Sam Silvershein: Welcome back to Driving Alpha. I’m your host, Sam Silvershein. This is the show where we go deep with investors who consistently outperform—those who are creating real value and driving venture returns that matter. Today’s episode is a special one. I first connected with the team at Water Bear after noticing how concentrated and high quality their early-stage portfolio was. The exact profile of partner that we look for at Alpha.
Our relationship started with a cold email, and we’ve since shared deals and built mutual trust. I’m excited to bring together their story today on this podcast. So, joining me is John Taylor, Co-Founder and Managing Director at Water Bear. John brings deep experience on the strategic side of venture, especially around generating liquidity and influencing outcomes—which are the most misunderstood parts of early-stage investing. He’s also tuned into the edge of what’s next, like AI and Deep Tech, and plays a key role in how Water Bear stays ahead of emerging trends while staying grounded in founder-first execution.
Also joining me is Brice, General Partner at Water Bear. Brice comes from a background in behavioral science, which gives him a powerful lens into founder psychology and team dynamics—two critical ingredients for early-stage investing beyond diligence. He’s also instrumental in growing Water Bear’s network and building the kind of long-term LP relationships that early funds need to survive and thrive.
Water Bear Ventures is an early-stage VC firm based in Boston backing resilient founders who are building venture-scale companies from the ground up. Their name says a lot. The water bear is one of the most adaptable organisms on earth, and the firm applies that mentality and mindset to all of their investments. With 35-plus companies funded and a strong graduation rate to growth rounds, Water Bear’s founder-first, global-in-reach, and focused on identifying exponential value before it becomes obvious to other investors.
So, John, Brice—thanks for joining Driving Alpha. I’d like to kick off by drilling into the origins of the name Water Bear. You know, why that name, and how does it reflect the way that you guys are investing?
Jonathan Taylor: Uh, yeah. It originates from the partnership conversation we were having at formation time—what do we want to call this? We sat down—Kyle, myself, Enrico, and Brice—and Enrico had already, back in the day, purchased the domain long term because he wanted to be in venture capital. And he said, “Hey guys, I’ve got this interesting name. It’s based on the tardigrade—the water bear.” And we were like, “Hmm, sounds kind of gimmicky, but tell us more.”
And then we got to thinking about what venture means. What kind of founders we want to back—and the characteristics of the water bear overlapped exactly with the theme and thesis of the type of people we want to support with capital, networks, and resources. So the story of the water bear is that it’s survived every apocalyptic event on Earth. It can survive in space. It can survive for years. So the theme is that founders need to pivot. They need to be adaptable. They need to have that survival instinct—whatever that means for their business. Is it reinventing the product? Is it raising capital? Is it marketing? Whatever they’re working on, they need to have that adaptability innate to their psyche.
Sam Silvershein: Yeah. Got it.
Brice Penaud: As capitalists, sometimes we can be critical of what other companies are called or why they exist to begin with. So they have to have a thesis as to the reason why they exist as a business. And so, I think that some of that mentality was somewhat approached here. And it’s also serendipitous.
So, the name is the reason why we exist. I don’t know if tons of funds can say that—I know that yours can because it’s specific to your thesis—but it’s the same thing for us. When we think about the name, it’s actually specifically what we’re looking for. So we’re saying our fund exists because we’re looking for the most resilient founders, who build the most resilient products, in the most resilient markets.
Then we extrapolate that into different theses across the things that we invest in—both on the people side and on the diligence side—but that’s literally why the fund was formed. So when you think about the name, we literally also think about it as an identity internally to the firm—as to why we’re around and why the fund was even created to begin with, or why anyone should even pay attention to us.
Sam Silvershein: It makes a lot of sense. Asking why we should exist is something that—it’s very critical. And if you don’t do that from the foundation, it’s only going to get harder and harder to answer that question. But I want to…
Jonathan Taylor: We launched the fund after a series of successful investments. We didn’t just lead with a fund. We intentionally designed pre-fund work, LP work before the fund, deal flow before the fund—built the whole ecosystem—and then defined our identity with the name and launched the fund with a real intention to compete in venture capital.
