Semil Shah, investor at Haystack and venture partner at Lightspeed, joined Lucas Bagno, investor at Village Global, for an episode of Village Global’s Venture Stories.
Lucas Bagno:
Hey everyone. This is Lucas Bagno. I’m an investor here at Village Global. Welcome to another episode of Village Global’s Venture Stories. Our guest today is Semil Shah. Semil is a co-founder and partner at Haystack and a venture partner at Lightspeed. Prior to Lightspeed, he was also a venture partner at GGV and Bullpen Capital. Semil, welcome to the show.
Semil Shah:
Thanks for having me, Lucas.
Lucas Bagno:
So Semil, first of all, congratulations, you just announced Haystack 5 a couple months ago, which is, correct me if I’m wrong, a $50 million fund. Can you tell us a little bit more about the fund and the fundraise process?
Semil Shah:
I’m not sure if you said 15 or 50, although that could be the size of a investment round these days, but it’s 50. It’s the same as our previous fund and we closed it in May of 2021, so really I have to say thanks to our team who put it together and then all the LPs who supported us during COVID and doing the fundraise over Zoom. It’s not normal for them to do that. And I think where we focus $50 million, even though it’s small on the grand scheme of the headlines we read, to us feels like more money than God, because we’re just investing early and really in people early. We came together pretty quickly in that sense and we spent a lot of time previewing it for people that we built relationships with for five years. And I think we were rewarded for previewing it and not making it a rushed process and also consistency of investments and the sizing and the valuations over a longer period of time. So we just feel very fortunate and yeah, we just made our first couple of commitments out of the new fund, which technically was cracked open January, 1st.
Lucas Bagno:
Congratulations. And it sounds like you’ve really found your ideal fit or strategy by maintaining the same size of the fund as opposed to growing more and more, which we’ve seen a lot of other seed funds do. Can you say a little bit more about your process to getting there and maybe some mistakes you’ve made along the way?
Semil Shah:
Do you mean process to getting to what’s the right fund size number?
Lucas Bagno:
That’s correct.
Semil Shah:
I’d say it’s probably more art than science, but there’s a couple of prevailing forces. Like if you’re a meteorologist and you’re trying to study the weather, and you’re looking at, okay, is there a high pressure system or low pressure system, and which way is a wind blowing? And there’s a lot of that here, you know. So what I’d say first is just the amount of capital in the market and the interest in investing in new technologies, new marketplaces, all these kind of things that have network effects is only growing every single day. From the first time I met you, like three years ago, it’s just a constant drumbeat daily. And so my feeling was that, that’s one sort of high pressure system.
The other one is the startup generations of people starting companies now, the whole canon on how to do it, how to fundraise, what to look out for to get smarter when you’re a founder, all of that is online or on YouTube and very accessible, not just in founder Telegram networks, it’s just on Paul Graham’s blog and everywhere. So my feeling was that one of the prevailing forces in the ecosystem is that there’s going to be an intense fight for ownership. So when I started about nine years ago, it was common for big branded VC firms to get 20% ownership at series A, and maybe 10 to 15% ownership at series B. That doesn’t really happen anymore because founders care, on the whole seem to care more about managing to a target dilution than anything else. And so I thought as you look at the fund venture math, I always used the heuristic that if you’re managing a fund under $10 million, let’s say an early stage fund, you don’t really need a model and you don’t need to be too disciplined about what it is, you just need to do good deals.
Then I always thought, okay, well, if you’re managing between $10 – $50 million, you need to kind of own five to ten points of your best companies at exit given all the dilution in order to have a chance to drive a multiple. And then I always thought, okay, if you’re going over $50 million, are you going towards a hundred or even more? You not only have to be right a lot, and we can talk about the shots on goal piece. But you have to own a lot of the companies that exit in an environment where people are competing like crazy to own as much as they can of the best companies.
The final piece is just a shots on goal. Like having done this business now for nine years and seeing number of companies go from two people to like a hypergrowth company, it was pretty clear to me that even in the series B rounds, where you would say, okay, board members already come in priced round at the A, and the company’s doing well, that even the investors leading with series B didn’t really know what the shape of the outcome would be.
