Plexo Capital's Lo Toney on backing emerging fund managers and the shift toward technical GPs

Speaker 1: CrowdStrike secures AI and stops breaches, And we'll bring in our first guest of the show, the founding and managing partner of Plexo Capital.

Speaker 2: What's going on?

Speaker 1: How are doing? Welcome to the show.

Speaker 5: Hey. Doing well. Thanks for having me.

Speaker 1: Thanks so much for hopping on. Since this is the first time on the show, would love to give everyone an introduction on yourself and just break down a little bit of your background, a little bit of your day to day. And then, well, I mean, we have so many questions about the firm and strategy and we can go through all that.

Speaker 5: Sounds good. So I founded Plexo Capital while I was at GV, Google Ventures. So I was a partner on the investing team focused mainly on marketplaces and mobile. One of the things that we had done at GV was to identify GPs that were fund one micro VCs typically investing at the pre seed stage Yeah. That we could partner with. And what better way to partner with them than by kind of meeting one of their needs which was helping them with their fundraise effort. Yeah. So we invested into about five funds that were emerging managers with unique perspectives and access to deal flow. And it worked for us and I looked at it and said, hey, I think I can build a strategy around this. So this was I think about 2016.

Speaker 1: Yeah.

Speaker 5: And I switched over to an entrepreneur and resident's role. Cool. Focused on building out the strategy. Yeah. Spun out in the spring of twenty eighteen, brought on Alphabet as our anchor investor for our fund one, and also brought on some other big tech companies, Intel, Cisco, brought on some financial institutions like the Royal Bank of Canada, and some traditional institutional LPs like Ford Foundation and Mass Mutual.

Speaker 1: You explain the evolution of the the relationship there with Alphabet? Because, GV, formerly Google Ventures, had it had all the benefits of a venture capital firm financially, but also a lot of the benefits of a corporate venture arm with partnerships and potential acquisitions. And that's always been something that corporate venture arms have sort of grappled with and evolved over time. But going from alphabet to a fund of funds into emerging managers, is there any conversation of dialogue and value add there? Or is it purely we think this is a great allocation of capital, this is purely financial investment?

Speaker 5: Yeah. So a couple of questions there. So first, I think it's important to just think about the corporate VC position within the ecosystem because there's there's almost a spectrum. Right? There's kind of at the far end, are purely strategic. Yeah. And then at the other end of the spectrum, they're purely financial. Yeah. And GV was at the extreme end of the purely financial.

Speaker 1: Got

Speaker 5: it. So much so that it really operated as a separate unit, just part of the the other bets umbrella.

Speaker 1: Got it.

Speaker 5: And the investors at GV invest for financial return just like a traditional firm on Sandhill Road. Mhmm. So it's all about identifying amazing opportunities with the best entrepreneurs that are typically one of one, and then coming into those firms companies as early as possible and continuing to support them over time. Mhmm. If there is an opportunity to be able to do something within the broader Alphabet ecosystem or relationships, then GV will make those introductions. But first and foremost, the focus was on just identifying the best companies. I would even say so much so that GV doesn't really think of itself as a corporate VC. Yeah. It thinks of itself just as a traditional financially focused VC. Yeah. And so then leading to the second question that was in your in your opening, the ability to be able to identify the best deals, you know, there's multiple paths to be able to to get there. Obviously, there's the existing relationships with entrepreneurs. That's very helpful. There are folks that operate at GV, that, you know, have good relationships based on prior working at Google. And so there's a lot of Googlers that do angel investing. They're great sources of deal flow. And then you also have, you know, these GPs that are on fund ones that usually bring some kind of unique angle or some edge that they have to allow them to see opportunities that other folks don't see. And the beauty of being a Fund One GP is that you don't have to really do any fund management. You got your lawyers to do your LPA. You've probably raised your fund. You've got a back office. So you can just focus on investing. And that was the opportunity that we saw at GV was, hey, why don't we partner with some of these folks and then it'll allow us to get access to some deals that we might not have seen on our radar.

Speaker 1: So walk me through the evolution of the thesis, the pitch, the sweet spot for emerging fund manager. Was there a background that you were looking for, whether it was entrepreneurial or spin out from a traditional venture capital firm? Were there sectors or sizing criteria? How did you think about narrowing who you were going to back?

