Siddhartha Ahluwalia 01:11

Hi, this is Siddhartha Ahluwalia. Welcome to The Neon Show. I’m your host and also founder of Neon Fund, a B2B SaaS focused fund investing in the most enterprise SaaS companies coming out of India, building for the world.

I’m super excited to have Raja Doddala on The Neon Show today. He’s Head of Venture Capital and Growth Equity at Churchill Asset Management. Raja, welcome to The Neon Show and so excited again to have you on the show.

Raja Doddala 01:39

Thank you for having me, Siddhartha. This is my, I think, the first podcast out of India. So thanks for the invite and thanks for having me.

Siddhartha Ahluwalia 01:47

Raja, I would love, you know, before I introduce you to the background, but I would love to hear from you. Right. What’s your background?

What brought you to the US and how did you came into Churchill? And then next set of questions would be from my end would be, what’s Churchill’s background? Right.

And what’s the broader industry that the firm operates in?

Raja Doddala 02:06

Yeah. Thanks for, again, thanks for having me. Like everybody, you know, a lot of people in my generation, I’m one of those people that made my way to the US from India at the age of, I want to say 22, 23.

And at that time, this was sort of mid to late 90s. You know, all the Indian immigrants at that time, I started in tech as a software engineer. I’ve done that for a few years, then went back to business school and took an interest in starting businesses inside of large companies.

And then, you know, that sort of progressed into corporate venture capital, investing in startups on behalf of large corporations. And then that sort of progressed into more and more into the venture ecosystem, you know, as a venture allocator now at Churchill Asset Management. And Churchill Asset Management is a $50 billion AUM private capital asset manager.

And Churchill’s businesses are private equity. We’re an LP in 300-odd private equity firms and largest private credit provider in the US for middle market companies. And venture and growth equity is one of the businesses at Churchill that I manage.

Our business at Churchill in venture and growth equity is we are an investor in venture capital funds, primarily in the US and a little bit internationally, but primarily in the US. And we not only invest in venture capital funds, but we also invest in startups directly alongside our venture capital partners.

Siddhartha Ahluwalia 03:53

And Raja, if you have to explain the fund of fund ecosystem that you operate in, what’s the broader ecosystem that is there in the US?

Raja Doddala 04:03

Yeah, if you think about venture capital, you know the source of capital for the venture capital firms, going back to a few decades, it’s really started out as university endowments, primarily being the LPs sort of, in a way, really a catalyst for venture capital ecosystem to grow in the US. But over the years, really over the decades, that kind of evolved into now, if you look at a venture capital fund, their LPs, limited partners, these are investors in a venture capital fund, would be typically university endowments or there’s other endowments that are not part of universities, but maybe healthcare institutions and large family offices. And then sort of the newest entrant in that space of capital allocators to venture is fund of funds.

And these are technically funds that invest in other funds. It’s sort of become a good source of capital for venture capital funds in that they provide a great service both for funds, but also for investors. You know, if you’re a large family office or even a pension plan that do not have the expertise to source and underwrite venture capital funds yourself, then a great way to get exposure to this asset class is to, in a diversified way, into invest in a fund of funds that they would source and underwrite and manage venture capital investments.

Siddhartha Ahluwalia 05:33

And how old is the fund of fund ecosystem in the US? As you mentioned, university endowments would go back investing in VCs approximately 40 years since the time of Apple.

Raja Doddala 05:46

Yes, yeah, yeah. So there’s a few that have been around 30 plus years, but not as many as endowments. But lately, you know, last 10 to 15 years, the business model has taken root in the US and also internationally. There are a lot of successful, fairly large funds of funds now.

Siddhartha Ahluwalia 06:08

And let’s say, in your opinion, right, who would be the top five funds of fund of funds on that list?

Raja Doddala 06:16

Hmm, that’s a good question. In terms of size, probably VenCap. They’ve been around a long time.

There’s one called Vintage Investment Partners out of Tel Aviv. And oh, I’m forgetting the large US one, Stepstone, is a large fund of funds. Sapphire Ventures has a sizable fund of funds. And then I’d put us in the, you know, sort of a somewhat large AUM.

Siddhartha Ahluwalia 06:51

Got it. And how the fund of funds have differentiated themselves from university endowments? Like, you are more open to private capital of hundreds of millionaires or billionaires who want exposure to this asset class, whereas university endowments are typically more reserved for the universities.

Raja Doddala 07:11

Yeah, I think those are, you know, slightly different purposes, right? You know, funds of funds are in the business of sort of, you know, capital management on behalf of other LPs.

University endowments or a hospital endowment, they’ll be investing the endowment of the institution, you know, among other asset classes they allocate to venture in managing their own sort of capital, you know, for the purpose of, you know, preserving the institution for the long term. I think different purposes, but operate somewhat similarly.

Siddhartha Ahluwalia 07:42

Yeah, got it. And for today’s podcast, we are more focused on the venture capital part of it, right? The seed, series A exposure, and especially, you know, on the emerging manager side.

So what according to, you know, Churchill’s definition are emerging managers and not emerging managers and what are the categories of that?

Raja Doddala 08:00

Yeah, it’s a good question. I think everybody has a different definition of what they consider emerging managers. In our opinion, it’s less about how many funds you’ve had, but we think it takes about, you know, 8 to 10 years for your portfolio strategy to sort of settle into one that really designed to take advantage of whatever your strengths are as a manager.

