Episode 748 | The Ins and Outs of Startup Investing
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Welcome back to Startups with the Rest of Us. I'm Rob Walling, and in this episode, I sit down with Einar Volset, co-founder of TinySeed, and we take it in a little different direction than we normally do. Oftentimes when we talk about TinySeed, we will talk about things that we've learned investing across. All these SaaS companies that could help you as a B2B SaaS founder, or maybe I'll interview a TinySeed founder so we can take learnings and apply them to the broader community and the

But in this episode, Einar and I talk through something that he actually knew quite a bit about when we started TinySeed and I knew very, very little about. And that is startup investing and venture investing and why people would invest in a fund versus investing individually. We talk a little bit about...

the math of venture and how and why TinySeed is so different. But we also talk about the fact that the venture industrial complex has really left behind thousands and thousands of startup founders. And that really was and still is the goal of TinySeed. As you know, my mission is to multiply the world's population of independent, self-sustaining startups. TinySeed is part of that because TinySeed

No one else was serving that market when we stepped in. And so this episode is a bit of Inside Baseball. It's a look behind the curtain of running a venture fund and TinySeed and even a bit about the broader venture space. I find this stuff super interesting because it's not something that I have ever been exposed to before running this fund. And who better to explain it than TinySeed co-founder, A.N. Arvul Seth.

Before we dive into our conversation, MicroConf Connect applications are open until tomorrow, January 15th. MicroConf Connect is an application-only paid community. If you sign up in the next couple days, you get access to our upcoming workshop with Kate Suma on January 23rd of 2025. You're going to join Kate live as she delivers SaaS onboarding best practices and tips, plus does a live teardown of a Connect member's onboarding experience.

We do a live workshop or event, or sometimes it's a Q&A with me once a month, every month for paid MicroConf Connect members. Head to microconfconnect.com in the next 48 hours to apply and get in in our January batch. And with that, let's dive into my conversation with Einar.

Aynar Volset, welcome back to Startup for the Rest of Us. Thanks for having me. It is good to have you on the show, man. Folks know you from Hot Take Tuesday. They also might know you as the managing partner of Discretion Capital that helps seven and eight figure SaaS companies sell for amazing outcomes, as well as co-founder of TinySeed.

There you go. It's nice to have you all to myself without Tracy interjecting with her blue sky nonsense. Seriously. Her open source communist blue sky. Yeah, yeah, yeah. That's right. This is great. Hey, Tracy. Hi, Tracy. So.

So today we're going to go a little off the startup to the rest of us beaten path, so to speak. And I have had a crash course over the past four or five years in not only just investing in startups, but then venture investing and what that looks like and how if you are a venture fund and you don't return what the S&P 500 does, then you crash and burn.

and burn. And I didn't even realize that was possible, how valuations are created. And, you know, frankly, we're going to talk about TinySeed, about the stuff we've learned. This is not just a big sales pitch of TinySeed. We are fundraising right now. And folks can reach out to you, tinyseed.com slash invest, if they want to get in touch, if they're an accredited investor. But the idea here is to share a bunch of the learnings that you and I have had

I think you had a lot more back in 2018 when we started this. But to talk about investing in startups, potential outcomes, and frankly, I also want to talk about TinySeed and really dig into why it's different from, say, someone going through YC. Because we have folks who get into both and who have gone with TinySeed. And that blew my mind. Because to me, YC has been the gold standard of gold standards since I was a wee lad back

And there really are some differences that cause folks to want to go the tiny seed path. Yeah, that sounds good. And also, I think it's just even if you're, you know, even if you're not going to go for tiny seeds, you're not investing in VC funds. I think it's helpful to understand, like, if you're thinking about funding, whether from tiny seed or other people, I think it's worth understanding, like, what are the incentives? How does this work on that end so that you understand what you're signing up for? Yeah, it's interesting, you know, in bootstrapping, let's say 10 years ago, kind of like, you

I did my talk, no, it must have been 20, I guess I did a talk 2017 or 18 at MicroComfort where I said, I think bootstrappers are going to start raising funding. And I like hinted at it in like a five minute section and one thing and kind of got some pushback and then the next one, like half the time.

was about it and it was right as we were starting TinySeed and some people were like seriously pissed. They're like, what? You're pushing your book. Since you're doing that, you're saying people should do it. And I was like, no, people are already doing it. That's why we're starting TinySeed is because there's opportunity here. Because I had already invested in, I don't know, eight, maybe eight or nine, about eight kind of bootstrap SaaS, mostly bootstrap SaaS that I just put my own cash into. And so...