Speaker 5: Yeah. I love this question because the most important thing for me was having perspective, having worked across a few different roles.

Speaker 2: Mhmm.

Speaker 5: And when I had conversations with people that were in the venture space for my own personal journey, the thing that I continued to hear was, hey, if there's an opportunity to get experience as a product manager, take it. And if you can do that at a company that's known for doing something with excellence within the ecosystem on the product side, where they have great engineers, where they have a history of, you know, identifying some of the best a talent that spins out and does great things. Take that opportunity, take that role. Because a product manager is like a mini CEO within an organization and has ownership and usually works across engineering, works across engineering to help identify features and functionality and how those should be prioritized, works with marketing to think about the positioning and how to get access to distribution, works with the finance team thinking about what the business model is going to be and what's the best way to monetize this opportunity. So it's great training ground to both, I would say, be an entrepreneur, be a founder, plus that playbook for product management is very similar to early stage venture capital. You know, what do VCs do at the early stage? Well, they think about what's the problem that's being solved, what's the existing solution set, what are the shortcomings of those solutions, what are people actually doing, Is there an opportunity to kind of rip something out? Or is this kind of people have solved the problem with duct tape and Excel? And what are the best ways to be able to get distribution? All of those things that a GP thinks about Mhmm. At the early stage pre CC, it's kind of the same playbook as a product manager.

Speaker 2: Yeah. It's it's interesting to to think back on the twenty tens and it really felt like the the the sort of like star power that researchers have today. Yeah. Product managers really had in the twenty tens Yeah. Where you had somebody that could have been just coming out of college, landed at a company, but then five years later they were like running a core business at one of these companies that that again, they they did their basically like tour of duty at a company that was like you said, op, you know, excellent operations, excellent talent density. And then they were just in such an amazing position to understand what what great growth looks like, understand what like insane, you know, market pull and and product quality and all these things. And then understanding like the tech stack at these companies at a deep level so that they would see all of these opportunities to invest in other software and infrastructure and things like that. And it feels like the the the humble product manager today is is has a lot less attention than, let's say, like, the star researchers. Mhmm. Right? You see that the researcher spin outs are getting kind of all the headlines. But it actually makes me think, there's probably a lot of alpha right now and ignoring, like, the new NeoLabs and just focusing on, like, who are the actual, you know, great great product managers today at these, you know, high growth companies. Interesting. Because

Speaker 1: Yeah. How are you balancing that transition?

Speaker 5: I gotta tell you, it's it's really a fascinating question right now because what ends up happening is after you get a few funds under your belt, you move to this more operational focus as well, So the thing that people might not think about a lot as they decide to transition to being a fund manager as opposed to working inside of an organization is that when I was at GV, it was amazing. All I had to do was focus on finding the best entrepreneurs. We had great finance people. We had great legal team. We had all this back office ops. We had marketing. I didn't have to think about anything. But when you are starting your own firm, now all of a sudden that's on your plate. And so I think that's one of the most difficult things is balancing it. But I'm going to tell you, one of the most beautiful things that's happened and the timing could not have been better is AI. Thanks. You now have the ability for a lot of these work, you know, things that I have on my plate that are really non investing. Mhmm. It's amazing how much leverage I can actually get from AI, which is great because you're a limited budget when you're a startup firm. And so you don't really have the management fee to be able to build out a big team to give you that leverage. But the beauty of today is that, you know, AI gives that opportunity. I can remember talking to my LPs when we were looking at Anthropic back in the fall of twenty three, and it just opened my eyes to the fact that, my god, I told my LPs I'll never forget the AGM where I said, hey, my objective is to use the AI tools that existed at that time. You got to kind of rewind and take yourself back. But at that time, my goal was, hey, if I can just have AI do the work of one junior analyst, I'm gonna be super happy. And now, you can have AI do the work of a whole team.

Speaker 1: Yeah. No. It makes a lot of sense.

Speaker 2: Yeah. Just just even just like the deep as soon as we had deep research, that was like the same thing as throwing basically a project over to a junior analyst type and saying, hey, want you to spend a week and really understand Yep. Evolution of this technology set, understand the market. And even if what you get back today is still like has like some AI slop in the writing, at least it's still like we'll communicate Yep. The ideas and get you being able to get up to speed on something Yeah. Which is is so interesting. Is and such an advantage for, yeah, these emerging managers with smaller teams or might be one or two partners and maybe no no analyst or Yeah. Associate types.

