How VC Firms Really Work

Ben Gilbert (0:00)

Hello, David.

David Rosenthal (0:01)

Hello, Ben. Happy 2019

Ben Gilbert (0:04)

Happy 2019 indeed.

LPs, happy 2019 Hope you had a restful and, I don't know, restful at the very least holiday.

David Rosenthal (0:16)

Yeah, and may great things await in 2019 I think it's gonna be a good year.

Ben Gilbert (0:21)

Yeah, me too. Something about it can only go up, something, something.

Not to jinx us.

David Rosenthal (0:31)

Yeah, well, we're going to the right.

Ben Gilbert (0:33)

Yeah, we're definitely going to the right. Can we talk about that for a minute, how like the phrase up and to the right is stupid?

David Rosenthal (0:40)

Yes, because you're always going to the right.

Ben Gilbert (0:42)

That's a time series graph.

Yeah, yeah. Okay, well, LPs, today, we want to talk about something that is interesting. We took the pulse of folks a few episodes ago, when we started to get into the structure of VC firms a little bit. And I sort of put David back on his heels and I was like, hey, let's not go too deep into this, even though it's like, you know, total navel gazing for us to want to talk about that and explore it and think about it. I sort of wanted a sanity check of is it something that that LPs are interested in? I think we had like three or four people write in like immediately after releasing it like, yes, please, this would be super helpful right now.

So we decided to dive in. And I think thanks to David for putting together a good structure for this episode. I was just scrolling through it and like you, I'm pumped at how clearly you were able to break it all down. It's almost like you recently started one.

David Rosenthal (1:44)

Oh my goodness. Almost. We have a lot to talk about. I think my favorite reaction when we asked for feedback on whether you guys would be interested in more, you know, kind of behind the scenes VC topics was, you know, quoting art of war of know yourself, know your enemy, know the situation. So we're going to talk about the enemy for most of you and the self for some of you today.

What it is really like for at VC firms, how they work.

Ben Gilbert (2:13)

We actually, we have a fair number of venture investors as LPs as well.

David Rosenthal (2:17)

Yeah.

Ben Gilbert (2:19)

Yeah. And I wanted to say too, before we dive in from sort of the entrepreneur side of things, I think it's really helpful or it's been really helpful for me when running a company to sort of understand how to navigate the world of fundraising and understand not only how firms are structured, but what sort of their incentives are and what success looks like to them. And I think we all know that it's like, okay, they want to outperform the stock market and deploy their capital and hopefully get it into a unicorn. And there's lots of tropes that some things are sort of sub investor scale and some things are, VCs only invest in things that could be $10 billion plus outcomes.

I think we're excited to dive into a lot of the nuance of that today and fund construction and also the bare bones 101 of what even is a VC fund from a technical and legal perspective.

David Rosenthal (3:18)

Yeah. Well, some of that, if anything, I feel like in recent years, as VC and tech and startups have become more mainstream, there are plenty of great places you can go to get just the basics on what is a VC firm. And Brad Feld and Fred Wilson, their blogging over the years has been great. Prolific. Prolific.

What I really want to do here is talk about really, what are the incentives for firms and people? And this is something that I feel passionately about because even though I was a VC at Modrona for seven years before starting Wave, it wasn't until, I feel like until leaving, starting my own firm, going out and fundraising, setting everything up that I understood now, a lot of the really behind-the-scenes stuff that we want to get into today. So here we go. All right. Let's start with what is a VC firm, both from a kind of structure and staffing standpoint. I think the first point here is that took me a little while to internalize. And I think on the outside is hard to understand. VC firms are not companies, both connotation and denotation of that. They are partnerships and they are a series of funds. They are not structured as a company. So what are they? There's a management company, which is a LLC partnership.