Sam Silvershein: Yeah, made sure that could be a, you know, winning model. Something that felt founders gravitate towards you. And then ideally also the LPs.
Brice, something you just touched on—and something that I saw a lot as I was doing research ahead of our podcast—is exponential value. You were touching on your thesis and exponential value, and I’m curious: what does that mean to you guys? Can you help define that a little bit?
Brice Penaud: I think of exponential value as being dots that connect along a line that has multiple components to it. You can think of exponential value all the way to the formation of the company that we’re investing in. So, does that company provide exponential value to its customers? Is there an order-of-magnitude improvement that is received by the startup that we invested in?
Going back to identity very briefly—and why someone exists—really the only companies that venture should be investing in are the ones that can deliver that kind of exponential value because of the math that we’re constrained by. So there are other companies that make sense for smaller checks or angel writing, but if we’re specifically talking about early-stage venture, that really should be the only consideration. In my mind, it’s only the companies that have this ability to deliver immense value to their customers.
And if that’s the case, then that becomes sort of the foundational principle upon which they can make their unit economics work, which make our unit economics work, which make us then fiduciaries to our LPs in a way that we can be proud of. So there’s a value chain there, where we have to connect the dots and make sure that, as investors, that’s part of one of the first core principles that we’re investing in. Otherwise, we feel like we’re not doing our job and we’re not being honest about the actual opportunity. If the opportunity’s not big enough, then it doesn’t really make sense even to take a look at the deal.
Jonathan Taylor: I think also to that point, you see a lot of trends in venture. A couple of years ago it was Web3. Now it’s AI. And so if we apply the exponential value thinking to how we invest, we’re not trying to get caught up in a hype cycle. We’re all trying to look for teams and products that have lasting value to their customers long term. They’re not just chasing the fad—trying to raise money on the momentum of the day. They’re actually building for the future.
So, you know, value has to be created on day one, and in year five, and in year ten. And if it gets acquired and they have an exit, hopefully they create value for their end state as well. We want long-term businesses.
Sam Silvershein: Yep. You know, you guys are investing at pre-seed, seed—at very early stages. And so how do you go about measuring that value when sometimes the company might not even exist and somebody’s coming to you more with an idea and a market that they’re going to address?
Jonathan Taylor: I’ll jump in first, Brice, but I think you have a lot of thoughts on this. Brice and I are sort of a yin and a yang—art meets science. We both index on the people. So especially at the pre-seed round, it really is a “who is the person?” Can they even create the product, the technology?
So for pre-seed, we really have to have high conviction in the founder. Is it a second-time, a third-time founder? Are they just incredibly impressive with what they’ve accomplished on a bootstrap budget, and now they’re finally raising an actual round? Whatever the variables are, it has to be, at that earliest stage, the person.
Brice Penaud: John, I think that what you were talking about in terms of art meets science—we do have a combination of the two. So John has an exceptional capability in meeting the right people at the right time, which is a huge component of quote-unquote “being lucky” in this space.
Everyone talks about, you know, “Oh, well, we got lucky because of X, Y, Z.” But part of being lucky means that you’re constantly cultivating relationships with founders who are about to build something meaningful. So if you’re at the intersection of ecosystems and builders and early-stage investors who are getting ready to make a transition into that space, then you suddenly have access to the right people.
One of the deals that we did was NFi, for example, in Boston. We knew the founders before they founded the company. They previously had an exit to MasterCard. They were thinking quite deeply about what they wanted to do next. They had lots of options—they could have built their own fund, they could have remained angel investors, they could have built the next company. They had a lot of choice.
But we built a really trusted, meaningful relationship with them to figure out whether or not we would be able to participate—because it was a competitive cap table to get onto. Then the other part of it was actually developing the relationship with them and all the other investors around the table to make sure that we could participate at the right time.