Speaker 1: Yeah. So so I I mean, the the the teams can stay so much smaller. At the same time, we've seen, you know, the funding rounds get so much bigger. Can you walk me through how the knock on effects of the ballooning seed series A, series B valuations and actual funding round sizes has cascaded through to your strategy? Have you had to evolve? Has it just been you're in the right place at the right time because you're growing your firm, so you're just growing into the new normal? Or have you actually had to step back and say, Okay, things are structurally different. We need to evolve our strategy.

Speaker 2: How do

Speaker 1: we think about

Speaker 2: Maybe more tangibly, you're you know, we have friends that have funds that they raised in 2024 where the strategy was like, wanna own five to to 10% of companies at pre seed seed and then follow on from there. And then almost all of those folks are like now being like, we're happy to get 3% of this round, you know, before and then the the markups can be quite intense, and the follow on capital can come quickly, but it feels like even in the span of span of like one deployment period, managers needing to like fully update their strategy on ownership targets and things like that.

Speaker 5: And that that was my answer. I mean, you hit the nail on the head. Because it's you couldn't have spoken a better truth. I just had this conversation with one of our LPs and her question was, you know, what are you seeing as the changes and the challenges within the ecosystem? And I went back to a point I made earlier, which is the GPs that are the best, usually they have especially in the age of AI, the thing that I really have noticed is that the GPs that are just getting started in their career, the best GPs are much more technical even within the last ten years. I think that's the biggest evolution that I've seen. And when I compare the profiles of not all GPs that are more experienced and deeper in their careers, but a significant number when you just look at their backgrounds, they don't necessarily have the depth of the technical side. And when you look at the GPs that we see today with the smaller funds, these are folks that are coming in with a very unique perspective and the edge, I think, translates directly from their technical understanding of a problem they had to tackle within one of these technology companies. And so what that does is it opens their eyes to this really unique set of problems that they know can't be solved, but they understand the technical limitations of the current solutions as to why those problems can't be solved. And they kind of have an a somewhat of an idea about the perspective of, hey, this is how I think this problem could be solved, but maybe there's one aspect that's missing. So maybe it's the compute horsepower or maybe there's a certain problem that hasn't been solved in an architecture side. There's something that's just missing, and so they know what to look for. And then when they see it, they can pounce on it immediately. And I think to your earlier point around being inside of a company, you understand two things that are really important. If you're in one of the big hyperscalers or you're in one side, one of the big tech companies that's, you know, really known for producing great employees, you know what excellence looks like in employees. You do know what a teams look like. You also know what an a organization looks like and how that organization should scale and some of the challenges that it's gonna get. So I think this new batch of GPs just has a really unique perspective that allows them to get in early. Now the flip side is being able to scale and keep that ownership stake as the companies now move so quickly through the financing rounds. That's the biggest challenge that we've seen. The fact that they don't have the ability to hold on to that pro rata like they used to. And look, GPs were very creative even within the last ten years. Right? If I look back to some of the deals that we were doing pre COVID, the GPs were doing things like going out and raising SPVs and getting existing LPs and new LPs to come on and help them keep as much of their pro rata as possible. Then they graduated to doing, you know, kind of these, you know, these massive funds that were just for kind of follow on investments. But now that's much more difficult because you've got this combination of these rounds are increasing in size so fast, plus you've got the bigger shops that come down earlier and earlier. And so those big shops are kinda already there and ready to scale up. Yeah. So this is the challenge that a lot of these firms have now.

Speaker 2: Well, for you for you, the the big question I have is like, how how do you manage and prioritize your set of co investment opportunities? You have this big base of managers that you've backed now and I imagine every single month, you're they're bringing you co invest opportunities and we're in this dynamic right now where, you know, you'll have the the top five companies in a category getting marked up like crazy and then even the five five through 10 are still getting marked up and and showing momentum and growth. And so, I imagine it's like a a massive headache, but also big opportunity of like sorting through those and but also like managing expectations with the managers on like when you'll actually lean in and and make a make a direct investment through their vehicles and when you have to sit stuff out.

Speaker 5: Yeah. I mean, Clearly, I've been looking at our deck because you understand it really well.

