An Inside Look at How a Venture Capital Firm Operates

Intro 00:01
Welcome to Startup Success, the podcast for startup founders and investors. Here you’ll find stories of success from others in the trenches as they work to scale some of the fastest growing startups in the world stories that will help you in your own journey. Startup Success starts now.

Kate 00:19
Welcome to Startup Success. We have Josh Gilbert, who is CFO of Freestyle VC firm with us today. Hi, Josh.

Joshua Gilbert 00:28
Welcome. Thank you for having me.

Kate 00:30
Thank you. We’re so excited you’re here. The first thing I want to do before we get into your role at Freestyle, because I know a lot of people are interested to hear what a CFO does at a VC firm, and then we’ll get into how a VC firm works because there’s a lot of people out there that don’t understand the inner workings. Yes, obviously, they make money when a company goes public, but there’s a whole lot that goes on before that. Tell us about Freestyle first.

Joshua Gilbert 01:05
So Freestyle has been around since 2011. We have little under $600 million of commitments under management, we are a seed investment firm, we basically invest throughout the country. David Samuel and Jenny Lefcourt are the general partners, they’ve been founders themselves. So again, Freestyle really knows the ins and outs of not just VC investing, but our GPs are founders, and we’ve been in the shoes of who we’re talking to. We have six core funds, and we have four opportunity funds. So we are currently investing out of our current sixth fund, and we’re making investments of $2 to $3 million, you know, 15% ownership we take, and, you know, if we really have conviction, we’ll do the Series A, we’ll do a Series B, and we have the opportunity fund to even add on to a C, or whichever a SAFE or something. So we love to find great founders and support them.

Kate 02:03
Oh, that’s great. I like that you’ve put an emphasis on founders, you know, that’s important. So you said something that I know, some founders would never admit, but you said that you have different funds. And so I, I’ve talked to founders, and this is fine. Explain that to us, because I don’t think they all understand that there are different funds, right, at a firm.

Joshua Gilbert 02:28
Yeah, and again, we are a seed investment fund. So we invest in the seed round. We typically, you know, in this market, and we’ll talk about this, you know, sometimes a series A could be called a seed, depending on the valuation. And also that series A’s are sort of recapping and could be a seed. So there’s a possibility that we could do that. But our core fund, which is our main fund that we invest  a seed round, are not meant to invest in a B round, initial round, or we don’t need a C. We’ll lead the seed round and, if we’re leading the seed round, we’re giving you a term sheet, you know, it could be the $3 million round on whatever, $15 million posts, we might take all $3 million, we might do two and a half, but we’re going to do predominantly the most of the round. And if it’s a little bit leftover, you’re someone either that key investor to bring in, but, you know, we’re also there, you know, we’re looking to support the founders to hopefully, you know, grow and have enough runway to build and work with them to go to the A round which we could lead or we’ll find another one of our colleagues to lead the round and for us to co-invest. And then some VCs, like us, have what’s called Opportunity Fund. And those opportunity funds are, for us, we don’t invest in new Series C or D companies, we’re investing in our companies that are already in our core fund, and supporting them even more from when a valuation is say over $200 million and that’s not meant for seed round, but it’s meant for opportunity, that we still feel a lot of conviction in the company, and we want to take the ride and some of our investors might not be in a core fund, they might be in the opportunity fund, or some can be in both. So again, there’s double dipping, let’s call it, but it’s meant, you know, these opportunity funds are there for us to support our winners and our founders that we have conviction in, you know, and be there to help be on the term sheet still. And it also helps, you know, when you’re looking for great investors to run a C or D to see that there’s a consistent investment of your series seed. It really goes a long way.

Kate 04:36
I can see that it would go a long way. And also I mean sober warning for all of you right, the seed companies that you invested in, you’ve gone through the process with them and now you can make these larger investments. So I just want to clarify that for everybody listening. You have your primary fund that invests in seed stage only, but your opportunity fund is for B and C investments of companies that you invested in, during their seed round. And you don’t necessarily lead on the B and C round every time. sometimes your co-investors?

