Kindergarten Ventures’ Vanta investment, and building a new Strategy for Venture (with Thomas McGannon)
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Hello, Acquired LPs. Welcome to another installment of the LP Show. This is an episode where it was actually recorded for a different podcast. One of David's LPs in kindergarten ventures, Thomas McGannon, has a great podcast called The Unlimited Partners Show that he started earlier this year. Thomas is a dear friend of both of ours, and it was very fun for me to get to listen to this episode and not participate at all. But you

but you're doing such a great job with the intro Ben thank you thank you David what did you talk about with Thomas Thomas pinged me about doing this and asked if we could talk about our recent Vanta investment we did a SPV in close friends of the show Vanta together and Thomas participated in that and I

And I said, sure. And we spent a bunch of time talking about Vanta, but we also talked all about kindergarten, about how kindergarten intersects with acquired, this sort of new form of venture capital that I'm experimenting with now. The non-professional venture capital is what I'm calling it.

It's this rare opportunity to get to hear a GP and an LP talk about an investment thesis together. That's what I thought was the most interesting is you get to talk about all the very firsthand knowledge that you have from the company, from talking with Christina, from all the stuff we've done with Fanta. And then Thomas comes in as the appropriately skeptical investor and talks about how he did diligence and where there are open questions and how to rationalize price. It was great. So listeners, you're in for a treat.

We want to thank our longtime friend of the show, Vanta, the leading trust management platform. Vanta, of course, automates your security reviews and compliance efforts. So frameworks like SOC 2, ISO 27001, GDPR, and HIPAA compliance and monitoring, Vanta takes care of these otherwise incredibly time and resource draining efforts for your organization and makes them fast and simple.

Yep, Vanta is the perfect example of the quote that we talk about all the time here on Acquired. Jeff Bezos, his idea that a company should only focus on what actually makes your beer taste better, i.e. spend your time and resources only on what's actually going to move the needle for your product and your customers and outsource everything else that doesn't. Every company needs compliance and trust with their vendors and customers.

It plays a major role in enabling revenue because customers and partners demand it, but yet it adds zero flavor to your actual product. Vanta takes care of all of it for you. No more spreadsheets, no fragmented tools, no manual reviews to cobble together your security and compliance requirements. It is one single software pane of glass that connects to all of your services via APIs and eliminates countless hours of work.

for your organization. There are now AI capabilities to make this even more powerful, and they even integrate with over 300 external tools. Plus, they let customers build private integrations with their internal systems. And perhaps most importantly, your security reviews are now real-time instead of static, so you can monitor and share with your customers and partners to give them added confidence. So whether you're a startup or a large enterprise, and your company is ready to automate compliance and streamline security reviews like

like Vanta's 7,000 customers around the globe and go back to making your beer taste better, head on over to vanta.com slash acquired and just tell them that Ben and David sent you. And thanks to friend of the show, Christina, Vanta's CEO, all acquired listeners get $1,000 of free credit. Vanta.com slash acquired. With that, none of this is financial advice as always. And without further ado, on to the interview.

When you reached out at that moment, I was just doing angel investing. I had gone full-time on Acquired. I was running that. Fortunately, one of the great unexpected true blessings of my life was... It's always funny to say that, but I don't know how else to say it. Acquired, which I love doing and doing with one of my best friends in the whole world, kind of unintentionally became a real business. And so that had kind of just...

It recently happened and I was just angel investing in, you know, stuff that mostly came from acquired writ large, you know, either relationships through guests on the show or what have you, but also the community and the Slack community specifically. There are a number of companies I angel invested in that I just met recently.

the founders, because they DM to me in Slack, and then you DM me, you know, and that started this relationship, which was super cool, because you were not the only input, you know, certainly, you know, my partner in kindergarten, that was a big input to it, too. But you're a huge input in us deciding to raise a fund around this. And you were our first major LP to commit to that that first sort of experiment fund, and then a large LP now in our second larger

I don't know how you define real, but longer term fund, let's call it that. So I'm just so appreciative to you for being part of the kindergarten acquired investing journey and now Vanta. It's been great. Yeah, I didn't know that. I appreciate hearing that the drivel that comes out of my mouth sometimes has a real world kind of decision tree impact.

The decision to go in the direction of using podcasts as a tool for making investments and building partnerships, it just made all the sense in the world to me.

When you go and you find the smartest, most creative, hardest working people speaking in real time, and you can kind of like reach in and ask questions, build relationships. It was a very obvious decision to me. And so I'm glad that what was obvious to me has built itself into a real business and a real partnership. You've spent a long time as a venture investor investing.

When you stepped out into running kindergarten, what were some of the experiences that you had that you wanted to replicate? What were some of the things that you thought that you could do better than what your prior iterations of venture investing? Like basically, what did you see that might suck out there that you guys could help?

And even though kindergarten might be a small fund, it does end up, I think, setting a lot of the, I guess I would say all businesses start as small businesses. And I think that it's a reflection of the evolution of the capital formation. Like, what were some of the thoughts that you had when you guys set it up? Yeah, well, there are a number of threads we can pull on here. You know, the first thing I would say is that I don't think I had that thought that with kindergarten,

We weren't really thinking about doing things better than at least how I had done venture in the past and the traditional way of doing venture. But we were very intentionally thinking about doing things different. You know, my goal, and I think we are very much a coexisting player in the ecosystem. Life is long. You can never predict what will happen. But I would be very, very surprised if what we're doing ends up disrupting traditional venture in like a major sense. I think it's very...

very much co-existed, you know, a complementary aspect to capital formation and traditional venture. My set of experiences at the firms I'd worked at and then also observed and been close to, I do think one thing that's universal in

an investing partnership is the partnership is super important. And we talked about this a lot, you know, in partners in our last episode we did together, the first unlimited partners episode. So that was like a very, very kind of intentional focus of, you know, partnering with Nat, starting slow, having this be a informal thing and see where it goes. And that's been, you know, glad we went that direction. The partnership has been going great so far, but in terms of the different versus traditional venture. So, um,

There's just a number of elements that kind of were all coming together right around that moment that I saw. One, and certainly very...

was the kind of enabling technology, if you could call it that, the enabling platform of AngelList and AngelList funds. The first kindergarten fund, as you know, ended up being $2.8 million total in the fund. Our intention that we set out was to raise $1 million. We wanted to create a $1 million fund, which

That just would have been completely impossible. There's no way that would have worked in any way, shape or form before the AngelList fund administrative platform, which had really only matured, you know, and it's existed for a few years, but it was only like,

Getting to a point where I felt comfortable as a former, quote unquote, professional VC fund manager being like, okay, you know, there's some compromises that that we're going to make by doing this. Everything is a trade off. But like, it's viable that we could run a fund on this platform, especially a small fund. That was certainly one is like, okay, this is fine.

possible. You know, and then two, this dynamic had existed for a while, but I was seeing it more and more in my angel investing and around acquired that I felt like there was room in the venture ecosystem for, like I said, complimentary capital to the big traditional venture fund players. And one of the hardest parts was

probably the hardest part reflecting on it about my career in quote unquote traditional venture is at the end of the day, every round is a zero sum game. Like if you're a sizable fund, you really need to lead rounds. I did plenty of partnering and splitting rounds and all that, and that can happen on the margins. But like really, truly, if you want to be a great fund manager and a great fund,

You need to lead rounds in the best companies and the best companies tend to be very competitive. And so it ultimately boils down to like, you know, answering a very simple question, which is why is an entrepreneur going to take your money over, you know, instead of Sequoias or Andreessen's or benchmarks or, you know, founders funds or what have you.

And frankly, most people don't have a good answer to that question. A lot of people have answers to the question, but they're not good answers. And for pretty much my whole career in venture, I don't think I had a good answer to that question. What angel investing and stepping outside of that dynamic

opened my eyes to was there's this whole different world where it's not instead of, you know, it's not a zero-sum game. It's not take my money instead of Andreessen's money. It's take Andreessen's money and take my money. That is really a core component of what we're doing with Kindergarten. So with a million-dollar fund, I mean, you're not doing this for the economics of the business

How do you think about the time that you put into kindergarten and the relationships that it can build with companies, with other capital partners? I think that there's something really strategic in my mind about the way that you're building kindergarten, and I'd love to hear you riff on some of that.