The openness and frankly, the stigma of raising funding has, I won't say it's gone because everyone's been a while seeing IndieHacker post on Twitter about this is why I don't raise funding. Quoting some anomaly, somebody sells for, what was it? Was it FanDuel or something sold for 500 million? And like the founder got nothing, but it's like, yeah. A lot more to that story. Yeah, there's more to a story than that. Yeah. So there's always these exceptions. And when we surveyed folks for the state of independent SaaS, it's somewhere around

one in four or almost one in three, like around 30% of bootstrap founders say they would at least consider raising funding. Well, I think it makes sense. And also this has always been my thing, a little bit of a sort of pet peeve thing is like, look, like some of the, some of these purists on the sort of never raise any funding part is like, they're never raising any funding. Oh, is that because, you know, your wife works full time at Morgan Stanley and so basically can support you or you have rich parents or like, you know, you're basically wealthy. So,

Yeah. It actually sort of democratizes starting your own SaaS business a fair bit for those that don't necessarily sit on a bunch of cash. Yeah.

Yeah, and it certainly makes it possible for less technical folks to do it as well because it's such a big cost, right? I was never, never anti-funding. And even in the days of Drip, considered like, man, it would be so much easier if I could raise $400,000 or $500,000. But I didn't know anybody. I didn't know how to do it. It was 2014. It's like all the stuff that's available today wasn't out there. So with all that said, with that preamble, let's talk a little bit about venture investing, what success looks like,

And frankly, how many venture funds just missed the mark and don't even beat an index fund that I could buy a Vanguard index fund? Oh, yeah, for sure. I mean, I think it's just worth for people to think about. Like, I think sometimes people think, oh, investing in VC funds, you know, thanks to Koya and reason, whatever. And it's just like, oh, it's how you get 100x. You know, like you read about these outcomes and you think, you know, what is what, you know, they're going to 100x.

The fact of the matter is, if you look at one of the golden decades for venture investing in the US was the decade between 2004 and 2014. It includes a bunch of now well-known names came through that decade. And so you might think to yourself, to be in the top quarter of performance of venture funds in terms of return capital in that quartile, you probably returned what? What do you think? Like 5x?

In fact, the actual math is more like 2x. I think it's 2.16 or something. If you use a venture fund in that decade, which was a good decade for venture funds, return 2.1x.

Then you were in the top quartile of funds. So that means if I invested $100,000 into that fund, I got my initial $100,000 back and then an additional $210,000. No. No? You put $100,000 in and you got $216,000 back. So, you know, it was a 2.1x. And over the course of what, seven to 10 years? Up to 10 years. Unreal. Yeah.

Yeah, that's a top quartile fund. And like, really, the reason is because a lot of funds like and also like, look, I think the median fund still returns like at least one X, but it's there is a good number that that returned less than one X is probably 40% of funds, you don't even get your money back.

That's pretty common. And so then you look further as like, okay, well, what's great performance in venture? Like top clearly like 2X over, in that same timeframe, the S&P 500 probably went way up. I mean, it had the housing crash in 2008, but nonetheless, like what is amazing performance, like world-class look like? And that's actually in that quartile, it was just over 5X. So if you 5X, if you're a venture fund at 5X,

then you were in the top 5% of funds in that time frame. And I think the reason why people sort of like misunderstand this, they think venture and then they think like, oh, you know, what do I know, think about when I think about venture? Well, it's like, it's like Airbnb type returns. You know, you hear about like YC, they invested at whatever, probably put the same, I was in the same batch. So I know what they put in, probably $40,000, $20,000. And you know, they, I

a thousand X or something like that. And so I think that sometimes translates into like, oh, at the fund level, that's the kind of return. So maybe not a thousand, but you're getting a hundred times your money. But that's an extreme outlier for venture funds. And really, if you're looking for a thousand X, you shouldn't be in venture. You shouldn't be in venture funds. That doesn't make any sense. It's almost impossible to get a thousand. It is impossible to get a thousand X in a venture fund or even a hundred X.

