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🔑 Key Takeaways

  1. The LP Show offers firsthand insights on investing in startups, skeptical perspectives, and the impact of investment decisions for participants, alongside opportunities to win prizes and build on Solana Foundation's blockchain.
  2. The use of podcasts as a tool for investment and partnership building is critical to building successful relationships. Kindergarten's focus on building relationships through real-time communication helps young companies grow and succeed, and its use of the AngelList platform and complementary capital strategy are key to its success.
  3. Kindergarten Capital prioritizes building authentic relationships with founders and gathering hard data on a company's communication funnel over traditional pitch meetings, resulting in a unique and effective investment process.
  4. Nurturing relationships with sponsors and startups creates potential investment opportunities. Vanta's sponsorship helped establish a connection that opened the doors to investing in the startup. Networking and building relationships with partners pays off in the long run.
  5. Vanta's platform provides much-needed observability for businesses to secure their digital assets, making it a valuable investment in the current climate where cybersecurity is a top priority.
  6. Adopting compliance automation tools like Vanta is crucial for SOC 2 compliance and ensuring a culture of compliance. However, it remains uncertain who will own the opportunity and investing in foundational infrastructure is key.
  7. Vanta software automates up to 90% of the compliance process, partnering with human auditors to certify audits. This eases the certification process for startups and younger companies, making Vanta a sticky and valuable product to have.
  8. Nailing a specific use case, understanding customer pain points, and transitioning to a system of engagement are crucial for Vanta's success. Building trust reports and creating a positive work environment under Christina's leadership are key steps towards becoming a platform.
  9. Vanta's focus on efficient growth, scientific sales approach, and defensible value showcase the importance of doing correct but non-obvious things for achieving durable success as a founder.
  10. A scarcity mindset and data-driven team are essential for success. Building relationships with family offices and investing in great partners and companies is the new VC deal dynamic. Partnership built on positivity and growth leads to long-term success.
  11. To be a successful investor in B2B and SaaS products, prioritize data-driven decisions and choose an investment approach that aligns with your strengths. Consider the complexities of board seats and their impact on founder relationships, and recognize the challenging responsibility of ensuring business success.
  12. Kindergarten offers a new approach to venture capital investments that benefits institutional investors like Thomas by providing a great investment product without high fees. Past performance is a good predictor of future returns, and fees matter over time.
  13. Investing in software businesses with liquidation preferences can offer unique opportunities for higher returns, with co-investing and Kindergarten offering alternative ways to prioritize fairness and transparency. The success of software businesses can create huge returns relative to the small amount invested, making it a valuable investment option.
  14. Private market investing offers perks like access to privileged information and rights with preferred equity, but liquidation preferences may create conflicts. Ratchets offer a safety net if a company goes public at a lower valuation. Stay up-to-date with changing features to navigate capital formation effectively.
  15. When considering using ratchets, it's important to take into account the specifics and circumstances of your business and your next best alternative. Although there may be competition and potential slowdowns, a middling outcome could still result in significant growth. By leveraging heterogeneity and remaining an aggregation layer, Vanta can remain relatively insulated from larger platform competitors.
  16. By shifting from a system of record to a system of engagement, Vanta can establish itself as a major player in the system of engagement market for security compliance and data security monitoring, potentially reaching a $100 billion dollar valuation.

📝 Podcast Summary

The LP Show: A Non-Professional Venture Capital Experiment and Investing Journey

The LP Show discusses Kindergarten Ventures' investment in Vanta through a non-professional venture capital experiment. Listeners gain insight into the firsthand knowledge of the company and the opinions of a skeptic investor. Solana Foundation is sponsoring all the limited partner episodes this season and invites developers to build applications on their highly efficient blockchain with low transaction fees. Acquired is asking their audience to take part in a survey with prizes of AirPods Pro and t-shirts from their merch store. The LP also discusses their investing journey and the impact of their decisions for participants like Thomas McGannon.

The Benefits of Using Podcasts for Investment and Partnership Building.

