
Semil Shah: Yeah. $3.2 million.
Turner Novak: Was it pretty much the same process as fund one? Like “Hey, we deployed the capital. The markups. Do you guys wanna do the next one? Was it new LPs? What was the process like?
Semil Shah: I always think of Jeff Richards from GGV as a canonical example.
Jeff is a super supportive person, and was like “oh, I'm gonna do $25k or $50k in every fund and then introduce you to 35 people I know”.
And then 17 of the 35 people were like, sure, I’m in.
Turner Novak: Wow.
Semil Shah: That's the great part of living here. If you're around people and they trust you and they don't think you're trying to do too much and you're coming at it with an earnest approach.
Turner Novak: So what is doing too much in this case? Is it just raising too much money? Getting over your skis?
Semil Shah: Oh, raising too much money. Or being too cute about it. Or actually just not presenting well. Like, one of the reasons I like working with you and spending time with you, is your earnestness level is off the charts.
So I think, I just think when people sense the earnestness in others here, they're looking for ways to help out. Whether consciously or subconsciously.
Turner Novak: Thank you.
Semil Shah: It's probably helpful to define like, what does earnest mean in this context? I think it means learning mindset, humble, I'm here to serve you. Like how, what can I do to help? I know it’s cliche. But actually following up on it.
Turner Novak: Yeah. The biggest thing I've learned with that is you don't ask “how can I be helpful?” You just figure out what they need and you just do it. And sometimes you can and sometimes you can't, and that's okay. But you just try to figure it out, and it might might not be a lot.
Semil Shah: Sometimes it is just spending time with the person who wants to talk.
Turner Novak: Yeah. That's true. Yeah. I think the first time we met in person, I was going back and looking at our. DMs on Twitter. We must have talked publicly, because I looked at our DMs the other day and my first DM to you was, “I'm gonna be in San Francisco, want to meet up?” or something. It was not smooth, there was probably other context.
Semil Shah: I think you've done an amazing job at lie reaching out to people and using Twitter. I don't know how you do it, but it’s awesome.
Turner Novak: Honestly, I don't really know either. I'm still learning how to do it. But it's fun.
A question around fund structures. A lot of times when you're specifically talking to more institutional LPs, trying to make the jump to slightly larger fund sizes. You go from “I'm doing this proof of concept to get a job at another fund” to “I'm actually doing my own thing.”
There's all these rules on how to do portfolio construction, all that stuff.
Based on what I've heard you say previously, you kind of changed the strategy between funds. They were all a little bit different. And you've mentioned how you didn't even know what some of these words were that people were asking you to talk about.
How did you approach and learn about those?
Semil Shah: A third was the earnestness of just trying to be like, oh, what is that? Ask other friends in the ecosystem. Asking the Jeff Richards and Puneet’s of the world.
A third was spending time with LPs and actually listening. As in, okay, an investment isn’t gonna happen here, but this is another person on the other side of the table. We have some connections around some things and they're telling me things if they're gonna spend time or give feedback, I would really pay attention to it.
And the last third was just the sort of cultural assimilation of sitting inside these partner meetings. I was and still am very fortunate to be inside those meetings for years, where you get that slow osmosis coming in.
But the portfolio construction I think is the big thing. Because if you step back and think about what an LP is buying when they're investing in a fund. Let’s say with a $3 to $5 million check in a small fund, they're investing in a blind pool.
I believe more philosophically that the product of a VC fund is actually an investment decision. And so those investment decisions are bundled into one blind pool product, which is the fund vintage that they're investing in. And if they don't trust that you're gonna get the geometry of that, right - or even just think about the geometry - they're probably gonna say “I'll wait till you figure that out.”
Turner Novak: And you’ve said before, that with a $40 million fund ownership starts to become more important.
Semil Shah: $40 to $50 million. Yeah.
Turner Novak: So say you have a $1 million fund, it doesn't really matter if you have a $5 million… How do you think about scaling that up?
Semil Shah: I think there're a lot of rules of thumb on this, and I don't know which one's the right one. so I'll give you a few. The ownership bands I always use is:
$0 to $20 million, ownership doesn’t really matter.
$20 to $40 million, you’re coming up on 5%. Maybe even 10%.
$40 to $100 million, I’m probably more conservative on this band. I think you need 15-20%. Which is so hard to get. Most good founders don’t want to give that up right away.
$100+ million, you start approaching the Benchmark model.
Turner Novak: And then it’s also how concentrated the portfolio and how many checks you want to do.
Semil Shah: Yes. The dilution can be pretty severe, especially in the last cycle, dilution was very severe.
Everyone just assumes they may have a hit rate like Union Square Ventures, and just ain't the case. So that's one school of thought.
There's another school of thought, if you follow Michael Kim and those folks at Cendana Capital, they've done a lot of great work around this. And I know a lot of LPs pay attention to this metric - which is “what is your entry ownership to fund size ratio?”
Turner Novak: Can you explain what that ratio is?
Semil Shah: Yeah. So, if you look at someone's portfolio, or if you look at Banana Fund 2, I would say, “okay, what's the size of the fund?” Okay, it's X.
So what’s the median entry ownership that Turner gets? I'm gonna score that against other funds I'm looking at. Because at the end of the day, assuming a decent quality pool to select from in terms of their networks and what they're gonna bring in. You want to know that you're getting as much ownership as the LP for the fund size that they're getting.
Turner Novak: So it's essentially the smaller the fund and the higher the average portfolio company ownership. Leads to a better ratio.
Semil Shah: I think it's an attractive metric that sophisticated LPs pay attention to. Because at the end of the day, they're buying into the blind pool and they want to have the ownership because they know the power law rules a day on these funds.
Turner Novak: So then how did you start to get more ownership? Like you were talking about $25k checks. Your portfolio companies are now worth a hundred billion dollars. I guess I don't know what DoorDash is trading at today, but these are big real companies that are doing billions of dollars in real high margin revenue.
How did you go from $25k to, I assume now you need to get closer to $1, $2, $3 million.
Semil Shah: Yeah. That's been a journey. I think now, if you look at the record, Haystack's officially been investing for over a decade now, technically. But I always credit Chris Douvos for this framework, he runs Ahoy Capital now.
Chris spent a lot of time with me early, some of that Palo Alto magic. But he had a great line, which is “crawl, walk, run”.
