Cendana Capital's Michael Kim on 16 years of seed fund investing: pattern recognition, the Yale model, and the arms race for young founders

Speaker 1: Your business is AI. Their business is securing it. CrowdStrike secures AI and stops breaches. Up next, we have Michael Kim from Sundana Capital. He's the founder, and I'm very excited to dive into your story. Welcome to the show, Michael. How are you doing? Thank you. Great to be here. Thank you so much. Have you. Would you mind taking us through a little bit of an introduction of yourself, your background, and then what you're doing today to sort of set up the conversation?

Speaker 7: Yeah. So I set I started Sendana in 2010. It was specifically to focus on seed and pre seed stage funds. Mhmm. The thesis was that these you know, suit these super angels were starting to institutionalize and bring outside capital in, guys like Mike Maples Yeah. Steve Anderson, Michael Dearing, Jeff Clavier. And so we were very early in identifying seed stage investing as becoming de facto early stage investing. And so, you know, it took me eighteen months to raise the first fund in 2012. You know, today, we have almost 3,000,000,000 under management. Our LP base is largely US endowments and foundations. Yeah. So, you know, we feel like we've we are now, you know, solid LP focused on very early stage venture. And, you know, a a lot's changed, and we can get into that. But, you know, overall, we are convinced that early stage investing is still the way to go in this world of AI. Do you think that

Speaker 2: if you look back, you you weren't even thinking big enough about how much the category would emerge? Because, like, clearly, the initial thesis was right. But in some ways, it feels like early stage venture has gotten bigger than anyone really could have predicted. Yeah.

Speaker 7: I mean, back then, there weren't opportunity funds. People weren't standing up SPVs. You know, I spent time with Josh Kushner when he was raising his first fund. He was talking about, you know, ultimately running billion dollar funds. We were a little bit too disciplined perhaps where we didn't we really wanted to have people play in the sandbox of seed, and so did not invest with Josh, did not invest, you know, in Ribbit, Mickey Malko's fund. You know, that's like a 50 x fund. So, you know, I I think perhaps I was a little bit limited in how I was thinking about it. So, you know, should have thought bigger. But, you know, the market's grown, obviously, and there are probably 2,000 seed funds now. And Yeah. You know, we're investing out of relatively large vehicles.

Speaker 1: So, I mean, 2,000 seed funds is is so so so much smaller of a pool than the broader start up ecosystem. And I'm wondering about what the day to day looks like if you're familiar with the venture capital fund that might be having a founder stop by the office every hour, on the hour, every day of the week, and then partner meetings, and they might be taking thousands of meetings over the course of a year. What is your what is your firm's day to day? What is the heartbeat of the firm look like?

Speaker 7: Yeah. Well, you know, just to give everyone a sense of how we invest, we want to be the lead investor. So we're the largest LP in in over 80% of our funds. So we work very closely with our fund managers. We're always on WhatsApp. We're talking to them. We do monthly calls. I would say also, one way to think about this is, you know, it's similar in in early stage versus late stage investing. Late stage investing, there's a a finite set of companies that, you know, investors want to be in. At the earliest stages, there's an infinite number, right, because new companies are being started every day. Yeah. So that actually transfers as well or translates to what we do. There are always new funds being created, Whereas, like, if you look at the Sequoias and Excels and Index and Founder Funds of the world, that's a finite number that LPs try to get into. Mhmm. Whereas we're actually discovering

Speaker 2: new fund managers. Sure. Sure. How many great new seed funds are born every year? Is it like two? Because I think when when you think about when you think about like venture investing, when you look back throughout history, there's like very small number of companies every single year that really matter, and you gotta you gotta get in those companies. And then if you look at all the venture investors that actually break out and build big platforms or just deliver really great results year over year or fund over fund, a lot of them got into those 10 companies. And sometimes all it takes is really getting into one in a significant way and that's what allows their career to blossom. But I'm wondering when I when I you know, we have six companies a day on to announce fundraisers, probably on average, sometimes sometimes a little less, sometimes more. And Venture feels so competitive, but when I really narrow in and look at the seed market, like true seed practitioners, it actually in some ways doesn't feel that competitive because I can kind of clock these sort of rising stars and I just know, like I have a good intuition. Like this person is Yeah. I don't know if they're gonna back, like, two out of the 10 next breakout companies, but I know they're gonna back at least one, and they're gonna break out. But I'm curious how how you view the market.