Yeah, yeah, yeah. You know, that first fund, you know, there's only so much on any dimension you can accomplish with a million dollar fund. That was very much intended to be an experiment of like, let's just see if some of these hypotheses we have, like, is the AngelList platform viable? Can we do this while Nat and I both have very consuming full time jobs? And not think of this as like our hobby on the side, but as a

integrated part of all of that in our ecosystem, which I think is your question that we'll get into in a sec. And that experiment went well. Now, as you know, our current fund is $12 million plus. And with a few SPVs, including this Vanta investment, we're going to have significantly more capital under management. What I was seeing through Angel Investing and what Nat was seeing as a founder, as kind of a leading founder in SureTech in a specific space, was that

We had all of these opportunities to have relationships with other founders and other companies that were great companies that were raising great rounds from the best venture investors. And we had opportunities to invest capital, but also just as important be have relationships.

business and personal relationships with those companies. The easiest to illustrate on the acquired side, you know, guests we would have on the show, our sponsors on the show, we would have venture capitalists on the show, and they would be doing, you know, rounds, and they would want to invite us along, say, you know, GP at XYZ firm, I'm bleeding around at this company.

Of course, you know, I'm going to do 70, 80% of the dollars into the round, but we leave some open for value added angels, other folks, you know, you have this great platform with acquired, with the podcast, with the community. We'd love to have you as part of it. So we were seeing, um,

literally like the VCs invite us into deals. That was a very different experience than the zero sum game of before. But the companies too, you know, our sponsors, you know, our guests, you know, they'd want to have deeper relationships with us. They'd ping us and say, Hey, we're raising a round. Would you be interested in being part of it? Would love to have you or, or sometimes even, you know, we were getting folks saying who are founders saying, Oh,

You're seeing such great deal flow. Let me know when you're doing deals. I'm angel invest as well. I'd love to come in and be part of it too. And so this is like kind of we're thinking like, man, kindergarten could be a way to just tie all of this together and do it at a much bigger scale than we could do with our own personal balance sheets.

When you and Nat are building the top of funnel and sorting through like what's going to make an interesting investment for kindergarten, what does that process look like? What do you guys usually use as your way of communicating? How do you kind of articulate a priority stack so that the other person really gets like what's most important? What's kind of nice to have in an opportunity? Yeah. Yeah.

Well, I can tell you what we don't do, which is what traditional VC firms do and what I used to do. We don't have Monday meetings. We don't sit together. One of the firms, I won't out them. One of the firms I worked at in my career, I actually love this. This is great. They ran the whole firm on a whiteboard. So they had a whiteboard and conference room.

And the Monday meetings would happen in that conference room. There were doors on the whiteboard. So the rest of the week, the doors would stay closed so that other people didn't see it. And literally, the whole firm, the portfolio company, the active portfolio companies, the pipeline of deals that the firm was prosecuting and ranked order, it was all just there on the whiteboard. It'd get together. It was just funny that they did it on a whiteboard. But every firm does a version of this. You talk about the portfolio, what the needs are, who's raising. You talk about

All the deals that, you know, every partner is interested in and, you know, what are the highest priority and you align. That is not what we do. Not what we do at all. Very intentionally. I don't want to claim yet, you know, we don't have any real performance on the board. We're still very early. So I don't want to claim that this is like,

going to work necessarily. But when we meet and interact with companies, it's not in the context of they're raising a round, they're coming to pitch us and they're presenting, you know, their deck and they're trying to raise money. We get to know these companies and these founders in a very, very different context. To speak to my side, I'm

I get to know sponsors on Acquired, guests on Acquired. I see, I interact with them. I interview them on the podcast. So I know them in that way. And then I get to see how does the Acquired community, how does our listener base react to these companies for our sponsors? What are the click-through rates for, I guess, how many people ping me after the episode and say, gosh, that was amazing. I would love to...

connect to it. You know, I can help with XYZ. How many VCs ping me and say, that was awesome. Can you intro me to the founder? I want to lead their next round, you know? So I just kind of have a natural sense. And then, you know, for the sponsors to have a business relationship with these companies, I know how they are to work with.

It's just pretty obvious to me which are the ones that we want to put money behind. I turned my camera off, but I'm smiling really big right now because the data that you're pulling together through that process, I think it's so differentiated. I think...

In many ways, you're getting to see what it looks like when people don't think they're being watched. Like you get to see into a business's communication funnel in a way that I just I don't think is even possible in a traditional fundraising route.

No, because it's performative. Precisely. Yeah. Having the opportunity to build that authentic, and what does authentic means? It's not performative. It's something that is spur of the moment. It's truly like what these people are, what these companies are, and it being like hard data. If you're talking about how

much everyone loves you. And then through the process of working with founders, having them as customers, seeing the way that your community relates, if you're seeing that that's not true, then I think that you have a very special way of making the exhaust of your business with the podcast kind of manifest itself into what I think is like really interesting capital formation, circulatory system stuff. So let's take Vanta. Let's get into Vanta as an example. I mean, it's

The foremost example in our portfolio. I mean, it's such a beautiful case study of this. When did you meet Vanta? What was that time zero? Yeah, so I'll take you through the whole story.

Ben and I knew of Vanta. We knew of Christina Cassioppo, the founder, for a long, long, long time. She had worked as an analyst at Union Square Ventures back in the day. This was right after I left New York, I think she joined, and I joined Madrona. I never actually connected with her, but she blogged, and USB is so public, and I had, of course, heard about her. And then

you know, when she left USV and went to go start something and did YC, we tracked her and she's still a prolific blogger, but we never actually met. And Ben and I, you know, both very familiar with, with her and her work. And then one day, Patrick O'Shaughnessy from invest like the best, who all of us here are friends with, he sent Ben and me an email and he said, Hey, I invested in, in Vanta and Christina. She's, she's pretty awesome.

She wants to meet you guys and she loves Acquired. Maybe on Twitter, we'd had some interactions. I knew that she was a fan. She loves Acquired and she wanted to talk to you guys about sponsoring. So that was how we first directly connected with her. We love all of our sponsors and many of them are like this, but she was just a dream to work with. We interacted directly with her. And we met other people in the company too. She was so clear about...

what the Vanta business is, why it's compelling for founders and companies to use Vanta, why our audience of primarily founders is a great fit. She was just wonderful to do business with, as was the company.

It was very smooth and easy. So that was the sponsorship process. And then shortly thereafter, the company was raising the round. She sent Ben and me an email and said, hey, this was right as kindergarten was just getting going and said, hey, we're raising this round. I love you guys. I'd love to have you be part of it if you'd be interested. No pressure. Obviously, you'd understand you'd be small checks. No big deal. And so kindergarten invested $100,000 out of the fund in that round. I think that was what happened next.

And then we just got to know her better through the sponsorship. And she invited us to a Vanta All Hands meeting.

This would have been, if I remember my timelines. In the spring of this year. I remember listening to it. I was in Singapore. It was like 100 degrees and I was on a long jog and I was listening. It was like in all hands. It was right before you decided to start the podcast. It was, yeah. Just a couple of days, actually. Yes. Yeah. So she invited Ben and me. Ben was in town. It was when we did the Altimeter episode with Brad. Yes.

That's right. We had told Christina that Bam was going to be in town. We'd love to get together. And she was like, actually, we're doing an all hands. Why don't you come by and we'll do a little fireside chat. I'll interview you guys. We ended up releasing it as a LP episode, but she didn't ask for that. That wasn't like the intention. We just thought it was so good. We were like, great, we'll bring the microphones and we'll record it if it ends up being good.

So we got to meet the whole team in person in the office and just had a great and we were so impressed with everybody. We got to meet Matt Spitz, the head of engineering who then came up. They were doing a for our arena show that happened a couple months later in May. We invited Christina to come up and do the interview portion on stage. She

She couldn't make it because they were doing what we did in March, I guess it was, was the regularly weekly or biweekly all hands at the office. They did their annual offsite down in Palm Springs, like the whole company flew in from all over the world that, you know, obviously they were leading down there.

Matt, who we met at the All Hands, he did a turn and burn. He flew up from the offsite in Palm Springs up to Seattle to come to the show and then flew out that night to go back to Palm Springs. Anyway, I say all this just to illustrate the depth of the relationship and how none of this in my career as a professional venture investor would have...

been any part of the equation and so then when they when vanta is raising this this addition to the series b so so the round that we invested out of the fund was sequoia led the series a and craft and and david sacks led the series b in april and april beginning of may of this year in 2022 and

We talked about with Christina on our sponsor slots this season. It was literally like, I think, the best round that any company has raised of 2022 so far. It was $110 million Series B and a $1.6 billion valuation. And so Christina pinged us kind of late this summer and said, hey, we're going to do a second close of that round because a bunch of LPs and the VCs are interested in putting in more money, you know,

If you have any interest, would you all like to be open to putting more money? And I was like, well, probably not out of the fund because we're small. It's not our strategy. But let me ping our LPs and see if we could have interest in putting an SPV together. Hence, Thomas, why don't you take the story from here? I'll be honest. When the update came across that you guys were doing an SPV here,

I was going to let it go by. I was busy with other things. We would not be talking if you hadn't reached out and said, hey, Thomas, I think that this suits you guys really well. I think you should take a look. I mean, I had definitely been familiar with Vanta through your...

relationship as them being a customer, same with a lot of podcasts. And again, just kind of referring to the network that gets built and the kind of liquidity that facilitates amongst talent and customers and capital was...

something that you did a really nice job kind of helping me get focused on this. It came at a really good time because a lot of the conversations that I've been having with my clients, the families that I work with, they're asking for cybersecurity investments. They see the breaches, they see the compounding nature of the problem and the value that is encapsulated in a secure digital estate and wanting to invest in that.

