E1075: Cendana Capital's Michael Kim on investing in Seed funds, would Facebook buy Robinhood & more

TL;DR

Seed funds and startups face challenges during the COVID-19 pandemic, with a focus on remote work, reduced funding rounds, and increased uncertainty.

Transcript

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Key Insights

• 💦 Seed fund managers are adapting to remote work and focusing on maintaining portfolio companies' capital.
• 🧡 Ownership is paramount for seed funds, with an ideal range of 10-20% ownership in portfolio companies.
• 📈 Trends that have accelerated during the pandemic include online learning, telemedicine, and e-commerce.
• 🥺 The economic impact of the pandemic may lead to a reduction in discretionary consumer spending and job cuts across sectors.

Questions & Answers

Q: How do fund of funds make money?

Fund of funds raise capital from institutional investors and individuals. They then invest this capital with other fund managers, and when those funds generate returns, the fund of funds pass these returns back to their investors.

Q: What criteria do fund of funds use to assess fund managers?

Fund of funds assess fund managers based on their networks, drive, vision, and previous experience as an entrepreneur or in the finance industry. They also look for fund managers who have a good reputation and are easy to work with.

Q: How do fund of funds navigate the competition between direct investments and their funds?

Fund of funds often co-invest with their fund managers in later-stage rounds, ensuring alignment and avoiding adverse selection. This allows them to invest directly in companies without competing with their own fund managers.

Q: What are the potential long-term effects of the pandemic on the startup and investment ecosystem?

The pandemic has accelerated certain trends, such as the increased adoption of remote work and e-commerce. However, there are concerns about a potential increase in white-collar job cuts and a negative impact on commercial real estate.

Summary & Key Takeaways

• Seed fund managers are adapting to the new remote work environment and managing investments through phone and video calls.

• Fund managers are focusing on portfolio construction, with seed funds preferring investments with 10-20% ownership, while smaller funds may settle for 5% ownership.

• New fund managers face challenges in raising capital during the pandemic, while existing funds are cautious about making new commitments.