Joshua Gilbert 05:13
Usually, co-investors are going to lead the B and C but you know, again, if we have the reserves in the core fund, and depending on the valuation, we might use that fund to add on because, of course, you want to keep your ownership as high as possible, and take advantage of it. Or, you know, if the valuation is meant for an opportunity, we’ll put in more money from that fund. So, it’s supporting our founders that’s really what it is, we’re here to support them, not just from the beginning stages, but we support founders, you know, all the way that are unicorns right now, you know, we still are very involved with them, and so forth.

Kate 05:49
That’s great. And we should note, not all VC firms do this. (Correct.) So I want everyone to know that Freestyle is one of the firms out there that has an opportunity fund. Right, some are just pre-seed, seed …

Joshua Gilbert 06:08
Some are pre-seed, some are seed, and some have tried opportunity funds and it hasn’t worked. I will say ours have been successful and meaningful to both founders and LPs, of course. And there are funds that you know, are meant to only be investors in the A or the B rounds. And then you have the larger VCs that, you know, are the ones leading the C, D, E rounds, but some of those actually have now started seed VCs themselves. But you also have to understand they are very knowledgeable in the later stage rounds, it is great to have these names in a seed round, but when you need the support that we can provide to the founders on, like ‘What are the founders going go through? What are the needs?’ we are more experts in that, and that’s why we’re seed.

Kate 07:02
I think that’s a great point to bring up for everybody listening, when you’re in a seed round, you do want an investing partner who is used to that founder support and what the questions you’re going to have and the needs you’re going to have, as you’re figuring things out. It is much different at a later stage round when you say?

Joshua Gilbert 07:23
Yeah, and even from operating perspective, obviously. I was in a roundtable on venture debt. And venture debt, when you talk about it on a series D is very different than a series C. And one of the founders in a Series A mentioned they have a great investor that led the round, they were more of a more growth VC, but they love the company, but when they asked them about how does venture debt work for an A, they couldn’t really answer them and help them because they don’t understand A round or see more venture debt. So we had a great conversation. She was appreciative to meet me so again, you know, it’s more operational and understanding. But again, names are important, right? Relationships are, it’s all about, well, in some ways, it’s about relationships, but it’s also knowing who you’re investing in, and what they can bring to the table to help support the founders, the company, and really the success that we’re all looking for.

Kate 08:18
Right. I think that’s so important to note. And then I want to spend a little time if you could clarify for those people listening, how a VC firm like Freestyle makes money. Because I had a founder ask me, they were embarrassed the other day, like, they have to go fundraise. And I’m like, yes, they do. And he was kind of baffled. You know, he’s a young guy, he’s got this great idea. But he was baffled by that. Can you explain how that works for people listening, because people forget that.

Joshua Gilbert 08:54
Yes, people forget that. Yes, we are out there, and typically, in your initial fund, you know, it’s friends family and it’s a smaller fund. And then you start working in hearing about, you know, institutional investors, and you know, they can be fund-to-fund family offices, endowments, colleges, large institutions. And so we’re going there, and we’re taking their commitments. And basically, they’re committing to our funds, and we’re using their funds. It’s not our funds. We do put in support of from our general partners. Yes, we do put our own commitments, but we’re using our basically our LPs, which are, you know, other people’s dollars. They’re looking at us to make the right investments. And we’re using those dollars to commit and make investments into founders. So that’s how we’re fundraising out there. And then our performance, then determines how can we raise our next fund to help and give more money to new founders. It’s the same deal like if our funds invest in portfolio companies that are successful, it’s easier to then to raise the next fund. Similar to a portfolio company, you raise a seed round and you do well, it’s a little easier to raise the A, If you’re not doing well, well, that’s harder. And same thing with us if we’re not winning, and we’re, unfortunately not doing well on our picking, it could be it could lead to a harder raise for the next one. But again, similar, you go from Seed to A, B, C, D, you know, wherever you go, we go from fund one from two from three and four. Different LPs come in some stay the same, similar to Seed, A to B to C — some same, some new investors. So it is really interesting, there’s a correlation between the two when it comes down to raising in a way.

Kate 10:41
Yeah, that is interesting. Okay, you explained that really well. And I think that’s important to note that you all are under pressure to perform too. So if we could just, I don’t want you to share proprietary information, obviously, but what kind of odds are you looking at? Is there a formula or…?