And what that meant in this context was like just slowly escalate your check sizes. So:
Fund 1 was $25k checks
Fund 2 was $50k to $100k checks
Fund 3 was $100k to $250k checks, with a couple of big top ups
Fund 4 was $500k to $1 million checks. That was the first time I wrote a $1 million check.
Fund 5 started writing $1 million checks
Fund 6 was $1 million checks.
Fund 7, we can talk about that later, but it’ll be $1 million checks
At a certain point, if you look at our data, one of the things I'm really proud of, if you look over the 10 years, it's 270-something companies in a 10 year period. If you were to scatterplot the median entry valuation over time, it really clusters around $8 to $12 million over that 10 year period.
And so, the reason I'm proud of that is we participated in the same rounds, but we've slowly taken more share of those rounds. That was how channeling Douvos was to crawl, walk, run. We're in run mode now.
Turner Novak: What does that mean, run? It is just the larger checks or you're, you're in stride. You're a real, a real institutional firm.
Semil Shah: Yeah. I mean, I don’t think anyone cares about that. It's more that we can play more offense. Write a $1 million check, lose a $1 million check, it's okay. We can take our shots and live and die by them,
Turner Novak: Talking through the rest of the funds as they evolved, we were at Fund 2 and then to Fund 3. So, you went from $3.2 million to…
Semil Shah: $8.2 million.
Turner Novak: $8.2. Okay. Those are not round numbers. Like was those, were those numbers you were trying to get to or -
[Both laughing]
Semil Shah: No, no, no.
Every fund, until fund five was always below the target.
Turner Novak: Interesting. How did that make you feel? It seemed like you had a great portfolio. Why didn't you hit your targets?
Semil Shah: It’s just hard to raise capital.
I think you could look at the first time I was trying to get those lumpy checks and raising Fund Three, the number was $20 million. And you have a goal. It’s kind of like if you're at a company and you say we're gonna do $20 million ARR in the first year, and you don't hit the goal but you get to $14 million. That’s not bad.
So in the third fund, I was like, well this is just what it's gonna be. But that fund will have like three to five $1 billion outcomes in it, and one that could be like a $30 to $50+ billion dollar outcome.
Turner Novak: So really quick, can you explain why that matters? For someone who doesn't really understand this, like why is that a big deal with, with the size of the fund and the outcome.
Semil Shah: Well, in the moment, or in that more immediate sense, you could view that as a failure.
Turner Novak: Because you didn’t raise as much money?
Semil Shah: Yeah. You didn’t raise as much money. You could view it as a failure. That's one lens.
You could view it through the second lens, which is that the market spoke. And the market speaks. Yeah, that's a second lens.
You could view it through a third lens of, oh, my hurdle to pay back the fund is lower and I can maybe raise the next fund sooner. There's no rules around when you can raise these things
It’s sort of like a founder saying “Hey, I was trying to raise $1 million, and I got to $600k. I'm just gonna go back to work and fundraise earlier.”
Turner Novak: Like, let's say it happens to me, like, should I be sad about it? Discouraged, like how should I process it?
Semil Shah: Process what?
Turner Novak: Just that “Man, I was trying to get to 20 million and I only raised $8.2. I feel like we do glamorize these things, and some of that's a good thing, but I think some of it's actually not, and we should appreciate a little more that it’s not really failure.”
Semil Shah: We can talk about this after, but Fund Four is where I felt the most fear and pain. It wasn't Fund Three.
Turner Novak: When you say after, you're saying in a couple minutes?
Semil Shah: Yeah.
What I would say in a more blanket sort of generalized statement is, number one, when people are investing in Banana, or Haystack, or the next fund to invest in, they don't owe us a management fee or salary. I think there are a ton of people I've met. And I would go so far as to say hundreds. Who say “I need to raise this amount in order to have a salary.” And I'm always like “do you deserve a salary?”
Turner Novak: Yeah, that's a good way to think about it. How do you earn the salary?
Semil Shah: Open question. But I think a lot of people just assume they do.
Turner Novak: How do you think about, if I'm starting my first fund ever today - or maybe I did my first fund in 2021 and I'm doing my second fund right now - how should I think about what I go out to do? How big the fund is? Backing into the salary number? How should I think about approaching all that right now?
Semil Shah: I approach it as, the first step or step zero, I wouldn't even attempt it as a full-time thing unless you have a capital partner ready to go to anchor a good chunk of it. Otherwise, you're just gonna waste your time.
Turner Novak: One of the things you've mentioned before is pre-marketing or pre-raising the fund. That’s what I always do. I just don't really like fundraising. I feel like the best thing to do is first get everyone committed and then actually take the money. There’s just less pressure. Is that a good way to approach it?
Semil Shah: A good founder is always fundraising. Now, there's different degrees of what fundraising mettle they have at a certain time, but they're always doing it. I think the same has to be true of a person who's leading a fund and on the hook for raising capital for the fund.
It is super hard. Founders have no clue how difficult it is for you to raise capital. But then they expect you to give it to them.
Turner Novak: What do you think founders should appreciate about raising a fund? Why is it so hard? Why do they not understand how hard it is?
Semil Shah: Well, they don't care,
Turner Novak: It's just, oh we're a big fund, we have a billion dollars -
Semil Shah: Some do, I don't wanna say everyone. A lot of the founders, when we back them, I wouldn't say everyone, but as part of the discussion, I always tell them for three minutes “hey, here's how this started”. Partially to just level set like “Oh, I've actually raised a lot of money over successive rounds. And I’ve helped a lot of companies raise, and I know what it's like to go through that.”
But, but I think a lot of founders, when they meet investors, for the most part, a lot of them haven't raised their own rounds of capital.
Turner Novak: The investors that they're talking to haven’t raised money?
Semil Shah: Yes.
Turner Novak: Yeah that's true. And I think, people get canceled for saying that being a fund manager is like being a startup founder. It's not the same. But there are some parallels.
Semil Shah: It's definitely not the same. I mean, the stress is definitely not the same
Turner Novak: It's different stress, and it's not the same level.
Semil Shah: It's different. But I still think in the capital raising mode, or when you put your face and your name out there, there is a parallel there.
Turner Novak: Maybe we can get a little bit back to the pre-marketing strategy.
So Fund 3, it was $8.2 million. Did you start investing the fund as if it would be $20 million as you were raising and then change the strategy as you realized it would be $8.2 million? Or did you raise all the money, hit $8.2 million, and then start investing?
Semil Shah: No. From January of 2013 until the Summer of 2017, whatever that is, four and a half years.