Speaker 2: I don't deck but I

Speaker 1: He only invests when it's anthropic. As long as it's a really good

Speaker 2: No. But I just like on a personal level being invested in some funds, it's like, I don't, you know, I do this like recreationally to date and it's like, well, I'm not gonna just, you know, I can't possibly do every deal Yeah. Even if they look like great.

Speaker 5: Yeah. Yeah. Well, this is this is the benefit of having that level of expertise where you can even apply it to a side hustle and you professionalize your side hustle because that's exactly the approach that we have to take, which is partnering with this amazing GP network that we've earned their trust. And the beauty of the GPs we work with is they invest so early, you know, an entrepreneur never forgets that first check or who took the bet on them. So that's the biggest thing for us is, you know, how do we go through all of these different opportunities. And I do go back to Anthropic because that's the one that really the light bulb went off on my head because you had a couple of dynamics that we've discussed. We it was the first time we had done an SPV, and this was the series d that closed in January '24 that Menlo led. So it started to come together at the end of twenty three. One of our GPs brought us the deal. A GP we had worked with before on on Reddit actually. We had worked with that GP on Reddit that worked out well. Yeah. And so I was excited because I wanted to get more exposure into AI and had a chance to dive in deep. But the challenge was, I mean, this was like an $18,000,000,000 valuation. Yeah. And we had never come close to anything that expensive before. Mhmm. And so I think there was this combination of, you know, getting our arms around that and, you know, thinking, god, for this thing to actually really come together to give the return, this has got to be like a $12,000,000,000,000

Speaker 1: It's like

Speaker 5: And now here here we are.

Speaker 1: Here we are. That's amazing. You you you alluded to the emergence of tranche rounds of more complicated financings of a ton of capital marshaling at the very early stages of some of the new companies. And I'm interested in the dichotomy that's emerging between the company builders versus the financing partners, the inception rounds and how GPs and emerging GPs are clarifying their position in the market. Are you seeing GPs have a good answer to where they sit in the market? Are they just starting to understand how to position themselves? And is it how accepting how acceptable do you think a like a wait and see approach? Or maybe we'll do a little bit of one and a little bit of the other versus there are some firms right now that are positioning themselves as like, we are the company builder firm, we're in the inception round. Don't come to us with the second or third tranche if you're an entrepreneur.

Speaker 5: Yeah. And I think that latter piece is where the the GPs that we've seen really clarify their position. Mhmm. That's I think the level of granularity that's necessary today. That wasn't necessary I would say, you know, five, ten years ago. Yeah. But today, is. Again, I just had this conversation with one of our LPs, an institutional LP that sits in a pretty unique seat. Mhmm. And that was part of our conversation when we started talking about how do GPs really kind of make their position within the industry. Mhmm. And, you know, now it is definitely being able to leverage some technical aspect

Speaker 1: Sure.

Speaker 5: That leads them to an edge they have in identifying an opportunity. Mhmm. But then even moreover, really focusing in on exactly the profile of company that makes the most sense, where that company sits within product market fit, and what I've even seen the specific needs of a company. So we've even got GPs that have a specialty of being able to have a network of product managers and they can tap into their product manager network when necessary. We've seen a GP that is, you know, has a partner, is a is a two person operation and the other GP has a history of working in PR and public relations and understanding how to position a company Yeah. Which is increasingly important. Because, you know, one of the things I don't really think people understand is that one of the risks of the rapid acceleration that we see in companies achieving this incredible scale, I think I just saw Higgs Field is now the fastest Yeah. Company to 1,000,000,000 in revenues. You know, one of the things people don't talk about is when you look at the history of a lot of the entrepreneurs, you know, you look at the jobs, you even look more recently at the Larry and Sergei's, they had time to be able to develop that muscle memory of how to develop into the shoes of being a high profile CEO and having to deal with a very, you know, persnickety board at times or having to deal with a state dinner with the president of The United States, you know. You you you never saw that need Well, you meant today. How to enter those environments when you, you know, you have like maybe ten years to get there. Now, you know, companies are getting there in ten months.