Personally, I've struggled a lot with cybersecurity investments. There aren't that many high quality, like generational companies built here. A lot of times it's because people try to build force fields. And

And building a force field, it's just an ephemeral advantage that you could potentially build. And so the nature of the investment started to look really attractive because it was something that I knew I was being asked for as I started to do my due diligence across my network, reaching out to investors.

general partners that have lots of insight into their customer subset, you know, fast growing, a lot of YC backed companies that are just getting to that point where they're winning customers. And this is table stakes. This is an expectation. Hearing some of those founders say, oh my gosh, like Vanta is a verb. All of our portfolio is using it. It really started to

kind of wet my enthusiasm because I thought that you could build what initially today is a, is a product company with SOC 2 compliance. But eventually I think, I think it can evolve into, into a platform company as in. So anyways, yeah. We're,

30-40 minutes in yet we haven't even talked about what Vanta is as a company yes we should probably do that this is also what got me so excited you know I had way back when I was at Madrona in Seattle I had done some some cyber security investing you know that was like 2014-2015 and

And I felt the same pain as an investor that you're describing, Thomas, which is like, clearly, this is a massive market, huge need that any company writ large, any person, any company needs cybersecurity. It's so obvious the need. It's perfectly ubiquitous. Everyone needs it. Yes. But the problem with the industry that I found in investing and I think, yeah,

has mostly still been true to this day is that it's just all, you know, it's all FUD. It's all like building force fields, as you say, you know, it's, it's teams coming out of the NSA or the IDF in Israel, you know, and these companies end up either looking like services companies or, you know, they build the latest and greatest force field that works until, you know, something else comes along that's better. And,

And so it's just this very difficult space to build actual durable products and moats in. And then here along comes Vanta. Vanta is explicitly, Christine would be the first person to tell you, we are not a security company. We're not from the NSA. We're not building force fields here. They're a security monitoring company.

It's this had this aha moment for me and getting to know them and the product and seeing the uptake in our community and the rapidity of clicks on the links in the show notes, but that your customer adoption and they're adding hundreds of customers every quarter. It

It's very much like a Datadog type situation. Like they're not building the force fields, they're monitoring the force fields and everybody needs that. The topic of observability was one that really dominated the last year that I spent as a public hedge fund manager. These are companies like Datadog, like Splunk, like New Relic, AppDynamic.

Having visibility into a digital estate, knowing that metadata that speaks about the software that you're working with, that speaks about the process that is being run. I think about the internet as this vast trove of data and you need some kind of process of synthesizing and curating. And that's what I think podcasts are so cool. Well,

in a similar way, monitoring observability, seeing how your software components, especially in an increasingly fragmented services-based, very ephemeral way that we build and run software, the importance of having monitoring instrumented throughout your organization and the fact that this is

getting to a scale where human hand-drawn whiteboard Excel processes, screenshots, it just doesn't work. It's breaking at an accelerating rate. It really gets me excited looking at, you know, I mentioned earlier,

How I became so in love with software was hearing the Salesforce journey, the way that the CRM has been stood up as a pillar of kind of data insight action and believing that as software eats the world, you're going to have multiple other platforms

grow and evolve their point of view for how this problem gets solved and where to insert themselves. I found it really compelling. It has to be software at this point. I mean, by the time this episode comes out, our acquired episode on AWS will be out. Part two of the Amazon saga. Part two of, I'm sure, many to come over the years. But the story of AWS. At this point, you know, AWS is just

One cloud provider is just the infrastructure layer, the base layer for building, I would say, a technology product, but really anything. Everything runs on AWS these days. There's other cloud providers out there too, and lots of businesses of any scale use multi-cloud. AWS has hundreds of different services, and that's just the infrastructure layer. So like,

understanding like are all of those services, you know, do you have them configured correctly? Are the right access protocols on there? Who has access to the data? And they're like, that's the infrastructure layer. Now layer on the like vast diaspora of application and software, you know, middle layer products between your infrastructure and then your end product. You know, you've got hundreds to thousands, literally thousands of different services

software products that all have access to data that all have security vulnerabilities that weave together to comprise the products and services of like every industry in the world right now like there's no way that a team of humans can keep track of that

No. And I think that one of the pieces of this investment thesis, which is to say like investing in compliance automation broadly that I really like is as I look at some of the notable breaches, I was listening to the Okta earnings call yesterday, and there's a lot of conversation about some of the customer breaches that they've had to deal with. And it's not Okta software that we're principally talking about. We're talking about software that is in their

supply chain. And so it's like, you know, when you come home from school and be like, Mom, like I was doing this, but the other kids were doing that, like, you're responsible for what those other kids are doing in your cloud software estate. And so what

What expectations can you put in place to ensure that the cloud services that you're bringing in are being run in a compliant, defensible, and also like in an organization where they have a culture of compliance? I think one of the things I really enjoy doing

with an investment thesis is talking to consultants like the Capgeminis or Deloitte's that have seen, you know, dozens of implementations of security programs and can talk about like what as a people process technology, what works and what doesn't. And the thing that I kind of realized in doing these calls through Tegas was that

Another great friend of Acquired and Unlimited Partners. What Mike and Tom have built there is so cool. And the acquisition of Canalys, I really think that that's the generational financial service provider technology layer. It's going to be very, very cool what they're building. But in any case, in talking to these experts that Tegas sets up, you really come to appreciate that the

The best that you can hope for when it comes to cybersecurity is to have a culture of compliance. And that is something that gets not, you know, snapshot in time once a year. It's something that is continuous. It's something that is part of the DNA of the way that you build, of the ways that you communicate. And by adopting something like Vanta,

And there are other competitors. And that's something that as an investor, I take very seriously. But I think that this layer could eventually be a very large kind of pillar in the digital estate. One thing we've learned, I've learned in the past several years, I catch myself whenever I'm about to say something is inevitable or I can't imagine any future where this doesn't exist. I'm like, oh, well.

None of us know anything. And strange outlier events can come to pass, as we all know now. But I think it is very, very likely in the future that this is a very large category of software because it's very hard for me to imagine. Again, never say never, but it's very hard for me to imagine that you're not going to use software to do this. Yes.

I don't think that there's any question about whether this is an automated instrumented solution. I think for me at the foundational layer, it's like when I make an investment, I like to think about it like Jeffrey Moore has done.

Kind of his stack of what a business is. At the low level, it's the infrastructure. So what are the first principal inputs that go into the world that your business is executing against? And so here, this is the infrastructure layer is software eating the world and a cloud-dominated software estate. What sits on top of that is a business model. So what are the products that you're building to serve to your customer base?

How does that draft on the wave of what's occurring at the infrastructure layer? And then on top of that is the operating model. Like how are you going to market? How are you communicating and pricing and creating and capturing value? And so at the low level, the infrastructure of what compliance automation executes against, I don't have any real concern there. Where I start to ask questions is,

This opportunity will exist. This is a when, not if. But is this going to be a compliance automation company that captures this kind of ingest and process communication layer? Or is it going to be something else? Is it going to come from a monitoring type solution like a Datadog? Is this...

tool, something that can be built and appended into like a service now, perhaps. Because right now what Vanta is, like it's a tool, it's a product. I think that there's a really exciting future where it does mature into a platform and then it has a lot of value that I'd love to, maybe we can talk about grading of this towards the end, but whether Vanta or one of its competitors

owns this opportunity. They created the category, but they are not guaranteed to win it. And I think that when you look at the depth of integration, the sophistication of the data and the flows and the processes that other businesses in orthogonal parts of the data journey have, there is a real question in my mind whether this is an opportunity that's captured by the players that are creating this category.

People who are familiar with Vanta are probably wondering why we haven't brought this up yet, SOC 2 and compliance. Probably these days, if you hear Vanta on an acquired episode or an Invest Like the Best episode or out there in the world, or if you use Vanta at your company, which if you don't, you should, you are probably using it to get SOC 2 compliant. And that's a really interesting

interesting kind of aspect of how this market has developed and what the go-to market that Vanta pioneered, there are these security compliance standards of which SOC 2 is the kind of broadest and most well-known that most businesses are going to want to have.

And the way before Vanta and its competitors, but Vanta was the first to do this, the way a business got SOC 2 compliant was you hired some auditors, either independent auditors or Deloitte or Accenture or somebody to come if you're a bigger business, to come in and audit your security infrastructure and protocols and all of your software supply chain.