And that happens to be based on the sort of timelines and pace of deployment over the last, you know, couple of decades. Anywhere from 8 to 10 years and 2 to 3 vintages, assuming a 2 to 3 year deployment, you know, pace. You know, we’ve sort of had a rule of thumb fund 3 to 4 is when I think you sort of, trends start to emerge whether they’ve been good at sourcing and picking and helping companies that you’re no longer emerging. That’s kind of our rule of thumb.

Siddhartha Ahluwalia 08:59

Got it. And for Churchill how like, how much of your assets under management are dedicated towards venture capital and how much of that part is towards emerging managers?

Raja Doddala 09:09

Yeah, so Churchill has about $50, you know, odd billion in assets under management. Venture is relatively new, so it’s not significant. We’re not disclosing the exact number, but we have about 35 managers in our book.

And it’s fairly large in terms of relatively speaking in the fund-to-funds ecosystem, but growing. We’re allocating every year.

Siddhartha Ahluwalia 09:37

Got it. So out of the 300, you have 35 VC funds in, you know, where you are LPs in. And 270 are mostly sort of the nature of PEs.

Raja Doddala 09:47

Yeah, the 280 to 300, that’s PE firms and 35 or so venture firms.

Siddhartha Ahluwalia 09:57

Yeah, and if you can share like some of the known names in venture that you are investors in.

Raja Doddala 10:03

Yeah, so I think the way we think about venture is we think there’s two or three different products inside of venture with sort of different risk profiles and different holding periods and obviously the returns and risk. So seed and pre-seed we think is one product. And series A through D, which usually used to be classic venture capital.

And then growth and sort of all the way to the IPO, that’s sort of a third asset class we think. Our approach to investing in venture is we primarily have stuck to the first two, seed and pre-seed and that’s sort of one set of managers. And then, you know, series A through D is another set.

So for series A through D, we’re somewhat concentrated 8 to 10 firms. These are, you know, sort of platforms, you know, well-known Sand Hill Road firms, you know, the usual suspects. And that’s sort of series A through D.

And for seed and pre-seed, we’ve taken the approach of we think smaller managers are better suited to invest in seed and pre-seed. You know, we have a long tail of 25, you know, ish firms in that. And most of those we’ve added in the last sort of three years.

And when I say small, I think anywhere from $25 to $125 million. That’s sort of the range we think is suitable, best suited for pre-seed and seed.

Siddhartha Ahluwalia 11:34

Got it. So the current strategy is just for the audience, you know, repeating it. You have 25 firms, which are pre-seed and seed, where the fund sizes are from 25 million to 125 million.

And then you have 8 to 10 funds, which are series A funds, which are typically called now growth funds.

Raja Doddala 11:53

Multi, yeah, Well they are not, I wouldn’t say they are growth, you know, I don’t want to confuse sort of the classic growth firms like, you know, CO2 and, you know, et cetera. So we’re more class, you know, venture firms that are multistage. So series A through, I think first, the entry point primarily is series A.

Siddhartha Ahluwalia 12:10

Understood, understood. And these are funds which are more than 125 million in size and maybe go up.

Raja Doddala 12:16

Yeah, there’ll be, there’ll be, yeah, yeah. So sort of 500 to, you know, 2 to 3 billion is the range of those. I mean, there are some that are much larger than that, that are not quite a good fit for us for series A through D.

We sort of stuck to sort of 500 to 2 to 3 billion is the range. Then we also layer in additional capital directly into the startups alongside our funds. These are, you know, post-product market fit, sort of, you know, you know, the cusp of, you know, scaling, you know, sometimes series A, you know, a lot of times series B and C.

Siddhartha Ahluwalia 12:56

Got it. So let’s say a traditional, let’s say a hundred million dollar family office, which has to dedicate to a few fund of funds. How would they differentiate Churchill among the stepstones of the world?

Raja Doddala 13:11

Yes, so we have yet to take third party capital. We’re currently investing our own capital source of work for this strategy. The source of our capital is our nonprofit parent called TIAA.

Founded a hundred years ago by Andrew Carnegie, dedicated to financial wellness of educators and healthcare professionals that kind of work in nonprofits. But in terms of, you know, with any fund of funds, I think that if you’re an LP allocating to venture as part of your overall asset base, I think the thing to remember, that’s different about venture from either even private equity is that there’s a lot of dispersion between the performance of top quartile and bottom quartile. Not so much dispersion in private equity, but in venture.

So the most important thing to look for when you’re selecting a manager, a fund of funds manager as an LP, a family office, is do they, do they have demonstrated access to top quartile top decile managers and consistently? And are they able to get the allocation, the amount of allocation that they would need to make their portfolio math work? And do they have access to co-investments alongside the funds?

And the co-investments is a great way sort of de-risks companies later on in the life cycle is a great way to not only shorten the J curve a little bit, but also maybe a higher return because some, you know, a lot of the times co-investments tend to be lower in terms of fee burden. So those are the two aspects that I would look for if I’m a family office. Do they have access to top firms?

Are they able to get enough allocation and are they able to access co-investments? Those are the three things that I would look for.

