Eniac Ventures Hadley Harris on portfolio construction fundamentals, partnership durability, and views on the shifting seed market

Follow me @samirkaji for my thoughts on the venture market, with a focus on the continued evolution of the VC landscape.I’m thrilled to bring you my conversation with Hadley Harris, one of the founding partners of seed stage investor Eniac Ventures. Over their history, Eniac has invested many amazing companies including AirBnB, Cameo, Hinge, and Soundcloud. After starting with an initial $1.6M Fund I 11 years ago, they currently grown and expanded to now managing over $300MM in AUM. It was fun chatting with him on the origin story of the original partnership and how they’ve evolved over the years together, and with the introduction of new team members. Also in our conversation we spoke about portfolio construction, which I personally find fascinating given the different approaches that exist. For those that haven’t seen it, check out Hadley’s post on portfolio construction (“Seed Portfolio Construction for Dummies”) as it’s a great post. Prior to Eniac, Hadley held various operational roles including head of Business Market Strategy at Vlingo, which was acquired for $225M by Nuance Communications. He did his undergrad and MBA at the University of Pennsylvania.A word from our sponsor:Vouch Insurance is a new kind of insurance platform for startups. Built by founders for founders, Vouch’s fully digital coverage takes minutes to activate. Vouch is trusted by the biggest names in the startup economy — such as Y Combinator and Silicon Valley Bank — who partner with Vouch because everything from onboarding to claims is designed for startups by experienced founders. Because Vouch is an insurance platform, and not a broker, it works with its clients to manage, mitigate, and avoid risks. http://www.vouch.us/ventureunlockedIn this episode we discuss:01:48 What led Hadley and his partners to start Eniac Ventures03:43 Considerations they thought through when starting a firm together after being friends for so long. 04:47 How they think about conflict resolution 07:00 The KPI’s they needed to meet before raising larger funds 08:49 Experiences as operators and investors that helped Hadley and his co-founders shape Eniac10:24 Drivers that led to institutional LP backing12:16 How Hadley thinks about fund sizing and how they arrived at their last fund size15:26 How the current market has shaped Hadley’s thoughts on portfolio construction and deployment18:08 How they balance optimizing for speed while maintaining integrity of due diligence processes. 22:01 How to build a strong succession plan to ensure firm durability24:13 What Eniac looks for when hiring and onboarding25:32 Breaking down his “Seed Portfolio Construction for Dummies” blog post34:34 Why more portfolio companies is often a better bet for smaller funds37:41 His market predictions40:06 The most counter-intuitive lesson he’s learned as an investor40:42 The thing he got most wrong about investing41:53 Who is an investor he really respects and why?Mentioned in this episode:Eniac VenturesSeed Fund Portfolio Construction For DummiesI’d love to know what you took away from this conversation with Hadley. Follow me @SamirKaji and give me your insights and questions with the hashtag #ventureunlocked. If you’d like to be considered as a guest or have someone you’d like to hear from (GP or LP), drop me a direct message on Twitter.Transcript:Samir Kaji:Hadley, it's so great to have you on the show.Hadley Harris:Thanks, Samir. I appreciate you having me on.Samir Kaji:Maybe where we could start is the beginning of Eniac back in 2010. And what I'm really curious to hear is the backstory of what brought you all together, the four of you, and what was that shared vision that you seized the opportunity that really led to starting the firm together.Hadley Harris:So, my three partners and I, Nihal, Vic, Tim and I all went to undergrad together. We're all engineering students at Penn. So, we actually graduated way back in '99. So, now have known each other for 25 years or so, which is crazy, makes you feel really old. The seed of Eniac started about 2007 timeframe. Vic and I, he was working at RRE Ventures, I spent a short period of time at Charles River Ventures before joining a seed stage company that they invested in and we were talking about, eventually, getting into venture. And honestly, the catalyst of why we wanted to start our own firm was, mainly, we just couldn't see ourselves, especially at that time, spending 10, 12 years kissing a bunch of guys asses to become a real GP. And it seemed like an easier path, which is probably not correct, to start our own firm.Hadley Harris:We recruited Tim who had a background in venture law as well as had been a founder and the three of us started planning together. And one of the most successful founders I knew was Nihal who was a close friend, also, from school. I reached out asking for some intros to folks who could fund us, some angels and he replied that he was in, meaning he wanted to join. So, we, after a couple of conversations, decided to do that. And that was the very beginning. Started working on 2008, started investing in 2010 and that was the origin story.Samir Kaji:One thing I'm always curious about is, in situations where partnerships come together and there's these pre-existing relationships, that I think are great because they do bring along an embedded level of trust that's hard to replicate. At the same time, we've seen situations where friends have come together and those personal synergies don't necessarily translate into a professional context. What were some of the conversations you had in the early days to ensure that, from a professional standpoint, you would have those synergies and alignment?Hadley Harris:It was a long evolution, honestly. We