And then they would issue a compliance report and say, okay, you are now SOC 2 compliant. Same thing for HIPAA and healthcare or GDPR in Europe for data practices. What Vanta said is we can actually use that as our go-to-market channel. We will be the software product that won't actually do... You'll still have an auditor that we partner with that you bring in, come in and do the certification to get the compliance certificate.

But rather than having a team from Deloitte come parachute into your company for a couple of weeks and rummage around, do all of the work via software and automate it. And then the compliance gets much, much easier, at least the burden of compliance for you as a company and especially ongoing in future years when you renew.

And so that's been the go-to-market strategy. I think this is super cool because eventually we want to, and I think Vanta and the whole industry and its competitors can evolve into that big vision we were talking about a minute ago of security monitoring, continuous security monitoring, the data dog for security, quote unquote. But I don't think data dog or ServiceNow or whomever, certainly over the past several years,

They haven't been willing to say like, oh, we're going to go get into the compliance certification business. We're going to go do SOC 2 audits. So it's been this cool little insulating bubble that they've been able to build the business up within. Now, will all of that change now as Vantus and its competitors have gotten... Clearly, this is a very big market. They've gotten quite big. I'm sure those larger companies that you mentioned that we've been talking about are paying attention to the space. But it was a really elegant way to start the company.

Yes. I think that initially when I started my research and I heard people say, well, and these are investors that had invested earlier in the company and have been observing it for a while, they said, gosh, like we really would like for this whole process to be automated. I mean, what Vanta does is they'll automate up to 90% of your processes. But at the end of the day, like...

SOC 2 compliance is an AICPA certification. These are auditors that are crafting the rules. And then I spoke with somebody that does security audits. He talked about how people are looking for the answer. And an auditor will always tell you that there's no way that you can bring me the answer directly.

when I first sit down, the answer is found through the process of examining what kind of a business that you have and how you're approaching your compliance frameworks. And so I think that, you know, as I look out at potential competition from other incumbents, I do think that the fact that this isn't completely automated, the fact that this is

Well, she made a very smart decision that none of the other early competitors to Vanta did.

which was that she and the early Vanta as a company, they partner with the auditors. The Vanta value prop is not, we are going to take all of these human auditors and we're going to turn all of this into software. The early competitors, this is what they were saying. All these audit firms are gone. This is all going to be, you're going to click buttons and then you're going to get your audit. What Vanta said is, we are going to turn into software the plumbing, the monitoring, the work, the tools, right?

And then we'll partner with, you know, auditors and audit firms and they will do the audit. Because as you said, the audit is a human opinion. And that was the way the industry worked. So what that did was two things. One, you know, it didn't piss off the auditors because it would threaten their business. You know, the way their other early competitors, you know, was a threat to their business. But also, like you said, like it's actually not

the right way to do things with the audits themselves to make that totally software. The auditors had a very good point on that. The other thing it did, though, it's funny you're talking about the go-to-market, it enabled, especially for SOC 2, all of these companies, younger companies, startups or younger and smaller companies, to

using Vanta enabled them to go get SOC 2 audits in a way that they couldn't before. Because like, you know, you're a starter. You're going to bring in Deloitte or even, you know, an individual solo practitioner. You're going to bring them in into your company for weeks and weeks and like,

have them audit your security practices. Like, no, of course you're not going to do that for cost reasons, if nothing else. But with Vanta, you can say like, oh, no, no, all the actual like work, the tool that we just do that with software now. And we can just buy Vanta and then have an auditor come in and we can be a seed stage, series A stage startup. How do you think that Vanta will perform in the current environment?

the weather conditions that we're all managing through. Yes. So far, it's been good. They've been hitting plan through 2022, which is great, or even slightly exceeding, which is great.

Once you start getting compliance certifications, especially SOC 2, you're not going to stop. It's very hard for me to get a match unless like a business pivots significantly where you're like, well, I have been getting SOC 2 compliance. I don't think I'm going to do that in the future. Like if you work with any customers or partners of any scale, especially in anything financial services related, which is pretty much

every product and service in some way, shape or form these days, you're going to need this. And, and,

And certainly you're not going to take it away. Your partners and customers would be very unhappy about that. The risk to your revenue is huge if you were to take it away. So I think it's a very sticky product. I think the risk in this weather climate to, as you say, to Vanta is if a bunch of their customers go out of business or pivot to something else, which I'm sure will happen unless...

things completely stabilize or, you know, turn back up in the coming months, which could happen. But if that doesn't happen, if we continue into sort of a protracted, challenging weather conditions for the economy and for startups, you know, for sure that will start to happen, I think. How do you think about it? This was a big piece of how I thought about making the investment. I think that by working with companies who need SOC 2 compliance as a way to, you know,

their revenue. Like this is a revenue enabling product or service for their customers to purchase. I like that a lot. As I've been listening to public earnings calls, there's a lot of focus on rationalizing the existing footprint. And so if you're a usage based model, something, you know,

Like a Datadog or a Snowflake, MongoDB talked about how in their cloud native or digital native customer group, they were seeing some slowdown, just the rationalization of that footprint. But the binary nature of do you have SOC compliance, do you not? And is it a critical piece to whether you can generate revenue?

I really love that mission-critical nature. I think one thing that Vanta does really well that I would love to see them continue to perfect is finding ways of standing up SOC 2 compliance certification as an announceable event for their customers, celebrating that and also affixing the name Vanta to that event

Achievement, making Vanta a verb that states, we take this seriously. This is part of our compliance culture. I think that that is a way that they can both help drive customer success, but also de-competing.

deepen the commitment at that organization to Vanta. One of the individuals that I spoke with through Tegas used to work for one of their competitors. He's now the director of compliance for a publicly traded learning company. And now I think what's important to remember here is like, this is somebody who has built a career building the processes and practices and manuals for how this works. So what's easy and achievable to this individual is

might be like very, very difficult for others that haven't been so focused. But his opinion was what Vanta is right now is a system of record. So you go to Vanta to see that you're

processes are functioning the way that they ought to. But that is something that, you know, with the right kind of skill and focus can be taken in-house. Like once you have a successful SOC 2 compliance program put into place, it's not rocket science to internalize some of that, the product that Vanta builds. Now, where it becomes impossible to pull out is if it can graduate to a system of

engagement, where through automation, through dashboarding and really robust integrations, the organization throughout has Vanta on their screens, where it becomes something that as a methodology of a

Maybe not daily, but weekly, monthly use that people are spending more time in Vanta, which is just going to be a very necessary piece for them to build on to graduate to platform. But I think that for me, like the real determinant of success for Vanta and for the investment is going to be whether they can make that transition.

I agree 100%. I suspect Christina and the company would also agree 100% with that. I think that's true of probably any software platform, right? Like if you want to become a platform, you need to become...

I like how you say that. Go from a system of record is great, but you need to go to a system of engagement. That's what Salesforce is, right? Right, exactly. Most businesses, it's really hard to build a platform out of the gate. I think if you say platform and V1 of your business, you're probably not going to find success. You do have to go through this process of...

nailing a specific use case, really understanding your customer base and what their key mission critical pain points are. And I think that in terms of discovery and identifying what kind of a business that you're building, that is such a key low-level piece that's so necessary. And then

as you're spinning this up, being aware of like, what's my next act, my second, third, fourth act going to be here. And I loved you and Andrew and Howard Marks talked about as the innovation cycles shorten, the durability of existing competitive advantage narrow significantly. And so historically having a system of record business would have inert you to like a decade of owning a specific use case.

Things are just moving too quick. Yeah, not anymore. Not anymore. That's 100% where, you know, why I say I think Christine and the company would agree with you. You know, the product focus now is on building out Vantatrust reports, which is exactly that. Like Datadog for security, you know, is a good shortcut analogy. But what does it look like to have a system of engagement for this space? You know, it looks like both internally at the company for monitoring, but also internally.

externally for your partners, for your customers. Here's Vanta Power Dashboard, a trust report from Vanta that shows you in real time, what are the security practices? What's the data access? Red, green, yellow, what's the state of all of my services internally? What's the state of my software supply chain? And just sharing that and being open.

You mentioned earlier that you've had Christina on to talk about the fundraising process. People have talked a good deal about her skill as a leader. What for you makes Christina somebody that earns this, like, ah, she's special designation? I don't think you can ever underrate someone who you want to...

be around, do business with. Every time I interact with Christina, like I come away, this is a classic thing that VCs say. And I think they say it as this shortcut because it's, you can't really put your finger on what are the components of it, but she's the classic founder. Like if I were ever to go work for somebody,

She's like one of the few people like I would be very happy to work for Christina. So I think that like that is certainly one element of it. I think the other element is like, you know, I'm very impressed with her as a founder in that she went and pioneered this space. Like Vanta was the first company. She was the first person.

person to see this like in a very, very non obvious way. Like she was on a very traditional Silicon Valley path, you know, like she went to Stanford, and then she went to work at Union Square Ventures, right? Like, which is in New York, not Silicon Valley, but like a very Silicon Valley firm, even though it's in New York, this hallowed position.