Joshua Gilbert 11:03
You know, some people throw darts. It’s really, you know, meeting a founder, you might have a half-hour meeting, within the first few minutes you meet the founder, and you kind of like can feel it, right. So it is like dating almost. It really, for the founder, you might have a 30-minute meeting, but you have only the first I would say two to three minutes, you have to win the heart and keep the general partner engaged, right? It’s the story, it needs to be there. Second founder, you know, we invest in second founders, that have done well in the first company, that’s really important, right? You know, someone who fails in a first company, doesn’t mean they can’t do well, for a second company. And sometimes those people who fail are the ones who then become winners, because they learn from their failures. And it’s important to talk about their failures and learn from it just like we have to learn why we failed in an investment. Right? And how do we change that or modify was an us? Was it the founders? But it’s finding confidence, doing your due diligence, it’s, you know, word of mouth, you know, a lot of times you’re getting it from other VCs, and so forth, or other founders, and, you know, name, of course, helps, you know, Freestyle being out there for a long time does help. And it’s changed because it has gotten harder, and more competitive for founders that are going out there and raising. They’re finding a couple of you know, they’re gonna get to a couple of term sheets now, right? And who do you choose? So I would say 10 years ago, when people started 11 years ago, there wasn’t as many startup companies, and now there’s a lot of startup companies and a lot of VCs, it’s more due diligence than ever. But the big thing is you love the story, you love what they’re going to build, you love the founder, you have conviction in the founder. And you’ll probably most of time you’re rolling the dice. But, you’re going to probably expect 30% of the investments that you make could return maybe cost or go to zero, You are taking a bet. So, you know, you’re not going to have all you need typically in VC, one grand slam can return a fund so many multiples, so you never know.

Kate 13:23
I bet. So that is a great segue to talk about this year, and your thoughts on this year and the ecosystem because it has been really wild for the past 18 months.

Joshua Gilbert 13:35
It’s a different ecosystem than what we were in. I remember before COVID, you know, the summer months were a little slower. And, you know, during the year you had December was slow and January, and everyone’s rushing Fridays before holiday weekend, where it’s like, okay, we’re doing this closing deal at four o’clock pm and so forth. And then COVID hit, and I actually thought COVID was gonna be slow, right? Because everything’s shutting down. And actually, well, I was wrong. COVID actually was the fastest growth of VCs, and the fastest layout of cash to portfolio companies I’ve ever seen. You know, you would sign a deal on Monday, and you could be closing on Friday, which means less due diligence was happening on companies. It was more, I think maybe it was a COVID fear or whatever. But people were just putting money out there investing, investing, investing. The summer was my craziest time. I mean, we didn’t rest, we all didn’t a rest. And it was innovation and who can come up with the most creative ideas, it was fast. It was very fast paced, and due diligence was not what it was before COVID. And now, in 2023, 2022 the market, yes public markets were up. But the private market is down In a way that secondary market is discounted at 60 to 70%. Valuations just don’t make sense. It’s, you know, people looking for exits, and there’s less companies buying other companies. Ii=t’s a matter of, when you think about creating a company who’s gonna buy you, how are you going to exit. So that’s also part of how you have to think about your story. But people are now seeing that COVID deaths faster than ever. So this is something that is different in this ecosystem, your vintage funds, you know, in the COVID years are seeing companies die faster than ever. In 2024, we’ve written off more companies than you would in a normal year already, because they didn’t succeed and why, part of that’s due diligence. Part of it is they ran out of cash too fast. Now, they’re asking for more runway. Then we had a banking crisis in 2023. So the banking has changed in different ways with lending and interest rates have changed. So the ecosystem, you know, yes, the stock market’s doing well, inflation, but there’s Wars, there’s China, there’s AI, so there’s politics, which we won’t go into. So there are a lot of things that all is affecting the venture capital ecosystem that have not affected it, some of these never. And the big thing is that people have to get used to is that we’re back to the old days, which are better for me. But where you do your due diligence, you’re on the phone, you’re working with the founders, you’re calling the references, you get the term sheet out there, and it can take now three to four weeks, and you’re asking for real due diligence, and we’re back to data rooms. And we’re back to asking questions, and even VCs have added additional policies that we like to have within the documents that weren’t there before.

Kate 16:52
I think that’s great, though. I know you said makes your job easier. Let’s delve into the due diligence a little bit, because I know people listening are hating it. But I think it’s for their benefit. I’m guessing you might agree with me. I mean, let’s talk about that.