A lot of people want access to those sorts of deals, but they don’t necessarily do the relationship development work that requires that kind of activity preceding the investment. And so that’s where the art and science kind of come together. You’ve got this ability to network with all these people and create an insane moat of amazing founders. And then I’m looking at the science side, which is: How competent are these people? What’s their business acumen? What does the market look like? Did we have enough time to diligence the space?
All of the more technical components that actually make sure that once we have conviction in the person, we have conviction in the rest of the deal—that actually makes sense from a due diligence perspective.
Sam Silvershein: I think a lot of people attribute, especially in our industry, luck. And they say, “Oh, that person got lucky,” or “It was just the right time, right place.” And what that overlooks is all of the work that goes into putting yourself in a position to get lucky—where you’re cultivating relationships, sometimes 5, 6, 7 years—both on the founder side and the LP side—to build and have the opportunity to invest in a sustainable business or help build a sustainable business.
And it looks like, “Oh, they got lucky, they decided to launch it and the market trends were behind them,” but it just overlooks all of the hard work that goes into it. But at the same time, you can get lucky, but then you need to change course. And something you guys already touched on is how you work with your founders. But, are you measuring grit before a founder might have to encounter a situation where they need to be gritty?
Jonathan Taylor: Just to put a bow on that last comment you made—the exciting thing for us is, like you said, we didn’t just get lucky once. It’s time-proven over a period of a half a decade, six, seven years now—whatever it is.
Our first deal is now officially at over unicorn status at a $20 million seed round. We have another deal that just raised their Series B. We were in their seed round, so that was in 2019, and in 2025 we’re also finding the same quality of deals. So at some point, the blending of luck to skill are overlapping, and it’s becoming more and more forefront in our fund that this is what we’re good at—we’re good at sourcing these early-stage opportunities—and it’s been time-proven again and again.
Brice Penaud: The part that John’s describing in terms of finding them—I think that’s the chemistry. Like, I think John has a lot of chemistry with a lot of these people, so that is kind of a hard thing to express on paper. It’s a hard thing to explain when you have chemistry with people who are super resilient or who are really gritty—it’s not always evident why you know that.
And that’s sort of what I was saying before, where we have art and science. I’m more on the science side, so I’m looking for the behavioral cues where that’s the case. And there are simple things that other fund managers can emulate, but they don’t necessarily do this.
You can simply look at, let’s call it, email response rate. If a founder has that grit and that resiliency, how often do they show up to the meetings that they say they’re going to show up to—on time? How often do they pull people into their meetings where they need other experience and other people to help them explain a product or a part of the company?
How many times are they willing to reach back out to you if you don’t necessarily respond right away? How often do they have the ability to meet other people in your network and try to get to you if they had some responses and a few things dropped off, but they want to get back in touch?
So there’s observational cues that you can take into account as part of a diagnostic framework to actually explain if these people have that kind of grit and resiliency. Part of it is also figuring out how you are defining grit or resiliency. They’re kind of interchangeable to me to some extent.
But one piece I think most people miss out on is—they think that being resilient just means breaking through doors and just keep going. That’s a part of it, but it’s not the whole answer. Part of the Charles Darwin quote that I like so much is that it’s not just the strongest or the smartest that survive—it’s those that are most adaptable, the most able to adapt to change.
So if you think about that, that’s another component of resiliency that you can measure across founders based on their behavior. So you just have to be conscientious of what you’re specifically looking for in terms of the traits of the founders in order to identify that early on.
So I think of that as a core component—you see behavior over time inside both the founder and the team doing those things that are building a culture of resiliency that you can recognize as an investor. And so, when you’re in the early stages, you don’t have a ton of unit economics that you can rely on that are necessarily predictable about the direction of the company unless they’ve caught lightning in a bottle.
So beyond that, you have to observe the behavior of the people who are building the company, and you have to have clear definitions about what specific things you’re looking for throughout that timeline.
Jonathan Taylor: I think on the softer side—when I meet founders, and like Brice said, I angle more on the relationship, the chemistry with the founder and the team—you want to get to know them. Like, what’s their lifestyle? What’s their situation? Do they respect the capital that they’ve raised?