And then she went to work for Dropbox. Well, she left USB to tinker with some products and then went to work for Dropbox in Dropbox's heyday. Then she goes and starts this security compliance business

monitoring company with no security background and like doing SOC 2 audits. Like, you know, I remember at the time, like to the extent that I like saw what she was doing and focused on it, you know, I felt this way a little bit, but I didn't even focus on it. I'm sure most people were like, Christina, what the hell are you doing? Like, you know, you should go be working at

uber or airbnb or something or like starting you know some you know god knows what it was just so not obvious that a this space was going to be big that there was you know defensible value to be built here and so you know that she she did white combinator the company did white combinator and they raised a little bit of money i think

I couldn't get this on. I think, I believe pair led the seed out of Y Combinator. Great, great folks. Love the people at pair, uh, known Mar for a long time. We were on a board together back when I was at Maduro. Anyway, and then like they just went and operated for years, like years and everybody forgot about them. And in the meantime, like they were just executing, right. And during the phase when so many companies were raising so much money, uh,

without having product market fit or anything. You know, she stayed so lean, like didn't raise any more money after YC, got to over 10 million. I believe she got to 13 million in ARR, you know, for the company before she raised another dollar, which was that first big round from Sequoia last year. Like when that happened, it was like, holy crap, we were all, you know,

to the extent that we were wrong about Christina and wrong about Vanta, like boy, were we wrong, you know? And so I just love that, you know, like it's not often you see the combination of somebody who is,

Like genuinely, great. Like I would love to work for you. And you can be so like contrarian and like you'll be willing to do all the correct but non-obvious things that great founders need to do. Right now, there's a lot of conversation about like durable growth and what constitutes durable growth. And I think that as I...

try and ask myself, what are the companies with the people and the products that are best suited to really understand and internalize and practice the inputs that go into achieving durable growth? For me, it's hard to do that without having been built on a notion of scarcity. So my favorite companies, so like Tony Hsu at DoorDash, the notion of 1% improvements

or Cloudflare, thinking about the scalability that they would need to achieve for their business to kind of achieve its full vision and what that required from a network speed and security perspective. Vanta having been a functionally bootstrapped business from zero to $13 million in ARR, I think for me, that is a really...

critical component to answer for myself as an investor. They're raising now a growth round. They're going to be receiving north of $110 million of capital. That's many multiples. How much did they raise in their Series A? Was that $50 million?

Yeah. So in any case, within a year and a half, they'll raise 200 million. Exactly. That's the point that they're going from very like cash constrained to upwards of $200 million of, of, of total capital coming into the business. And knowing that they have the, uh,

ground level appreciation for the value of a dollar and building in, I think, in the most recent interview that you did with Christina talking about this round, just how they're taking really a scientific approach to building their sales reps and the efficiency. Weekly cash reports. Precisely. I don't know too many companies in 2021 that were

raising the kind of money that, you know, which was a lot of companies that were doing weekly cash reports. You win races in the turns, not in the straightaways. 2021 was a straightaway. Like no one was winning a race last year, but this year when things get more challenging and when communicating that value to your customers really has such a higher bar. You just hear everywhere the discussion about elongating sales cycles, which is really people spending a lot more time asking themselves,

is this product or service really worth it? And I think that in order to communicate that to your customers, I think that it's sort of something that you have to practice inside your organization. And so it does give me a lot of confidence that pouring in this amount of growth capital and that being a couple of times the inflow of investment arsenal that the competitors are raising, I think that that does really portend

getting ahead in this turn in the market. We're both now very biased to love Vanta and want to talk it up and everything. And that's great, as we should be. Yeah.

But to be grounded in data for a little bit, opinions are opinions. I love it. Sequoia used to have this great saying about they're so good at changing their minds about things when the data is there. They'd meet companies early and be like, I don't know, is this durable? Can this be a big thing or whatever? And then I think this is a Leone line. At a certain point in time, the data doesn't lie. If the revenue keeps coming in and keeps growing, you've got to go with it. So in Q2 of 2022, you know, like...

that's the current weather climate, you know, arguably even worse than, you know, here in Q3 2022. Vanto's customer growth accelerated. They added over 300 customers in Q2 2022. Like, what more can you say? You know?

The metric that I cared the most about here is, and I think maybe it was the first question I asked you, is what's Q2 going to do and how does that compare with the Q4 to Q1 sequential growth? Because you're absolutely right. This is data that's coming in in real time and seeing how that rubber is meeting the road, the numbers don't lie.

I don't know what the future is going to hold from a market perspective or from a product perspective or from a customer expectation perspective. But having a team that is data-driven and has kind of that, again, that principle of scarcity woven into its culture, I think is really important. And you're right, this has been a conversation about

like why it is that we're enthusiastic to invest in Vanta. I will concede that I've listened to interviews that some of the founders of competing businesses have given some of the reasons for being their background, the credibility that they have as founders. It is not a foregone conclusion at all that Vanta runs away with this segment.

There are other businesses that are growing very quickly. And so I think that just because you create a category does not mean that you own it. And it's gonna be really fascinating to watch. Were there any dynamics with this round

the participation, like maybe the way that I'd ask it is when you come in and you look at a business and the round that they're raising, like what are some of the questions that you ask that about, like what's being accomplished here? What are we bringing to the company that we didn't have before? And what might be worth talking about that here? Kind of back to the beginning of our conversation here about,

kindergarten and if it's interesting later we can talk about uh nat or you should have nat on the show talk about how he operates within it you know for me and through acquired it really like like i said intentionally from the very beginning both for personal reasons just personal preference reasons and that i thought there was an opportunity like i don't want kindergarten to be

to look like or be or feel like or operate like a traditional VC. Like I've done that, you know? And that's like, it's great. Like that's a great, you can make a lot of money. There's great, they serve a great role in the ecosystem and the great ones are truly, truly great. But this line of thinking, not that I think this is, you know, where you're going with this specifically, but like of like the deal dynamics, like,

I genuinely don't care about deal dynamics anymore. It's one of the things I hated about being a traditional VC, especially at a, at a, you know, while I love the firms I work with, they're great. You know, it wasn't, we were always fighting Sequoia. Like I said, that question is square. And just like, you always had like that question, just nagging always there was like, why is a great founder going to take my money, our money over name, your top tier firm, uh,

And then the question that you ask yourself is like, hey, okay, if I'm competing with them, why would the founder take my money? But the other really even more insidious question, truly more insidious that you end up asking all the time is like, are they taking my money because the great VCs passed? You know, like, I just hated all that shit.

I think about the Groucho Marx line every day of, you know, I don't want to be a member of any club that would have me. I think that investing with you, working with your network and kind of the supportive nature that a lot of kind of what you bring to bear represents, it helps me answer that question in a way that I don't get to very often, which is to say, like, I am...

I am joining the club that wouldn't have me. I'm just going on the shoulders of someone else. I think that that's why I thought that partnering with you as I built out this practice of working with family offices would be a really high value node in our network to build out. And it definitely has. Because that dynamic is so baked into...

the traditional venture ecosystem. It's kind of like the, you know, fish asking, like, you know, what's water and like, Oh, yeah, the David Foster Wallace, always, always love a David Foster Wallace reference. Totally, right? Like, so, you know, be yanking myself out of that. It's really open my eyes. Anyway, so the way I think about all this, like, I truly don't care about dealing for better or worse, I do not care about deal dynamics. You know, when I want to invest in companies, it's because

I meet them through acquired they're great partners I like what they're doing you know like all those other reasons we talked about at the top of the show you know and here in this Fanta situation you know the Dale Downing I'm excited like you know Kraft and David Sachs like you know one of the greatest SaaS investors of all time like led this this round in the depths of the Q2 crash of 2022 and like this was you know I think they've talked about they didn't say the name Fanta but like

they talked about this deal several times on, on all day and episodes at the time, you know, and Saks reference did a bunch. I don't know why I didn't say the name anyway, but, um, anytime that somebody talks their book, it's just, um,

an open uh flank for one of the well actually you know what you're right i feel like especially on all in you know i love those guys one of the things that's so great about that podcast is the dynamics and the tension between all of them but you're right they don't talk their book there because they just like they pillory each other when they do which is i love that they do the podcast but that to me is it kind of highlights like what what i what i don't think is present in in most partnerships like when i when

Whoever it is that we're doing business with, any interview that I do, any investment, any introduction that I take, I genuinely want the very best for every person that I'm coming across. Like, I want to find ways of like, oh, you've got a sundae? Let's put some whipped cream and cherries on top of that. And when you have... I love it. When you have like a weekly commitment to something that is like...