Turner Novak: Okay, that's a long time. This is the first three funds?
Semil Shah: More like four. I was continually fundraising and investing in founders continuously over those four and a half years. With the exception of a six month break I took.
Turner Novak: Did you just have $2 million bucks that you could sit on and you didn't have to raise for a time?
Semil Shah: Something like that. But for those four years, I was constantly every day meeting someone to get $50k, and then that evening turning around and investing $50k.
Turner Novak: Did you ever have, like a waitlist? Where you had three founders that you owed some money to and it was like, I'll send it to you in three weeks, I just gotta raise it.
Semil Shah: I always tell the story about Ironclad. There were a few of these, but Ironclad was my favorite. I was fighting to get into the Seed round. I really liked Jason [the founder of Ironclad]. This was at the beginning of Fund Three, the $8.2 million fund, and I had not closed some of it yet. And I wasn't sure when it was gonna come in. And my wife was very pregnant with twins and we were about to go from one to three kids. And I was still living month to month. This is the fall of 2015.
So I remember fighting to get the allocation. Jason was extremely gracious as he always is. And then I explained it all, wrote out the situation, and asked “do you mind if I wire it in a month?” and Jason just wrote back and said “Sounds like a lot. No problem.”
Turner Novak: So it was just communicating and just letting the founders know.
Semil Shah: Yeah. And again, it goes back to the Maples line. Jason let me invest. And I've had founders do this on occasion, where we ask can we wire like a week or two later, and they are just like “no sorry, I can't”
I don't fault them for it. It is what it is. But Jason, to the Maples point was like, he created the opportunity for me at the end of the day.
Turner Novak: I think as a founder, when you talk to a lot of people, sometimes it’s “I just wanna get this done. I want the cash in the bank and be out of fundraising mode”. So I can appreciate that.
Semil Shah: Yeah. Tough. Jason was raising something like $2 million. So the $100k I was offering him, I think he knew he could get it somewhere else if it fell through.
Turner Novak: So, for people that have never raised money before… you don't have to have a fundraising event. Like, you can just meet someone, they want to give you a certain check and you can, you can just take it.
Semil Shah: When I started investing, most entrepreneurs were cobbling SAFE notes together. That was the standard. Then at some point in 2016-2017 people just decided, they probably read enough TechCrunch articles where they'd say “oh, I have an idea and I'm gonna raise a $2 to $4 million seed round”.
And a lot of them didn't raise those rounds because people were like “well, I have much better flow for $2 to $4 million, with actual traction or no cold start problem.” But that became something people sort of expected.
Turner Novak: The founders were raising $2 to $4 million?
Semil Shah: Yeah, they were just out of the gate raising it. And it's still happening today, there are different reasons why it's happening today.
You wanted to talk about pre-marketing?
Turner Novak: Yeah. So we're on fund four now. So, you went from $8.5 to, what was Fund Four?
Semil Shah: $8.2 to $22.8 million.
Turner Novak: So again, did you -
Semil Shah: Nope. Didn’t hit the target.
Turner Novak: What happened with Fund Four?
Semil Shah: You know, it was the first time I got legitimate institutional foundation checks.
Turner Novak: How big were those?
Semil Shah: $5 million, $3 million. $3 million.
Turner Novak: Wow. So you had some people who really went to bat and said we’ll be 10, 20, 30% of this fund. And when did you meet those people? Did you meet them and they sent you the money the next day or how did that work?
Semil Shah: No. I'd met them through the Fund four process. Took about anywhere from two, you know, one to two months to the full six months.
Turner Novak: That's not that bad. It sounds like a lot, but that's actually, that's pretty good.
Semil Shah: Yeah. I know a lot of people today would be like - Ugh! - but that's pretty standard I think.
Turner Novak: Well then, how did you, and maybe you've learned a lot and not necessarily what you did with Fund Four, but how do you approach building relationships with LPs?
Semil Shah: Yeah, that's another big question. I feel like I've done a good job at that.
I think in Fund Three, when I was trying to raise $20 million and got to $8.2, I quickly realized that like, oh shit, a lot of these people are never gonna invest in this fund.
But, we had a number of mutual connection points. Or they were LPs at GGV, or a16z, or at Lightspeed. And I knew a lot of people there.
So I just kept my notebook with me and did little things. Tried to help 'em out. Tried to help 'em get into funds. Tried to help them see SPVs. I’d take feedback since a lot of them would spend time with me. So I just built up a network. I started emailing out other funds to them. So I started, I don't wanna say it's a newsletter, but it's like a Google list.
And then we started, you've been to the Alignment Summit? That's kind of my pay it forward thing for the ecosystem in terms of other managers, where I felt like a lot of people like Puneet, Glenn, Jeff, Paul, etc had helped me - hundreds of people helped me - but I can't go pay those people back. So then it's like, okay, well I know all the LPs now. I know a bunch of GPs, so I just host a curated, tight annual event for those folks and put 'em in the room together.
Turner Novak: Yeah. They're really good events too. I've only been to the one this year.
Semil Shah: But you know, I spent time with them. They do appreciate the candor. I think they appreciate having time to get to know you, reference you, see how you change.
Turner Novak: Yeah, that's a good point. See how you change. Because that's what a VC is looking for in a startup. They're looking for that rate of change, the progress, the lines not dots. Yes. And LPs are really looking, a limited partner - those are people who invest in venture funds - they're looking for the same thing.
Semil Shah: And, you know this too, I didn't really appreciate how heavy the referencing is. You know, it's just insane. Now, some of is silly.
Because it's like, all they can do is diligence. So it's like, let me fill my week with diligence. It's like “What does Turner do?” and by your 19th call, what are you trying to uncover? But at the same time, it is important to reference.
So you have to be referenceable, there are just a lot of people who are not referenceable. And if you're trying to be a VC and you're not referenceable, then almost by default you probably shouldn't be doing it.
Turner Novak: How do you become referenceable? Or in other words, what are the LPs looking for when they're doing references? Do you know what they ask?
Semil Shah: You'd have to really ask them. I've taken a bunch of reference calls so I can sort of synthesize what they're looking for.
I took one for a good friend last week. Actually he just told me today he got a $10 million commitment right after that call.
Turner Novak: Wow. So you know what you're doing with these reference calls?
Semil Shah: Well, I’m trying to play it very fair. I usually say “if you want X, Y, or Z” or here’s what you're buying, and you want this, you should do it.