Like, if they’re overspending and burn’s going up—are they doing that because they want to protect and they’re willing to be scrappy and have that grit? Or do they just think money comes and goes and they’ll just build and build and build?
So I think there’s a lot of things you can kind of screen for just by having conversations like: Where do you live? What’s your lifestyle like? Do you travel? Things like that. Are they living a lifestyle that equates to a startup journey?
If they’re living in a lifestyle that doesn’t align, maybe they don’t have the grit. So I think there’s a lot of ways you—between the art and the science of conversation—you kind of profile the person and say, “Are they going to be lasting?” And is this a journey you want to go on if they can’t last?
So I think there’s a little bit of—that’s why Brice and I kind of feed off each other, because we’re looking at it from different angles and interviewing people for different reasons.
Sam Silvershein: Jonathan, without giving up all your special sauce to our listeners, are there specific hunting grounds or places where you find there’s a higher propensity to meet these gritty founders?
Jonathan Taylor: Well, there’s tons of communities and ecosystems—especially in Boston. It’s probably one of the top five hubs in the world, if not higher than that. So Boston’s flush with hunting grounds. However, you know, we’re looking—we’re hunting for the lions—and it’s hard to necessarily find them all the time at all these various events.
So I think, alluding to the earlier part of the conversation—to prove our value as fund managers—we’ve had to index on the founders that we truly believed in. So even though we’re at an event where there’s a hundred founders, maybe we walk away with one or two relationships that we think are meaningful.
So you’ve got to cast a wide net and then kind of just cull the herd as you see what resonates to our style, our approach—the people side, the resilience side, the water bear theme. And I feel like we’ve done a really good job. Our water bears—our founders—are all aligned with these various characteristics.
So we hunt from everywhere. It’s from exited founders, it’s from other family offices, it’s from other funds, it’s from events—boots on the ground in Boston, Philly, Austin, Miami, New York—wherever we might go. And that’s the exciting part. I like the hunt a little bit—the chase of the founder. And when I know I really like what they’re doing, that’s when I really kick into that relationship-building mode.
And you know, “How can I help? What can I do? I really want to get into your round. I want to secure a stake. Where are you at? Who could be beneficial for you to meet?” I try to offer it up on a platter—but it takes a lot of energy. Now we have that flywheel, but it took 10 years of building that groundwork.
Sam Silvershein: A number of questions coming out of that comment. First, I want to touch on—do you have any recent examples that kind of capture your involvement beyond obviously just providing capital, with a couple of your portcos?
Brice Penaud: Yeah, I’ll call out one company—RiskAverse—if you don’t mind, John. I mean, that company…
Jonathan Taylor: You can go with that one, and I can pick a different one. But sure.
Brice Penaud: I was thinking about that one in particular because it took a lot of time to figure out whether or not we were going to participate in that company. But John built the relationship with the founder two years prior to us investing.
So when the comment is made about—it took a decade of groundwork—I don’t think that’s an over-exaggeration. It literally is a decade’s worth of relationship-building with a whole bunch of people who are ultra-high quality, who tend to recommend other players in this space.
The founder of RiskAverse in particular—his brother sold his company somewhat recently. So they’ve got good stock inside that family. But the founder had approached John and said, “Hey, this is what I’m building. This is what I’m looking to do.” Six months later, came back—“This is now what I’ve built.” Six months later, came back—“Okay, I’m raising a very small amount. Would you be interested?”
And it took time for us to build conviction in that company. Now that company’s doing really quite well—without giving anything too much away about the specifics of the business—but it’s doing so well that we’re excited to share it with other investors and other deals. Now their cap table’s becoming competitive.
So we really do create this—“we invest” work. What do all those little ingredients look like? It’s kind of like watching those Michelin-star chefs prepare these incredible meals. And you look at the final product, and it’s absolutely stunning. But then people have a desire to try and understand, “Okay, how did you make that dish?” And you see the amount of preparation that people are involved in—all the prep work—and you realize how much of an effort it actually takes to get to that finished product.