So if the series B investors don’t know how can pre-seed and seed investors know. And so because of that, it’s kind of an optimization between, how many good shots on goal can you take as a fund manager given as a reflection of our network at Haystack? What’s the amount of ownership we can reasonably ask for from the founders that they will be willing to talk to us and have us along for the ride. And like, what’s the amount of capital that we need to write two to three checks in the companies that graduate from, B to from C or from C to A. I’m a big believer in constraints and so you could use a lot of different math to come out to somewhere between $40 and $75 million. And I kind of settled on $50 in order to make it a round number, to sleep at night to have reserves, but to still be constrained. So hopefully that answers your question? I’m happy to double click on any of those.
Lucas Bagno:
Absolutely. So I’m curious, tactically, does that mean that you have standard allocation for what you consider to be a standardized Haystack deal where you’re going to lead or follow and then reserves for a couple of follow-ons and then perhaps a few buckets for a few exceptions, perhaps like the small check on the hot round. Is that fair to say?
Semil Shah:
Yeah, more or less. I don’t think we try to be too prescriptive about, you know, something has to fit perfectly because it’s kind of cliche, but everything is about exceptions and when to break the rules. So what I would say is typically, if you look at the rounds that we’ve done, the total capital into the company is somewhere between 500K and 3 million in that round. And we’d like to keep it in that zone. So we’ve done a couple that are like $4 million seed rounds, but would I would say if I thought about those rounds, the founders were exceptional, the syndicate was exceptional, and the company typically already had a product or MVP in market and so there was something to kind of look at where there’s evidence of like building and shipping and even in some cases customers. So we try to keep it between 500K and $3 million, but sometimes there are exceptions. I would say in the last fund, maybe there’s like four or five of them that broke that rule.
Lucas Bagno:
That, that makes a lot of sense when it comes to the deployment cycle, how do you think about time diversification across multiple funds? I think especially in 2021, we’ve seen so many seed funds that raise the entire funds and deployed within three to six months. How do you think about that?
Semil Shah:
Yeah, there are a number of ways to think about it, so I can only share what I think I’ve settled on, but I don’t, I want to proclaim that it’s the right answer. And I’ve gone through like, how people go through stages of grief. I’ve gone through stages of thinking about where I land on this issue. So for the first, I want to say like three years of investing, I just didn’t know what time diversification was at all. Didn’t pay attention to it. Didn’t know what it meant, no idea. For our funds three and four, as I started to learn about it and I’ll share what I learned. I really wanted to try to make each fund a two year your initial deployment, meaning, okay, we started them in August or September, and we finished writing the initial checks two years from that date.
That was really important to me to just see if I could do it. And then in our last fund, fund five, it was like basically 29 months or 30 months, two and a half years of initial deployment. I kind of told LPs, I’d like to do it two and a half to three. So I really wanted to get as close to that as possible.
Oh, so a couple caveats. I think at seed, time diversification is a little bit different than other stages of the market. And so I think at seed, it feels reasonable for an institutional pre-seed or seed fund to have their initial deployment period be somewhere between two to three years. I think obviously there are famous examples of like IA Ventures and those guys where Floodgate’s earlier funds where they went longer and they did really, really well. I think it’s hard to separate out are they just really good investors, which they are, or does time diversification matter and help with pacing, I think there’s no way to answer that question.
But the argument I’ve heard about, and then I’ll offer a warning. The best argument I’ve heard for at least being thoughtful about time diversification came from an investor who’s an LP at Fourth Street. And I’m going to paraphrase this. I don’t have the exact data, but they said like looking at economic cycles and corrections in capital markets, even if there’s a minor SaaS correction or whatever. Now, if you have a longer initial investment period or time diversity, you give each vintage of a fund better a chance at having valuations that are lower during the six to 12 month period. So if you raise and deploy really, really quickly, and you don’t have a strong capital base that understands that strategy, a number of problems can creep up.