Speaker 7: Yeah. I mean, with the fund, obviously, you get 20 to 30 shots on goal, and the idea is that we're indexing on fund managers that have access to amazing founders. And, you know, one good example of that is Neo. You know, Ali Partovi. You know, he was the first check-in the cursor. Yeah. First check-in the Kalshi. Yeah. He has Cognition. He has deal. He has ramp. You know, amazing track record, but he had a sourcing engine. You know, he created this Neo Scholars Program, so he was going to Harvard, MIT, Stanford, CMU, all these different places to identify the top CS students. And, you know, I think right now, we've been investing along this thesis that there's an arms race for younger founders, and part of that is AI native companies. Small teams can actually generate substantial revenue, so the next round is actually a growth round. That actually translates to some of our fund managers that really focus on finding young founders. A good example would be Carlo and Coco at a fund called Nova, and they spend they're 25 and 23 years old. Their third partner, Henry, is 19. They spend a lot of time with kids in college. We have Corey Levy at Z Fellows who's all over the college campuses. Josh Browder, he's a Thiel Fellow, and he's on the selection committee, so he gets access to this. You're absolutely right. Venture is a power log game. I think with fund investing, they have more shots on goal. The other element, dynamically, is that one fund may be good, but the next fund actually might be better. It's multiple layers. What we have to do is track who are they investing in, how these companies are performing, and then decide whether we continue on with with them or not. And, you know, Neo is an is a very good example of one that we have continued to invest in since fund one.

Speaker 1: You wanna be the anchor LP in a new fund, you're excited. What does it actually take to win that allocation? Is it different than winning a seed stage venture round for a start up? Are you identifying value add or or strategic advice? Like, what are the what is your pitch to new fund managers? I imagine it's like

Speaker 2: Yeah. Signaling Yeah. There's way less scarcity and there's way less urgency.

Speaker 7: Right? Yeah. That's absolutely correct. Yeah. I mean, funds are raised over a period of time. They're not raised in a week, so there's not competitive term sheets, etcetera. Yeah. You know, I think one of the things that we benefit from is that we know what we want. We know what to look for. We have good pattern recognition. So, like, with Kirsten Green, her first fund, 40,000,000. We were the first to commit. We did 10,000,000, and she was off to the races. I would say that because of the sixteen years of pattern recognition, we kind of know what we want in a fund manager. Again, it's indexing on people who have amazing access to tremendous founders. Obviously, we want to see some picking ability or proven picking ability, so we've never invested in a first time investor, but we've invested in plenty of first time funds. We think that networks and domain expertise have a shelf life. You could have been like the VP of whatever at Google ten years ago. That's not as relevant today. And unless someone has hustle and they're building on those networks and the intellectual curiosity, I think that's what we also look for, is sort of like the it factor.

Speaker 2: Yeah. Are you are you so maybe to try to repeat it back to you, is, like, volume of deal flow and access your preference over, like, just raw picking ability? Because when you think of, like, Z Fellows and Neo, sure they clearly can pick great companies, but it's also they just have insane, they have insane access, right? They've built these sort of pipelines of And that feels almost easier to bet on, but then you have other investors who just clearly know how to pick winners. We have a buddy who like, I think the first two companies the Ever Angel invested in, like both became unicorns. And so he has like, clearly has access and picking ability.

Speaker 7: And a little and a little luck, but you definitely need that as a as a VC. Yeah. I mean, luck is definitely part of it, but you gotta be in the right rooms. So we're investing in this one guy. He worked with Nat Freeman and Daniel Gross. Mhmm. He's a very smart person. I can't mention who he is because he's still fundraising, but, you know, he's someone who has the intellectual curiosity. He's seen what great could look like. He's learned from really good investors, and he's in the right rooms. Now, do we know if he's going to be an amazing fund manager? No. But, you know, he's got the ingredients there. You know? And to your point, you know, because there are so many companies being formed, you've got to be able to have some sort of competitive advantage, some sort of discernible edge in finding these and accessing these founders. You know? So Carlo and Coco, for example, have that. They have the hustle. They're in the right rooms. They have the right access, not only just at the founder level, but also, you know, like with Sequoia and the downstream capital.

Speaker 4: Mhmm. Jordan?

Speaker 2: Do you how much do you value if someone's a former founder? Because a lot of people like to talk and say, oh, yeah. Yeah. Former founders make make such good investors. But but when I think about it, some of my favorite investors across stages have never started a company. They've never had a job other than, know, just just looking at deals and trying to pick good ones.

Speaker 7: That's it. For sure. Mike Moretz, legend, was a journalist. Yeah. And Bill Gurley, he was an equity research analyst. But I will say, at the earliest stages, a lot of our fund managers are actually ex startup people or operators. That's because, you know, if you're a founder, you want someone who can actually help you. I know it's a total VC meme that, hey, how can I help you? What kind of value can I add? But I think at the earliest stages, founders do want that help, even the best ones, although they probably don't need as much. But if you look at late stage investing, there are typically ex investment bankers, consultants, and lawyers. There is some sorting, and we do see a lot of ex founders. We actually have current operators. We're invested in Ahmad's fund, CEO, founder of Mercury. That perch gives him really great perspective, and he's a founder magnet. People want to work with him. Yeah.

Speaker 1: Can you give me a little bit of history on how venture capital alternative investments became attractive to LPs, endowments, universities. We often talk briefly about the Yale model. How real is that as a story that gets told? What were the other key turning points in endowment sort of waking up and starting to allocate towards venture capital?