It’s not that we’re doing that particular sort of final touches—it’s the founders that are doing all that work—but we’re the ones that are finding the people who actually have that skillset to be able to deliver that kind of ultimate value.
So that’s how I think about the founders in some senses—as standout people who are sort of in this Michelin-star chef kind of section. Who have their own flavor, their own way of doing things. It’s not identical, so it’s not prescriptive, but you recognize the patterns of excellence across them—and that’s the piece that we focus in on.
Jonathan Taylor: I’ll just share a quick summary. The cycle for me was a company called Pays, and we invested in. It was a deal that got brought through a good friend and network—you can call it luck at the time. But since that point—the initial introduction several years out from that original seed round—now they’ve raised their Series B, and they’re on their path.
It’d be a great deal for us, Sam. But it’s like—the founder said to me three years into this deal, “John, you’ve been so good to us. You’ve helped at all points—just through conversation or capital. Anything you need from me, let me know.”
So you don’t get that kind of a reaction if you haven’t won the relationship and supported their journey in a meaningful way. So that, to me, was a really validating moment.
Sam Silvershein: Yeah. Building trust is difficult. And then once you get that trust, being able to—one, capitalize on it—but also make sure you’re fulfilling your promises.
Jonathan Taylor: It’s exciting. It’s not like, “Hey, a founder needs help—crap, we’ve got to sort through their issues.” Brice and I like problem-solving. We like to act as a parachuted CEO for the moment—or we’re all CEOs together, let’s work this problem. So we actually like the challenges of thinking through: What can we change on the operations, on the execution, on the sales—whatever it is. What’s the bottleneck, what’s the unlock that we can find? And we really enjoy that process. It’s fun for us.
Sam Silvershein: Having the opportunity to figure things out together. We had those situations a little bit less at the growth stages, but when we had a SPAC—having conversations with CEOs from the SPAC standpoint of, “Hey, we want to help you go public,” and they’re like, “All right, help me learn what that takes,” as opposed to, like, on the venture investor side where they’re trying to sell us on their story. And I’m trying to figure out where pieces may or may not fit.
And getting that trust because you’re working with them through a different angle. So you guys have been doing this for 10 years, raised and deployed Fund I. I know you guys are going out for Fund II. Talk to me about some of the biggest takeaways from Fund I that you’re going to apply to Fund II—how the market has evolved, and how you guys are repositioning yourselves and being gritty to ensure the continued success through Fund II.
Brice Penaud: Well, there are a couple of things that come to mind. One is—keep on mastering the fundamentals. I think that lots of people try to adjust based on what the market is saying is hot or popular, rather than trying to stick to what they’re already good at as fund managers.
So I think about that as a core component of what John was describing earlier. Yes, there were trends towards B2B SaaS, then Web3, now it’s AI/ML, distributed tech—the next sort of popularity contest. But if you chase those popularity contests, you end up kind of losing the ball on what’s critically making those businesses succeed and create enterprise value from the perspective of your portfolio.
So, I would say that one thing that’s evolved a little bit is that obviously everyone is calling themselves an AI company these days. So part of it is doing a bit more diligence into those claims. Are you truly an AI company? Is it applied AI? Are you structured machine learning? Are you unstructured machine learning? How quickly could someone else replicate this product? Are you a wrapper with ChatGPT and a few other things cobbled together?
Making the differentiation between what is “there there,” as they say, is critical for us. So that’s one component—being a bit more specific on what the actual utility is behind the technology for Fund II. But then there are trophic levels of it, where I think what’s sitting at the top at the moment probably is machine learning and AI.
But the question is: How is it deployed inside the products? And does it meaningfully change the outcome for the customers? And if you can make that business case, then it becomes clear why we should invest and whether there is exponential value in that particular strategy.
So all those things have to come together when we think about the next round of companies that we’re going to invest in. And I do think of them as companies—rather than just tech bets—which I think is how a lot of people kind of see some of these investments. We really think of them as individual companies that have clear utility because the technology makes sense—because the adoption makes sense.