went from friends and it took time to really get a working relationship. We were pretty thoughtful, I think, about that. We started working a couple years in with a professional coach and have now been working with the coach pretty consistently over the last eight years or so. Because it's one thing to be friends, it's others to have that working relationship and, in some ways, being close friends, while it has its advantages around trust and shared values, it has its, I think you were alluding to it, its disadvantages and that things can get personal a lot quicker. I imagine you'd see that we're a family business as well. So, for us, it was really about being intentional and understanding that we still had a lot of work to do even though we knew each other really well.Samir Kaji:Take us into those conversations. You guys are talking, were there particular considerations or a particular set of values you've all agreed on and said, "hey, this is how we're going to operate together. These are the protocols and let's ensure that, as we go along, things like conflict resolution are done in the right ways."?Hadley Harris:Yeah. If I were starting again, I think we would make sure to have those conversations. To be honest, it was more of a natural progression. I think everything for us, and I'm sure we'll talk about other areas of the business, has been constant iteration over these 11 years or even before we started investing. And this is definitely one of them where, I think, we jumped in and started working together and then handled the different challenges as it came over time.Samir Kaji:So, you mentioned 2008 and then really starting the firm in 2010. And 2009, of course, was this barren wasteland of anybody allocating capital. How did you guys get comfortable doing this with four people with a really small fund?Hadley Harris:Yeah, the fund was tiny. It was $1.6 million, our own savings and some friends from Penn who were silly or naive enough to give us money when we didn't know what we're doing. And yeah, I'm very happy that they actually did quite well because that would really bothered me. We were still doing our own thing, so we're running our companies. So, in a lot of ways, we looked like more angel investors and almost like an angel group in terms of how we operated. So, our partner meetings were Wednesday night and Sunday night. We were meeting founders during the day, but pretty fluidly.Hadley Harris:And then, as our companies got acquired, I was the first one to go full time in our second fund. When my second company got acquired, then we started focusing on it full time. So, it was really our third fund where I'd say we were quote unquote, institutional and that happens also [inaudible 00:06:16] we had institutional investors. Those first two funds, I think, allowed us to pick up a lot of experience but in a relatively unstructured environment.Samir Kaji:I love the story of starting off with a million and six as, really, your proof of concept. And I remember, even back then, we used to actually refer to a lot of folks as super angels that were writing more significant checks and, often, managing other people's money but still in the early days. What did you guys see as the inflection point where you decided, "hey, we are now wanting to do this as a full-time gig, it's not going to be a franchise." It sounds like it was really the jump to fund three, which I think was about $55 million or so. What did you have to do to get to that point?Hadley Harris:Yeah, I think a big event for us was we had an early investment, a company called Tap Commerce, that had a pretty quick exit for about $100 million in about, I think, about two years. And that, even though it seems very small, returned a big portion of our first fund and we had a couple other smaller exits. So, interestingly, we had really solid DPI going into our third fund. Again, these were small funds, so you're not returning huge amounts of money and for us, that was really important. Because when we raised our third fund in 2014, that was the very beginning of, I think, where most of the LP community were starting to notice and see, they weren't really investing.Hadley Harris:We were fortunate, our lead investor, a major university endowment, had a program they had put together, invested in us and a couple of other seed funds like Homebrew and Freestyle that were around our vintage. So, we were in a good place, at the right time and had somewhat of a track record, even though, again, it was in this relatively unstructured manner. So, those things came together and we had, also, rolled off our own founding companies and those companies have been acquired so we could focus on full time. That became a nice inflection point for us.Samir Kaji:There's two type of emerging managers that are formed in terms of what their prior, most recent experiences. One is, there are former founders that decided full time investing is what I want to do. The other is somebody that worked at a big firm and then rolled out. You did both. Your partners, actually, somebody did work in RRE and they also worked at a company. How did those experience shape how you wanted to build a firm and the type of firm?Hadley Harris:So, Vic had spent two years at RRE, I had spent just a summer at CRV. So, my experience is pretty thin. We really came at it very much from the founder angle and a lot of what we were doing in the early days, I think was, what we saw, it's bringing more of a founder mentality to seed. I think that you can be successful in both. I think that people are coming from more investing backgrounds can be great pickers of companies. I find, and I'm obviously biased, that folks with operational and founding backgrounds tend to have a little bit more to add in terms of their background and experience, but also a certain empathy for