Joshua Gilbert 17:09
I agree with you 100%. And I would say that, yes, these founders, and it can be repeat founders, it’s new founders, it’s ones that are raising, new company, whatever it is, they are not used to this. And they’re not used to knowing, you know, we have cash policies now that, you know, don’t take the cash and put it in risky investments. That’s a, you know, keeping it sort of liquid, but with the interest rates the way they are looking at opportunities, working with the right banks, having two banks, having segregation of duties – all these policies. Insurance: insurance was always like, okay, let’s not worry about insurance, but no – Do you have D&O insurance? Do you need EO insurance? Do you have general liability? People forget when you have an office, you need general liability insurance and for your lease. So these are things that we’re requesting to see certificates. In the past, I probably wouldn’t request to see the COI ‘s of insurance policies. And what’s interesting is you find out you get them, and quarter percent of them are outdated and not renewed, right? And then so, it’s helping you understand it’s not just raising, it’s building your operations correctly from the beginning. And contracts, everyone hates that part of the due diligence. Our attorneys make a list and it’s like, can you send us all the agreements of your consultants, and why isn’t this one signed, and this one left and they didn’t sign an exit an agreement. But you know, all this is important, not just for us investing, we want to see it in financials and so forth. But when you go raise your A, and it’s not us leading, and it’s a different type of fund. And when you go to the B. These growth funds, you think we’re asking for a lot, it’s harder. Okay? So it’s really in the end, it’s preparing you for the new age of what was back in the day before COVID. It was it’s not new, right? It was there. But it’s new because we didn’t do it. And really, LPs are requesting it. And again, like we talked about in the beginning, we have fiduciary responsibilities, because money’s coming from LPs to do our due diligence, and you know, and you miss things, no one’s perfect, right? But it really is important to cross T’s dot I’s. And also what it does is it helps the founders from the beginning think about questions, that that’s what we’re here for. Right? So when we do finally figure out the due diligence, and we sign the dotted line of the agreements, you know, that’s when our conversations start. And we can use some of the due diligence to help build and expand the operations and what to correct and so forth. So it’s not just you know, I know it’s a pain, but it’s really meant for one we want to make sure that there are no issues right, and that’s important. But it’s really there to help you from operational getting started to when you’re ready to get that A, you’re going to be more prepared.

Kate 20:09
That is spot on. Because we have seen so many A investments blow up because they didn’t have the correct foundation, right —  employee classifications were off, they didn’t have the right insurance, all these things come out. And so it’s so much better to go through it, like you said, early on, so you can scale correctly, you have the right processes in place. And then also to have these policies like you said, because when we had that banking crisis, you remember that weekend? Am I going to be able to make payroll? What’s happening Monday? What’s coming Monday? But this way, if you have some in a larger bank and smaller and you’re diversified, and you have policies in place that will protect you, it’s going to pay off.

Joshua Gilbert 20:59
Correct. You mentioned the banking crisis, and I didn’t sleep for four or five days. And I had to deal with myself. I was in the same position as everyone else. I was on the phone over the weekend. I had certain connections with banks, and I was able to be on the phone with some of the bankers and my portfolio companies. And, and that’s also some of the difference of when you’re with, again, a Seed VC versus a larger VC and growth VCs, you know, who’s gonna be on the phone with you during that weekend, and who’s going to try to send out information and, and so forth and walk you through, it’s not even just being on the phone. It’s walking through on what do I do, and, you know, that’s what it was, I was at home and my job that weekend was to first get my funds in order and second was to assist our portfolio companies. And for this, it wasn’t just seed. We were assisting B’s and C’s, because the relationships, right? Because they’re coming to us, because it’s like, you know, listen, you know, people and you know, and that’s what it was all about. And that’s what we were doing. We were helping and again, well, that’s all part of this.

Kate 22:13
I think that’s great that you pointed that out. That’s one of the reasons why we respect Freestyle so much. You all really, really support your founders and provide a lot for them. Before we segue into some just general advice for founders, I wanted to ask you if you could just describe your role a little bit because I think that would be helpful. You’re CFO at Freestyle, you kind of danced around a lot of the things that you do in this interview, but if you could just kind of delve into it, that would be helpful.