So, that’s the fundamentals that I think most people don’t necessarily spend a lot of time on. It’s contextualizing the environment appropriately to the business fundamentals. And I think most people don’t make that translation very well. They’re just going, “We have a huge thesis on AI, and that’s what we think’s going to win,” but that doesn’t really mean much at all. You’re just kind of saying something that’s quite obvious.
So, I think that it requires a little bit more digging underneath the layers or going a little further down the iceberg to actually understand what you mean when you say things like that.
Rather than making big claims about what our second fund is focused on, it’s more about focusing on the fundamentals first. And yes, there is a propensity to lean toward those types of companies—but that’s simply because the technology is becoming ubiquitous.
Sam Silvershein: Yeah.
Brice Penaud: That’s kind of, in part, how I would define Fund II.
Jonathan Taylor: I’ll say quickly—someone said this to me recently and it really stuck. It was a great statement. They said, “I’m done borrowing other people’s convictions.” That was one learning. You get introduced to a deal through what you think is a tier-one or one of the leading funds of the universe. And they’re doing this deal, and yeah, we got allocation for you. “Can I do diligence? Can I meet the founder?” “No, it’s quick, it’s coming, it’s going.”
So unless it’s something that I can understand and get some insights into, I don’t want to borrow people’s convictions anymore.
And secondly, for Fund II—I view it as: Fund I, we’ve proved ourselves. We have the track record. Yeah, we have some losses, but major wins, major markups, unicorns coming—all the pipeline is good for deal flow. So for me, I look at it as, now we can do bigger checks, have more ownership, maybe do board observer seats as well, and really drive outcome.
Because for me—like Brice said—I’m relationship, I’m business development. And if we’re going to have more skin in the game with bigger money and LP money, let us go to work with the team, with the founders. Let us use our networks, our resources. And I think that’s the exciting unlock for Fund II—closing the amount we’re trying to raise.
Sam Silvershein: That really resonates. So you’re fundraising, you’re moving on to your second fund, you’ve had a couple of cycles, you’re starting to build more of that institutional muscle and those relationships that—we here at Alpha know—takes the same effort as trying to get the right founder.
So what would you say LPs are getting right about early-stage venture given today’s market cycle, we’ll call it? And what do you wish they understood better?
Brice Penaud: I think a lot of LPs are extremely savvy, and I think that most people aren’t spending enough time with them asking them directly what it is they want to accomplish and why. They have leverage and they have choice. So, I think part of it is that you have to understand what it is that they really want and why.
And I don’t know that many people are spending a huge amount of time asking those sorts of questions—beyond just casually. So for us, that’s where we’re spending a bit more of our time. So if there’s a specific LP—let’s call it a family office that made wealth in the fintech sector—then let’s try and find the deals that speak to them, because it’s their language.
And not just because they understand it on a more broad scale or fundamental level, but because they actually see a point of arbitrage that maybe we won’t see. Or they actually have people inside their own network that we can leverage. Or perhaps there are customers that we don’t know about that we can introduce to the founders.
So it’s a little bit about the alignment that I think most of the time gets lost in the investment cycle. And I think that’s something that actually founders are not even aware of—that happens. There’s an invisible line that tethers the LP, the GP, the board, and the executive team of a company. And if you don’t fully understand that, then you can’t get alignment.
So the GP’s job in that whole entire thing is actually to quarterback that alignment. From my perspective, you need LPs who are going to understand your strategy well enough—because you understand what they are looking for—and that’s got to match the venture strategy you’re building. And that has to match what the board of a specific portfolio company is trying to accomplish, that empowers the executive team to then succeed.
I think those invisible lines of communication don’t necessarily get talked about very often—either on the LP side or on the founder side. So if we’re in the middle as GPs, then I think we have a responsibility to communicate that to a degree of confidence that we can do it. We don’t have to over-communicate every little detail, but enough to understand that there is alignment—so that there is trust and confidence in the fact that we’re doing right by their capital, and also that it’s a lasting strategy for returns. Because that’s ultimately what we’re there to deliver.