the founder experience, which is extremely difficult, that is really hard to learn from afar.Samir Kaji:That certainly makes sense. And I agree with the empathy variable which, of course, there's so many parallels to what you guys have done both as operators and founders but, also, founding a firm together and that you have to build brand and you have to raise money and all those things are hard. Eventually, you did hit that inflection point of becoming more institutional. I think that was around fund three when you raised your fund size and you started to talk to some of the institutional investors be it the university endowments and foundations and things like that, you had some DPI at the time. But I'm curious, if you look back at some of those conversations, what type of factors were they really evaluating in deciding whether to invest in a fledgling firm? Was it the DPI or was it something else?Hadley Harris:Yeah, it's interesting. I think you see that a lot more now where the seed ecosystem is a lot more developed, where LPs are looking for more of those institutional signs. I'm sure that that was a factor. It was just so early and there were so few LPs that are even considering seed that, in some ways, I almost feel like, maybe, the bar was lower from an institutional point of view because I don't think we were very institutional. I think there was an interest in this space because it was clearly becoming a thing. To your point, when we started in 2010, people would call it super angels, people didn't even consider it venture. It was definitely looked down upon by the venture community as a whole in terms of its level of sophistication.Hadley Harris:By then, I think it was clear that this was a thing and LPs are trying to figure out how they're going to play with it. I don't know that they expected the level of institution that we have now and folks like us. I think, surprisingly, the DPI was a big factor because it's like, "The bar is low and these guys actually can return money and they seem to be in some good companies and they got in at these crazy low valuations compared to the rest of our portfolio." So, I think that was more of it, surprisingly.Samir Kaji:One of the things I often see with institutions that are investing at the early stages, be it a fund two or three or even a fund one, is once they deem a firm is investable, the thought is, not only invest in that fund but multiple funds and, over time, scaling their check amounts. And, in your case, you haven't materially increased your fund size relative to your peers and, certainly, not tripling or quadrupling even though the seed environment and the average seed grants have increased so much. Can you walk us through how you think about fund sizing and how did you arrive at the fund target of your last fund?Hadley Harris:You're asking about shared vision that we all had and things that we all felt strongly about when we were going into it. I think one of those things was that we'd rather be really good at one thing and doing that well. And we'd rather be the best seed fund or strive to be the best seed fund in the world rather than trying to be yet another multistage fund. So, for us, it's often come down to focus and this is certainly one of those areas. I think we're at a place right now, where our fifth fund that we started investing in six months ago is $125 million. I personally think, especially for a more concentrated approach, that that's as big as you can be and be a pure seed player. That number may change in the future where we can have a larger fund, I doubt that it was going to happen, but if you did see some contraction to the smaller fund, that makes sense. And I think you'll always of see us focus on that so that we can do what we do well.Hadley Harris:Every time we raise a new fund, we can take a step back and consider, "Hey, let's pretend we hadn't done anything and what would we do." And there's a lot of interesting strategies out there. I think there's an interesting strategy for a smaller A fund, call it a traditional series As, that there's a little bit of a, I think, a soft spot, especially in New York and the East Coast. So, we certainly can serve stuff like that but we always come back to seed. Because one, I think we've build up a strong confidence and we've been iterating now for 11 years.Hadley Harris:So, I think this is the evolution of all that iteration, especially around processes and, to a certain extent, brand. And the second thing is we just really enjoy it. It's a different type of investing. We really like to roll up our sleeves and spend time with founders. And at the end of the day, you're investing before product market fit and you're doing your best to get them through product market fit. And that, to me, is the most exciting part of venture and, certainly, that some people are very successful at later stages of investing, but I don't think it would be for us. More on a personal thought.Samir Kaji:We've had a few guests on the show and we've talked about there's different muscles that you have to exercise at different stages. And I don't mean Series C versus Series A, I mean, really, from where a company is from a development standpoint and the different inflection points. The thing that I do wonder sometimes is, the markets actually evolved dramatically since you guys started and, certainly, even more in the last three years. Where the seed rounds, now, it's not unusual to see a seed round done at $3 to $5 million pre product market fit. Valuations have shifted from, what used to be, single digits to, now, 15 to 30 million in certain cases.Samir Kaji:And then, there is an acceleration to when the Series A happens in terms of the Series A players now coming upstream. Has this, in any way, evolved your strategy with fund five in terms of your ownership, how you think