Using podcasts as a tool for making investments and building partnerships is a smart move, according to David. Finding smart and creative people, speaking in real-time and being able to ask questions and build relationships is critical to Kindergarten's success. While Kindergarten may be a small venture capital fund, it plays a complementary role in the ecosystem, coexisting with traditional venture capital. Kindergarten's focus on building partnerships is crucial as it helps young companies grow and succeed. While the million-dollar fund is not about the economics of the business, it is about building relationships that can lead to successful investments and partnerships. The fund's use of the AngelList platform and complementary capital strategy are key to its success.

Kindergarten Capital's Unique Investment Process

Kindergarten Capital's investment process differs from traditional VC firms. They do not have Monday meetings or rank order the pipeline of deals. Instead, they build authentic and meaningful relationships with companies and founders by interacting with them through the podcast, sponsors, and community. By doing so, they are able to gather hard data on a company's communication funnel and determine which companies they want to put money behind. This differentiated approach allows Kindergarten to have a unique capital formation circulatory system that prioritizes relationship building and authenticity over performative pitch meetings.

Building Strong Sponsor and Startup Relationships Can Turn into Investment Opportunities

Developing a good relationship with sponsors and startups can lead to potential opportunities such as investing in them. Acquiring a sponsor like Vanta became a stepping stone for the hosts to build a strong relationship with the company and its founder. They learned more about Vanta's business and had the chance to meet the whole team in person. This led to opportunities to invest in the startup when they were raising rounds of funding. The good relationship they had built opened doors for them to consider investing in Vanta through an SPV, which highlights that networking and maintaining good relationships with partners and startups you work with can eventually lead to investment opportunities.

The importance of cybersecurity observability for businesses in the digital era

Vanta is a security monitoring company that provides observability to the increasingly fragmented services-based software components. They are not building force fields but monitoring them. Their view for solving the cybersecurity problem and inserting themselves is compelling. Cybersecurity investments are highly demanded as the value of a secure digital estate is encapsulated. Vanta is attracting lots of customers, adding hundreds every quarter and is on track to becoming a platform company. It's a great time for investing in cybersecurity as companies need observability and visibility into their digital estates. AWS is just one cloud provider and a technology giant where all businesses are running. Everything needs cybersecurity, making Vanta each day more relevant.

Investing in Compliance Automation in Cloud Software Estates

Investing in compliance automation is essential in ensuring a culture of compliance in cloud software estates. Adopting tools like Vanta or its competitors can help with SOC 2 compliance. However, it is uncertain whether companies creating the category will own the opportunity, as there are businesses in orthogonal parts of the data journey with a depth of integration and sophistication of processes. The compliance automation industry could eventually be a large pillar in the digital estate due to the automation and instrumentation required for compliance. Investing in the foundational layer of infrastructure is key, but the business model and operating model are also important factors to consider. Compliance automation is a when, not if, opportunity, but it remains to be seen who will win the category.

Vanta's Partnership with Auditors Makes Compliance Easy for Startups

Vanta is a software product that automates up to 90% of the compliance process, making compliance much easier for companies. Vanta does not aim to replace human auditors who are crafting the rules but partners with them to do the certification audit. Vanta's partnership with auditors has been a very smart move, enabling startups and younger companies to obtain SOC 2 audits easily and cost-effectively. Once you start getting compliance certifications, especially SOC 2, you're not going to stop, making Vanta a very sticky product. The risk to Vanta is if a bunch of their customers go out of business or pivot to something else, which is possible in the current environment. Vanta has a go-to-market strategy that focuses on partnering with auditors, and they aim to eventually evolve into continuous security monitoring, the Datadog for security.

Factors Driving Investment in Vanta

Vanta's mission-critical nature of enabling revenue through SOC 2 compliance is a key factor in the investment decision. The transition from a system of record to a system of engagement is crucial for Vanta's success in becoming a platform. The importance of nailing a specific use case and understanding the customer base's pain points is crucial. Vanta's focus on building out trust reports for both internal monitoring and external sharing is a step towards building a system of engagement. Christina's leadership skills and ability to create a positive work environment make her a classic founder that people would be happy to work for.

Vanta's Bootstrapping Success & Growth Proves Value in Security Compliance Monitoring Industry

Vanta's success in building a functionally bootstrapped business from zero to $13 million in ARR is a critical component to achieving durable growth. Despite competitors raising multiple times the inflow of investment arsenal, pouring in growth capital into Vanta does portend getting ahead in this turn in the market. With over 300 added customers in Q2 2022, Vanta's customer growth accelerated, proving their defensible value in the security compliance monitoring industry. Their achievement of raising a little bit of money, coupled with a scientific approach to building their sales reps and the efficiency, makes them a great example of a founder willing to do all the correct but non-obvious things that great founders need to do.