When they call me for a reference, which is my only frame of reference on this, it’s
How do you know the person?
Do you share deals with them? Do they share deals back with you?
How do they find deals?
What would you describe as a superpower that they have?
Any interpersonal issues? What's their behavior like?
Why do founders wanna work with them?
It's those kind of questions.
Turner Novak: So some of those rhyme with what they might actually ask the manager that they're looking to invest in, and it's a reference or just making sure the storylines up almost.
Semil Shah: Yeah, because they know that most VCs, when they're talking to them, they are just full of shit. Right?
[Both laughing]
Turner Novak: I think I was really bad at that initially. Like I didn't brag at all, and I think I undersold myself. Maybe I'm getting better at it, but
Semil Shah: I think over time you'll be rewarded by that. At the end of the day, nobody knows, none of us know what we're doing, We don't know what's gonna happen to the companies. And I think just almost blurting that out and saying “Here's how we're gonna manage the uncertainty around it” is refreshing.
Also, it's better to have other people talk about you over the long-term than you to be talking about yourself.
I think as a VC for every 60 minutes you speak should be one minute of full-on marketing yourself, and then after that it should be 59 minutes of storytelling and having other people tell your story.
Turner Novak: That’s fair. I've noticed the storytelling really helped with LPs.
They basically just ask about the hottest markups or the best companies. How I found them. How I got into them. What I did. And it's the same question. So I’ve started to just weave it into the narrative and the pitch and I try to push it a little bit 'cause I know they're gonna ask it.
Semil Shah: I think it’s just a timeless thing. People remember stories. “Oh, I took a red eye to Houston to go to this event to like meet this founder”
Turner Novak: “And I got in front and then we led the round because I introduced them to some customers or at the event that they closed.”
Semil Shah: Yeah, just the little things.
Turner Novak: So the $22.8 million fund. You had your first couple big institutional checks. And you said this was the hardest, I think you mentioned earlier, this was the hardest one to get done.
Semil Shah: That when the most fear set in.
Turner Novak: What was scary?
Semil Shah: There were, I want to say two episodes, where I was struck with a bolt of fear. But they were different types of bolts.
So, I started in January, and I was gonna try to go to the end of June.
Turner Novak: This was 2018?
Semil Shah: 2017. And raise a $30 million fund.
There’s a top tier venture firm on Sandhill Road, it doesn't matter what the name is, but one of the main, figure heads of that fund is a very well-known, powerful person. And he’s been a very great friend, partner, and mentor to me. And he said “any LP you want, I'll intro you.”
So I said “Hey, I'm not gonna do that. But if I ask for one bullet a year, will you fire one bullet?” He was like -
Turner Novak: What's a bullet?
Semil Shah: Just one, really nice intro.
Turner Novak: Just a single?
Semil Shah: Yeah. Because he was like, I can do 10, 20 this, whatever you want. And I'm like, well, I'd rather sit and amortize the bullets over time because I don’t know when I'm gonna need them.
Turner Novak: You might use all those bullets and have no ammo left.
Semil Shah: So the first bullet I had him fire was into this university where I had met and known these folks. I'd gone to visit them, and they’d invested in emerging managers. It was a big university, so I was psyched.
So, I had met them earlier, and I knew they were gonna be on Sandhill Road for that firm's AGM, which was every January. They would often invite me to the drinks portion of the two or three day event.
Turner Novak: That's what you do with the Alignment Summit. You do the AGM and then you do the summit.
Semil Shah: Yeah. I staked out being on Sand Hill that day. And, I remember emailing her, this was the Head of Privates at this university. And I had already gotten that reference the Mega Star, and it was a detailed one.
Turner Novak: What does that mean? Detailed?
Semil Shah: It wasn't like “Hey, you should meet Turner.” It was actually what I exchanged the 10 to 20 intros for one. I'm like, can you actually sit down and write an intro? That’s what I want.
So I sent her a note. I'd already met her. Already visited her on her turf. Already had that note sent. And then another one of my really good friend and mentors, she had already backed.
So I started fundraising on January 1st. So I’m on Sand Hill Road, email her and say “Hey, I know you're at the Rosewood. If you have half an hour or 45 minutes while you're here on the trip” - because she has to be at the annual meeting, that's her job - “it would be great to meet you. I'm right across the street.”
I think in about, if I had to guess, I would say 17 minutes. She wrote back and said -
Turner Novak: That's good. That's encouraging
Semil Shah: Except, this is where it gets dis-couraging.
She said “sorry, too busy” - sent from my iPad.
Turner Novak: At least you got a message though.
Semil Shah: At least I got a message. So, I think that bolt of fear was like, oh shit.
Turner Novak: What was the fear? Because you had a bunch of other conversations -
Semil Shah: I viewed it as an omen. Because, it was like, oh wow, I just took 10 bullets. I squished it into one. And I fired it here. And she didn’t care.
Turner Novak: It was a cannon ball instead of a bullet. And it missed.
Semil Shah: I actually, I don't think it missed, I think it didn't make any dent.
[Both laughing]
Turner Novak: It just bounced off.
Semil Shah: It just bounced right off the, uh, the institutional wall.
And then the other fear was more in April or May when I had been traveling a lot. So, my ass was on a plane constantly. One week I would fly out to Dulles and then fly back, and I fucking hate that airport. I don't know why.
Turner Novak: Wait, Dulles, which one's that?
Semil Shah: In DC. Because then you gotta drive like an hour and a half into -
Turner Novak: I've only been to DC once.
Semil Shah: I like DC. DC is great. So then I'd go to Boston, come back. Then I'd go to New York and Boston. And that's just kind of what you have to do. But then, all those times on the plane coming back and you're stuck at $8 or $11 million.
And then, when June comes, June is a time when things just stop. I was just starting to accept that it's not gonna be much of a change from the last fund. But then it turned in the last four weeks.
Turner Novak: Of June? What changed? There’s still vacations. Fourth of July's coming up.
Semil Shah: Honestly, I don't know what changed.
Turner Novak: Maybe end of quarter? Something like that.
Semil Shah: No idea. To this day, it was random.
Turner Novak: So you went from $8 to $11 to $22 million?
Semil Shah: $22.8.
Turner Novak: So you doubled it in the last four weeks?
Semil Shah: It was something like that. I think the last three checks amounted to like $11 or $12 million.