If you're wanting to do that, then you should put all your money into single bets. Like you should be investing in individual companies and like concentrate your position as much as you can into your extreme high conviction bets and just go for that. And that's the way to do that. But a lot of investors,

They don't want to do that. And so the question then is like, why would you invest in a venture fund instead of doing that? The reason is you're reducing risk. That's what you care about. Like you're basically trading off. You're saying like, look, OK, I'm willing to forego this notion that I'm going to, you

But the flip side is I'm less likely to lose it all. The standard outcome, if you invest all your money into a single company, is you're going to lose it. Like at least an early stage company, you're going to lose all the money. And if that's not something that you want to do, if that's not part of your investment strategy, then investing in a fund makes sense and you're making that trade off then.

And that makes sense to me. So I entertained, after I sold Drip, I had a little bit of cash on my hands and I entertained the idea of investing in a couple different venture funds. And I never did, but it wasn't because I didn't think the returns would be there. It was because I had enough people approaching me through MicroConf and this podcast, which

where I was like, that's a legit business. Like Jordan Gall, right? With Cardhook at the time and Justin McGill with LeadFuse. And there were just these great little B2B businesses. I was like, I kind of had enough people coming my way at reasonable valuations, to be honest. When I went on AngelList, here was the problem. I went to AngelList because I was like, oh, I'm going to make a few bets.

And holy mother, I mean, the valuations for like almost no revenue were like 10 million. And I did put like five grand into one of those and I put 10 grand into another. And all of them either went to zero or returned. One returned me 11 grand for my 10 grand investment. I was like, all right, I consider that. I mean, it's probably about way above average return. So good job, Joe. It really is. So I'm in a little bit of a unique position, right? I mean, that's the whole thing is like the deal flow is kind of coming to me.

Well, I think that's the key thing. Like, I tell people this, and I'm not just, I'm not being, you know, unusually humble about this. And the fact is, like, TinySeed wouldn't work if you weren't there. Like, at least the early days. Like, you know, like, I don't have the deal flow. You know, I just don't. And I think, like, because of your background with MicroConf and Startups for the Rest of Us and all the stuff that people know about you, and there's probably you and, like, I've been saying, like, there's less than half a dozen people worldwide that can just

that naturally has that kind of deal flow, quality deal flow, pricing power that's coming your way. And I think really that's part of the reason why you would invest in a fund, because

if you look at it, say you have an amount to invest, whatever that is, 100,000, 250,000, 500,000, whatever it is. Okay, well, if you do your research and look, you realize you probably shouldn't just pile into just, you know, a single bet, like put it all on black as it were. So instead, what you want to do is you want to go out and you want to make a lot of bets, ideally, like you probably, I think like the math pretty much says, like, you know, if you're going to have a better than 50% chance of at least breaking even, you should be making at least, I think it's

somewhere like 15 and 20 bets, like investments rather than bets. I shouldn't call it bets. 20 investments. But like if you think about, okay, how do you do that? If you have $100,000, you say, okay, I believe the math. I want to put $100,000 in. Now you have to write 20 checks of $5,000 each. Now you have more problems than when you started because do you have the deal flow to find 20 quality investments? Are

are you going to see enough good deals just from your networks and friends and connections and whatever, an angel list or whatever, in order to make that, those investments? And I would argue that most of the time you don't. Like, you don't see the, you don't get to access the deal flow. You don't have it. But even if you did, so say you were uniquely well-connected, now it's like, okay, now you need to convince people to take a small check from you individually. Like, so now, like, most people aren't going to take, like, most people who invest, like,

An individual investor that goes along and says, all right, well, you know, I want to put $5,000 in. It actually can be quite hard to even if people are raising money, it can be quite hard to get people to accept $5,000 because it's such a small check. So there's usually like a minimum before you have to get in. Absolutely. The minimum in my experience, and I believe every company I invested in was $25,000. Yeah. And that was it. So.

Yeah. I mean, I'm sure friends, you can get a friend who can cut you a deal or whatever. But if you are trying to make that many investments. And quality investments, like, you know, like a friend will do it. That's great. But like, how many friends do you have? Do you have 20 friends that are really, truly, rigorously, like is high quality and that you can put $5,000 in? It starts to get difficult. And then, you know, on top of that, like once, even if you get passed, like, can I even get my check in? Can I get the deal flow? Yeah.