about how much capital you put up front versus reserves? Talk to us a little bit about it. And just for full disclosure, I'm a portfolio construction nerd. I want to dig into your blog in a second, but let's first talk about fund five and the evolution of it.Hadley Harris:It really hasn't changed much of our portfolio construction from a strategy perspective, it just changes the inputs. The way that we constructed our model and strategy, the conversion rates and the size of the allocations and things like that are all inputs to the model and then, it flows from there. We are doing bigger rounds, they are at higher valuations, I don't think we've moved as much as the market. And then, the conversion rates and the allocations in the Series As have gone up quite a bit. So, we try and account for all that. But from a strategy perspective, we're still doing the same number of deals, we think about overall number of investments per fund in the exact same way. We're targeting 36 in this new fund which is what we did last time.Hadley Harris:Where we've seen the big change from a strategy perspective is in our diligence process and we've, basically, rebuilt our entire process and team in the last six months from when we launched our new fund around moving much faster. So, we've hired quite a few people, we went from 6 to 12 people in the last six months. Most of those folks are on the investment team, most of them have investment backgrounds. We're headquartered in New York, so there's amazing talent from hedge funds and private equity and folks that want to get into venture. And that's also good because it's a good yin and yang for our backgrounds, we're more founders operators, we don't have finance background. So, it's nice to have folks like that on the team and this allows us to move a lot quicker.Hadley Harris:And then, we've done our actual voting process to give more autonomy to the individual partners. Not necessarily because we think it makes better decisions, I'd be happy to talk more about how we vote and make decisions and that's changed a lot over time, but more so that we can move a lot quicker. Because in this environment, it's really important that you can make strong decisions fast to get into the best companies. So, we really optimized for that.Samir Kaji:I do agree with that completely. And especially in today's world where it seems financings are moving at warp speed and some firms have done exceptionally well in optimizing for speed. Somebody like Tiger, of course, is a great example. Now they've done it, at least from an outsider's perspective, in a way where they're not sacrificing diligence. They do a ton of work up front before actually meeting with these companies. How do you think about optimizing for speed without sacrificing the appropriate level of diligence or making sure that you have integrity of decision making that continues to ensure that you're making the right investments that fit within thesis and have the best probability of outlier performance?Hadley Harris:It's always a tough balance. Over our history, we've been more consensus driven, I'd say, than most. There are a lot of folks that are very individual conviction driven funds and then some that are more consensus. We've generally been more consensus, but we've always had a system that allowed for dissent because, I think, that's very important. You could have up to two partners actually not think that we should do a deal and we'd still do it. They do have a veto so, certainly, if they felt strongly enough, anyone in this [inaudible 00:18:36] can kill a deal. In that case, you need a lot of conviction from the two partners. And I'd say the most common scenario for us is that three partners think we should do it, at least one with pounding the table level and one who, mildly, doesn't think it's going to work out.Hadley Harris:And I think for outsized returns, that's a fine place to be. We have, in the last six months, just responded to the market giving the lead partner, that table pounder even more ability to move quickly. They still need to get everyone up to speed, every founder that we invest in does meet with all the partners, often individually, we don't generally do a partner meeting. And then, of course, we have these other five or six investment professionals who are in the loop and are helping drive diligence around the market, around backgrounds on the team, around competition and whatnot so that we can move quicker. So, that's how we've been thinking about it in terms of that balance that you mentioned, which is difficult to, I think, get right. And it's interesting, when you talk to even firms that are around 30-40 years, they have very different approaches to that question.Samir Kaji:And always think the culture is great when independent partners can be advocates and take the swing on behalf of the partnership. And maybe that's not for every deal but a variable. There is that deal and that deal could be the outlier. But in the past, we've seen firms that create a weird culture because there's attribution and, if some partners done a deal that went badly, now all the other partners were thinking about voting them off the island and we've seen that. And this was really during the '90s and 2000s. Not as much as now, although it's still early. How do you ensure that that culture where you really keep the oxygen for a single partner to be an advocate, feel comfortable with taking a swing when it's non-consensus but, at the same time, have some level of accountability?Hadley Harris:So, we don't have any attribution and we're pretty staunchly against it. Both internally or externally, certainly, one partner needs to run point with that company just for efficiency. So, we don't share externally who drove each investment. We've had LPs ask for it and we kindly refuse and you'll