Siddhartha Ahluwalia 15:10

And is getting an access to the, let’s say, A16Zs of the world is a tough or Lightspeeds of the world is it tough in the, in the LP world?

Raja Doddala 15:19

Yeah. I mean the, yeah, usually the top decile top quartile, because I don’t know the returns of those two firms you mentioned. But if you’re, if you’re a top quartile manager consistently, typically oversubscribed and it’s difficult to, to get access and especially enough of a chunk of that fund.

Siddhartha Ahluwalia 15:39

Yeah. And let’s say VCs, you know, demonstrate their value to entrepreneurs by providing go to market, by providing portfolio management teams. How do LPs or fund of funds provide their differentiation when competing for the top decile VC funds?

Raja Doddala 15:55

Yeah, it’s a really interesting question. I think I’d put it in a couple of different ways. Typically what’s been sort of touted as a desirable LP is two different things that people, you know, VCs look for.

One, how sticky is that capital? You know, is their investment time horizon long enough? Because VC is a long asset class.

So are they patient? Is that patient capital? And can we count on them as long as we’re, you know, I’m speaking from the perspective of a VC firm, as long as we’re performing according to sort of our promises, can we count on that LP capital long-term?

That’s, you know, that’s important. And then two, are they, are they forward thinking enough because venture is investing in, you know, sort of, you know, new technologies. Sometimes there could be cycles, you know, technology cycles that, you know, go, may not go according to plan.

There may be a vintage that may not be top quartile. Are they understanding of sort of the patience in, in understanding cycles? And then the other, you know, sort of lately, you know, there’s the other aspect of, are they helpful?

Just like founders look for how helpful the VCs are, are the LPs helpful? And the help from LPs could come in the form of, can they help introduce us to other LPs as I’m raising my new funds? Can, can I count on them for references?

And, you know, I’ve been told by some LPs that I’m somewhat of an N of one because I’ve been a software engineer myself and, and, you know, I’m part, you know, we’re a subsidiary of a large firm that’s also a buyer of technology. And we occasionally help portfolio companies of our funds, even close contracts. So the help can come in a number of different ways.

But yes, I think it’s a really an important question that’s being asked these days. What can you bring to the table besides capital?

Siddhartha Ahluwalia 18:10

And what’s your strategy and check size when you’re operating in pre-seed and seed and when you’re operating in A and Bs?

Raja Doddala 18:17

Yeah, that’s a good question. So for sort of the multi-stage firms, they tend to be large. So that’s, you know, sort of the, I don’t want to give you the exact number, but let me go back to seed and pre-seed first and then come back to the, to the A.

For seed and pre-seed, the way we think about it is anywhere from 5 to 15% of the fund size is sort of what we look for in terms of a check size, depending on our familiarity with the manager or experience with the manager and their track record. And for series A and B, that would, that would be a rather large check. So we wouldn’t, we wouldn’t write that large of a check, but it’s a sizable, much larger than a check that we were writing in a seed and pre-seed manager.

Siddhartha Ahluwalia 19:10

And let’s say for, for putting money in 25 pre-seed and seed funds, how many funds you would have evaluated seriously?

Raja Doddala 19:18

Yeah, good question. So we see two to 300 firms a year. And we’re very selective. So call it, you know, 8 to 10% of the funds that we see we commit to.

Siddhartha Ahluwalia 19:29

And what’s the process like? How many months or years you like to evaluate them? What typically meets your…

Raja Doddala 19:36

Yeah, definitely not years. Definitely not years. So we’re somewhat clear about what we look for. And we have a fairly, I sort of call it an open book test.

We don’t want to make it, we don’t want to make it an opaque sort of black box kind of a process. We have a sort of well-documented questions that we look for answers to. We openly share that with our managers.

And you know, usually if your data room is well-organized, we’re able to get most of it from the data room. And then we also, you know, check a lot of references. We want to see what your reputation is in the market, both from collaborating with other firms, but also what the experience will be for a founder to work with you.

And if your data room does not have all the information then we’ll, you know, we’ll get on the phone with you. And then we typically spend a lot of time with you in person. We’re one of those people that are somewhat old school.

We like to see you where you work and your team and the team dynamic. And we really get to know you as people, especially seed and pre-seed managers you’re underwriting as much as the track record, but also you as people. We’re forecasting how you’ll behave for the next 10 to, you know, a lot of cases, 20 plus years.

And we’re forecasting how, you know, what kind of decisions that you’ll make. We’re forecasting how you evolve as a person because when we bet, when we bet on you, that fund will take 10 to 12 years for it to come back and then another vintage. So we’re talking about a multi-decade relationship.

So when you’re getting almost like getting married with a person for multi-decades, we want to spend time with you in person and get to know you. And what we say to our managers is that we set expectations very clearly. We sort of, you know, we’re a small team, even though it’s a large AUM, we’re not a large team, the underwriting team, especially.

So we clearly communicate, we sort of have a monthly investment committee meeting and we will tell you whether you’re proceeding to an investment committee process or not. When that happens, it’s typically a three to six week process, more, you know, closer to three than six. Then we’ll tell you when we start that process. And then at the end of that process, we’ll tell you our decision.

Siddhartha Ahluwalia 22:09

Got it. And typically I assume this process would take what, two to three months from the start of the first conversation?