One is you may be catching vintages at the wrong time. Two is you may have to go back to individual LPs who could be more fickle. And then three, you have to start asking people for money before there’s real evidence that what you’re doing is working. And so just to round out your question, Lucas, with a lot of new investors coming on an AngelList, which I think is great, and a lot of new investors being really excited about technology, which is great and the pre-seed and angel sort of market of this is where people start because there’s no barrier to entry, which is great. People who blow through their funds really quickly, who actually really want to build a franchise or at least have successive funds, maybe like reducing their chances of success in doing that, because there’s not enough of a checkpoint in between for the capital to say, yeah, I want to keep investing in you because the money keeps coming back, or I can see the money keep coming back.
I think it also sends a softer signal to LPs and especially institutional LPs of like, “Hey, this can be someone who’s too loose.” And I can’t trust them with that money. And I think once you have that branding in the eyes of professional LP, it’s very hard to reset that.
The final thing I would say is that technology and this early stage of investing can be so accretive that someone could just do two funds in a year, do two six month funds and have an amazing track record in that just 12 months of investing, keep the funds really small and make more money than other people would make spending 30 years at GE or something. You know what I mean? And so it just depends what someone’s trying to optimize for. But I would say that if people are trying to get to a fund two and fund three and grow their funds, even modestly investing funds in six months is basically like a death march.
Lucas Bagno:
Fascinating. You mentioned that you didn’t think about time diversification at all in your first couple of years. Are there other concepts that you really value and think a lot about today that you totally overlooked or didn’t really appreciate on your first few years?
Semil Shah:
Yeah. So number one, well, sorry, in no particular order, time diversity, although I think I figured out the logic for why it’s a positive thing to have time diversity pretty quickly. Once I realized the benefit of it. Two would be portfolio construction. Now I really struggled with this because any manager going to a institutional LP who knows what they’re doing will have to be able to discuss portfolio construction. I’ve written about this topic a lot in my blog and another podcast. And basically it’s like a test it’s sort of like, okay, Lucas, if you’re in graduate school when you’re defending your dissertation on the microeconomics of Miami over the last century, you can’t really prepare for your dissertation defense, you either know it by that point or you don’t. And I think there’s a similar analogy to talking to LPs about portfolio construction.
If you can’t construct what you think a portfolio is and defend it, meaning like in a fluent language, they’re just going to think you don’t know it. So that would be two. I think, understanding how to make follow on investments and getting in position to make follow on investments is not something I appreciated at all. And that’s related to dilution. I think it was really hard to understand the gravity of what the dilution is and I’ve written about this too, because as an early stage investor, your positions are small. You don’t have information rights, you may not have a back office that’s going to track the price per share. And so it all kind of compounds. And so the line I kind of use about this is that the only way to learn this kind of stuff, meaning like the impact of dilution and how to get in position for future rounds can only be learned through experiencing it firsthand and experiencing the pain of screwing it up.
Lucas Bagno:
Right. And what about the flip question? I’m curious, are there any concepts that you thought were really important when you’re first starting out that you actually don’t think matter as much today?
Semil Shah:
Yes. And this is very specific to me, but I thought that it would be smart to say, hey, I invest in marketplaces and I invest in consumer networks and I invest in this and not that it’s a bad thing, but I thought that like that would help me get to good investments and maybe it did and maybe didn’t. But if I look back at all of them it’s like, I met a lot of people and we call it kind of kissing frogs from the fairytale, and then you meet some people who are just more electric or more interesting than other people on the margin and you followed them. And that tends to lead in our case to better investments. Not because there was some thesis or some market we were looking at. And so probably that would be something I felt like for the early, early stage was not useful. There’s a side discussion to have about like raising sector focused funds and how it’s easier to raise from LPs or not. I mean, I don’t know.
I think if you raised a Bitcoin sector fund or a crypto sector fund for a host of reasons, those people have been rewarded for it, but there’s a lot of other examples and other sector funds where I’m just not even sure they’ll get past the fund one or two.
Lucas Bagno:
Right. To talk a little bit more about the LP fundraising, what are the most common mistakes that new fund managers make when it comes to fundraising for their first few funds? And it may be that we just covered them when talking about the time diversity and portfolio construction but I’m curious if there would be anything else.