probably notice even publicly, we never assign deals to partners. So, that's one thing. I think the reason we're able to do that is because we're all founders in the firm and we have a shared history.Hadley Harris:I think that gets very difficult when you're Sequoia or any long-standing firm and you have folks coming in at different times and you need to be able to rate them. So, I think we're really fortunate there and I think that's a very important part of our ethos. And as we evolve over time, my hope is what I'd like to see is Eniac live on beyond me being a General Partner. I think that's something we definitely want to keep, but it will be much more challenging than it is when we all came in at the same time.Samir Kaji:I'm so glad you alluded to succession planning because it is something that so many firms struggle with. While I know it's really early in your firm's life and all of you have plenty of runway, what are the things that you do to ensure that you're starting to build the foundation for proper succession planning? And specifically, when you integrate new team members, how do you foster a culture of inclusion to let them understand that they, not only have a voice, but are part of a long-term plan?Hadley Harris:It was a big concern for us. So, it was the four of us and then we started hiring bill employees, probably, about four years ago. And then, we've always had one or two non-partners and, again, just added six. So, now, we have 12 with eight non-partners. It's gone better than I expected, to be honest, because I was really worried. We're very close knit and we have our own old jokes and all this s**t that can be hard for someone new. And we had an honest conversation before we started this recent hiring spree with our two, with Kristin and Anna, who have been with us a couple years and they, surprisingly, felt that we were pretty open.Hadley Harris:So, it's one of those few things where, actually, we were doing better than I thought. I think we all recognize the danger of being this tight knit group so, I think, we all independently, not in a way that was probably too thoughtful as a strategy point of view, put a lot of emphasis on being more welcoming and making sure that they didn't feel outside of the loop. And we'll see with these new folks, some of them are just going to come on in next couple of months.Hadley Harris:But it's something we're definitely going to keep an eye on it. I think it's definitely a danger to the business as we think about things going forward. And, to your question about succession, it's something we're already thinking about. I think we do have a long ways. We're all 44, so I'd like to think we have a good run left in us and we're still loving it. But these things, at least from seeing other firms, I think it's never too early to start thinking about what that looks like. And I think we all want the firm to live on beyond us. Certainly, beyond our day-to-day involvement and we know that that's not going to be easy and it's going to take time to figure it out.Samir Kaji:Are there things in particular that you'd look for when you're adding people to the team to ensure that there is true diversity of thought? Understanding that, in many cases, when you have partnerships that have been around for so long together, you build your own echo chamber. Can you, maybe, just walk us through the types of things that you really focus on when onboarding somebody?Hadley Harris:Yeah. With our recent hires, we've really tried to hire people that are pretty different from us in terms of experience. I think all of them have finance and investing experience coming in. I think majority of them did some time in investment banking and then worked at either a hedge fund or private equity firms. So, non-venture and that's certainly something that they're learning. But they all have investment frameworks that I think helps especially a lot of their job is spent around doing diligence, as I mentioned very quickly, to try and get up to speed on stuff.Hadley Harris:So, it's really good for that. And honestly, we learn a lot from them. None of us have finance backgrounds. Vic and I did MBAs but I don't know if we learned anything and we never practiced any of the finance. So, from a modeling perspective and market sizing, I think they're even better than us. So, it's been nice having junior investment professionals that actually bring a lot of new thought and skills to the table.Samir Kaji:And what you're describing to me sounds like a two-way apprenticeship. You learn from them, they learn from you particularly as it relates to investing, running a firm and all those type of things. Speaking of investing, we've touched on it through different points of this podcast. But you wrote this great post along with one of your colleagues, I think it was called Portfolio Construction for Dummies. Give us the cliff notes version of that.Hadley Harris:Yeah, it was really interesting because we've struggled and iterated in portfolio construction throughout our history. And a few years ago, we went out and went to all the OGs of seed folks that had been doing it longer than us that, I think, have tons of experience and talked to them about some of the issues we're having with portfolio construction, especially around allocating funds over time and recycling. And basically, they all said, "we're trying to figure this out."Hadley Harris:Folks that have been doing it 15 years were like, "well, we just raised an opportunity fund which is find the answer." So, it came to the realization it's like, no one knows this s**t and seed is different from Series A and beyond in a couple different ways. You need a broader portfolio for the same level of winners and, in the time horizon, you're adding one or two years average full time over A. And seed itself started 14 years ago, so