Inside a Y Combinator Venture Capital Fund

0:00 There is no business in the world that is safe today from AI. So if you're a founder, you can go and compete with the biggest businesses in the world and you have an unfair advantage if you're AI native. They might employ a 100,000 people, but technically you could out compete them. In Silicon Valley, the venture capitalist is the one holding the money and the power. But running a fund looks a lot like running a startup. And they raise capital in the same way that founders do. A first fund is one of the hardest raises there is. And on this trip, I got to see that side of it up close.

0:31 >> My first fund I raised for 18 months. I'm not kidding. The entire time I thought I was not going to make it. It's so difficult. People tell you, "No, no, no." It's like, "Oh my god, it's so hard. I'm not going to do it." >> Today, I'm going behind the scenes with Gabrielle Jerosen, the founder of Lobster Capital, a fund that only backs white combinator startups. He traveled to Silicon Valley from France, built one of Europe's largest angel syndicates off the back of a YouTube channel, and has put more than $36 million into startups since 2020. His first fund closed at $12 million, well past the initial $8 million he set out to raise, and he's already working on a second.

1:09 >> I'm a founder. I've built many companies. I still consider Lobster Capital as a startup that I'm the founder of. >> Lobster's entire strategy comes down to one rule. If a startup didn't come out of Y Combinator, he won't touch it. But every fund in the valley is chasing the same demo day list. An allocation in the best companies is the hardest thing to get in venture. So the real question I want to understand is how a solo GP running a fund this size gets into rounds that some of the biggest firms in the world are fighting for.

1:37 >> First meeting with one VC and he said you should cancel all your meetings. >> This is even better. This is the real San Francisco. Today we're going to do something a little bit different. We're actually hanging out with a guy called Gabrielle and he runs a fund called Lobster Capital. Running a a micro fund is hard. It is it is very very like running a seed stage startup. Lobster Capital actually invests in YC companies only.

2:10 So they're a mandated YC firm, which is really interesting. And obviously the odds of any one YC company becoming a unicorn is is really relatively high in comparison to like any other kind of accelerator or most other startups that you just invest in. So the risk to reward is really solid, but it's a super long-term game. Fun life is 10 to 12 years. He's also doing content on top of VC. So media and VC. Going to catch up with Gabrielle. Should be a bit of fun. He's French. he moved over here from France, so I'm sure we're going to hear a bit about that. And we're going to a French cafe, of course, to start. So, yeah, let's jump in.

2:54 >> What's up? >> Yo, what's up, man? >> Here we are. >> Here we are. Let's go to Blue Bottle. >> Typical VC cafe. >> Yes, >> us Australians, we're really picky about our coffee. So, Blue Bottle for us is like not high on the list, but I do it. I I mean it's like a great convenience. >> Come on. You don't come to Blue Bottle for the coffee. You come for the VCs that are here for the crowd.

3:19 >> You come to raise a you know a $50,000 angel check. Run us through what's actually going on today. What are we up to? >> So the first founder we're going to see is a founder that I've invested in. He's raising his series A. So he wants to chat, you know, see what intros I can do for him, how to frame the pitch. At second meeting we're going to go see Mike from VC Lab. This afternoon it's going to be another meeting with another portfolio company. They've already raised their series A, but it's just, you know, catching up.

3:44 >> Nice. I love it. >> And so, how many of the meetings you had this week that could very much result in a 6 to 10 million check in the next few weeks? >> Probably 60% of the meetings were with leads that can close the round. >> That's like three or five or more. probably like 10 to 15. >> Wow. >> Yeah, probably >> 10 to 15 different firms right now could be writing you this check >> probably. That's like in the last week.

4:14 >> But then like it's insane. It's a very productive week, right? So even if you get a >> plus like probably another 10 meetings that were with people that are very interested but don't have the check size capability to leave the room. >> How do we know if the first meeting went well or not? So George's opinion is if they ask for the deck, it's a good thing. In my opinion, you'll hear about next steps right away. like you won't close the meeting be like okay send me the deck by they'll be like okay send me the deck how the round is shaping how much time I have YC rounds move very fast including series A like this so what's the round dynamics if they're asking you when are you closing you know those would be signs that I look for you you've heard that before I'm sure >> yeah that's interesting first meeting was one VC and he said you should cancel all your meetings like tried to tell me to cancel all my >> what that's okay this is even better >> this is getting very creamy >> yeah that's the That's how it should be.