fundamentally imbued with friction and competition at a layer that I don't think is a positive sum creating. It's just like, huh, I love the instruction and the conversation that comes for it, but I'm going to build my business and frankly, my life a little bit different. Obviously, it works for the besties on all in. Like, oh my gosh, the show has been successful. Each of their firms have been successful. Anyway, all that aside. So Saks led the deal. And then so like the way all this kind of came about was

It was always written to the docs. They were thinking about it. You know, there's LP interest, but then kind of as the summer went on and 2022, you know, went on to Christina, just, I don't want to quote her, but I had a bunch of conversations with her about this. I think she just decided, you know, like you said, there's, there's competitors out there in the space and you know, this great round is happening. And she's like, I think just kind of came to the conclusion. She was like, you know what?

let's like get as much capital in as possible right now let's just fill up the war chest not in a like 2021 way of like oh it's you know i'm so you know a hot company you know like may or may not even have product market fit yet let's just you know raise money to raise money of like but no like hey this is a new climate there's competition out there growing fast like you know this is a great valuation and you're great around got great folks around the table let's like

Now's the time to actually fill up the war chest with as much money as possible to go out and work like hell and execute and be the winner, be the system of engagement of record in the space. So that's kind of how this all came together.

When you see Kraft lead a deal, like I don't know if you've done business with them or participated in like a lower level. We've done a few other deals, earlier stage deals. Can you characterize like what involvement that Kraft has? What does a Kraft investment look like? I've never worked with them before.

I could speculate. It would be pure speculation. Like, I don't know. Especially with, you know, how kindergarten, it's not like I sit on boards with them. Yeah, I know. I think just... Another non-obvious thing that when I yanked myself out of the professional, I use professional as just the term for like the traditional way. Traditional is better. Venture ecosystem of, you know, board seats. Like, it's just...

I had a conversation with a really great, you know, older generation investor who is just wonderful, great investor, well-known, all of the things during that period. And he said to me, he's like, board seats are one of the like, you know, paradoxical, like anti-secrets of beast. Like everybody is so, there's all this ego and status of wrapped up in like, who's on your board? Do I, you know, I want to join the board of this company. I lead this round, blah, blah, blah. And it's like,

there's no upside to being on the board. Like on, it's on every dimension. Like there's no upside for you as personally being on the board. You're exposing yourself to a lot of risk, but there's no upside with the founder relationship either. You create this like quasi adverse, you know, not adversarial, but like it complicates the relationship. He's like, you,

you know, he's like, I found in my career, I have much more influence on the company. I can be much more, you know, involved, happier, all the dynamics, not being on boards. I was like, ah, yes, you're right. Why did I ever want to be on all these boards? Because of credentialing. Yeah.

Yeah, credentialing. Exactly. Which is a totally normal thing to want. But I completely agree with you. Like, if I were to sit down and say, hey, David, like, let's have a really nice conversation. We'll share a lot about each other and our hopes and fears. And oh, by the way, I have a loaded gun that I just set on the table here that I, you know, not only have the...

to potential use, but in many ways, like have the responsibility, which is to say, like being a board member means that you are responsible. You have a duty to ensuring that a business is performing to what you think is the highest and best use. And that's a really difficult responsibility. It really changes the dynamic of the relationship. It absolutely does. I think that that's something that I am really,

learning and really appreciating the difference between, I'm on the board of one company, I have a great relationship with that founder. I think it helps that maybe also by investing at the seed stage when you're working with these companies, joining the board might be a little bit different because you know that their wellbeing, supporting the founder is the job to be done by the board. But once you get to 50, 60, 100, $500 million of revenue, that relationship gets a lot more complex. Or heaven forbid, a public company.

Absolutely. Of course, they're great board. I had great board relationships with many of the founders that I was on their boards. But the point that this investor was making to me that just like totally hit home. You're right. Like there is a time in your career or a time in a company's life, there's situations where it makes sense. And that investor, you know, he takes board seats. It's not like he doesn't. In general, like if...

If the situation doesn't require it, it's generally better not to be. Anyway, your question was about craft. So all of this is from afar, arm's length. But I think what they are, certainly what they market themselves, I think what they're quite good at is they're just really plugged in on what the attributes of great SaaS companies are, particularly around...

and valuations and multiples and all that. And they're very data-driven on that stuff. Well, I've never actually studied all of the data. It'd be interesting to do so. But the belief, the common belief that I generally think is true is in B2B and SaaS products, like

that works pretty well. And the consumer is different and more hit-driven and more unexpected things can happen. But yeah, I think Kraft's just really good at that, as are other folks like Emergence, too. It's funny, I love Emergence. We're super close with them, too, on Acquired. They're a little more qualitative. They're a little more liberal arts to Kraft's engineering approach to SaaS investing. And that's okay. That works great for them, too. But that's what I think of when I think of Kraft. It's

It's really helpful in my situation, my seat where I'm bringing investments. I am not a professional investor in the way that Kraft is. I'm not a professional investor in the way that a real estate manager or private equity fund is. I have to operate by way of proxy. And so in this environment where I'm getting asked for cybersecurity investments, I have some

on what good businesses might look like here, what lower quality businesses have historically been. And then when I think about the people running the business and the investors getting on the cap table, I really have to look

like lean on years of experience and past performance doesn't indicate future returns. Like that's total bullshit. Winners keep winning. And so for me, being able to bring... At least in venture. In venture, past performance is definitely a predictor. I think it's increasingly a predictor of future returns, just as the benefits of scale become more and more pronounced. You know, I really do believe that businesses...

And an internet age particularly skew to perfect commodities or perfect monopolies. I think that that's a very long term fullness of time observation. But nonetheless, for us to be able to co-invest with some of the like global

tenured, most rigorous B2B focused SaaS investors. It's a really great opportunity that you've given me to kind of come in and step in, make this investment because it's really the product that I had hoped that I would be able to deliver when I started this journey, when I reached out to you and said, hey, I've got this thesis on podcast networks as a way of building an investment program. Yeah.

ah that's so cool maybe it's worth spending a little time on that's the deal dynamics of the kindergarten's spb here at this deal the um maybe without getting into specific numbers but for me and nat you know it gets going back to sort of everything i've been saying all along here a little bit on our first episode and the lp episode that we nat and i did with ben where we talked about things about kindergarten a little bit mostly about kettle but a little bit about kindergarten and

We're not trying. Hopefully it's clear that it's genuine. I'm not saying this as a feint. We're genuinely not trying to build a traditional venture firm. Genuinely, genuinely. I want to do acquired. Nat wants to do kettle. Those are the things. And kindergarten is the part of that ecosystem, flywheel, whatever you want to call it. So we're not interested in

scaling assets under management to scale assets under management and scaling you know management fees to scale management fees and building a team in charging premium carry you know which is where i was going to get into here like you know hopefully we can provide a great investment product to lps like you and what clicked for me in this process i'd sort of like maybe intuited this a little bit than chatting with you and like hearing it i think was valuable to you of like when we do

We don't want to raise large core funds like the kindergarten fund too now is just about 12 million. We might take it a little bigger, but that's the scale that makes sense, I think. This SPV vehicle will end up doing, I think we're

when all is said and done here, we're just wrapping up some loose ends, it'll be roughly about the same size as the whole fund. Double digit millions are close to it that we're investing in Vanta here. I don't need to charge a management fee on that. We don't need to charge 30% carry on that. We don't even need to charge 20% carry on that for our large LPs. So I hope to you that that's

Compelling and different. It's compelling at a lot of different layers. And so I think about your business when when when we're in your motivations, when we are partnering with you. And when I see that that that kindergarten is.

It's really play for you what is work for others, which is another way of kind of you saying your margin, your fee structure is my opportunity. You've mentioned a couple of times that you're not a professional investor in the traditional sense. And that's core to my thesis, which is the service that you are providing here, connecting me as an LP to Vanta as a company that I get to invest in.

As I put myself in your seat and I see how you're interacting with Vanta, the way that you are growing the surface area in Acquired for them to really get the full benefit of a partnership with you guys.

And then when we start to talk about, you know, okay, they opened their round, which this is maybe another thing I should have mentioned earlier. As I've been asking people, hey, what do you think of Vanta? We have an opportunity to invest. People have said, oh my gosh, like that's a really tight, highly sought after, like how did you get into Vanta? And then I say, oh, it's, you know, it's through David Rosenthal. And then everybody's like, oh yeah, that's right. Like everybody loves David. And I...

Think, yes, that is the business. You check in the mail. That is the business that I want to invest in. And so I understand why it is that Christina opens the door for you to lead an SPV. And then when you and I are talking about what I need to do my job well, which is bringing –

thoughtful investments that fit specific needs that meet criteria whereby I can point and say, here's where we're adding value for you to be so flexible on fees the way that you have. It really helps me feel like I'm doing my job as an institutional investor. I mean, I think that one of the really...