Semil Shah:
I mean, Lucas we could talk for straight 90 minutes about all the mistakes people make about trying to raise capital. Do you mean like trying to raise institutional funds, like having real LPs or do you just mean raising funds, period?
Lucas Bagno:
I guess perhaps a better way to frame this question would be, if you are starting out again, if you could talk to yourself nine years ago when initially trying to raise these funds, what could you tell yourself to make that process less painful?
Semil Shah:
Yeah, I think I would answer that question differently. To me, it’s two different questions, sorry to be semantic. But for me, there was nothing else I could have done. I mean, because I really had to fight for every LP dollar really hard. And so I’m not sure what I could have done coming out of nowhere. You know, I literally turned over every stone possible. So I don’t think there’s anything I could have done. I almost think it’s just like a miracle I’m sitting here, but I see a lot of people now do it or they contact me and I see a lot of people making a lot of dumb mistakes and making a lot of naive assumptions. And I’m happy to talk about that but I don’t know if my path is instructive for other people other than if they want to experience the pain second hand.
Lucas Bagno:
And can you maybe talk a little bit about what are some of those common naive mistake that you see often?
Semil Shah:
Yeah, there’s a bunch of what I would call tactical rookie mistakes. And then there are like some bigger hairier like, oh God, I don’t know if you can fix that, mistakes, okay? So on the tactical ones, it’s not getting someone to help you create like a professional deck, not having your data organized, not having a clear message in the deck about who the GPs are and why they’re in a good position to invest inside their networks, sending the deck via any other method than PDF, asking tons of people for intros who don’t even know you have never done a deal with you, trying to treat LPs like an ATM and sort of think of capital raise like a startup would think about raising capital. It’s totally different and just a general feeling of entitlement around it.
So there are just 99 tactical common mistakes I see. For example, even with people I know really well who ask for an intro to someone or want me to pass along to LPs and I do this from time to time to people, I just won’t send them a DocSend. I just refuse to do it because I know the LPs won’t look at it, but people will push back. People will call me, ask me for my help, I’ll help them then I’ll offer to make those intros and then they’ll reject my advice. So it’s just kind of, I guess humorous at the end of the day, but I just stick to my guns on that. Then there are like the big, hairy mistakes, which are raising a lot of money, but not knowing time diversification or portfolio construction, not having taken some risks on their own, not starting with a smaller fund.
I’ve met a lot of people who just felt like if I can’t raise 50 million fund, I don’t want to do this. Well, you know what? There are a lot of people who have raised million dollar, $5 million, $10 million funds that suffered and built it up over time. And if you’re not willing to go through the pain of that, because everything is a market, then why should anyone invest in your fund? So I think that the world in which we live in Lucas, where we give money to entrepreneurs and there’s a lot of money and a lot of entrepreneurs, that’s not real life. Real life is going to an investment committee that manages money for a hospital or manages money for a family office where they’re giving you the capital to make blind pool decisions. And I don’t think people really understand how deep a commitment that can be for some others.
Lucas Bagno:
Right? One of the things I’ve heard you say before is that you wish you had started developing those relationships with institutional LPs before you did. Tactically, what does building the relationship with an institutional LP means in practice and what are things that you did that worked really well and what didn’t work?
Semil Shah:
Yeah, to be clear actually, that’s not entirely true. I made the relationships with institutional LPs really early, it just took a long time to convert. What I did was, is like I took notes, I invited them to give me feedback. I took notes on their feedback, I tried to keep them up to date very briefly over time and I went to a lot of events where they were there just so I could meet them in person. But again, I probably went on a tougher journey in terms of like the amount of time it took but I did invest in those relationships very early it just took a long time to sort of tip over. And for some people it took one or two funds to tip over. So that would be like an entrepreneur wanting to pitch Accel for their seed and Accel passes at the seed and then you really want to work with Accel and then they pass at the A and then you finally get to the series B and they say, okay, we’re going to come in. Most founders will never go back.
Lucas Bagno:
Right. And then I guess to talk a little bit more about what’s happening on the markets today, when it comes to managing your LPs, what does the downturn we’re seeing means for fund managers and how do you manage that your portfolio proactively communicates what’s happening with your LPs?