Turner Novak: And usually the advice is, find the anchor when the big checks first -
Semil Shah: Yeah, I don't know who gives that advice because it actually makes no sense.
Turner Novak: Why does it not make sense?
Semil Shah: It's not real. The amount of people that can go start a fund and find an anchor is probably less than 1 in 1,000. So if you're keying off that advice, it's statistically not wise.
Turner Novak: So why do people give that advice if it's just not right?
Semil Shah: We live in an industry where people love to give advice.
Turner Novak: It sounds good on paper.
Semil Shah: It sounds great!
Turner Novak: It actually makes it sound easier. Because you half raise the fund -
Semil Shah: And it maps to everything you read on TechCrunch. Because it's like “oh, who's your lead investor?”
Turner Novak: The thing that's really interesting is people think the lead investor catalyzed it. That’s why something happened. But that's not always the case.
Semil Shah: Again, I think less than 1 in 1,000, right? So if you have a partner from Benchmark spin-out with a partner from RedPoint. And they're both relatively young. There's a really good chance that very high signal LP institutions will back that fund.
And if those people are in the fund, there's probably an, I would say 5, no more than 10, very high signal LPs. And I don't mean there's only 5 to 10 good LPs. But I mean more in the sense of, if they anchor your fund, there's a whole smattering of people that want to co-invest with that anchor. But it's notver many.
Turner Novak: So did you have that? Did that happen for you or no?
Semil Shah: I wanna say, eventually. We do have a large university anchor. But that only started in Fund Five. And I had known them for over three years before they said yes.
Turner Novak: Interesting. So you probably first met them at Fund Two or Three?
Semil Shah: At three. They were investors in GGV. Extremely nice people. Very diligent. Very disciplined. Very knowledgeable about early stage. So they were real craftspeople about this arcane little world.
And I thought the thing that they did that was very smart and unique is they said, and I’m paraphrasing, “Hey, it was great to meet you. We’re definitely not gonna do this fund. We do have notes because we did spend some time talking about you and talking with other people” - and their job is prospecting over a long horizon - so they said “when you're done with the fundraise, send us a note and we would love to just give you some feedback on what we see and you can take it or leave it.”
And so I took them up on that.
Turner Novak:Do you remember the feedback?
Semil Shah: Yes.
Turner Novak: Can you share it?
Semil Shah: It was the portfolio construction. Can you actually really write $500k, $750k, $1 million checks? And then, what are your plans for the fund? And I don't think I had great answers for any of those, but it gave me a good roadmap.
But I also remember that I was in the car, waiting at some park to pick up some kid. So it was just one of those memories I just remember. This person said, call me after the fundraise, gave me the feedback. I remembered to do it. They honored their end of the bargain. And it wasn't a cheap call. And I was like, okay. Yeah, that was cool.
Turner Novak: That's honestly a, a good sign that they cared to do that.
Semil Shah: I think they're, they're just buttoned up that way.
Turner Novak: One interesting story that I've heard about Benchmark is I always call and give you feedback on the pitch, which
Semil Shah: Oh, really?
Turner Novak: At least that's what I've heard from founders.
Semil Shah: It's a good technique. I mean, I'm sure a lot of people who are listening follow Leo Polovets online. Leo is a very thoughtful, still waters run deep person. When he spends time with the technical founders, he'll write a longer note.
So I do think like how you do that, or how you give feedback, it creates a little bit of a brand impression. Because it is a touch point. And it also over time can be a self-selector thing in the sense of showing to the founder “I'm actually listening”. And then that I cared enough to call you for seven minutes and just tell you. It’s alarming to me how many people don't do that. I don't think you need to do it for everyone you meet. I think it's just a function of how much time do you spend?
Semil Shah: If you ask someone for three or four meetings, I don't think you owe them a letter response. But you do owe them a response.
Turner Novak: Yeah, you do.
Semil Shah: And then the medium and what you say is a function of how much time you spent.
Turner Novak: That’s true. And maybe a part of it is that, as a founder, if you have three calls with one venture firm, you had three different touchpoints with them. But from the firm's perspective, three different people that spoke to the founder.
Semil Shah: Yes.
Turner Novak: Just one offs. So there might be a little bit of a disconnect
Semil Shah: That happens at big funds a lot right now.
Turner Novak: And then, I think that's our advantage as a smaller fund. We can just be more personal. Obviously, we can't cover as much, but we can be a little bit more intentional about what we do.
Semil Shah: And it's also less threatening, right? I mean, the ownership requirement itself is less threatening.
Turner Novak: So you, you had this big institutional LP that came in
Semil Shah: A couple.
Turner Novak: A couple, okay. So Fund Four to Fund Five -
Semil Shah: Fund five was the first time it was technically oversubscribed,
Turner Novak: You finally had a oversubscribed fund! That's always a good. Everyone brags about that. That’s good, right?
Semil Shah: Yeah. I would say like the technical oversubscription happened in the last seven days. When I mentioned this to some of my LPs, they were like, oh yeah, that's classic behavior. It happens. It was wild how much money -
Turner Novak: But it happens on the venture and the startup side too. Putting a round together, struggle, struggle struggle, then all of a sudden it just happens.
Semil Shah: Yeah. You have a pile on effect at the end. But we capped the last funds we've raised, including that $50 million one that was oversubscribed, we put a hard cap on it. That’s something we can talk about that actually for the audience.
My general advice is to self-imposed a hard cap.
Turner Novak: Why would you do that? It's so hard to raise money, would you want to just keep raising? What's the rationale?
Semil Shah: This is just one man's opinion, but I think if you're asking a hospital or a family for $3 million, they deserve the right to know within a band how much money you're gonna raise. Because it affects the geometry of all that stuff
Turner Novak: Because they're slotting you into their portfolio, just like you're making a portfolio. They need to know, should our return expectations be 5x with a chance of 10x. Or should it be 2x with a chance of 5x.
Semil Shah I always come back to this line of, whether you're a founder or VC, you really have to stop and think of every dollar you have. Respect the dollar. Where did it come from? Why did it come to you? What are you entrusted to do with it? A lot of people don't give a shit.
Turner Novak: It was actually really interesting. One of my LPs gave me that advice. He said, the one thing you need to realize is that this is other people's money. This is my family's savings.
I don't think that was his exact wording, and I really hadn't thought about it like that - I had thought about it, but I was like you're right. It is actually a big responsibility.