A lot of the lessons that I feel like I learned now is on the allocator side of the table came from our mutual friends over at Matimco, especially Nate Chesley and Nav Harukumar. And they focus a lot on fees because over the fullness of time, fees really do matter. And so in this situation where-

And carry more than, but, you know, over a number of years, if you're charging 3% management fee for 10 years, that's 30% of the fund. Yes. And so for me then to be able to go and articulate this investment to others as, I mean, we're not paying a management fee. We're paying probably half of the carry. If you're talking, you know, just spreadsheet math of, okay, let's, let's call this a 20. Let's, you know, hopefully be, I don't know what conservative is, but, uh,

You know, hopefully we can do better than a 20% gross return here, but let's just for math's sake, say 20% gross return. If I'm invested in a two and 20 fund structure, then my take home is going to be about 14%. And the way that you and I and Matt have set this up, our take home here is going to be 18%, 400 basis points of differential performance per

In the context of co-investing with a fund like Kraft and Sequoia and YC. Maybe to hopefully tie it all together a little more. This is why I'm so excited, both excited about the opportunity that we hazily saw for kindergarten and it coming together, but also why I was so passionate. Once Acquired became a real business and I was like,

oh, wow, I love doing this. That's just amazing. And like, this can be my livelihood and I don't need to play the same game anymore. When you're in the traditional venture firm world structure, you know, certainly I won't deny there's an element of greed that goes into, you know, the high management fees and carry and building assets under management and all that. Like undeniably, there is,

associated with that writ large. I'm not saying any individual people in VC are greedy, but it's just in aggregate incentives drive behavior, right? But there's another reason why all this happens, which is when you're trying to build a firm to compete in the zero-sum game of being one of the best firms to lead the rounds, have the opportunity to lead rounds in the best founders and best companies out there, which is a zero-sum game, and you have to beat the other people,

There's all this artifice building that goes into it of which your terms with your LPs are actually part of it. Like being able to say like, you know, to yourself, to your LPs, to founders, to others, having it known in the ecosystem of like, we charge premium carry because we're that good of which all the top firms do. There's an element of the like firm building in there too. And, you know, and the management fees are part of that, you know, the office, the multiple offices, you know, the big staffs, all that just like,

Again, there's nothing wrong with that. Like that's the way the traditional ecosystem works. I think that's fine thriving. I don't think we're going to disrupt it. We're going to be complimentary for sure. Having done all that, I just didn't want to do it anymore. I was like, no, do not want that in my life anymore. So it's just so cool to be able to do this, you know, in a different way.

Yeah.

can grow very efficiently to several million dollars of recurring revenue. When you're investing, as this round is put together in the preferred equity, you have a liquidation preference so that as long as the company sells for north of the money raised, that you get a full return of capital. The total dollars raised, yeah. Yes. I was a public hedge fund manager for 11 years. Every stock that I ever bought

absolutely had the potential that it would go down the very next day. Right. And that I would imagine if you had that feature in the public markets where you could invest in whatever, you know, X, Y, Z security and be like, I'm only playing for the upside. I'm pretty, you know, 99% probability, you know, my basis is not going to go below a hundred percent in this investment. It,

It's very liberating for me as a, as an investor that can go out. And I think a lot about my job as being something of like a bartender or a butcher. Like my job is to deliver the best product for the right solution. I mean, I'm helping other people achieve their goals. And so I need to be considerate of what their risk tolerances are, what their sophistication might be having the liquidation preference in this spot where I can, I can help. And a lot of the families I work with are, are,

more legacy in nature. So this will end up being some of the first software technology exposure that they have. I care very much that this is a good experience and having the ability to say, all right, you know, this company is being priced at 10, 20, 30 times revenue. And I think that we can earn a nice return on that. But in the event that

you know, the forecast doesn't pan out the way that we're hoping. The downside is really, really limited. And again, that's something that's, I think, very unique to software businesses, where when they are successful, they are so economically successful that the amount of money, the total dollars raised is such a small amount relative to the, you know, intrinsic value of 80% recurring revenue business. And it's really then, I think,

for me, as I've been trying to think about ways to navigate a private investing program, I think that A, this is a feature that I will continue to seek out, but B, it really distorts pricing. And as you have more capital come into... Yes, we have had a bit of a reset from a FundFlow's perspective, but

The secular trend, like as more dollars, more institutional dollars come into the theme of software eating the world, and as these liquidation preferences are in place, the price, the way that, like you said, if this was a public investment, how would you price the can't lose money? And then what's the upside? It really gets distorted. And it doesn't seem like something that's fully taken into consideration in the market. You know, when companies... No, it's very... Oh, it's fun. Let's jam on this a little bit. Yeah.

This is one of those secrets hiding in plain sight that, yeah, I don't think it's talked about enough. I'd hoped we might go there in the interview we did with Howard and Andrew Marks that came out a little bit ago on Acquired when I asked them about, especially Howard, about differences between public market investing, which is a highly efficient market, and all that, and private market investing. I was hoping we would touch on this feature of at least venture private market investing. Yeah.

But yeah, you're absolutely right. The concept of preferred equity is, to my mind, a huge reason why there are outsized returns to be had in private market investing versus public market investing. Now, access is a bigger one for sure. Privileged information rights, all of that is true. But this is certainly a piece of the puzzle for me. If you step back and you think about

For me personally, in my own activities and you as an LP, why do I feel good about committing large portions of my net worth and my time and energy to investing in private market technology companies versus public market technology companies, which have...

many of the same features of like still, you know, in cases be plenty of upside left, infinite liquidity, all of that. This is one of the features that is a big feather in the cap for private market investing. It definitely is. It's been peculiar to me that it

It hasn't been talked about as a distorting factor in valuations. I've been digging into this more recently. I was going down a Twitter rabbit hole, just searching liquidation preference and other similar terms to see how people are talking about this. A lot of the secondary platforms like Forge, pricing, common, and preferred equity, they end up trading very

Way closer in price to one another than I would expect. When companies go public, there almost always is a – as going public, the preferred converts into common. So I understand that that point of convergence does exist. Well, there is also –

Depending on the scenario, on paper, the benefits of this to the investor are larger than they actually are because it only applies to an M&A scenario. If a company were to go public, then the preference gets wiped away. Actually, I've seen this way back in the early days of my venture career of you can get a management team and an investor base at

strong odds of incentives here where like if a company if a management team thinks that they can take up say they've raised money at a valuation that is no longer reasonable you're you know whatever the intrinsic valuation of the company should be much lower if the management team thinks that they could actually get

an IPO through and get public and get liquid, their strong incentive is to do that versus to sell the company even at the equivalent price, especially at the equivalent price. Because you sell the company, the investors get a much larger share of their proceeds because of the preference. You go public, the preference gets wiped and everybody shares equally. Yes. Yeah. And I think that that's something that you certainly have to express the view here is

So Vanta is raised at a $1.6 billion valuation. If they go public and the price is less than that, then you don't have the protections of that liquidation preference. So then as an investor, I'm asking myself, what are the series of next best alternatives that Christina might have? Does this company go public in a variety of worlds where they are under a $1.6 billion valuation?

Which is basically just at the end of the day, like, is there enough gas in this tank that I'm pretty confident that we can get within the next couple of years to that threshold? I very much believe that they will. But I think that as more capital comes into...

earlier stage technology enabled assets. And I look at myself as a Sherpa kind of fostering those flows. Having the liquidation preference is really helpful. What are downsides of having liquidation preferences? I mean, does this end up operating something like debt in an organization? I don't think functionally. I mean, well, we should talk about ratchets in a sec here. But I think for a standard liquidation preference like this,

Like I said, I've seen it in my career where you can get a company in a management team, common shareholders at odds with preferred shareholders over companies viable but not as viable as thought at odds.

In that case, it was a very capital-intensive company that had raised a lot of money. Again, never say never, right? I'm sure this will happen in cases and has happened. But in a software company, it's pretty hard because it's not the valuation that matters with the liquidation preference. It's the amount of capital raised. So let's take Vantage here. Round numbers, let's say it'll all be about $200 million that they've raised. That's the preference stack.

whether the valuation was 500 million or 1.6 billion, as it actually is in this round, or 3 billion or 5 billion or whatever, that doesn't matter. It's getting the money, the dollars back to the investors. So for argument's sake, let's say Vanta had raised a $5 billion valuation, but only had 500 million that it had raised, or company X, $5 billion valuation had raised $500 million total of capital. If the company had an opportunity to exit for

That's obviously way lower than the valuation, but in an M&A exit, but the investors would get their 500 million of capital back. So for software companies that scale so efficiently, as you say, it's not that big a deal. Ratchets are what's interesting. I wonder if we'll start to see this coming back. This had happened in the sort of mid-20-teens era where people were unsure about the

the economy inflation a little bit back then and square is the most famous example. Their last one or two private rounds at square had, you know, raised with these dynamics we're talking about, but the extra feature of a ratchet and what a ratchet is, is, is basically saying, um,

This dynamic applies both in an IPO and in M&A. So liquidation preference is usually just M&A. If you go public, the preference gets wiped out. But a ratchet says, no, no, it stays. So if you were to go public at a lower valuation than this round, investors essentially get their money back through a variety of mechanisms.