Joshua Gilbert 22:46
Yeah, you think about CFO, you think oh, numbers. But really, I wear all hats. And it’s not just all hats of the CFO of Freestyle. Yes, deal with my LPs. And I have audits, and I have tax, and I have my operations on my side. I have insurance and payroll, and with PEOs and banking, I go through all that billing pay, and all that. So I take all that and budgeting. So we do all that running the company too, right? But at the same time, I’m here to support, and Dave and Jamie are there too – they understand running the business, helping the founder coaching the founder, right? Listening to founder, they need advice. But where I come in is that, and I this is what I love. I love helping if I could be a professional, this would be my favorite job in the world, maybe. But I’m here to support operationally, and from there, it’s like it’s working with them and helping them with term sheets for venture loan. You know I read the debt agreements. And give advice. You know, I don’t run the business, but I’m here to help them try to make the right decision when they’re going into what bank to use, what outsourced CFO to use? Is there a payroll provider? What type of benefits, budgeting, right, you know, they want to go through budgeting, when companies are, unfortunately, having issues with cash flow. I’ve worked with them, and we will sit with the CFO, and I’ll sit for a couple hours. And we’ll both have the budgets and you know, and say, Well, I’ll say I’m not sugarcoating stuff. Sometimes I’m the bad cop, unfortunately. But it’s a good thing. Right? And you know, like, what’s that and why is that and why aren’t you cutting marketing or … But it’s so it’s sort of like taking everything I do in my role, but we’re here to help them and we’re here to help them operationally. Founders also need it because some of the founders are the only person in the roles of everything. So Dave, Jenny and I, it’s a team. So Dave and Jenny do their part. And then they say, Oh, here’s Josh, talk to Josh, you know, he’ll help you here. I find that to be the most fun part of the job. I love working with my LPs don’t get me wrong. But because really, what in the end is most important? It’s, we’re here to help our founders build successful companies, which then provide capital and cash back to who? Our LPs. So it’s a full circle. And if we can have fun and help our founders and the people operating in those companies do well and succeed, well, then we just made our LPs happy. And then you’re happy. So that’s the fun part,

Kate 25:45
Right and you’ve helped a founder, I can see why that’s so rewarding. But also for everyone listening, like, that’s what you want in a seed stage investor. What you just described there, that level of commitment and help and knowledge for the founder. Take note of that, please, everyone listening, I could talk to you for hours, but we have to wrap up. We always end the show with just some general advice for founders that you want to share. Thank you.

Joshua Gilbert 26:14
Yeah, I mean, again, you’re not going to be talking to me, probably at the beginning, you know, I will get involved, but when you’re out there talking to the general partner on your pitch, be open. It’s okay to say that you failed a company. Tell the story of why, right? It’s okay, you know, show your passion, right. Show the passion to the GPs. But most importantly, when we’re going through the due diligence, don’t hide anything. We’re going to figure it out. Don’t hide it, be open. We’re here to help. Sometimes corrections need to be made. And again, like you said, Kate, that’s the beginning process of it.  For me, I get involved, right from term sheet into it. So, but it’s more just, you know, again, this is relationship. And if you’re going to hide things and sketchiness, it’s going to be found out. We’re a big world, but small world. But in the end, it’s having fun, right? And having fun, just remember, you know, you’re running a business and we want 110% of YOU in this business because we’re gonna give you 110%.

Kate 27:23
I love it. Great advice. And so true to be upfront. And I think people panic, right. And they hide things. I think that’s great advice. Josh, I have so much respect for Freestyle. We all do on the Burkland team. I mean, such an excellent seed stage investing partner. And then the fact that you continue to support these founders later too is so great. For those listening who want to find more information about Freestyle. Can you share your website and where they can go learn more?

Joshua Gilbert 27:57
Yeah, we’re all on LinkedIn, Jenny Lefcourt and I are on LinkedIn. You can just go to freestyle.vc. Reach out to me on LinkedIn, Even if we’re not investing in the company, we’re here to help because you never know, the next round or the next company might, you know, want to raise and again, it’s starts with relationships.

Kate 28:25
Very well said, Thank you so much for being here today. You know, we’re gonna have you back in the future. This was so great. Thank you.

Joshua Gilbert 28:35
I really appreciate it. Thank you.

Intro 28:38
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