Jonathan Taylor: I was going to say—I think LPs have gone through an experience in the last 10–15 years. You know, venture was kind of a new asset class. It always existed, but for the masses and the family office, the high affluent—I think it was relatively new. You heard of the Ubers and the Facebooks. You wanted to get some skin in the game.
And then 2020 hit, and then inflation hit—and they felt jaded. “Hey, there’s been no distribution.” So then they kind of take their foot off the gas.
So I think they’re doing things right by trying to say, “Hey, let’s just take control back.” But I think they need to strive to be more patient, and understand that we’re starting businesses. Yeah, call it venture capital, call it whatever you want—you’re starting businesses, and it takes time to grow a company. And there’s going to be a lot of variables, a lot of dynamics that change year to year.
So I think they’re right that they want to have more control and more influence in the outcome, and maybe be more direct to deals—but I think that’s hurting great emerging managers like us, who do a lot of that work to feed them a list of opportunities, in a sense.
Sam Silvershein: As somebody who’s exploring potentially becoming a very small LP, I think where I’d want to play is in—or invest in—is emerging managers. Because to your point, overcommunication is critical. And I think if you try to go to a larger VC fund, you’re just a number to them.
And my microscopic check, which doesn’t move the needle to getting anybody toward their final close—they’ll treat me as an emerging manager, they’ll treat me as well as their biggest LP. And, you know, use my network or leverage any of my experience for that.
So I am curious, because one of the things that we’ve been trying to work on here at Alpha is leveraging LPs and their networks and relationships. So have you guys found a programmatic way to do that? You know, CRM to help out? What tools are you guys using to ensure that you are—you’re fully optimizing your LP relationships, and then using that to make sure that your founders are as successful as possible?
Brice Penaud: Well, part of it is somewhat self-selection, I think. So there are people who really do want to be involved. So the people who are leaning into us—we will allow that leaning in to be fully reciprocated.
And then there are other people who’d rather stay a little bit more silent, because venture is just a tiny component of their asset allocation strategy, and they would rather spend their time on other things—which is absolutely fine with us too.
So I don’t think there’s any pressure to do that in some sort of programmatic way. I would say that the focus for us is probably more on the outcomes for the founders and the companies. That’s actually where we see the responsibility to the LPs. If we can spend more time with the founders, that actually benefits them the most.
So while we love spending time with LPs, we actually see that as being the highest yield that we can put our time into. That’s the best return on our time. Then there are specific moments in time where we might ask for very specific advice—because, again, it’s contextually relevant.
So I see people who are spending too much time with their LPs just for the sake of building “the relationship,” quote unquote, rather than making meaningful interactions, conversations, requests—those sorts of things—when they make sense.
So there’s a part of this that I think requires authenticity in terms of building the relationship with them, rather than trying to create artificial or arbitrary touchpoints with them. So I think there’s a fine line between putting people in a box and saying, “Hey, let’s have a bunch of touchpoints with them so they feel like we’re communicating,” versus saying, “Let’s make some really meaningful, contextualized introductions or requests when it makes sense.” Because now we see upside for everyone inside the value chain I was speaking about earlier. And I think that also builds more trust with people.
Jonathan Taylor: Yeah. I think for LPs—some of them are just—they hear the stories of venture, the wins in venture, the upside that you can have. So they jump in and they have a bad experience.
And I think we look at venture—an analogy in my mind is like a bond ladder. Every year we want companies to mature and come due, so we can rotate that capital out and up to the next ladder.
So my point in saying that is: the consistency of investing in venture matters, and diversification. Like, it’s good to get your own deals and do your own direct LP work, but also stake funds—because now, instead of it being just you, it’s a force multiplier for your outcomes.
You’ve got your own portfolio. You’ve got another 30 companies through this fund, another 40 companies through that fund. Now you’ve got almost a hundred or north of a hundred companies. You’re enhancing your opportunity for major outcomes.