Semil Shah:
Yeah. I mean, I think when COVID happened, which is a more fear based thing where people just didn’t know anything about the virus or treatment, transmissibility, I think a lot of investors did like a full kind of health report for LPs to kind of get ahead of problems and communicate. And it turned out that the market just ripped after three months. So it’s like, maybe that was for not, I don’t know. And obviously there are some COVID deaths related to startups. I think on this one, it is a pretty big structural correction, I think for pre-seed and seed. Our general philosophy with Haystack is just to be radically transparent with LPs and not get into the whole marketing game. I think the types of LPs we’ve been lucky to attract that we want to keep are people we can call up and be like, “Hey, this company I guess we made a mistake, it’s not doing well.”
And they don’t really worry about, Semil is telling me the truth. I just put it out there. So I think for this one and we’re going through this now, I think the approach is just to encourage companies to keep as a CEO and founder, part of your job description is to keep the company financed. And maybe that means you have to keep the company financed at a rate that challenges your previous notions about what your company is worth. And so that’s the same message we would send to a founder as we would send to an LP. We would say, and I even mentioned this in our last quarterly letter, which is our fund to five which is just in the ground now has incredible lift in two and a half years.
I mean, it could be the best performing fund ever in Haystack. And it has a set up to do that, but I just told them and I said, if you look at them you should be really excited. But the reality is like, I don’t know what’s going to happen over the next two years in these companies. So we’ll just tell you as we know, we’re not marking up those deals. Other people are marking up those deals, but we don’t sit around and say, “Oh, it’s best fund ever.” It’s like, if you’re an LP and you’re to just assume it’s going to be a great fund, then that’s the LPs problem. Our job is to just be sober about what we think about the company and the position, but we’re investing so early that other people are marking it up and we don’t have control over what the founder does.
So I think it’s just these things are just more philosophical for me where it’s just easy to be an adult and just say, yeah this company is a really great company, really great founder. We really like it. Is it worth what the last round was? I have no clue. What should you tell your committee? Probably not. It’s probably not worth that. But at the same time, the exits in these companies are so random like you just never know. So I think there are just very simple answers to this, which is, we just don’t know. And it’s not just revenue too. You can’t just say, oh, well I think that company’s good because it has revenue. What if my GM bought Cruise for $1.2 billion or $1.6 billion, excuse me, I don’t think they add revenue. So it’s random.
Lucas Bagno:
Right. Given the massive correction we’ve seen on the public markets over the last few weeks, we’ve started to hear some tension on the growth stage. It was reported last week I think that Tiger was cutting off on valuations. How long do you think until this affects the seed market?
Semil Shah:
I don’t think this affects the seed market really at all. I mean, I think you’ll have a little bit of maybe people are a little bit more sluggish to invest at seed, which is probably a good thing. Maybe it’s instead the three days it’s five days or something. I think just generally with Omicron, with the start of the year, people sort of always being slow. I think with people sort of tending to their portfolios, maybe it’d be a little bit slower, but if you meet a great entrepreneur and they’re raising 800K, why would you bicker over it being six post or nine post or 12 post, depending on what the deal is? I just don’t see that there’s too much money in the system for that to matter.
Lucas Bagno:
Right. And if we do go on the prolonged downturn for the next, let’s say 12 to 18 months, what implications do you think that this will have for solo GPs and angels?
Semil Shah:
Yeah, so that’s where I would be like pretty concerned. So a lot of people come to me and they want to raise a fund. It could be 10 million, it could be 100 million. And the first thing I always tell them is if you don’t have a capital partner already to anchor you or back you in a meaningful way, let’s say you’re raising $10 million and you don’t have a family that’s going to give you five just right out of the gate, you’re entering a world of pain. So now if you extrapolate from that and sort of say, okay, well, a lot of people of these smaller funds, they haven’t been proven yet and they have to keep going back to individuals. A majority of those won’t have the positioning and credibility to keep going back to those people and some of those people may end up being fickle about wanting to invest or not.