Speaker 7: Yeah. I mean, David Swanson, a Yale legend, you know, he obviously pioneered the endowment model of having significant exposure to private markets. I think 60 of their endowment is private markets, including private equity. I think 25% alone is to venture. You mentioned a word that I think describes venture. It's about stories. If you think about asset allocation and small cap value investing or these public funds, the standard deviation of returns is pretty tight. In venture, because of what we just talked about, you know, in power law, you know, a handful of companies can do generate most of the returns. And so, you know, I think a lot of endowment and institutional LP types get attracted to those anecdotes. You know? I think, you know, for for for kids, you know, the Facebook movie actually inspired a lot of people not to just go down the Goldman Sachs, McKinsey path, but try to try to do something new. And so, you know, it is it is narrative based. It's anecdote based. But when it hits, it really hits. You know? I mean, I I don't think Neil will be upset for me saying this, but, you know, they had 4,000,000 in Takashi. It's worth a billion 5.

Speaker 1: Wow. Seriously. Yeah. That's incredible. Yeah. Wow. That's wild. He's goated.

Speaker 2: Going to the Midas list. The another question for you. How much time how much time do you spend looking through a fund's portfolio and trying to apply or understand what your like a real, like, fair value to different assets? Because as an angel investor, I've done, like, 70 some odd companies, and there are companies out there that I'm up, like, you know, ten, fifteen x, and I believe the company is probably a zero. Right? And and knowing the way that the venture game is played, there's a lot of you know, I'm not in the venture business. Right? Yeah. So I don't have to report to anyone. I'm just like, I do it for fun and and I enjoy I enjoy learning from the process. But I know there's venture investors who are out there with in the same exact situation, and they're not exactly probably like raising a hand and being like, you know, Michael, like, know I'm up 15 x here, but it's I'm probably getting wiped out.

Speaker 7: Yeah. I mean, there's a couple of things around that. All the SaaS companies and vertical SaaS companies in 2016 to 2022 before ChatGPT came out, we call those the messy middle. Those are companies that raise probably at 50 times revenue, maybe at a billion or more. And today, they might have a 100,000,000 of revenue growing 10%. You look at the SaaSpocalypse, you look at the rerating of software multiples to, like, three and a half times. Those companies are probably, at best, worth 300 to $400,000,000 The question then becomes, our fund managers and everybody has those companies in their portfolio, but have the fund managers been proactive in marking things down? We've had fund managers, for the most part, be proactive in marking things down. We've had other fund managers that haven't, and we know that those are unrealistic marks. The other thing that we do, just to give you a sense of this, is when we diligence a fund manager for the first time, we are very founder centric. We'll call all of the founders that they've ever invested in and really get a good sense of, can this person help you or how do they help you? But also importantly, and this gets into some of the inside football, a fund manager has to come to us with a plan, Portfolio construction. We're going invest in 20 companies. We're going invest $1,000,000 in each. What we do is we assess the credibility of that. If you're an angel and you're getting 25 ks into a bunch of companies, that's one thing. But if you're running an institutional fund and you're saying to your LPs, I'm going get $1,000,000 into each company, that's what we want to hear from the founders. So we we run a very founder centric diligence process. Yeah. I

Speaker 2: my my best ever investment is roughly at a 150 x to 200 x right now. And I would love to think about a world where I could have I put 25 k in. I would love to think about a world where I could have put A million. A million in. But like, honestly, at that time, this was a few years ago, 25 k was the like, I was begging for 25 k. Right. So I could never go out and be like, yeah, like, There at a million was someone else. They wanted to give me a million, I turned it down. I was like, no. It was like, was getting the last slug Yep. And I'm very grateful for that. Yep. But but, yeah, that that that's You gotta fight for that allocation. It's so interesting to think about think about the past into into building an exit. Regrets too. Mhmm. Like,

Speaker 7: I I I've I've invested in two of the three best venture returning funds ever. We're not in lowercase one, but I I we're, you know, we're involved with lower carbon now, and I've known Chris Saka for probably twelve years. But the other two funds are Founders Fund two, which I'm in and personally, and also Blockchain Capital two, which is Brandenbart Stevens. So That f f two is approaching three. Yeah. FF is probably gonna be a 300 x fund. I think blockchain capital right now is a 157 x fund, and it's on its way to being 250. And Chris Saka, of course, was 204. Know, I didn't realize that TF2 is that good. SpaceX. It's It's that freaking Yeah. Amazing. No. It was a lot of Yeah. Not having more in those. Yeah. Wild.

Speaker 1: But yeah. Thank you for coming on. Thank you so much for talking about the anti portfolio, the wins, the losses. This is like what makes a great interview. So thank you so much. It's been a lot of fun. Yeah. I appreciate it. We'd love to have you back on and talk more about venture, the different landscape, how rounds are changing, how funds Yeah. Next time, what

Speaker 2: what what I think what we would appreciate because you have a bunch of interesting data is like a regular interview where you're talking about the current actual market dynamics from an LP standpoint because like Super interesting. Getting that kind of read, all the venture stuff and the venture deployment is, you know, a lagging indicator Mhmm. Typically of, you know, LP Yeah. Activity for you know, historical LP activity. So this was great. I appreciate it. Yeah. Thanks for having me on. Yeah. Have a great rest your day. Have a great rest of your week. And we'll talk to you soon, Thank you so much. Let me tell you about Cisco.

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