Raja Doddala 22:15

Probably. Yeah. I think if it’s not a fit, we’ll tell you immediately.

We’re able to rule out strategy fit and size fit and sector fit very quickly. If we didn’t rule you out in the first or second meeting, then yeah, typically a two to three month process.

Siddhartha Ahluwalia 22:34

Cool. And what are the vintages of these funds at pre-seed and seed that you come in? Like the funds between 25 to 125, do you usually coming in fund one, fund two, fund three or fund four?

Raja Doddala 22:45

Yeah. So a good question. We do do fund ones, not many. We do a handful of fund ones. We think it’s important to discover new managers and sort of bet on them when they’re before they, they scale. But typically, fund ones and fund twos are rare, but they do happen. But lots of fund threes, fours and fives.

Siddhartha Ahluwalia 23:11

Okay. I assume. So out of the 25, roughly five to six would be fund one and twos and 20 would be what fund threes and fours today?

Raja Doddala 23:20

Yeah, fund threes and fours and a lot of fives too.

Siddhartha Ahluwalia 23:23

But don’t you see the challenge there that between 25 to 125, the managers that are able to raise their fund three and four are able to scale beyond 125 million, probably raise like a 200 mil fund.

Raja Doddala 23:35

Yeah. I think some do and some don’t. Some believe the right amount of capital to, to, to produce better, you know, top tier returns for a seed and pre-seed strategy.

You know, some believe it’s about, you know, the top end of that is like 125, maybe 150. And if you, you quote scale beyond that size, you likely won’t be part of our portfolio anymore.

We think, you know, especially seed and pre-seed is sort of a boutique business and we don’t think it should scale to hundreds of millions of dollars. So if you end up one of those people that would do that, we typically would opt out.

Siddhartha Ahluwalia 24:17

Got it. And following this strategy, right between 25 to 125 million, the pre-seed and seed, what have been your geographical focus? I’m not even asking about the country focus, but if by country, you have to spread by cities, what would they be?

Raja Doddala 24:31

Yeah, that’s a good question. So in the US California still is the epicenter of the venture ecosystem in our portfolio. We’re in the US so, so, so we’re about 90% US, 10% Israel.

And in the US predominantly probably 70% California, even in California out of the 70% that we have in California, probably 70% in the Bay area and maybe 30% in LA an increasingly growing ecosystem. And then New York is probably 20 to 25%. And again, a growing ecosystem and then a handful that are in different cities.

And it’s very important to maintain, it’s very important to maintain that and follow the trends as to, to where the best companies are getting founded and funded.

Siddhartha Ahluwalia 25:24

And why do you think the ratio is such right today? Is it because the number of unicorns or the number of exits in these areas?

Raja Doddala 25:31

It’s the, it’s a network. It’s, it’s, it’s, it’s, it’s really a network effects sort of ecosystem. It’s the, you know, it’s the, it’s the, it’s a large companies, you know, you know, think about, you know, Meta and Google and the Stanford and Berkeley, you know, it’s, and it’s, it’s a big sort of self sort of reinforcing ecosystem of advice and capital and talent and universities and VC firms.

So it, you know, lots of, you know, thankfully lots of other cities are trying to grow that ecosystem, but it’s still, especially these days, it’s, it’s even growing, especially with AI. It seems to be that the San Francisco Bay area seems to be the epicenter of all the AI, you know, work that’s happening. But I think that’s, even other countries are, you know, trying to sort of get this going and it’s, it’s, it’s, you know, it’s, you know, eventually it’ll happen, but I think it’s really hard to build that network.

Siddhartha Ahluwalia 26:29

And what would be the sector split across these 25 funds?

 

Raja Doddala 26:33

We, we tend not to focus on sectors because we’re, you know, it’s, you know, this is a sort of a, you know, time, the timeframe for a venture fund is sort of a three year deployment period and then a 10 year, 10 to 12 year sort of exit. So we, we tend not to be sector focused, especially, you know, seed and pre-seed, we think you’re, you’re betting more on the founder.

 

You’re underwriting the founder more than a thesis. I mean, there are some that are sector focused seed and pre-seed funds. We haven’t done those yet.

 

The ones that, the only ones that we’ve been somewhat curious about lately and we haven’t done any is sort of the defense and space and in, you know, newly renewed interest in industrialization of the U.S. we’ve been studying that sector, but so far we’ve been mostly generalists not sector focused funds.

 

Siddhartha Ahluwalia 27:23

And since you mentioned that you are not sector focused, right? So would it be like your capital is spread more towards the generalist fund and not sector funds?

 

Raja Doddala 27:33

Yeah, I would, I would agree. Yeah. So what is interesting in the multistage firms these are series A through D, these are, you know, large platforms, they, they’re technically generalists when you look at the whole fund, but within that they have specialists partners, you know, one partner focuses on enterprise, one partner focuses on infrastructure, the other partner, you know, focuses on defense and FinTech.

 

So we’d like that in a sort of a platform, a series A, you know, firm where the firm can invest in, you know, most of the sectors that are part of the ecosystem, but they have people that have, you know, areas of interest and have credibility in that space that there are known commodity that because of that expertise that they see, you know, best of the deals. Seed and pre-seed, it’s more of a, you know, a person, the manager and their reputation, regardless of whatever the sector is, and they’ll see some of the best founders regardless of what they’re working on.