Speaker 2: Now, I'll give you I'll give you the best example is Noah Noah from Instinct going on invest like the best to to announce the new round. Yeah. There was one question on security, you know, Patrick was basically saying like, look, like a lot of people just don't, you know, don't trust or aren't gonna trust a new product like this with all, you know, their email and Yeah. Payment information, all this stuff. And I I thought his answer was fine, but it it didn't it didn't Was he trained? It wasn't like it wasn't like he he hit a hit a home run. But I was like, I gotta You gotta give him like some time. He's 23. He sold the company. He's like less than a year old.

Speaker 1: Yeah.

Speaker 2: It's a $10,000,000,000 company, but like, know, give him like Yeah. 10 more of those interviews and he'll probably answer wildly differently.

Speaker 1: Now now you don't get ten years. You get three and then within three years of starting your company, you're getting made fun of on SNL while you're having dinner with the president. It's such a weird scenario. Right?

Speaker 2: How do you VCs love to talk about taste and how taste is important. But how quickly do you clock a man like how many can you clock a manager's taste in companies over the fund cycle? Because every manager comes out and they say, we wanna back the most important companies in the world and, you know, back visionary founders. Right? It all sort of like blends together. But then my manager friends, you can just tell usually, maybe it takes me a few years, but I have a friend who like loves to back all the hyper controversial founders Mhmm. On x. Like almost every single one he's in. If you can think of somebody that like went viral for doing something crazy or saying something weird, he's in all those companies. And then I have like other, you know, another set of friends that are that are managers and they love to back the like super earnest Yeah. Really kind. Yeah. And they're both saying the same thing to when they're doing their fundraisers. Right? They're like, we wanna back visionary founders and yet they sort of self select into these like What

Speaker 1: kind of vision are

Speaker 9: you talking about?

Speaker 2: Yeah. Visionary The archetype.

Speaker 5: Well, I love that because it also comes back to the personality of the GP Yeah. And kind of the the type of dynamic that's gonna be most interesting for them, so kind of intellectually. Because I you know, everyone I think the best GPs that I've met, they're just so smart and they're so intellectually curious. And I think when you really break it down, birds of a feather flock together. And so you see like the most interesting pairings with GPs and founders. And you really know it holds true when you start to look at the deal flow that they're getting. So it's like people kind of can immediately identify, oh my god, this is like the perfect company for GPX over here. Right? And I think that's another piece that speaks to the edge and how a company or how a GP can should position their firm within the ecosystem. And you do start to see part of the the taste as you call it. I think that's a great way to describe it. I work with my son and, you know, we kind of track and monitor GPs. And one of the things that's a telltale sign is, hey, are these GPs just kind of chasing the next hot thing? Or is there some consistency in the approach that they're taking not only within a certain sector or a certain problem that's being solved, but also with the the personality of the founder that's going after this on this opportunity. And you can definitely start to see that certain GPs kind of always go after a certain profile of founder. And to be honest, for us at least, those are the GPs that we like the best because it means that they're they're consistent. Yeah.

Speaker 2: Yeah. Yeah. And it's you don't wanna like, especially if you're evaluating new managers. If you if there's a person if you think they're gonna be going after a certain personality type that and then that personality type is not represented in the in the portfolio in your portfolio Mhmm. Already, then it actually starts to be interesting because you're not just gonna get sort of an average of everything else you already have gonna have exposure to.

Speaker 5: No. See that's exactly right because our objective is to cast as wide a net as possible.

Speaker 1: Mhmm.

Speaker 5: Yeah. And the best way to do that is to have unique approaches within the GP network that we've developed, which now allows us to have this great source of deal flow that's not very overlapping. So we see more unique opportunities.

Speaker 2: Yeah. Yeah. How how are you processing if if a manager comes to you and, like, how are you processing, like, Vice specifically right now or managers that are, like, principled about not touching certain categories? Because over the last five years, it seems like every major platform VC has made investments in gambling and and maybe multiple forms of gambling.

Speaker 1: But also some of those companies don't look like gambling at all when they start. It's like,

Speaker 2: oh, crypto Sure.

Speaker 8: But but

Speaker 2: but but there's been billions of dollars billions of dollars deployed from a bunch of firms that historically wouldn't have touched these sort of Totally. More more vice like categories. And so I'm imagining a manager that comes to you and says like, hey, I wanna invest in the best companies in the world Mhmm. But there's gonna be some companies that their financial performance will be amazing, but based on my values, don't wanna touch them. Mhmm. That in some ways could be not good for LPs because you theoretically should back every company that's gonna generate a great return that's operating within the general laws of The

Speaker 1: United the worst possible managers like, I'm morally opposed to AI. I sat it out for ethical reasons. Like, that's why I passed on everything now.