no one had really dealt with this.Hadley Harris:So, we took it upon ourselves to really put an emphasis on building our own core abilities internally, both from a modeling perspective and a strategy perspective. And I guess, the three things that I tell folks that are starting off and I love spending time with new seed managers on stuff like this and these may all seem obvious to a lot of folks, for some reason. One is just aligning for the power law. Make sure you have enough shots on goal. I meet a lot of founders starting a pre-seed fund that maybe looks a little like our first one with 15, 20 portfolio companies. It may do incredibly well, but you're taking a crazy risk.Hadley Harris:The second is, when you lay out your strategy in terms of allocations, number of portfolio companies, that needs to be a starting point and you need to constantly iterate. And that's why, back to your question around how our portfolio construction has changed in this environment with rounds getting bigger and faster and conversion rates being higher, those are all just inputs to the model and the model adjusts. You know what I mean? Not just the model, but the thinking. And so, you could start off with I'm going to do X number of investments and I'm going to assume this type of conversion rate, but you need to feed in the real data and you should be able to then spit out the best strategy for that environment and for the results that you're seeing.Hadley Harris:And then the last one is, recycling is extremely difficult. And we're big believers in recycling, almost all institutional LPs want to see it. You can argue about whether that's the right thing for everyone or not but, I think, if you want to be an institutional investor, you really need to do that. And you need to build a model, and I think we've made this available online, that ties in both time as well as the construction itself. And that was the thing that was always missing when we talked to other players in the space. They always had two models. One is this is how I'm laying out my construction and this is my use of funds over time. But you need them to tie together or else you can't predict what is needed to properly recycle.Samir Kaji:This is really tough and I don't know that there's a single way that's perfect for every single fund size or strategy. I think it does range. But let's go into a couple of things that you noted. So, number one is having enough shots to goal. So, not having too concentrated a portfolio because, ultimately, you don't want to get to a point where your conversion rates are so low that, by the time your portfolio matures, you only have four or five companies that are at the Series B, Series C level. Today, the conversion rates seem to be much higher than they were a couple years ago and, a lot of times, those rounds are happening quicker and quicker. So, it's not uncommon to see a Series B happening, in some cases, maybe two years after that seed round, which we would have never seen before.Samir Kaji:And recycling, you mentioned, is something that is really tough. And if you look at some of the small funds, let's say, 20% of their total investable capital will be reserved for management fees. And then, you have 3 or 4% additional which is related to legal fees and fund admin and all of the other fund expenses that are generated. And because you don't know timing of those exits, of those original deals you do, which are probably in the first couple years, recycling is really tough and you often have to be creative.Samir Kaji:And there's a few ways that people have done it. One is looking at the future fees that you're going to collect and effectively deploy that banking on the fact that there are going to be some exits in year four and five that, ultimately, can be used for those management fees. What advice would you give to somebody that's running, let's say, a $20 to $50 million fund that's struggling in today's environment because the conversion rates are higher, the amount of reserves that need to be deployed in a very quick timeline is higher and the exits from those initial investments just aren't happening? How do you get up to 100% deployed?Hadley Harris:At least what we've ended up having to do and it's probably the best option we've done, is what you’ve alluded to and that is taking a calculated risk, which is understanding when you need to get what back to be able to cover your management fees and plotting that out. So, we tend to plot out high, medium, low scenarios on when we'll get cash back. We're fortunate to have some historicals that we can lean on. Industry, other historicals, generally things moving faster. So, that makes that portfolio a little conservative. But we almost always dip into future management fees. And at the end of the day, we always have the same conversation which is like, "If we don't have any exits in year 9 or 10, then we won't deserve to be taking these. We really should just move on to greener pastures. Get a new job or whatever."Hadley Harris:So, we almost always end up borrowing against that and, honestly, we've come really close. We've had some exits that saved our asses because we were about to just not be able to pay ourselves and we definitely cannot forego a quarter or so on certain costs. But yeah, that's the best thing to do. Understand what is needed and, really, to a granular level. But then, at the end of the day, it's got to be some [inaudible 00:32:02].Samir Kaji:You absolutely can't. And the other point that you just talked about, about borrowing against your future managed fees, which could create a situation where you have to defer in the future is that the conversion rates are higher today. I remember, the past, it's modeled at 50 to 60% and, now, maybe it's 60 to 80%, given the manager. How does that affect how people should think