 

Siddhartha Ahluwalia 28:33

Got it. So if I have to summarize for our listeners and emerging managers who are listening, you prefer more sector agnostic funds than sector specific funds. Is that correct?

 

Raja Doddala 28:43

I do, but I think again, we tend not to be dogmatic, just like we, just like a seed manager really is underwriting the person. And the idea at the beginning, we’re the same way. We find a manager, you know, a seed manager that we really, you know, everything else sort of checks out in our criteria, but that person happens to be running a sector focused fund.

 

We’re not going to say, Oh, there’s a box that, you know, there’s no, there’s no sort of hard, you know, we tend to be somewhat open-minded more focused on the manager versus the focus on the strategy of the fund. Yeah.

Siddhartha Ahluwalia 29:20

Yeah. And you, since so much focus on the manager at pre seed and seed rather than performance. So what are those qualities?

Raja Doddala 29:30

No, those are not mutually exclusive. No, those are not, you know, the idea is that if we, the input, if we get the input, right, I think at the end of the day, we’re trying to build a top quartile, top decile sort of portfolio of funds and companies. So you, who we think is going to be the best manager, you know, invariably, the reason we think that way is because they’re going to be producing top quartile top decile performance.

Siddhartha Ahluwalia 30:01

And, and let’s say if you have to put some metrics to the performance, what would those metrics be for somebody in the pre-seed and seed, one, three, and four?

Raja Doddala 30:13

Yeah. So, so let’s say you’re a, you’re a seed and pre-seed manager, and this is your fund one. So there’s not a whole lot of metrics in a fund format, but what we don’t do is we don’t invest in managers in fund one if they had no investing experience whatsoever.

If this is the first time they’re writing a check that would never even pass the first email through us. So in that case, what we’d look for is typically people had had a long angel track record writing small checks into companies. And in a lot of cases, more cases than not these are, you know, folks that had worked at other firms have a track record from those firms that are attributable to them.

It just so happens that they’re branching out and starting their own firms. So that’s always useful. So without either one of those, we wouldn’t invest in a first time fund.

Now, if you’re a fund two, even though it hasn’t completely been resolved, you still have fund one. We can see how, what kind of companies that you underwrote, and we can see graduation rates, which are really important. If you’re a seed manager, you know, what’s been the graduation rate to series A?

If you’re a pre-seed manager, what’s been the graduation rate to seed? And who’s in those syndicates? Who’s marking you up?

And are they quality investors? And what are the business metrics of underlying companies? Have they been progressing at a pace that’s reasonable?

And those are different ways you can underwrite without a three to four fund track record. And in terms of funds with established track record, let’s say you are fund three, fund four, now you’ve had a few years, maybe a decade, 12, 13 years, then the classic metrics that we care about, there’s not one that’s more important than the other. So the three things that we look at is the IRR.

You know, IRR is important in that the purpose of the IRR is if you’re an asset manager that’s allocating to multiple assets, then you have expectations for what the IRR is. IRR is a great way to compare one portfolio to the other, one asset class to the other. Are you getting enough of a premium commensurate with the risk?

That’s the function of the IRR. And also the time period. The other metric that we classically care about is DPI, sort of cash on cash.

So typically 2.8 to 3 puts you in the top quartile depending on the vintage. And some vintages it may not. Some vintages it may put you in the top decile.

So that’s important. DPI is important. But also if you took 15 to 20 years to produce 3X, then that IRR is probably 8% or 10%.

So you have to look at both. And then if you haven’t had any exits yet and there’s not a lot of liquidity, then the TVPI. So this is the unrealized, both realized and unrealized.

And we also look at the quality of those markups if they’re unrealized. Are they paper marked? For example, I think 60% of the unicorns that were marked up in 2021-2022 are probably not going to ever realize their markups.

And so what is the quality of those markups? And what are the fundamentals of the business? So it’s not like one metric, but it’s a combination of different metrics.

Siddhartha Ahluwalia 33:39

Got it. And typically, because you have been invested in a few decades in these asset classes, what are the underlying assets that have produced real DPI across these funds? Like any sectors specifically, which you have appreciated as LPs? Has it been consumer? Has it been enterprise tech?

Raja Doddala 34:02

Yeah, I think so. Enterprise is probably the most likely in terms of distribution. If you look at a normal distribution, the enterprise is probably the chunkier part of the distribution.

And outliers probably have been consumer, but those are really rare. If you normalize it for the entire population, outcome per exit will be really, really small in the consumer. But the ones that do produce tend to be outliers.

So we tend to favor enterprise because I looked at some data, the exit data for the last 25 or 30 years. Median outcome is about 90 million, believe it or not. Obviously, there’s outliers, top, there’s like 20, 30 billion.

But medium outcome is about 90 million, 80 to 300 is the most likely outcome, and those tend to be enterprise companies.

Siddhartha Ahluwalia 35:04

Got it. And why do you think that is the case?

Raja Doddala 35:08

Umm. I don’t know why, but it’s really hard to create a company that’s worth enduring, and that’s worth multiple billions of dollars. If you look at all the public companies in the US today, companies that are worth more than a billion is about 300 companies. That’s it.