Also the larger the fund ask, I think people are getting wiser to the fact that it can depress returns. So I think there’ll always be a healthy kind of scout market for people doing, let’s say sub five or sub $10 million because people can at least understand that you can drive a return by keeping the fund small but I think the larger ones that don’t convert over into institutional capital and can be partners with their LPs, at least over two, three or maybe even more funds, it’s going to be hard to keep meeting entrepreneurs, making good decisions and dealing with the money side of continuing to raise a capital when there’s so many options. So I do think that that would’ve been harder without a correction in the market, but it’ll be heightened because of that.
Lucas Bagno:
Right. And you wrote an essay over the weekend called the market as the greatest critic. One of the things you talked about in that essay is that you believe that, and correct me if I’m wrong, that you believe that the market will reward companies that have better product diversity. Can you talk a little bit more about that?
Semil Shah:
Yeah, it’s kind of a cliche, but I think the most value in network scale and power accrue to companies that have platforms. You can define a platform in a number of different ways, but it could be that other people can build on top of said platform or it could be that there are some cross fertilization between products across the platform. Microsoft could be a canonical example of both of these things. And so that like when public market and group growth and public market investors are looking for an ability to be durable at scale, I just don’t think they’re going to be interested in companies that can be a billion or $10 billion outcomes being a point solution or a one trick pony, I think they’re going to want to see people using their scale and their revenue and their stock to be acquisitive, to integrate new products and services.
I mean, I think Salesforce is kind of the poster child of this, buying slack and Tableau with a huge stock price during the pandemic. Microsoft being very acquisitive. Now it’s easy for them to because they have more cash than God, but look at even Twilio acquired Segment. So I think some GP from Felicis had a great tweet about this in the last month or so where he said it’s really a shame that a lot of these companies had had really big inflated stock prices through the COVID bubble didn’t use their stock as a weapon to like diversify their product line. And so what does that mean for us like Lucas, you and I and see, that’s what I was trying to think about in writing that, which is, there’s no way to know if the next investment that we make has any shot because so much has to get right there, but we will know over time how someone thinks and then we’ll be investing more across those rounds.
And so I think it’s something to pay attention to about what can be a platform, which founding teams have that sort of aggregation and integration mindset. And so for me, that’s my big takeaway from all this because I can’t imagine a seed market that’s not vibrant. I think it’s very vibrant.
Lucas Bagno:
Right. And to talk a little bit more about the state of the seed market, last year everybody was talking about Tiger. Tiger didn’t really affect the seed market as much, meaning we were not competing directly with Tiger. But one thing that we did see happen quite a bit was the multi-stage funds coming in earlier and earlier. Could you talk a little bit more about how you think the dynamic of multi-stage funds versus seed dedicated funds has shifted over the last couple years?
Semil Shah:
Yeah, I think in 2018 I tweeted about this and then I went on Harry Stebbings’ podcast and we just discussed this and the evidence on the ground was that entrepreneurs were voting with their feet, that they wanted to do these slightly bigger seed rounds and the premium founders. And again, premium founders don’t always result in success, but we’re voting for these slightly larger rounds with the name brand firms. You could argue on reasons why they get more money, there’s a little bit less solution. They get the brand name, they can recruit against it, they make the next round easier, all those sorts of things. I think that is only intensified since 2018. So now we’re coming up on four years. I think the one thing that changes is that going back to your question about does the seed market change and I said, it may change from doing deals in three days to five days.
I do think the bigger platform funds and branded funds will be a little bit slower because they have more dollars at work and more exposure in other parts of the market that have been more severely corrected. And so there’s going to be a digestion period for them to figure out where is the market? How do I handle my portfolio companies? I may need to do a down round or something like that where it’s really a material issue. And so I think that creates more opportunities than would’ve been otherwise for people like you and me.
Lucas Bagno:
Right. And in your mind, is signalling risk still a thing or is it less relevant nowadays?
Semil Shah:
Oh boy. So I kind of whiplash on this honestly. And I see both. I think there’s one argument where you basically say, “Hey, Semil and Lucas, if you raise, $3 million and you can’t do enough with it to then raise the next round, we probably suck as entrepreneurs”. And I think, I really believe in that, like on the one hand. On the second hand, I think the reality is having been inside a lot of these rooms where people are evaluating a deal and not sharing the following with the entrepreneur, they do wonder why didn’t so and so just do the next round, especially if they have a huge fund. And when a deal is not obvious that can make the larger fund feel like they’re being played and they would slow it down or possibly even disengage.