about reserve ratios because, now, a mortar company is going to graduate to that Series A meaning that you have to, potentially, deploy more and follow-on capital? What's the calculus that people should use in today's world and are there situations where people just don't follow on in the A because the price point's too high and, therefore, should just revert back to a normal 50% of the company's that I’m going to do a follow-on on.Hadley Harris:Yeah. In general, if we think that the conversion rates are going to be higher than what we initially thought, we will do less in new investments. With the idea being that we can put more of our effort into a smaller number of investments, we can make the bar higher and still get what we think is the needed distribution to have a really strong fund. Where you bring up a good point is, in that case, you would actually follow-on more into each investment.Hadley Harris:If you feel that those follow-on investments are irrational, then that should question that calculus. Generally, and maybe under some optimists, there certainly is some irrational behavior. But at least at the Series A level, we have felt that the companies on the margin maybe a little bit high but that they're actually growing really quickly and that we're getting into relatively unprecedented times in terms of the end result of these companies and just the part of the GDP that we're covering with venture.Hadley Harris:So, we've continued to invest in our companies in those earlier stages. Once you start to get into growth rounds, as a seed manager, I don't think it makes sense. Call your Series C and B on. As a seed manager, to be investing, it's certainly out of your core fund. But of those early funds, we've continued. So, long-winded response. I think, in general, you should cut down in terms of the number of investments you’d be looking in.Samir Kaji:And maybe that's an answer for a lot of the seed funds that are in that $50 to $150 million size. Maybe the answer is different for a lot of the nano funds that are 15 million, which might want to index heavily toward that initial check versus reserving a lot for follow-ons. Would you say that's true?Hadley Harris:Totally. I think in general, if you're a very small fund, most likely you should not do much following on at all. I think you're better off having more shots on goal. I should add, there's a lot of ways to be successful in this game. We tend to be more concentrated. There's also folks that do three times as many investments than us that are very successful. And I think that is a fine answer. If we do 36 and you want to do a hundred investments, that's fine.Hadley Harris:And you're not going to be very involved with each company, but your chances of getting a winner are higher. Best to outlead and that has all these other ramifications. Where I have trouble understanding is when you're just too low and I just think you're taking too big of a risk. And that's what I see, to your point, with a lot of first-time micro funds and would be much better off. Just do your 25, 30, at least, preferably even more, investments and have no follow-on. Don't try and constrain that because you want to save some follows.Samir Kaji:I agree and there's a number of people that actually have the same belief, including some of the LPs who have actually done the math and have seen some of the returns. Now, let's go global for a second and talk about where we are in the market. So, it's interesting, you started Eniac at a time where we were coming out of recession, now we've been in this long bull market. And in today's world, technology has become a bigger and bigger influence on our everyday lives and it's very clear that technology and innovation is this immutable force that is going to continue to exponentially increase. The market, though, in terms of capitalizing these companies, has evolved from funds looking fairly monolithic to really mass fragmentation.Samir Kaji:And I look at venture or investing in tech companies as a barbell. You have the seed in ecosystem, lot of firms, early, early stage. Not a lot of raised by seed funds, I think it's a small piece of the market. And then you have the behemoths, which I've referred to as aircraft carriers that do multi stage, multi geography and are going bigger and bigger. And they're now being joined by crossover investors being the hedge funds and the like. There was a great article that came out yesterday in The Information and it was by Sam Lessin. And his point was that seed managers, some are somewhat insulated because they're boutique, their early stage.Samir Kaji:But in terms of larger check writers, what we used to call tourists are really not tourists anymore. They're just capital that is going into software companies and that firms like Andreessen will get bigger and bigger and they'll approximate the next generation BlackRock or KKR. And where things get murky are the folks that are in the middle that quite aren't Andreessen or Sequoia but are series A and series B firms that are, let's say, $250M to a billion. And his view is that that's a really hard place. And I think Marc Andreessen has said that in the past, too, that barbell investing makes the most sense.Samir Kaji:What's your reaction to that? And then, more importantly, how do you see the market today and how it may evolve over the next coming few years?Hadley Harris:Yeah, I generally agree. Predicting the future is very difficult, so we'll see what happens. But my gut is that something like that will happen. That you're going to see consolidation at the later stages with much bigger firms. People talk s**t about Tiger but I have a lot of respect for what they're doing and we've worked pretty closely with them in a lot of our portfolio companies. They don't make sense for every situation, but there are certainly