So it’s really difficult to produce a company that’s worth more than a billion and that will continue to be worth more than a billion. It’s just that’s the way the laws of capitalism works. So the most likely outcome would be sort of a $200 to $300 million outcome, which is why I think the fund size is important.

So if you have a $500 million seed fund to do a 3x net, so that means you have to produce $2 to $3 billion worth of total outcomes, which is very difficult to do.

Siddhartha Ahluwalia 36:10

Which means that even in the best case scenario is at the end of your ownership cycle, you’re holding 10% in across each of your winners. Your winners need to be combined $20, $30 billion in size, which is unrealistic.

Raja Doddala 36:24

Correct. And that’s very unlikely to do. So that’s why if you’re a $50 million seed fund, to do a 3x, you have to produce a total of maybe $220 million in total outcomes.

There’s a number of ways to do that, and they have a lot more optionality in their outcomes than a large fund.

Siddhartha Ahluwalia 36:40

And what are the number of portfolio companies that you have preferred in your pre-seed and seed funds?

Raja Doddala 36:48

Yeah, I think there’s not one way to do that. I think we’ve thought about that a lot. Some say they prefer lots of shots at goal, where they’ll have 60, 70, 80 companies, and they have very little, if anything, in the form of reserves for a follow-on.

Some have completely opposite approach where they’ll do 12 companies, and they’re super high conviction bets and high ownership. Risky, but also if that is their strategy and they’re able to produce the returns based on that strategy, and they’re able to get ownership in great companies, that can work too. But the most common we see is sort of 20 to 30 companies, maybe 40, and 30 to 40% reserves follow-ons for pro rata.

That’s the most common thing that we see. But what we tend to do is when we think a manager and their values and their sort of judgment and their reputation sort of checks out, we tend to be open-minded and be tolerant of different strategies inside of a fund.

Siddhartha Ahluwalia 37:56

And in your portfolio, you are saying that in your pre-seed and seed, most of the funds would have between, let’s say, on an average, 30 to 40 companies?

Raja Doddala 38:03

Yeah, 25 to 40 is the most common size we see.

Siddhartha Ahluwalia 38:09

Yeah, and if you have to compare your set of pre-seed and seed managers, what differentiates the top from the rest?

Raja Doddala 38:17

Yeah, I think it’s the age-old question. But at the end of the day, what is your unique, I don’t want to be corny, but what is your superpower? Are you someone who’s well-respected in a narrow field of data and open source?

I’m just going to pick that as an example. You’re well-known in that community, and you’re likely to see not all, but most of the great projects and pre-seed companies in that area, are they going to come to you? And are they going to accept sort of your check where your contribution is not just capital, it’s something that you add to the table?

And are you going to get meaningful ownership? That seems to be the biggest predictor. And the second is, when you’re a pre-seed and seed manager, are you resilient?

Do you have the patience to stick with that company for 10 to 12, sometimes 15 years? Are you able to… It’s a really hard work, and it’s a long process. And do you have the patience and do you have the wherewithal to help them?

And third is, are you able to get them to graduation? Are you able to introduce them to quality series A lead? And then maybe introduce them to some customers early on.

So those are the sort of leading indicators of what makes a seed manager great. And we look for those, and they’re somewhat qualitative. But what we’d like to do is we’d like to be right more times than not.

Siddhartha Ahluwalia 39:59

Got it. Speaking of current macroeconomic challenges, right, how do you think the fundraising environment is for both the larger set of the funds that you operate in, that are series A and B, and the smaller pre-seed and seed funds?

Raja Doddala 40:16

Yeah, no, there’s no doubt that the fundraising environment has become tighter. But I would say we’re sort of back to normal. We think sort of the 2020 to 2022, maybe even 2018, 2019 to 2022, sort of three to four year period, sort of an anomaly where people just, you know, everything was getting marked up.

It’s sort of a venture, you know, treadmill that, you know, assembly line that everything, you know, everything was getting marked up without a whole lot of proof. And everybody was raising funds. I think at the peak, there was like 7,000 venture funds.

Maybe I’m getting that number wrong. You know, thousands of venture funds, a lot more than the ecosystem can really bear. And even the ones that are established have, you know, raised a fund every 18 months, and some of them every year in multi-billion dollar funds.

That time is definitely gone. It may come back. You never know.

But now the power dynamic definitely shifted from the founder to the fund and fund to the VC. But the trend that I welcome the most is that we’re back to sort of process-wise a more reasonable process to underwrite, both underwriting companies and underwriting funds. And I’ve been hearing anecdotally, I don’t have the data in front of me, but the graduation rate from fund one to fund two apparently is at the lowest.

And fund two to four is even lowest, which I think is healthy. I think we’re normalizing back to sort of normal. As an allocator to VC we think that this is a great time to allocate because of sort of more reasonableness in terms of process and timelines and fund sizes.

But even the larger firms have been, I mean, I wouldn’t say they’re having a tougher time, but definitely not as easy as it was in like 21 and 22.

Siddhartha Ahluwalia 42:20

So what do you think the strategy should be for the pre-seed and seed managers in the current fundraising market?