Semil Shah: The classic line for this is, in our roles as investors, we have to treat it like it's our money. But also remember, it's not our money.
Turner Novak: Yeah. It's almost harder. Makes it even more, I wouldn't say stressful, but there's -
Semil Shah: You're entrusted as a steward.
Turner Novak: You're a fiduciary.
Semil Shah: I think a fiduciary is more with respect to being an officer in a company. I think of this as you're more a steward of that capital, and they're entrusting you with that blind pool.
So the reason I brought this up is just around the hard cap. I don't think it's fair or respectful to the dollar. If you say, well, I'm gonna do a $25 million fund, but because my fund got hot, I'm gonna do a $100 million.
Turner Novak: Does that happen?
Semil Shah: I don't know. But I'm just saying, I don't think that's fair.
Turner Novak: I agree. A lot of times I'll tell founders, I don’t care who else is investing. And I'll say, I'm in, I'll help you raise it. But I have some parameters and if it gets outside those, I just invest anymore, I'm sorry. And I usually try to be pretty transparent about it.
Semil Shah: Absolutely.
Turner Novak: Okay, so Fund Five? Six?. Which one were we on?
Semil Shah: Who knows at this point.
Turner Novak: The $50 million. So it was Fund Five.
Semil Shah: Yeah. That was 2019 we raised it.
Turner Novak: 2019. That’s an interesting time to be starting to deploy a new fund. For people out of context here, the prior couple years you've been doing this, it was always a grind. The money was not really flowing the same way that it was recently [in 2020-2021], but not now [in 2023].
So what was that like when you started to deploy in 2019?
Semil Shah: I had already been primed to write a couple $1 million checks. But now I was like, oh, that needs to be pretty much everything.
So luckily, I was able to work on that in Fund Four. Definitely made a ton of mistakes. That's always the fund that keeps me up at night, just all the mistakes I made.
Turner Novak: Really? What was the biggest one?
Semil Shah: Well, the mistakes of omission are always bigger than the mistakes of commission. There were definitely some big omissions, where when you combine it with the mistakes of commission, it makes it more painful.
Turner Novak: Like what?
Semil Shah: OpenSea we passed on three times. I helped Nick Tomaino raise his first fund and we had been friends for a long time. So he was very generous and shared everything with me. So he shared the Seed, the Seed extension, and their second Seed extension. And all the graphs were going up.
Turner Novak: So why were they raising seed extensions?
Semil Shah: No one gave a shit about them.
Turner Novak: And so what, this was 2019? 2017?
Semil Shah: It was 2017, 2018.
Turner Novak: Okay. And to people who don’t know, OpenSea is the biggest NFT company. Or NFT marketplace.
Semil Shah: Yea. I mean, it's in a tough spot right now. But for a period in time of what that would’ve been, and it definitely would've provided liquidity, it was a huge missed opportunity.
Turner Novak: So in 2019, getting back -
Semil Shah: That’s $50 million.
Turner Novak: $50 million.
Semil Shah: Hard cap.
Turner Novak: Okay.
Semil Shah: Oversubscribed.
Turner Novak: It's important. Everyone needs to know that. He had an oversubscribed fund.
Semil Shah: I think the math is important, it was after six years.
Turner Novak: So we talked a little about pre-marketing. Did you do a lot of pre-fundraising before? Because that’s a big number to get to. As in, before you actually started, were you like, okay, I have $30 million from my existing LPs -
Semil Shah: At that point, my philosophy was that a quarter of pre-marketing is useful because people move slower. On the LP side, they have calendars and pipelines that they're dealing with. They have fiscal years that they're dealing with, and people need reminders. I think it's almost like you are fundraising, but you just call it pre-marketing beausecause it's like a different part of the dance. But it's all semantics.
Turner Novak: Yeah. I think you've used the phrasing as it's intentional, but it's not formal. You're intentional about reminding people. Updating, keeping them in the loop. But nothing has to happen yet.
Semil Shah: Because I think a lot of what they are looking for is little things, in the same way you would look at a founder. Let's say raising a growth round, for example, when I set a close date, never move the close date.
Turner Novak: Never? What if you didn't raise anything? Not even 10% of the target?
Semil Shah: Well again, I'm only doing this now at this part of the game on Fund Five, Fund Six, Fund Seven. But to me, it's a signal of “hey, we're, we're gonna be on this schedule. We've communicated the schedule. The decisioning shouldn't be that complicated if you have time. And this is what we've determined for our business to be a decent timeframe, and we're gonna close on this day.”
So I think part of it is for the capital to respect that, hey, banana wants to close on XYZ date.
Turner Novak: Yeah. And if you've done a good job of meeting people and them getting to know you, they probably already know their decision.
Semil Shah: I’ve found that repeating the close date, being really upfront about it way ahead of time, and treating the LPs like actual people, the overwhelming majority will absolutely honor the date. Whether they say yes or no is a separate question. But they do honor the date.
Turner Novak: So this was Fund Five in 2019. Did you do something in 2021?
Semil Shah: We now raise every Q2 of an odd year.
Turner Novak: Why Q2?
Semil Shah: it’s my little secret.
Turner Novak: Are you gonna share it?
Semil Shah: It’s the best quarter out of the four quarters for us to raise.
Turner Novak: Are there things that don't work in the other quarters?
Semil Shah: I think of Q1 as most people just don't wanna make commitments in January. February is the shortest month. And then March is there.
Q2 all kids are in school, everyone's working, and everyone's trying to finish before the summer starts.
Q3 is the summer and the fall. And the fall has its own sort of pace and rush.
And Q4 is kind of a shit show.
But all these LPs have very different fiscal years funds. We invest on a pretty clear cadence in terms of money out the door per month or per quarter. So I don't know if it would work for most funds.
Turner Novak: So how did that go? The most recent Fund Six.
Semil Shah: That was in Q2 of 202.
Turner Novak: 2021. Interesting time to raise.
Semil Shah: I would say that was the easiest fundraise ever. All the LPs and a few new ones came back. It was the same size. And I really have to thank them all. Because of the pandemic and Zoom, they weren't able to touch and feel the portfolio and the team in the same way that they would've otherwise.
I think a lot of LPs supported a lot of VCs through the pandemic. Not that we couldn't have raised, but they let go of a lot of their process. And my hope would be a lot of VCs, if they felt that from their LPs, to remember that.
Turner Novak: And I think now it's almost the opposite where, the ease of closing a fund in 2021 and 2023 are almost opposite maybe. Or, t's at least a lot different.