situations where having someone who will move very quickly and isn't very price sensitive and isn't going to get involved that does make sense.Hadley Harris:And I think a lot of the later stage VCs that hate on Tiger should really think about themselves and the value that they're adding. It's clearly not that valuable if people were taking Tiger over you. I'm obviously biased but I do think that it's hard for those aircraft carriers to address seed. There are people who market and, certainly, even when you're raising your last fund had conversations with folks that thought that even they would do seed.Hadley Harris:And I guess the thought exercise I always have with that is, if they were to do seed, how would they do it? And if you're a $10 billion, Andreessen of the future or whatever, how are you going to seed fund? Certainly, Marc Andreessen is not going to be leading them. You're going to have to hire a ton of junior investment professionals that are going to have to be guarding those firm because it's just not worth your time for a GP to do that. And then, are the best founders or, at least, the majority of founders that would want to work with the junior investment professionals, I don't think so. There certainly, maybe, are some who have done it before and really just want to be left alone, and that's fine and, maybe, it does make sense for them. But the vast majority of market are going to want to work with folks that can add a lot of value, that have seen this show before, hopefully, both as an investor and operator.Hadley Harris:So, I just don't see that happening. And I think that's why, despite a lot of downward pressure, especially in crossover rounds and in our Series A, we still feel very secure about where we are.Samir Kaji:Those are all great points and it does speak to this notion that seed in itself, at least seed managers, operate in their own sub asset category within venture capital. So, I want to end it with our heat check section. And starting off, the first question I have is, the most counterintuitive lesson you've learned as an investor in your 11 years at Eniac?Hadley Harris:Find that, sometimes, you can do too much work or too much diligence. Or, if you do a lot of diligence, which we tend to do, at the end of the day, you have to forget about some of it when you make your decision, because you can get into the weeds. And, at the end of the day, it's all about the quality of the founders and the size of what they're trying to do and the fit between the two of those and don't get too caught in the weeds.Samir Kaji:That's definitely good advice. It's something that you have to go through to actually experience. Second question I have is really related, too. Now that you've run a firm for 11 years, what is the thing that you look back and say you got the most wrong?Hadley Harris:In our early days, we thought we were hacking venture with a lot of stuff. And some of that stuff worked and, a lot of it, we realize why that's the case. I think in our very first fund, 2010 investments, we made a bunch of investments that were really inexpensive when we thought we could bargain hunt and I just don't think you can bargain hunt in venture. Part of the calculus of time was, "hey, this company can sell for $40 million and we're going to do really well." The problem is, no one's going to lead that next round. So, it sounds obvious in hindsight. But yeah, yeah, I think that's probably the most obvious one.Samir Kaji:Those type of outcomes could be great for the founders, but it's never really going to move the needle for a managed fund. So, the last question, I was actually tempted to and I'm not going to do this. I was going to ask you who your favorite partner at Eniac is. I won't do that and, instead, what I'll ask you is, you've run across so many great investors, both as co-investors, follow-ons and people you've spent time with. Is there a particular investor out there that most inspires you where what they say most resonates with you and you've modeled yourself to a certain degree around what they do?Hadley Harris:I tend to focus and spend the most time following investors that also started their firm. I feel like it's a little bit of a different skill set starting a firm and joining a VC. And for me, and I think my partner's in the same boat, that's what gives us the balance to scratch our own founder itch and VCs. I think if we had all joined a firm, we may have left by now to start something new. So, there's the classic guys like Don Valentine that we like to be the things that he said in the past and find that really helpful. And then, there's some guys who I consider the seed OGs that started a few years before us like Mike Maples and Jeff Clavier that have been very generous with their time with us over the years that I just think we've learned a ton from. So, it's folks like that, I think, that are most impactful for me.Samir Kaji:Yeah. And I would say that it has been amazing within the seed universe of how helpful GPs are to one another, especially as you go to first generation, second gen. You're part of the early days of the second generation. I know you guys have done a lot to help other GPs which is great. Hadley, this has been a lot of fun. Thank you so much for being on the show and congrats on everything you guys have done at Eniac and excited to see what you guys do in the future.Hadley Harris:Thanks, Samir. I really appreciate it and great questions, really enjoyed it.Samir Kaji:Thanks so much for listening to another episode of Venture Unlocked. We really hope you enjoyed our conversation with Hadley. To learn more about him and Eniac Ventures, be sure to go to ventureunlocked.substack.com for detailed notes on the show and my ongoing commentary about the world of venture capital. 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