Speaker 2: But

Speaker 1: That'd be insane.

Speaker 2: Any anyways. Yeah. So I'm sort of rambling, but I I think you get the

Speaker 1: Yeah. Generalization with the LPA and and and the vice clauses and whatnot.

Speaker 5: Well, that's that was the first place I was gonna start, which is the first thing is to always go back and and, you know, check the LPA cause usually there are some vice clauses in the LPA and you wanna start as broad as possible, but there's always gonna be an LP or two that you kind of are balancing. Do I I really want this LP, but they've got these vice clauses and so you have to balance that. If you're balancing that correctly and we can put that aside, I have seen a couple of GPs that actually focus on vice. Like, their their whole point of view Yeah. And their whole approach is to go after the vice opportunities, particularly because there's not a lot of capital chasing them. They're often really good businesses. Mhmm. And the with the limited number, you keep the valuations much more reasonable. Mhmm. And then that preserves a lot of the upside. And I think there's another thing that just naturally happens is we evolve as a, you know, as a when you think about The United States and where we've been historically over the past hundred years, we've almost had a little bit of a pendulum swing for certain things Sure. That are considered vice and now they're not considered vice anymore. Yeah. And then it also kind of just depends on the general mood I think. Know when the economy is doing well, you know you kind of have a little more leeway with some of the things that could be a little bit more in the vice category. When things get a little more restricted or when there's, you know, a certain administration that could be in, then you could see things kind of moving in the other direction. You know, think one of the things that I've looked at right now, don't I wouldn't consider it a vice per se. Although, if you go into certain gyms in, you know, Southern California, it could probably be a vice, which is peptides.

Speaker 1: Oh, yeah.

Speaker 5: Right? So when I start to think about peptides and how the pendulum is swinging with peptides, you know, we've got the GLP ones, which are peptides. Yeah. People may not know they're peptides, but they are. Yeah. And now we've getting we're getting a little more open to thinking about having peptides be a little bit more regulated, but regulated in the right way so that we can get the research necessary Yeah. So that people can now buy these on the regular market as opposed to the gray market.

Speaker 1: Sure.

Speaker 5: So that's one where I think, you know, the pendulum is swinging in the right direction partially because of the administration, you know, it's it's RFK junior who's really a proponent of peptides. So, you know, I think there's opportunities there and you just have to I think as a as a if I'm sitting with my LP hat on, right, I've got to think about what parameter I wanna put around the LPA and how restrictive do I wanna be. Because there's some great opportunities that, you know, I I don't really think of them as vice anymore in, you know, in in the twenty twenties.

Speaker 2: Yeah. No. Well, yeah. The other the other thing is like, if you're a VC invests in a vice company and loses money on it, then they're they're gonna like, if you're gonna do it Of course. At least at least put up good returns. So that's the other thing that's been driving more LP probably friendliness around a lot of this stuff just because a lot of these companies have been performing performing quite well. But anyways, this was great.

Speaker 1: Yeah. This was fantastic. It's great

Speaker 2: to meet you. Thanks for coming on.

Speaker 1: Thank you so much. Thanks so much for

Speaker 5: having me. Conversation.

Speaker 1: This is great. Let me tell you about Shopify. Shopify is the commerce platform that grows with your business and lets you sell in seconds. Yeah. Online, in store, on mobile, on social.

Speaker 2: I've First already time reading that, John.

Speaker 1: And now with AI agents. I don't know. I got too much going on today. We have a few more guests joining in just a minute. We'll see who's here next. We can give you the high level on the SpaceX launch for Starship's first orbital mission while we wait for our next guest to join.

Speaker 2: Elon Musk Next time there's a launch Yeah. And we know that that Starship's gonna be landing in the Pacific Mhmm. I say we try to get Tyler out Both. Splash zone.

Speaker 1: In the splash zone.

Speaker 2: In the GoPro. The GoPro. GoPro.

Speaker 1: What does that do? They already filmed these.

Speaker 2: No. No. But it would be it would hit way harder if it was Tyler behind the camera.