5:05 I heard it when I was a kid in my family. It's like the stinkier the cheese, the better. But it has to stink. It's only a French thing. Like everyone else would find it disgusting. But yeah, in France it has to look bad to almost smell bad, but then you taste it and it tastes very good. So Gabrielle's thesis is about as differentiated as it gets. He only invests in Y Combinator startups. But this still begs the question of how does a solo GP with a $12 million fund get into the same rounds the biggest firms in the world are literally fighting over. So let's get the notepad back out. Gabrielle's first fund closed at $12 million. He was chasing eight and it took him 18 months to raise and there's already a second larger fund in the works. Now the whole fund runs on one rule. If it's not a Y Combinator back startup, he will not invest. and why Combinator is the most successful startup accelerator in the whole world. Over 5,000 companies funded since 2005 and more than 90 of them are now worth over a billion. Their combined portfolio value is north of $600 billion. So here's the case for his filter. Roughly 4.5% of YC companies become unicorns against about 2.5% for other venture-backed seed startups and about 45% of YC companies raise a series A against an industry average of around 33%. So, on paper, you nearly double your odds just by fishing in that pond.

6:24 But here's what that filter doesn't solve. YC has its own power law. Out of the 5,000 plus companies they backed, the top 10 are driving something like 65% of all of the value. Narrowing down to YC alone doesn't mean you win. So, let's do the fun math. $12 million after fees, he's got about 10 million to actually deploy across around 30 startups. Call it a $300,000 check per company. And for his investors to call this a strong fund, he needs roughly three times their money back. So $36 million. Now YC company's price high.

6:54 Say he's getting in around a $20 million valuation. 300K buys you around 1.5% but after years and years of dilution could be about 0.5% by the time an exit happens. So hypothetically, a billion dollar company could maybe return him 5 million on that initial check. Even a unicorn only pays back about a seventh of the fund. Which means the math doesn't really work on unicorns. It works on decacorns $10 billion valuation plus. Now a $10 billion company at the same half% on exit returns $50 million four times the entire fund and roughly one in four YC unicorns becomes a decacorn. So the whole game here is the price he gets in at. Same check half the valuation doubled the ownership. And that's exactly what his website actually says. But the real question here is whether the price he gets in at leaves enough room for the returns his investors actually need later on. And that is the whole bet. Now, just like Gabrielle does, I'm making about 20 small promises a week. Send that deck, make an intro, check back in on something next month, and they're always scattered amongst a ton of different conversations. This is where our episode partner, Granola, has been genuinely useful for me. It's the AI notepad that can run in the background of your calls, and one of the recipes I've been leaning on a lot more recently, pulls every outstanding to-do across all of my conversations and puts them in one list.

8:12 So instead of scrolling back over weeks of notes trying to remember what I said I would do, it's just there. Literally everything I've committed to pulled from every conversation. And in a job like mine, doing the thing that you said you do is pretty much the whole job. I use this every day, so it's an easy one for me to recommend. I've left a link down in the description to get your first month free. Thank you so much to the legends at Granola for making this episode possible.

8:36 >> Hey, how are you? >> I'm so happy. >> Hey man, I'm Will. >> Mike. >> Lovely to meet you. >> Nice to meet So Stark Fund is like the perfect product in that one to five to five, >> you know, million dollar range. And because we've lowered the barrier to entry, so you can do a first close on 150K, >> people can just start getting going, right? So boom, investment. Boom. >> But you're if you close 150K, you're investing like 10K, right?

8:57 >> Yeah. Yeah. But then but then you can then you can keep raising into the start fund and just keep doing these rolling closes and get traction. >> And if it's over over five, then you move to the real fund thing. Well, it maybe some people are actually stay staying on and going to 10 because the fees change like the more money you raise, the lower the split is in the fees. So, it actually makes sense economically up to like 10 plus. But that's where you we usually have a conversation. You're right. It's like, look, maybe we should go to fund two now and and and set up a classic traditional fund cuz now you've got the, you know, got over the whole new manager hurdle, all these different things. You can start working with like >> you know, more institutional LPs and that kind of stuff. And that's that's that's where it fits. So actually everything we've built actually kind of works together very nicely.

9:42 >> How was that? They're early investor in the fund. That's super awesome. You guys have a good relationship. >> Yeah, it's good. They've been first of all very helpful when I got started and now you know hopefully I hope I'm I I've outgrown them. But they're always my biggest fan. You need like raising a fund is so difficult. A startup we were talking about you you'll close 5 to 10% of your investors. But a VC fund you'll close one to two% of your investors. If you're good, you'll close maybe 3, four, 5%. Like, you hear so much nos. And so, you need some people literally just cheering for you, believing in you, and being like, >> you're going to make it happen.