Raja Doddala 42:30

I don’t know that I have a whole lot of concrete advice. I think the only thing I would say is be reasonable in terms of fund size. I think the smaller, you got to decide what is your minimum viable fund size is, meaning what is the minimum amount of capital that you need to get reasonable amount of ownership in quality companies and the number of companies that you think you need.

That’s 15, depending on your strategy, 20 companies, whatever. And if you think it’s 50, maybe think slow, maybe think lower. The lower the fund size, especially in this environment, the lower the fund size, the more the optionality is in the fund to create a three to four X outcome and take your time deploying that capital.

And also expect to spend, I’d be hearing anywhere from nine to 12 months fundraising. But knowing that it’s going to take that long, what I would do is get to your first close as quickly as you can. And don’t wait until you get to a big number for the first close.

If you’re raising a $30 million fund and if you have a line of sight in the 10 million, have a first close, start writing some checks so that the LPs that are still evaluating you can get a sense of the kind of companies that you’re able to access and the kind of ownership that you’re able to get. It’s easier to show them than tell them what your strategy is.

Siddhartha Ahluwalia 44:03

Got it. And right now in this environment, let’s say, how many funds have you seen closing down or pausing on their next fundraise? Has it happened with your existing managers?

Raja Doddala 44:17

I think it has. Not in our book, but I’ve seen some anecdotal data online that the mortality rate from fund one to fund two is like, I think we went from 7,000 or so active, I forget the number, is it 3,000 or 7,000 active funds to more like 1,500. So that tells me that a lot of funds either have decided not to raise their next fund or they are unable to raise.

But I’m also seeing the opposite. There’s a lot of new fund announcements, people that are branching out from reputable firms and starting out and starting their own funds. I’ve been seeing that as well.

Siddhartha Ahluwalia 45:02

You mentioned earlier about data room. What does a good data room look like to you?

Raja Doddala 45:06

Yeah, so we decided to write that down and share that with managers. A good data room, depending on how many funds you have, will have clear… First thing that we look for when we get invited into a data room or we get introduced to a manager, what are the top line return numbers? Your IRR, your number of companies, the fund size, vintage, number of companies in the fund, current realized, non-realized value, net of fees.

A lot of people don’t break that out, which is really annoying. That’s usually a bad sign when you have gross IRR and gross TVPI versus net. Make it very, very easy to find those.

Because a lot of LPs, especially LPs like us, we’re trying to target top quartile. If you have a track record, then if we’re not able to determine whether you’re top quartile or not, or it’s very difficult to get that from your data room, then your first contact with an LP is an unpleasant one. So I would make sure you have that.

And then once you pass through that gate, what we like to see is the quality of the portfolios. That means what are the companies underneath in the portfolio and how are they doing, their financials? Are they making progress?

What are the customer concentration? And then pipeline of your businesses. And if they’re close to profitability, what is the runway to profitability?

And who are in the syndicates? Who are the co-investors? And who are the references?

It’s not rocket science, but I think the easier you make it to find this information, the quicker and easier your underwriting process will be.

Siddhartha Ahluwalia 46:56

Got it. And any common mistakes that you have seen the pre-seed and seed funds make in their data rooms that you would like to highlight?

Raja Doddala 47:04

Yeah, the most common one, the most one of my pet peeves is make it really hard to find your top line performance where we have to put it in Excel and calculate it. That would really create a bad impression. And gross versus net.

Gross is meaningless to LPs. You have to have net of fees. And also, what are your fund drivers?

A lot of times it’s not obvious. You have 25 companies in a fund. What are the five or 10 that are really driving your markup, your IRR, your TVPI?

Make it super easy to find that. A lot of times they make it really hard to find that.

Siddhartha Ahluwalia 47:45

Got it. And now to the most exciting part of the conversation. How is Churchill thinking about or how are you thinking about India?

Raja Doddala 47:53

Yeah, so the way we think about geographies is we like to really do the work, show up on the ground, understand the ecosystem, understand the managers, and understand the syndicates, and exit environment, and the founder quality. And just like we were very deliberate in the US about geographical concentration, like 70% California versus 25% New York. What are those sort of dynamics in that ecosystem?

So there’s a lot of things that we sort of need to understand before we go into a market. We haven’t done that work in India yet. But India, obviously, it’s near to my heart.

It’s a place of my birth. And India is ascendant. On a world stage, tech has always been a strength of India.

But it was sort of transitioning slowly from services-based sort of economy into more innovation. I’ve been hearing great things about India in different cities, including tier two cities. So our approach will be, we’re really excited about India.

But we definitely need to show up and get to know people and get to know the ecosystem before we invest.

Siddhartha Ahluwalia 49:13

Got it. So I can think is maybe you’ll cut your first check in 2030?

Raja Doddala 49:20

No, no, no, it’ll be sooner than that. Usually takes about a year for us to get to know an ecosystem. So we hope to do that work soon.

And I think one thing that I’m trying to learn about India is the liquidity. The story, again, this is probably an unfair story, because it’s sort of very anecdotal, is lots of great companies, liquidity has been slower in the Indian ecosystem. I think that’s in the process of changing.

And, but that’s one area that I’d like to learn more about.

Siddhartha Ahluwalia 49:57

Yeah. So would you follow your same strategy as in the US, in venture, that pick up approximately 25 managers between 25 to 125 million, and then pick up 10 managers on the growth stage in India?