Then it's like, okay, well, who's setting the price here? Are you going to be able to get it? Because...

Whatever VCs tell you, the name of the game in VC is entry price, exit price. If you overpay for your investments, then you're not going to make any money. If you invest at $50 million pre for a pre-product, pre-revenue business, it's a really big hurdle for you to make a reasonable return, obviously, because you overpaid for it. And so that's sort of the third thing that comes into it. It's like, do you have the pricing power? So can you get the deal flow?

Do you have the pricing power to get a reasonable valuation? And can you even put your money in? And that's alongside like, okay, well, you probably have a full-time job. Like how often are you doing these investments? Like, are you learning fast enough to stop doing stupid and start doing good investments? Like, and that's really the reason why, along with this, you know, spreading of risk, why people invest in venture funds as opposed to just being individual angel investors.

Right, and this is one reason that venture funds became content marketing machines and built brands. Do you remember? This is a recent phenomenon. I mean, maybe at best it was between 2005 and 2010 is my memory when they started really coming out. Because in the 90s, I grew up in the Bay Area, lived there, I worked construction there, I didn't work in startups. But there was nothing published by venture firms.

First Drowns.

First round. And then came 500 Startups and Techstars where it's like, here's content to help founders. Here's what a VC term sheet looks like. Here's what all these terms mean. Here's how you can get screwed by liquidation and there's the preferred and then participating and there's all these things that you didn't even know what they meant. Brad Feld, right? He wrote a bunch of books about it. That was a big thing was for them to start A, generating deal flow, but B, to get the

I think, from people. So they weren't, because they were a commodity before. It's kind of like, if I'm going to go borrow money for my house, who's going to give me the lowest rate? We know with no prepayment penalty. That's it. It's commodity. It's numbers and it's pricing. And that's what I think venture was a little, at least from my perspective, was a little more like that at one point. And then it became not, right? It became how do I get people to know me such that I do have some type of pricing power and also a lot of inbound interest. Yeah, and I think, you know, I think like,

I know for a fact that's sort of what YC, you know, partly why YC started. It's like because it was it used to be kind of like, how do you how do you get access to this? It's like and it was like, oh, you know, my dad plays golf with this lawyer who can get you an intro and then you could get like. But like, I think in part, that's why, like, you know, VC started out so geographic and remain to this day so geographically concentrated because sort of what it was like, like you'd get everyone was sort of there and you had kind of be there. You had to be in Silicon Valley in order to get money.

And like you had to have those connections and be able to work a warm intro. I mean, that's still the case for a lot of the cases. People are like, you know, figure out a way to get an intro to me. That's turtle number one kind of thing. So for sure, that's been part of it. So let's talk about valuations, like how these valuations happen. And there was a big realization at one point where you and I were talking because I had always heard, boy, you need billion dollar exits in order for a venture fund to make money.

So how does TinySeed make this work without a billion dollar exit? How does all that work?

Well, I mean, there's a couple of different things here. And actually, like a billion, to a degree, like a billion dollars is apparently too small, even in some cases, like there was actually, I think it was Sam Altman, who wrote a piece, you know, Mr. OpenAI, but used to be president of YC. He wrote a piece, how to invest in startups. And I think that was like 2018, 2016, something like that.

And his main point in that article, which I still think is up, was, you know, you shouldn't invest in anything unless it can be $20 billion or more. Like, you know, just don't even waste your time unless you think it can be a $20 billion exit. And, like, I mean, that article was in part the reason why, like, TinySeed became a thing. Because, like, that's crazy. Yeah.

It is.

And while that's true, like if you're playing that game, then that's how you should be playing that game. Effectively, our argument was like, look, there's got to be a way in which founders and investors can both succeed where outcomes are not quite $20 billion. You know, like I think most people, you know, listening to this would agree that

that like a $75 million or $100 million exit, even if it's like selling to some lowly private equity fund, that's pretty good. I think a lot of people listening to this would think to themselves, yeah, if I owned 80, 90% of a company and sold for $75 million, I'd be having a pretty good Christmas right about now, if that's what was happening. And so effectively what we're thinking with TinySeed is like, look, there's gotta be a way where like you can have that be success and everybody makes out well.