10:19 >> Is this ground, by the way? >> Yes. >> Is this the spot? >> Yes. Look at that. Going down is not great cuz it hurts your knees. But, of course, going up is by far the worst. So, the views are nice and it's great for the for the heart. >> Yeah. This is where all the thinking before the deal making happen. Exciting. >> Okay, so I just got a text with George and we were talking this morning about the investor signals at the end of the meeting and whether or not you should present a deck. And I was telling him it's, you know, I like when founders go without a deck. It's kind of a bold move. And so he texted me. I went for a conversation, not a deck. At the end, she mentioned next steps, the research she's going to do and asked for the timeline. So, he went without the deck, the bold move, and she did all the signals that she's interested. So, you know, already this morning, you had what, 10 to 15 firms interested in the series A.

11:11 >> Yeah. >> That's just one more. >> Crazy. But it's funny. It's funny when you turn those conversations from a presentation into just a conversation between two people. >> Exactly. >> Like, yeah. Very, very cool. >> Well, you know, we were both of us were seeing this morning. It's a relationship business. And so when it's transactional, >> Yeah. >> it's not, it doesn't feel, you know, but when you build the relationship, look, every investor might not invest in you today, but they'll invest in your next startup.

11:37 >> Totally. >> And so you just, you know, and it's the same for you as an investor. You might not invest in this company now, >> but you want to be helpful to the founder. So when he founds his next company or her next company, they're going to think of you. >> Totally. So what's the story behind this deal with these guys? How did you meet them? >> Through YC. like YC selected them. It's an interesting story. They had a previous company that failed. Same team, learned some stuff in the process and it's actually very interesting with what AI is doing. They started by selling AI tools to insurance brokers and then they realized instead of trying to convince them to use our tools, why don't we replace them using the tools that we built and just compete with them and kill them. So this is the thing YC has been talking about for the last two years is these AI native vertical companies that just instead of saying AI to insurance brokers become the insurance broker etc.

12:42 >> So where does it go from here? You've had insane growth. Yeah, insane. You you went from a team of seven or eight to 55 in like a couple months. Yeah. >> You've raised 47 million. Is that the accurate? Pretty congrats. >> Thank you. >> and where does it go from here? What's coming? >> Yeah. you know the so the most important components for right now is like you know how do we sort of scale out the team so we can orchestrate everything from engineering to operations to customer service because we one of the things about insurance is that it's a demand capture business right there's a trillion dollars of demand out there in commercial insurance and really the most important thing for people there is like you know finding an insurance brokers that they can trust one thing I learned more recently I was thinking I was looking at the light bulb and the lights went off I don't know like randomly ran off in San Francisco one night and I was like, "Wow, I haven't seen, you know, power go out in many days or months."

13:37 And then I realized that insurance is like utility. >> Yeah. >> You know, it's every business needs it. There are 36 million business 36 million business in the United States. They all need insurance >> and a lot of them are struggling. They're going like with five 10 different brokers trying to look for the res, you know, the best price >> and it takes them forever. You get in a month, >> take a month, sometimes they get ghosted, you know. So it's so how how do you sort of solve for that? I think you need to provide people the ability to trust you.

14:04 >> Yeah. >> And that you know you'll go find them the best price or find them the best product and that you know you're somebody who like provides you transparent service. And that's really what we want to provide is we want to be that name brand where when somebody says insure commercial insurance or insurance they should think about Harvard. >> There's a lot of founders that watch this channel. as VCs, as operators, too. But for the founders, right? A couple of these guys are NYC or maybe about to get accepted in. What would you say to those guys right now? Early stage.

14:33 >> I mean, congrats. You're a founder. it's it's, you know, it's tough being a founder. keep at it. The sunshine over the rainbow is is worth it. I draw a lot of inspirations from all the founders that I meet. You can see how relentless they are, how motivated, how fast they execute. you probably have to be a little bit paranoid and have a sense of urgency. But if you have a sense of urgency and you're just making things happen, you're going to do great.

14:54 And if you move fast, move super fast and put your heart into it, there's a good like a good chance you're going to go places, hopefully you'll be the one that we'll make a video about in the future cuz you're going to build an amazing company. >> I love it. Thank you. Awesome. Thank you so much. So good to hang out. See you.