E10: Michael Kim | Founder of Cendana Capital on How Small VC Funds Can Return 200X+
Sep 18, 2023
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Michael Kim, founder of Cendana Capital, discusses his thesis on creating a fund of funds at seed stage, insights into the changing landscape of VC, and whether VC should recycle capital. They explore the success of small VC funds, the challenges of scaling funds, and the economic trade-offs for different fund sizes.
Small funds can bring significant returns, outperforming larger funds.
Nano funds are an attractive option for LPs, creating new names in portfolios.
LPs are recognizing the potential of smaller fund sizes and high ownership stakes in portfolio companies.
Deep dives
The Importance of Small Funds in Generating Returns
Small funds, such as Chris Saka's lowercase one and Manu Kumar's fund at K9 Ventures, have shown the potential to bring back significant returns. Despite their smaller size, these funds have achieved multiples that have outperformed larger funds. This highlights the opportunity for material returns that small funds can provide.
The Rise of Nano Funds and their Impact
The emergence of nano funds has opened up new possibilities in venture capital investing. These sub-20 million dollar funds, largely ignored by institutional investors, can be an attractive option for LPs. By investing in and supporting these smaller funds, LPs like Sandana can create new names in their portfolios and potentially establish long-term relationships with promising fund managers.
The Evolution of Fund Sizes in Venture Capital
The changing dynamics of venture capital have led to shifts in fund sizes. The decreasing cost of starting a software company and the growth of multi-stage firms have influenced fund managers' strategies. As a result, the size of seed and pre-seed funds has increased, while LPs have been cautious about the larger funds. LPs are recognizing the potential of smaller fund sizes and the importance of high ownership stakes in portfolio companies.
Factors Influencing Venture Capital Investments
Various factors, such as the cost of startups and the presence of mega-funds, have shaped the venture capital landscape. The availability of capital, the perceived value of ownership stakes, and the potential for strategic partnerships have all influenced investment decisions. LPs must carefully consider these factors and continually assess investment opportunities in the evolving venture capital market.
The Unique Approach of Sandana
Sandana takes a hands-on and proactive approach to portfolio management. They act as trusted advisors to their fund managers, working closely with them to navigate challenges and make well-informed decisions. Sandana's focus on people, seeking out fund managers with high integrity, horsepower, and compatibility, reflects their long-term perspective and commitment to building successful relationships.
Michael Kim, founder and Managing Partner of Cendana Capital sits down with David Weisburd and Erik Torenberg to discuss his thesis of creating a fund of funds at seed stage, insights into the changing landscape of VC from the 90s to today, and whether VC should recycle capital. Cendana Capital has invested in Forerunner Ventures, K9 Ventures, and IA Ventures. If you’re ready to level-up your startup or fund with AngelList, visit https://www.angellist.com/tlp to get started.
(1:00) Episode Preview
(2:15) Michael’s journey from international relations, to investment banking, to Silicon Valley
(5:07) Why Michael started Cendana and the opportunity he saw
(7:30) How has Michael’s thesis changed with the influx of capital?
(8:30) Nano program
(13:15) Challenges of scaling funds
(16:50) Sponsor: AngelList
(17:55) Economic tradeoffs for different fund sizes
(19:20) Management fees as non-recourse loans
(20:30) Ownership percentages and returns
(23:17) Contrasting fund of funds platforms with a concentrated portfolio approach.
(26:27) Bringing institutional capital into early-stage and esoteric strategies.
(33:11) The LP reset and the current VC landscape
(34:00) The denominator effect and dry powder in the market
(41:00) The paradox of VC success and importance of fund selection
(44:57) Portfolio construction
(49:00) Which fund managers Michael will bet on, and why.
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