And that's sort of the ground thinking on the investing side for TinySeed is like, how do we make that happen? And really what that boils down to is a couple of different things. Like one is, I don't think it works for every single industry, every kind of product, every kind of service. Like there's just some things that are just requires a lot of capital, is extremely capital intensive. You know, like it makes total sense to keep raising money. And like if you keep raising money and burning money, then you're

Like the sort of winner take all stuff makes total sense here. Like your Airbnbs, your hell, you like your new open AI stuff, right? Like it makes total sense. I'm going to raise a gazillion, a trillion dollars and this, whatever. And even some of the smaller stuff is like, look, my standard thing is like, look, if you're going to be doing like a home grooming startup service type thing, that it's got, it's got to be capital intensive. Like it's like an Uber, you got to spend money on it. And like, you're going to get diluted, you know, up the wazoo and you have to gun for an enormous outfit to make any money.

But like what we realized is like, okay, but there is this subset of specifically B2B SaaS where like it can work because for a couple of different reasons. One is it's so capital efficient a lot of the time because like the gross margins are like, you know, 95%. That's not unusual. And quite often on the discussion side, I talk to founders and they're like, yeah, do you think I'm profitable enough? I got 65% free cash flow. I'm like, okay, yeah, I think you're profitable.

This is great. On recurring revenue, on millions of recurring revenue. Yeah, like expanding revenue and it's like, it's crazy. I mean, like you even see this in some of the like go public companies like Zoom and I think Zoom actually is the sort of poster boy for this, you know, the Zoom. I think they went public with more money in the bank than they raised. Yeah, something like that. It's just incredible. Yeah. Once they hit escape velocity. Yeah. And that's sort of like what B2B SaaS is like. And so I think it works for that. And in a sense that like there is this notion that it basically,

If you take a little bit of money once, and then you don't need to raise anymore. You can if you want to, but you don't need to. And so that's what works for TinySeed or mostly Bootstrap with TinySeed-like companies. And if you combine that then with what we consider to be reasonable valuation. So I think if you're playing the classic VC game, $20 billion a bust, yeah, you're right. It doesn't matter that you're paying $25 million for a pre-revenue product.

at YC demo day as a seed investor. It's fine. Like who cares? Like if you could invest 25 at 25 million evaluation into open AI or Airbnb, then great investment, go do it. But 25 million say, and then it goes to a billion dollars. Let's just say that rather than 20, let's be a little less ambitious than, than Mr. Altman was. That's a 40 X return on your money. That's a good, that's a good return. That's a great return. Sadly, and we can get in the math area. It might not be good enough for a, for an investor, like a fund investor, but

But the flip side of that is like a billion dollars is still a billion dollars. It's still kind of an unusual outcome. And I'm not saying like valuation here. I'm saying like actually cash, like IPO or selling or whatever, like not just make-believe valuations, actual money in the bank.

And I think that's pretty, pretty rare, right? And the fact of the matter is, like, if you come in the kind of valuations that we do at, and there's, you know, it's capital efficient enough that these companies aren't raising money all the time. So say if we come in at a couple of million, 1.8, I think is our average. And then you 40x that, that's 72 million. 72 million is still a lot of money, but it happens a lot more frequently than a billion dollars. Like we've done in discretion capital, we've done several deals this year that have been sort of in that range.

And that's just us, you know, and like nobody ever reads about them. Like we actually did, you know, like years ago now we did that iceberg, you know, the measuring the depth of the software iceberg title based on, you know, Patty Eleven's quote, an observation there around like most people don't know how much money exchanges hands about, you know, for these kinds of outcomes and how common the big ones are or the reasonably sized ones. So that's what it boils down to. Like basically what we're arguing is like, look,

If you're going for that kind of enormous outcome, then yeah, it makes total sense. Raise it 25 million and capital will go for it. Like become open AI, become Airbnb. But there's also this other class of startups

where, you know, if you're B2B SaaS and as an investor, you can put money in at a couple of million and then they sell for 50 to 100 million dollars. That's as good. Like, it doesn't matter to you. If you get 40x your money, what do you care? Whether 40x means 75 million as an exit or 40x means a billion dollars. It doesn't, I mean, other than bragging rights, it doesn't matter, right? It's just end price, exit price. Exactly. And that's the thing, A, the epiphany that I think I had at one point, or you kind of explained that to me. And it totally makes sense when you name the numbers, but