Raja Doddala 50:10

No, I don’t know that we would replicate. So we don’t, so we think of, we think of geography as a variable in our overall ecosystem. We wouldn’t replicate the same portfolio approach in an ecosystem on its own.

So we will sort of think about what weight in the portfolio does India sort of deserve, based on our current strategy. And within that, maybe we think about seed versus growth, but we wouldn’t have the same numbers. So the proportion of India in the overall portfolio will sort of grow over time.

I think we’ll probably start with a couple of managers, and then we’ll, you know, we’ll get to know the ecosystem, and then we’ll gradually increase that. That’s kind of, you know, based on how it’s going, you know, in other geographies that we entered, that’s kind of how it will go.

Siddhartha Ahluwalia 50:59

And let’s say if somebody has to think about your strategy, what strategy would be going to be in India, like, what was your strategy in Israel, when you opened up in Israel? Was it pre seed seed versus growth? How much were the fund sizes that you backed?

Raja Doddala 51:15

Yeah, we sort of stuck to smaller fund sizes, and we sort of, we had both. We have seed and sort of series A. So it’s pre-seed through series A is kind of what we did.

We weren’t very deliberate about the stage focus, more about the people. Again, we go back to underwriting people versus the strategy. So we underwrote people that we thought were simpatico with the way we think about investing, and we invested in those.

Again, who are they? What are, you know, what are their strengths? What is their superpower?

Is the fund strategy aligned with their superpower? We haven’t bet on any emerging managers there. These are established managers, you know, they had a great track record.

Siddhartha Ahluwalia 52:04

Got it. So these are managers, and how many managers would you have backed in Israel?

Raja Doddala 52:09

We have four.

Siddhartha Ahluwalia 52:12

Okay, and I assume all of these managers would then be in their 8th to 10th year when you back them?

Raja Doddala 52:18

Yeah, some longer. Yeah.

Siddhartha Ahluwalia 52:22

Got it. So I think if you’re entering a new market, I would say that can be a proxy strategy, for example, for India.

Raja Doddala 52:31

I don’t know, I’d be open-minded about that. So I wouldn’t know what the strategy is until I, you know, sort of learn the ecosystem. But that’s a generally risk, you know, on a risk-adjusted basis, a thoughtful approach.

But I wouldn’t rule out earlier. I mean, it’s every geography is different. I mean, you know, India is not as, you know, farther along, you know, yet.

I think it’s at the cusp of, you know, breaking out. So I don’t know that strategy in Israel would work in India. So we would be open-minded about how we would approach India.

Siddhartha Ahluwalia 53:05

And one last question, you know, before I dive into the next section, right? How do you think about the public markets in India versus public markets in the US?

Raja Doddala 53:15

Yeah, it’s really interesting. Public markets in the US have been, I mean, some people say they’re closed, they’re not. It’s just the criteria for, you know, what a successful IPO candidate has been changing and moving around.

So, you know, we’ve sort of had probably the longest period of, you know, lack of liquidity for privates in the US. But I’ve been lately hearing the opposite in India that, you know, if you have a software company that’s, you know, $50 to $100 million in ARR and growing at a healthy clip and on the way to profitability, you know, I saw a tweet the other day that said…

Siddhartha Ahluwalia 54:02

From Gokul Rajaram.

Raja Doddala 54:04

Yeah, Gokul. So we know Gokul well and he thinks it may be a better place to, you know, one question I would have, again, I don’t know this, I need to learn, is that, you know, what is the situation in terms of like repatriation of capital, you know, your returns back. So that may be a question that we need to learn.

But it’s an interesting thought from Gokul that India might be a better place for software IPOs than the US.

Siddhartha Ahluwalia 54:33

Got it. And on your personal side, right, you are interested in, I think, cycling, running.

Raja Doddala 54:39

I am. Not running, not running. You know, I’ve had a… I used to run then a bit of a cycling accident a few years ago and from then I stopped running. I strictly just cycling is my sport.

Siddhartha Ahluwalia 54:55

Right. So any form of cycling that you like specifically?

Raja Doddala 55:01

Yeah, I used to do road and mountain, you know, biking and lately it’s more road than anything else. But recently I’ve gotten into, I’ve got a new gravel bike. That’s sort of a new new trend here in the US and Europe and it’s, you know, tend to be a lot more fun, a lot more, a lot safer because you’re not on, you’re not out on the roads in traffic.

So I’ve been doing more gravel lately but, you know, historically been more road cycling.

Siddhartha Ahluwalia 55:34

Awesome. Thank you so much, Raja. It’s been an amazing conversation today.

I learned a lot and I hope my listeners learned a lot, right. Thank you so much for the amazing insights sharing your journey, sharing Churchill’s journey and especially your thoughts on, you know, what are you looking for in emerging managers?

Raja Doddala 55:51

Well, first of all, thanks for reaching out and inviting me on the podcast and I’ve been impressed with sort of the roster of guests and what I liked about your podcast is that you have, your interests are wide and really, you know, thought-provoking conversations, you know, from people in investing, people in government and the broader economy. So I’ve been, you know, I’ve learned a lot from your podcast as well.

Siddhartha Ahluwalia 56:14

Thank you so much again for being on The Neon Show.

Raja Doddala 56:18

Thank you.