Having a team that is data-driven and has the principle of scarcity woven into its culture is essential to success in businesses like Vanta. Creating a category does not guarantee owning it, as there are other businesses growing quickly. Traditional VC deal dynamics do not matter as much anymore, it's about investing in great partners and companies for various reasons. Working with family offices can be a high-value node in a network and supportive nature helps build strong relationships. Building a business and life with positivity and growth can be achieved without friction and competition at every layer, like in some traditional partnerships.

The Importance of Capital and Board Seats in Today's Competitive Environment

In a new climate of increasing competition, it's important to fill up the war chest with as much capital as possible to be the winner and the system of engagement of record. Board seats are paradoxically anti-secrets as they create a quasi-complicated relationship with founders. Being data-driven is key to successful B2B and SaaS product investments. Emergence takes a more liberal arts approach while Craft takes an engineering approach. If the situation doesn't require it, it's generally better not to be on the board. Being responsible for ensuring a business is performing at the highest and best use is a difficult responsibility set to execute.

Kindergarten's Unique Approach to Venture Capital Investments

Past performance is a good predictor of future returns in venture capital while businesses in an internet age skew towards perfect commodities or perfect monopolies. Kindergarten is not interested in traditional venture capital and wants to provide a great investment product without scaling assets under management and charging high fees. This approach benefits institutional investors like Thomas who need to bring thoughtful investments. Kindergarten's fee structure helps Thomas feel like he's doing his job as an institutional investor. It's a valuable opportunity to invest in Vanta through Kindergarten as Vanta is a highly sought-after company. Fees matter over the fullness of time, and Thomas learned this from MITIMCo.

Investing in Software Businesses with Liquidation Preferences for Higher Returns

Investing in software businesses with liquidation preferences can limit downside risk and provide a unique opportunity for investors seeking higher returns. The traditional venture firm world structure involves high management fees and incentives that drive behavior. However, newer models like co-investing and Kindergarten offer alternative ways of investing that prioritize fairness and transparency. Liquidation preferences are a unique feature in private market investing that can distort pricing and provide an attractive investment option. The success of software businesses can create huge returns relative to the small amount invested, and as more institutional dollars come into this space, the market will continue to evolve. This is a valuable secret hiding in plain sight that is not talked about enough.

Preferred Equity – Advantages and Disadvantages

Preferred equity is one of the features that gives private market investing a big advantage over public market investing, as it offers outsized returns due to access to privileged information and rights. However, liquidation preference is one factor that may distort valuations. While it provides investors with more protections and incentives to go public, it may also create conflicts between the management team and investors. Ratchets, on the other hand, may be a more interesting feature as it applies both in an IPO and M&A scenarios, providing investors with a safety net if the company were to go public at a lower valuation. Understanding the different features that come and go over time is crucial in effectively navigating the current capital formation cycle.

Ratchets and the Importance of Considering Business Specifics and Circumstances

Ratchets, while having a bad reputation, can actually provide downside protection and attract more capital for a new investor in exchange for a higher valuation. However, the specifics of the business and circumstances matter when considering the use of ratchets. A founder's next best alternative is also a key input for predicting their future decisions. While Vanta faces competition and potential slowdowns in growth, a middling outcome could still see a growth rate of 50% in two years. It is challenging to predict the unknown unknowns that may impact a company's fundamental factors, but as long as Vanta remains an aggregation layer and leverages heterogeneity through various cloud services, it can remain relatively insulated from larger platform competitors.

Vanta's Potential Path to Market Leadership in SOC 2

Vanta, with its high net retention rate and rule of well into triple digits, is dominating in SOC 2. However, to reach the A+ grade, it needs to transition from a system of record to a system of engagement. By standing up compliance automation as a major pillar within the digital estate and developing new ways of translating the data into something of communication for external stakeholders, Vanta can become a way of communicating operational stability and excellence. This could turn the company into a market leader in the enormous market of system of engagement around security compliance and data security monitoring, and bring in a $100 billion dollar valuation.