The fact that the venture industrial complex is so focused on valuations and so focused on these large exits

has almost to a point like brain, I'll say brainwashed some folks into thinking that's the only way to do it. And what it does is it leaves out, you know, I talk about my 1-9-90 rule where I say around 1% of startups should go after venture, about 90% should bootstrap, and I think about 9% should raise probably some type of funding. Maybe that's tiny seed, maybe it's angels, but it's like not venture track. And

The idea there is that going for $10 billion, $20 billion outcomes, it leaves out so many founders, thousands of founders who maybe should or maybe want to raise some type of money and still have a great outcome, right? And there is really no outlet for that outcome.

that we knew about before us. It was Indie.BC and us. And then, you know, there's obviously some individual investors. There's a handful of others, but that's where it is. And so what's a trip is every application process for TinySeed, we do run it twice a year, every six months, we inevitably get one company that we make an offer to and

And they come back and say, we'd love to take your money. We want to be part of it. But, you know, we were looking for like a $10 million valuation or someone can remember someone said 20 million and they were doing they were doing 30, 40 K MRR or whatever. I mean, it was a respectable company, but it's like, no, we're like, no, that you don't understand. You don't get your cake and eat it too. Right. You don't get tiny seat at that valuation. That's not how we work. And I think also like what some people, although I think awareness is raising a little bit, what some founders don't understand is like,

Look, there are trade-offs to this. Obviously, if you can raise it $100 million valuation, billion-dollar valuation, there's really great things about that. But some of the bad things are there's a whole universe of outcomes that are not the doors closed for you. If you raise it $25 million, the chances that you're going to be able to or be allowed to sell for $50 is very low.

In some cases, if you have extreme power and all this stuff and you didn't give away any rights, that's fine. But if you push valuations as high as possible, investors are going to put control provisions in there that sort of says, okay, look, the reason why we're giving you this high valuation is because you're saying you're gunning for this enormous outcome. So we're going to put some barriers in place that pushes you, that aligns everyone to that kind of outcome or nothing. Not get a high valuation and then sell for a reasonable amount. That door is very often closed.

And that's the challenge, is if you're in a, especially if you're a first-time founder or have never had a big exit, I heartily believe this, and I've heard Dharmesh say this as well, so it like,

Makes me think it's a really good idea is if you haven't had an outcome yet and you get some type, you get an offer for never have to work again money. I don't know, man. I've on the mind to take it, you know, and maybe that's 10, maybe it's 20, maybe it's 30. You know, it's nowhere near what we're talking about here. But like get one, get a win, then you can do whatever you want. And I'm so much more, you know, an ascriber to that, to kind of tucking that away.

So I know of a company I'll keep anonymous that raised, let's say like, I was under 40 million in venture over a few rounds. And due to liquidation preferences and other things, they would have had to sell for something like 80 something million for anyone but the VCs to get money. So right, it's like two X, like, you know, I don't know all the details, but that's the kind of stuff that I'm not sure people are aware of when they're like, I'm going to raise it 10 or 20 million. It's like,

oh man, like you, you've just really cut off a lot of your, of your optionality. And that was such a big thing. We don't, I don't say this as much when I talk about Tiny C these days, but in the beginning, it was just optionality. We are optionality. You can raise, you cannot, you can do, you know, what makes sense for you. And we have had a bunch of people raise seriously.

Series A's. You know, we've had a handful of folks raise several million dollars. A handful, but actually like just to change track a little bit, not as many as I thought. It's funny because like we raised our second fund in 2021 and obviously 2021 was a good time in the markets. And at the time I remember looking and I was like, oh, about 30% of the companies have raised money. And that's what I used to say, like about a third, about a third.

And then I was coming around to fundraising again. I was like, okay, let's look at this. And actually it's 8% of Chinese e-commerce, less than 10%. Because 2022 and 2023 was such a disaster. There's not that much capital. It's very expensive now. And so that number just plummeted, right? Yeah.