So I think to answer your question, it’s a mixed answer. I think the reality on the ground is that single risk does exist because I see it happen in real life. By the same token, I think if you raise three to four million bucks, I don’t mean this if you raise a million bucks, but if you raise three to four million bucks and then you can’t aggregate enough resources and make a compelling pitch to the next investor, it might just be time to go home.
Lucas Bagno:
Right. And when you look at the seed landscape today, are there any fun strategies that you think are underrated and perhaps deserve more attention?
Semil Shah:
I think that a lot of people are doing this in now, but I don’t think the overwhelming majority of them will be successful at it. But I would just point to what Erik Rannala and his partners have done with Mucker in LA. They don’t do social media, they don’t blog, they don’t tout their horn. I don’t even think Erik does podcasts. And they’ve been incubating and preceding and kind of hatching and growing companies that have really turned into big things. And when you do that properly early and you just put small dollars behind it and there’s no signal risk from your own internal capital, the ownership is quite attractive. So I do think you’re seeing people trying to do this more incubation ownership model. I think there are a lot of problems with it, but I think Erik and the team at Mucker have done it really well. I’m sure there are a couple others I don’t know about or forgot, but I also know that a lot of people who are going to try I will not even have a chance
Lucas Bagno:
Absolutely. In other recent news for the seed stage, we’ve seen YC come out with this a 500K standard offer. I’m curious if you have any thoughts on what that means for pre seed funds broadly and how does that impact Haystack if at all?
Semil Shah:
I mean, doesn’t really impact Haystack. I think the broader math of it is important, which is let’s say Lucas and Semil were in YC and then if we accept this 375 note at whatever the market price is for the next note or next round, depending on what’s the valuation of that round, that number is already baked into the ownership. So it does create less real estate for other people to invest. So it will have an impact. It’ll be interesting to see whether founders accept that or not, because YC now will be subject to their own, to their environment as well, which is they’ve created environment. And I mean this in a positive way that they’ve had a lot of influence around founders being more target dilution sensitive, and they’ve contributed to more education being made public in a sort of startup canon, if you will. So what if founders say, well, I don’t want to accept that condition, I don’t want to accept that additional money going in. They may or may not, that remains to be seen.
Lucas Bagno:
Absolutely. And then final question for you. I know we’re running up on time, but on a year, like 2021, when rounds were getting done within a matter of hours and then on a year like 2022, where portfolios are down 50% plus what are things that you did to stay sane?
Semil Shah:
I don’t know if I stayed sane, but I think I’m really lucky that we have three little kids who were certainly impacted by the pandemic, but not to the extent other kids were around the country. So trying to keep a perspective that like in a certain way, we were COVID beneficiaries as sort of terrible as that sounds, we didn’t choose that. But there are day to day struggles. So I think it’s having a partner at home, my wife who is really excellent with kids and has a huge reservoir of patience. I think again, I guess I selected wisely in terms of sort of life partner. I think I love what I do as work so even though it was an adjustment for Zoom, because I’m a very social person and I like meeting people in person, once that adjustment was made, it sort of just clicked.
And I do like this new world of doing things over Zoom and then I’m someone who’s pretty easily entertained. One of the few hobbies that sort of stayed with me into adulthood is I really enjoy cooking and it’s kind of one of the few things I can do where I really don’t think about work or think about other things as much. And so if I’m able to cook and sort of scratch that itch or appease that part of my brain and watch things like The Last Dance or get into pro sports or spend more time with my kids, even if it can be maddening, I feel pretty satisfied. I mean, I would love to go travel and do all sorts of other things that I feel cooped up by and I’m sure that’ll happen at some point, but yeah I feel like it was sort of a war of attrition for everybody, but I can’t really complain about it either.
Lucas Bagno:
Definitely. Well Semil, thank you so much for taking the time. It’s been an awesome conversation.
Semil Shah:
Yeah. Thanks for the invitation.