Semil Shah: Yeah. I always use the bane meme from Dark Knight Rises when this happens. Where the first four fundraises for me were all so painful and so long. I'm just conditioned to expect that in every fundraise. But for the majority of people who started doing this, it was pretty easy.
I would just say, having just gone through it again, to expect a lot of pain now.
Turner Novak: So how did it go? Its Q2 of 2023, that’s when we’re talking right now. What happened in Q2 of 2023?
Semil Shah: We just closed two new funds. We have a second product now that's a $25 million companion fund to do very small checks in the Series Bs in the portfolio.
And then we upped our core fund size a little bit to $75 million and ran the same campaign as the last two fundraises. So it was just dialing in, very procedural. It happened very quickly.
But if I go back and look at questions I got in Fund Five, because we have a lot of the same LPs in Funds Five, Six, and Seven. We're an incredibly fortunate position, small is beautiful right now.
In Fund Five, the questions were pretty hard, but manageable.
Turner Novak: Were these still portfolio construction and check size questions?
Semil Shah: No, just the whole process. On a scale of 1 to 10, it was a 5 or 7 on the “hard spectrum”.
On Fund Six, that was the “double down during the pandemic” fund, that was a 2 out of 10.
Turner Novak: Was it the send an email and a week later you had -
Semil Shah: No, no, no. It wasn't like that.
Turner Novak: I've heard some stories.
Semil Shah: It was still a process. But something I'm not gonna forget is that people were like, we're gonna change our own process and and then let's keep going.
This fundraise we just closed happened very quickly, but the questions were considerably harder and more thorough. Even after all this.
Turner Novak: Sowhat are people, what are people asking you at this point? You've been through everything.
Semil Shah: What I would share with the audience is less about me, and more about what to expect or anticipate.
If you take one thing away from this segment, it would be that pretty much every LP for the most part is “re-underwriting their decision” each fund. So that's number one.
Number two is to always remember that if Banana Capital has a relationship, I'm just picking with, let's say you have a friend at UCLA's Endowment and they invest in you.
Turner Novak: That'd be nice.
Semil Shah: Send me an email and I'll intro you.
You think, oh my friend Thomas is at UCLA, he's an investor in Banana. But actually, you have a personal relationship, and a contractual relationship with the University of California at Los Angeles. And so now, even if your friend Thomas at UCLA wants to invest in you, they have to go to their investment committee. And committees are cutting down allocation sizes or just hitting pause.
So that's happening. There's re-underwriting. That means re-diligence, everything, double check everything. There's the fact that you can't push things through as easily, and committees are getting tighter.
And then, just the capital availability in the endowments and foundations here and in the traditional US LP market - of course they have lots of money - but right now they have a liquidity problem. And this is why you see a lot of people going internationally to raise. I think we're in the early innings of all that, having just gone through that literally weeks ago.
Turner Novak: Which could change the LP landscape if it sticks, some of the foreign capital. That’s both good and bad.
Semil Shah: All of our investors are US investors. We have one European Life Science Institute that's an academic institution that's between Europe and the US. But that's a personal choice people make. We will definitely hear about more global capital coming in.
Now I do think, and this is a little bit above my pay grade, there will be higher scrutiny on foreign sources of capital. I don't know how that's gonna manifest. I think in previous years there used to be some social pressure or fear around taking certain types of international money. But I don't think that will be there anymore.
Turner Novak: There’s almost no choice for some people, right? Correct. Yeah. So
Semil Shah: Correct. So they will bypass the fear of social repercussions. Now, there still could be regulatory repercussions, which I have no idea how will work.
Turner Novak: I guess you just have to figure out how to manage it. It's probably a “worry about it later” thing for a lot of people
So you mentioned this thing called investment committee at a big LP. What is that and how does it work for people who don’t know?
Semil Shah: Imagine you're building a relationship with an LP at a big hospital network or health foundation. The CIO (Chief Investment Officer) there sits on the board of trustees of the whole hospital system. So they have their own investment committee meetings, and then they take the ledger to the trustees and say “we're gonna be redoing these funds”
So that CIO is putting their neck on the line.
Turner Novak: So are usually the trustees of a hospital? Local businessmen?
Semil Shah: I mean, industry leaders and community business leaders,
Turner Novak: So these people probably don't know what the hot seed stage startups are, right?
Semil Shah: Of course not. But think about a university. A University has an investment committee. For the endowment, it usually includes a president, the CIO whatever trustees are part of the school. They can't have “Banana capital showed up in page six of the New York Post”, so they're careful about all the repercussions of that, in addition to the cash management piece.
So for example, I think this will come to a head in crypto. You could have one person at an endowment and foundation who really believes in crypto. They could be super technical. They could have made good crypto investments. They want to continue going, and the committee's just says no.
Turner Novak: There’s extreme headline risk.
Semil Shah: No, just I don't want to allocate to that. We’ve decided as a committee, we don't wanna allocate to that
Turner Novak: It was always really fascinating to me to see, coming from the institutional LP world, I'd see all these people talking about “the institutions are coming to crypto.”
And I was always like, huh. I guess I'm just not talking to the right institutions. I don't know.
Semil Shah: The other thing for the larger funds is that the committees have cut allocations. So say, in the past, we've done $20 million in your funds. Now, we’ll do $10 million just to preserve the relationship. Maybe we'll do more in the future, but -
Turner Novak: So I actually laughed when I heard you answer this question. It was on 20 Minute VC with Harry Stebbings.
Semil Shah: Oh yeah.
Turner Novak: I think it was 2016. He asked, what's the five year vision for Haystack? And you said “Survive. Still be investing in companies.” And it’s now seven years later? You survived.
Semil Shah: I survived.
Turner Novak: You’re still investing. What's the new 7 year, or 10 year vision? Where’s Haystack going?
Semil Shah: I really do think it's an exciting time. I'm personally cautious in some ways, but really excited in others.
I go back to the Douvos line. The first 10 years were the crawling and walking. And now we can run. We'll never have to worry about LP capital again. We have infrastructure set up to where, basically all we have to do now is just invest in founders, help them, help our ecosystem friends, and that's our job.
And we have a companion fund, which goes into the series B. So we typically try to do a Seed and A check out of the core. And if something graduates and we really like it later, we've built up a very selective SPV program with our LPs. It’s maybe once or twice a year, and we can take a bigger shot in a company.