Interesting. Yeah, I think that that's what I'm probably most looking forward to about this ongoing and continuing phase of the capital formation cycle is just as a practitioner learning about the features that come and go over time and increasingly kind of using those as tools and as ways of also charting where we are in this capital cycle. I think it's going to be really interesting to see.

And it's interesting, you know, the Ratchets got a really bad rap in that era. And I'm not exactly sure why, you know, if you think through it like as objectively as possible. Early stage investors hated them, which I think is why they got a bad rap. Because if you're an early stage investor in a company like this,

take Square, for example, that ratchet can really hurt you. It can cause you to suffer a lot more dilution at the IPO, which you're already probably not happy about dilution at the IPO, but you'll suffer even more because of a ratchet. And so I think a lot of early stage investors got very vocal about hating them back then. But like anything, it's a term, it's a feature, right? Like you're providing further downside protection to a new investor in exchange for

a combination of a higher valuation and, and more importantly, more concretely, probably more capital, uh, getting put into the business. I'm not sure it's actually that bad, you know, and the management team kind of sits somewhere in the middle. If you want to go deeper, we can discuss their motivations too. Yeah.

It just depends on the circumstances, right? Like the specifics matter in terms of where the business is, what that marginal dollar might accomplish if raised. And then also like, I think one of the things I really like here is, and I've heard this from some investors that have partnered with Vanta, where they like to be involved because they think that Christina is going to be a founder that has multiple acts in her, which I don't know why.

whether that has basis or not. But the point being that her next best alternatives, I think a lot about next best alternatives. What does that look like for her? It's going to be a very high bar that she has to continue to put her life's work into Vanta. And so I feel like when it gets to a point that she might think that

Doing something else is more attractive. Getting the highest value and having that be a data-informed decision that happens earlier rather than later, I think, is something that when I go into thinking about who the people are that are involved, their next best alternative is a really key input for what I think that they might do in the future. Yep. Great. Do you want to move on to grading? Oh, yeah. Yeah.

How do you want to grade this? Well, I think it needs to be forward-looking. What does really bad look like? So really bad, you know, an F is that this category that Vanta... Everything we were just talking about actually becomes relevant, which I really think is unlikely. I think that it is as well, but I kind of want to do this for posterity's sake because...

As a professional hedge fund manager for a long time, my pre-mortems and post-mortems looked like translating Hebrew to Chinese. The unknown unknowns were so often the dominant fundamental factor that I should have been paying attention to. So I think for me, there's some posterity value in doing that.

So like, what is really bad look like from here? So really bad looks like, well, maybe we'll go back to the Jeffrey Moore mindset. So at an infrastructure level, I have a hard time manufacturing risks at a software eating the world level.

Where the risks start to manifest is creating the category doesn't mean that you continue to own it. In fact, it attracts a lot of competitors and some of the competitors are very strong. And also there are large behemoths that control a lot of data and workflow adjacent to Vanta. And so there are scenarios where growth slows dramatically and it ends up being a risk

public comp kind of valuation of something in kind of the four to six times revenue multiple. I think that fortunately for Vanta, a slower growth environment would likely result in the company having pretty good cash flow margins. There is downside absolutely to that $1.6 billion valuation. Is there downside to the 200, 250? No, I think that that's hard to get there. To your point though, also about that

it's a little bit of a sidebar, but I just learned something the other day that blew my mind, which is that to your point about large incumbents, the software companies, you know, might want to enter a space. Microsoft, I learned about a new software, a new product, cloud software, you know, application software product from Microsoft that they launched 18 months ago that is now doing one and a half billion dollars in annualized revenue. And I was just like, holy crap, like that's crazy.

crazy that is so crazy impressive that Microsoft you know can still do that and does that and like man so awesome and you know it's 10 years ago probably wasn't doing that but like oh it's just yes of course it's distribution that does that but just that like but their ability to see it's like the eye of Saruman and Lord of the Rings like to see that opportunity and be like my

$1.5 billion of ARR in no time flat. It is a very challenging part of investing in an ecosystem-driven internet services world. So I was very bullish on Slack. And it was actually, I think, one of the few private investments that we made at the fund where I worked. But we were users and we just loved it so much. It transformed. Talk about a system of engagement.

But holy hell, Microsoft's ability to pour water on the Slack fire was really remarkable. And I think that that's a piece here that I feel a little bit more comfortable just given the nature of...

of this being an aggregation layer and very few companies are monocloud. And so as long as that digital estate has a lot of heterogeneity, as long as you have Azure, AWS, GCP, a suite of cloud services that go into building your infrastructure, I think that this is relatively insulated from cloud.

the big scary platform competitors. What does a middling outcome look like? I mean, I think they continue to grow at a north of 100% rate for the next decade

year or so, but then that stair steps down to maybe 50% or so in two years. I think we're the middle ground for it. I don't think we actually said throughout the company. I won't say the actual numbers, but the revenue growth rate in the ARR growth rate for our Panta is unbelievably impressive. Truly, truly top tier. One of the best I've seen in my whole career, which is awesome. So that's another feather in the company's cap. It is. As businesses go

grow so quickly. The bar for exceptional growth, I think it just has to go up. As you think about continuing to refine your investment thesis for the environment that you're operating in. I mean, I remember when I first got into software, like a rule of 40 company was really good. So rule of 40 means recurring revenue growth plus the cashflow margin that they're able to earn. Vanta is, you know, rule of well into the triple digits. Um,

Well into the triple digits, yes. Which is exciting. I think that having that be a durably high number and that really being a function of a data-informed decision that is making those return-oriented investments into the business and having a forced rank way of prioritizing capital, this is really a capital allocation exercise that Christina and team are

working towards. But in any case, for a middling outcome, I think that they continue to dominate in SOC 2. They find ways of appending the SOC 2 product with some PCI compliance, maybe some HIPAA, Sarbanes-Oxley. I think that that piece for me is going to be really important. Right now, their net retention rate is good, but I want to see it improve over the coming quarters. I

I think that that will be a function of... They don't have a good expansion product flow. It's kind of like, you buy Manta? The expansion is you add more compliance certificates. It's not a usage-based expansion right now, which, as you say, can be a double-edged sword in a tough environment. But generally, usage-based expansion is great. Yes, yeah. And so I think that the middling situation is where they kind of stay in the system of record world. They have some expansion, but not a lot in...

three years, it's 200 and something million dollars. And you probably get to that $1.6 billion valuation. Maybe you can get kind of a 15, 20% return from here. And it's just, you know, it's

It's a fine investment. And what I would say also though is something challenging right now is when you have dislocation in the market, there are lots of purchase decisions you could make right now that might look like exceptional investments. So the bar is pretty high on a relative basis. Again, bringing in that liquidation preference really does kind of help justify the investment even in the case where it's something of a middling outcome.

What does an A look like here? An A looks like standing up compliance automation as a major pillar within the digital estate. So something like a CRM or a service management, like what ServiceNow has built or even observability like Datadog is in the process of building out. In that scenario, you end up ingesting data

upstream processes, creating a visualization and engagement layer that really hones in on the core risk profile of a business. And I want to add one thing that really could get me super excited for that A plus is when I think about what's the information that exists in a business that could really tell me something about its DNA, about its culture, about its likelihood to...

execute and win large markets, it does have to do with the insight that Vanta captures. And so if they can find ways of translating the data that they're ingesting into something of a communication to the outside world about what that company is, kind of almost along the lines of what an S&P or a Moody's do for assessing financial stability, I

If Vanta can become a way of communicating operational stability and excellence, I think that there is all a sundry of ways of creating and capturing value in that. A hundred billion dollar company in that world is not out of the question. So that's the thing that like when I'm daydreaming, which I do sometimes, that is how- I love the way you phrased it earlier. It's just like it really is a-

Great way to capture what you're talking about is can Vantik cross the chasm from a system of record to a system of engagement? If they can do that, yes. Like this is the system of engagement around security, compliance, and data security monitoring.

is going to be an enormous market. Again, with the usual caveat of like, I can't be sure about anything anymore, but like, but I'm pretty sure that that's going to be an enormous market. Yes. All right, listeners, thank you for joining us on this episode. We'll see you next time. We'll see you next time.