So I think it’s consistency—choose an asset class. If you like venture, stay consistent. Find good fund managers that you know and trust. Keep deploying. And don’t get caught up in the hype cycles, is my opinion.
Look at it as a schedule of maturity. Each vintage will come due. And if you’re lucky—on the front end, five years—maybe 10 years. So keep stacking them.
Sam Silvershein: I think one of the things that we’re seeing a rotation back to, especially at the growthier stage—hype-year companies, which we saw in 2020—are these SPVs. And, for lack of a better term, armchair venture investors who come into the market when there is a lot of LP capital floating around that is just looking for places to park it where they think they’re going to get quick upside.
And as we know, this business is not about quick upside. Going back to kind of where we started the conversation—it takes years to build the best businesses. It takes years to build the relationships to get into the best businesses. And sometimes you kind of have to ask yourself, “Why am I so lucky to be able to get access to the next round of…” I don’t know, I’ll call it SpaceX for this example.
But the GP that you are investing behind may not be around in a couple of years. And that would be a bad experience for that LP, who would then force themselves to kind of remove from the VC market, which I think is a problem.
And, hearing you guys communicate how you think about setting up the fund, but also how you communicate with the LPs and how you identify an LP that’s a good fit for you and you’re a good fit for them—it’s a very thoughtful way of going about it. So, really appreciate that. And as somebody who needs you guys to survive for many, many more funds—so I have many, many more shots on goal—I appreciate that aspect of it.
You know, kind of wrapping up here, where do you—actually, this segues great to what I just said—where do you see Water Bear in the next five to ten years? For you, what would success be?
Jonathan Taylor: Yeah, I mean, think five or ten years—shortly on the five-year timeline, we’d probably have several exits coming. Hopefully a couple IPOs. The first deal, obviously I mentioned, just raised at a $1.4 billion valuation. So with their revenue growth, they’re probably good for the public markets.
But hopefully everything else can find a good suitor—through M&A or private equity, whatever it might be. At that point, we’ll probably be raising Fund III or Fund IV, depending on the timelines here. But the goal would be to have a consistently growing, stable bullpen of companies and vintages—and be in the market so we can keep flowing you the best-in-class deals.
Brice Penaud: The other part that I would just add to that is saying that I think because this is a long-tail game, I would see it as—we would just keep building out this venture fund until we’re in a position to say, “Okay, we’ve been doing it for 10, 20 years. This is the best that we can do.”
We feel like the edge that we have has been worked out. And I think most people aren’t willing to admit when that does happen. You can think of athletes that are in that position—but other funds too, where they can no longer be edgy, so they become capital moat institutions, which is a whole different thing.
Now you’ve become sort of pseudo-private equity combined with an RIA and a whole bunch of other things. And we see that happening now, to some extent, with some of the large legacy managers. That’s not our intent.
So we want to make sure that we’re being honest with ourselves in the sense that we want to keep growing the vintages because we think we can take more ownership, and we think we can get some better fully diluted positions and some better terms. But that has a ceiling.
We have to be honest about the fact that after a certain number of vintages, either you develop the fund to have really strong successors who have similar business and philosophical principles as you—who can then take it on from you, which is a separate path—or you can say, “We’ve done the absolute best we can. The AUM that makes sense in terms of the ability that we have—based on the team, the portfolio construction, and the size and number of deals that we’ve done.”
And I think that has a ceiling. I think most people probably don’t really admit that. So I think that we’re conscious of that. What that means is that the targets for each fundraise are very specific, because we know what kind of capacity and bandwidth we can take on to be meaningfully helpful to the companies—and being honest about the level of quality of diligence that’s required to execute these deals.
So I would say that’s another component of how we might define success—it may have an end time.
Sam Silvershein: Guys, I think we could have a whole other podcast just on that topic. That is—yeah. I have a lot of thoughts, but I’m going to end it here. Really appreciate you both for taking the time to come on Driving Alpha. And I appreciate the listeners for tuning in this week to our interview with the Water Bear guys.
Thanks a lot, gentlemen. I’m looking forward to getting a couple of deals done with you.