So that's the next 10 years, just doing that. And now, if we find the next HashiCorp, we don't just invest $25k, we start with $500k or $1 million. Stick with it, and aggregate capital in the ones that graduate. And now, the things that graduate are getting better and better, because the checkpoint has gotten tougher and tougher.
Turner Novak: So for people who are just hearing this for the first time and they haven't seen the announcements, what is the latest fund?
Semil Shah: We just closed on a core fund of $75 million and a companion fund of $25 million.
And really, nothing changes about how we work. It's just that the capital's committed and ready to go. And it's all from great, sources that have higher missions than you and I. So we’re very fortunate to have that.
And the reason I thought this would be good too do is, I do think I saw the tip of the spear of what a lot of people are gonna experience for the next two or three years. And I could just provide a good warning of “Hey, here’s how to prepare for that.”
Turner Novak: Yeah, it's gonna be an interesting two to two to three years.
Semil Shah: I just think it's just gonna be really, really tight. There are gonna be LPs who want to make commitments to people like you and me, and they just can’t.
Turner Novak: What advice would you give to the next Semil Shah? He's doing his $1 million fund or $3 million, or whatever they're doing right now.
Semil Shah: I think what's different now with AngelList is that there is a function to collect money and run these small funds or SPVs. You can build up a track record. But to also really be thoughtful about what your track record may look like, or what the logos are gonna look like in two or three years. And that anyone who's looking at you in two or three years is gonna ask, “what check size did you write?”
So you're going to be forced to concentrate more capital than you would've in the past. Maybe you were comfortable writing $100k checks or $250k checks, but now you have to write $500k checks.
How do you get in position to do that? How do you show a provenance of how you found the deal? Who's in it? What does it do? And what happens to it after? Because people are gonna scrutinize if it gets marked up or not now.
I also think just having the fund size capped and set at a number that fits with the person's personality would probably solve half of everyone's problems.
Turner Novak: You just make sure your strategy matches what you can do.
Semil Shah: Exactly
Turner Novak: Are there any other announcements that you've just made that we should talk about right now?
Semil Shah: Aashay, that's probably the big thing. Aashay Sanghvi started working at Haystack right outta college for four years now, and done such a great job.
He’s now a junior partner in the fund with significant economics. And, you know Aashay, he’s done a great job. He’s so much fun to work with. And like you, super earnest, learning all the time. And I didn't intend to do that. It just sort of happened organically. And I thought of copying the USV model, which is when a new partner comes in, they come in as a half partner to start, and do a fund cycle and then go full.
You should have him on the show at some point
Turner Novak: I should, yeah.
Semil Shah: Probably be more interesting and more optimistic than me.
But he’s been great. And that’s the announcement. We got it done, and we're very grateful.
Turner Novak: Also, I wanted to give a shout out. We're in the Founders Inc office. They -
Semil Shah: Omar and Eric.
Turner Novak: I don’t know if you can see in the background, this is an awesome studio. It's kind of a hybrid. Venture fund, community, and I think they incubate companies. It’s a really cool space in the marina in San Francisco. you should check it out.
Semil Shah: It's in Fort Mason, just to give the pinpoint accuracy. But they’ve been great. So thanks to Omar and Eric.
Turner Novak: We’ve got all the drinks we needed. It’s an incredible setup.
I do have one last question.I feel like you used to make and produce a lot of videos. And other content. And maybe you still sort of do, but you do it less. Maybe I know the answer, but why don't you do it quite as much anymore?
Semil Shah: Well, I'm gonna change that pretty soon. I think it's just a combination of having three kids, then Covid, these funds started to really work pre-covid, and then during Covid and then we started to make bigger investments. And then a lot of career stuff started taking off. And so I think just the pressure of managing the work relationships + the home life and relationships I was like, man, I just don't have the time for that.
I also do feel like, if I'm gonna write a post, I should try to fit it all into one tweet, 280 characters. And if I cannot then I go write it. But I don't tweetstorm, I don't like tweet storms. If I tweetstorm, I tweetstorm about food or a show I saw that blew my mind or something.
Turner Novak: That’s true, yeah you do.
Semil Shah: I don't like the tweet storms. I think those are sort of mostly not polite.
Turner Novak: Not polite?
Semil Shah: Yeah. I think tweet storms are impolite.
Turner Novak: Why do you don't think they're polite?
Semil Shah: Because you kind of flood the zone. Most people who tweet storm, I actually don't follow.
Turner Novak: So these are the “ChatGPT is changing the world, but 99% of people don’t know how to use it. Here's seven tools you should follow.” Those kinds of things?
Semil Shah: I mean, if something pops up curated in my feed, sure. But the worst tweet to see like pop up is like 37 dash
Turner Novak: why do people still number them? I don't think you need to number the tweets anymore.
Semil Shah: I don't know. I think it's a cool product feature of Twitter. Thanks to Marc. Marc Andreessen had great tweet storms. That was the original sort of flood. But I just think a lot of them are clunky. I don’t like them. I don't like doing it to other people. And it's basically out of my feed.
Turner Novak: I think it's gonna be interesting to see how Twitter keeps changing. Honestly, as someone who has always used and still uses Twitter heavily, I think it's changed more in the last six months than ever.
Semil Shah: I think Twitter's amazing. But I do feel like it's either a) put it in 280 characters, or b) write it out. And most of the things I've been thinking lately, I've been forcing myself to say, okay, what’s the core nugget?
Turner Novak: That’s the beauty of Twitter too. It’s just small little Bites. It’s-short form text instead of video. It's short-form blogging.
Semil Shah: I also think I'm more organic about it. If I feel like writing about something, I'll just go do it. But if I don't feel it, maybe I had nothing to say.
And also this podcast format is actually a little bit better in some cases, right? Rather than writing five posts about the things we've just talked about, it’s actually better for people to hear it conversationally.
Turner Novak: Yeah. You can take 30 minutes to read a blog post about the story of Haystack. But also, somebody could be running. Maybe people are doing the dishes right now. Or driving to work. And it’s pretty raw, you’re just sharing it, and it's unedited. I mean, we'll edit a little bit, but it's just the story. It's not polished. It will be, it's kind of polished because you’ve probably shared all this a hundreds of times before, but
Semil Shah: Yeah. Hopefully useful.
Turner Novak: Hopefully people learned a lot.
Stream the full episode on Apple, Spotify, or YouTube.
Find transcripts of all other episodes here.