Exactly. And so they just haven't done that. Like they just haven't raised, haven't raised any money. And actually that sort of relates back to like how is the tiny seed different? And it's sort of like what I think people maybe don't understand is like how do venture measure performance on the way? Because the issue with a venture fund is like, well, good and bad. You don't know if we're any good for at least 10 years.

So if you're a charlatan, you can kind of keep going for 10 years and say, oh, I'll prove you right in a couple of years here. But like, I think it's understanding like how does most VCs, like how does that make our life hard? Like why is it a problem for a venture fund that only 8% of your companies have raised further funding?

And the answer is, as traditional venture fund, it'd be a failure if only 8% of your companies raise money. And the reason for that is the way that venture investments work is that you as an investor, when you come along, or a GP, like a VC, basically, you come along and you're basically every quarter or so, you send an update to your investors, your LPs, basically, that says, this is what my portfolio is.

And the way that you do that, obviously, they're not publicly traded. And so what you're doing is you're basically saying doing two things. You either keep the market the same if they're just nothing material has changed, i.e. they haven't got out of business or they haven't raised money. Or if they raise money, then you market up to this new valuation.

And because of the length of these funds, most of the time, like a successful VC can raise several funds without returning any money at all. You know, it could just be like, hey, I'm raising fund number three and like look at my performance on my fund one and my fund two is up, you know, 3x or whatever, 2x, 5x. And it's all based on markups. It's all based on like how successful are you, are your portfolio and raising subsequent higher, you know, raise more money at higher valuations.

That's to a large degree what success is like in VC. Like if you can have...

a fund that, you know, this is probably why YEC is such a great business. They, you know, they invest at one point, whatever they do. And then, you know, it's like the standard valuation markup three months later at Demo Day is like 25 million. Well, that's an enormous markup straight there. It blows everyone else out of the water. They capture a lot of that value to be perfectly honest. And so what do we do? Well, so we have to come up with something different, you know, which is always kind of challenging. And I think like the difference for us is like what we're trying to do is to say, look,

look, these companies, the successful companies don't really need to raise any more money after this because they're so capital efficient. So how do we capture the fact that like the successful companies don't raise any more money? So there's no automatic markups. And actually, like, it's funny, guys, in 21, when we had more markups and stuff, I remember doing it this way. And I was just like, OK, well, you know, we'll mark up. Why not? We're not going to handicap ourselves.

people are asking, like, there's really not necessarily quite of a correlation between the success of the company and the valuation market. Because in 21 in particular, and like, this is true in all bubbly things, you would have people who raised because they were doing really well. And then people who raised because they were doing really badly, and they were running out of money, and they were going to go under unless they raised money. And so they were able to do so. And then they got marked up above what even some of the best performing companies that we

had. And so what we decided to do was basically say, like, look, we're going to give you a market price. And so we have a couple of different variants on this. But sort of our sort of base case valuation, which is most of the numbers we share out, it's basically some sort of a revenue multiple based on growth mostly. And it's somewhere between 2x and somewhere between 7x.

And really what that valuation is, is different to even like a typical VC markup in the sense that, look, if you raise a Series A at a billion dollars, that does not mean you can sell your company for a billion dollars. That's just not happening.

If you raise it 200 times ARR, you're not selling it 200 times ARR. It's not possible. Our base case valuation though is more like what is the market price currently? What is the liquidation price of the portfolio at the moment? And that's what we go to market with, which is

Kind of a handicap. I've got to be honest with you. Oh, big time. Much more conservative. Much more conservative. And we provide like the optimistic case, which goes, I think, to up to 11x. And we have one which includes the markups whenever they happen and a little bit more. But most of the time we're referring to the base case, so liquidation type valuation. And the reason for that is mostly that I want to be as conservative as possible.

I basically want to be able to argue because we're already doing something different. We're not your typical what everyone else is expecting and like, oh, yeah, this is how you get through an audit at Carta because the markups is from Andreessen and blah, blah, blah.

So we had to be a little bit more conservative. It can be a challenge. Although I will say, and although it's not apples to apples, I was pretty stoked when Cardio, which is our fund management platform, they came out in the spring with like a performance metrics of 1800 funds, which actually includes us. And, you know, we were in the top five to six to 16% based on the venture metrics there. So even in our using our most conservative metric evaluation. So that felt good, but it's still a challenge, right? Because like it's new. Yeah.

People would rather have, in some cases, people are like, look, I believe that this company is worth a billion dollars because Andreessen says so, even though they're only doing 500,000 ARR, more than I believe that this company is worth 5X ARR.

I call it brainwashing, but whatever it is, it's a standard. It's the safe. It's nobody gets fired for buying IBM, right? That's just the way. Right. I mean, that's always the case. I mean, venture, I'm going to side rant here about venture and branding and stuff. But venture, I think a lot of the time, it's sort of a self-fulfilling prophecy. If you get lucky very early on in the early fund...

and you get the brand built, then you sort of like capital comes to you and, you know, deal flow comes to you. And it's sort of self-fulfilling prophecy that you do pretty well. So my one piece of advice, if you want to be a classic VC and you want to start a new venture fund is to be extremely lucky with your investments in your first fund.

That's the way to do it. That's all you got to do. Just be lucky. Just be lucky. That's good. No hard work or skill. Let's just go all after luck on this one. Yeah. No, no, no, no, no. I'm not listing hard luck or skill. I'm just saying like, given a choice, you would rather have be lucky. You'd rather be lucky. Yeah.

So as we wrap up, if folks are listening to this, if someone is an accredited investor, we are raising our next funds to invest in ambitious B2B SaaS companies. They can hit you up directly, tinyc.com slash invest if they fill out that form. That goes directly to your inbox. Anything else you want folks to know?

No, I mean, I think that's it. I mean, like, it's a little unusual. Like, we're just sort of like, we're this is again, like we're saying, like, you know, it's every it takes 10 years to know if you're good in this game. And we're like, we're in year five. And you know, indications are good. That's what it is. The markers. Yeah, the arrows are going in the right direction.

Things are good. Like we're not a little bit unusual, too. Like we're not vastly increasing the size of our fund, which is, you know, quite common. Like in the VC world, it's very often like you start with a small fund and you quadruple it and then that works out and you quadruple it again. And like we're not doing that. We're just sort of like, look, this is what we feel good about. This is the size of this opportunity. And like we're keeping the funds sort of the same and just keep executing the way it has been because it seems to be working.

We think it will be continued to do. And the reason VCs do that is that's how you make more management fees is the bigger your fund, the more money you make. And we're like, you know what? The opportunity that the deal flow we see in a six month period is X. It's been really consistent, which is great.

And I don't want to raise, we don't want to raise twice as much money because then what are we going to do? Invest in, like, we're not going to double our deal flow in the next six months. Maybe we will over years, but like. We might put more, like there's opportunities. Like we could put more money into individual companies. Like do we do all this stuff? But fundamentally the core strategy of TinySeat sort of remains the same. Like this is the size of the opportunity. This is what we think believes. And there are numerous venture funds that have done, like have done well at say being a $25 million fund.

And because they've done so well, like lots of people are interested. And then they decide, let's raise $250 million. But if you're $250 million, all of a sudden, you're doing different kinds of investments, maybe even in different kinds of companies, different stages. Who says you're good at that? Like, you know, just because you're good at writing $250,000 checks does not mean you're good at writing $5 million checks into later stage companies. And your competition might be different. And your deal flow might be different. And your pricing power might not be there at that stage and all this stuff. Yeah.

So we've invested in almost 200 companies over four and a half years, and we're going to stay at that pace. So the indexing across a lot of ambitious B2B SaaS companies seems to be working for us so far. It allows us to keep the sort of batches small, right? It's nice to have some of that intimacy. Like we're not 150, 200 people in batches. Like we're talking 20 people, 25 people, which is nice.

Tinyseed.com slash invest if anyone's interested and Einar Volset on Twitter, ex-Twitter, if folks want to see you posting about the San Francisco Giants. Or EinarVolset.com on Blue Sky. No, I'm only kidding. Oh my God. Record scratch. I was like, what? You're on Blue Sky? You're going to lose your bet. What?

You're going to lose your bet to Tracy. Thanks again, man. Thanks for coming on the show. Thanks for having me. Thanks again to Anar for joining me this week on the show. Thank you for joining me this week and every week. This is Rob Walling signing off from episode 748.