The Venture Capital Strategy That The Wealthiest Investors Use with Yotis Tonnelier – EP 303

Justin Donald: What's up, Yotis? Good to have you here.

Yotis Tonnelier: Yeah. Thank you for having me.

Justin Donald: Yeah. This is going to be a ton of fun. So, we got a chance to hang. You flew in on Wednesday. We did a little happy hour at the Red Fridge Society, where I'm a member, and there's a really fun, post-exit founder community, and then also tech community. My good friend, Chris Taylor, runs that place. You met him. He's a blast. My good friend, Mario, who's our sommelier. He was pouring wine and having a good time. We had a bunch of people just mixing and mingling, talking about investing and venture and AI and robotics, just deep tech. And so, it was fun being able to feature you that way and really have you get exposure to a lot of the friends and family and ecosystem that I have here in Austin.

Yotis Tonnelier: Yeah, it was really nice. I think the ecosystem in Austin is really special. Of course, you have SF that the leader is going to continue to be the leader for the next 20, 30 years. But there is a very nice vibe in Austin in a lot of industry, depending on AI, VCP. So, yeah, it was pretty fun

Justin Donald: Yeah. Well, I had a blast. It was fun hearing you teach and share all the things that you know, and then obviously you came in for this show, and I appreciate you making it to come in, in person, from Miami. It was fun getting a chance to hang with you when I was out there earlier this year. So, I can't wait to get into your niche of investing. And so, I mean, you're big in the venture space, but let's specifically say kind of Series A through Series D, potentially beyond, but that's kind of your sweet spot. And for those that don't understand that, elaborate a little bit because there... And by the way, we'll go back in time to you as a founder and you having exits, but I just want to establish, like, your expertise here, being in these more mature companies.

You know, you get to a Series A, a Series B, Series C, and so on. They're getting more and more mature. Revenue is higher at each segment. The way that you allocate is different and very calculated. So, talk about that a little bit.

Yotis Tonnelier: Yeah. So, globally, we are looking on the low end, a minimum of 2 million in annual recurring revenue. Depending on the industry, it can change. That's on the Series A. The all-investment thesis is really on the post-product market fit. So, we really need the company to already know the customer, confirm the consumer, confirm the need, confirm everything before we look to the company. That might be an investment for us. Sometimes we find a seed company that might be a fit on the quality but not mature enough. Of course, we have partner that invest before us on those companies and then come back to us. And then we have Series B, Series C, and D, to be exact. 15% of our allocation is A, 70% is B and C, and then 15% D.

Justin Donald: So, basically, it's calculated like, "Hey, this is not a startup company. This is a mature company." And then as they continue to mature, you're rolling more capital into them to the tune of, I mean, 70 to 30, right? Yeah. I mean, really, it's actually 85 to 15 as they mature beyond that Series A. And so, I think that's important because a lot of the time people hear investing in venture. And so many of my friends who are entrepreneurs, because they've run successful companies, they're like, "Oh yeah, I'm going to just throw money into my friend's company and then this company. And because I'm successful as an entrepreneur, I can spot these companies."

And they end up investing in all these super early-stage companies, seed, pre-seed. So, that's not you. You guys are well beyond that. But even in the venture side of things, there's a huge disparity of top quartile to bottom quartile, right? You've got about a 25% return gap there from the data that I've analyzed. So, you've got people obviously that are losing money, but your lower quartile is kind of operating in the 4-ish percent. Your top quartile is kind of in the 20% to 25%. And so, not all venture is the same. Not all sectors or subcategories of venture is the same. Why did you pick what you picked in venture? You know, kind of going deep.

Yotis Tonnelier: Yeah. I think a couple of precision on that. I think there is a segmentation for the past, I will say since 2021, between pre-seed and seed. You can see there is a fund that really specializes in that. And then you have the fund that doing A, B, C, D, or A, B, C, is just about the risk, as well of those different stage. I think there is also a lot of angel investor or successful exit founder that start investing in pre-seed and seed because that's where you are the easy allocation to get. But our making a mistake on trying to play I call that the quantity game, without the quantity. So, what I want to say is that when you are an angel, and you start investing in two or three pre-seed and seed, I mean, you are going to hit the wall, for sure. It's impossible.

Justin Donald: Odds are against you.

Yotis Tonnelier: It's not going to work, you know?

Justin Donald: You need the law of numbers, 50 to 100, bare minimum.

Yotis Tonnelier: Yeah, of course. And I'm going to give you an example. I know, so one of our partner and advisor is Jean de La Rochebrochard. He’s the MP of Kima Ventures for the past 10 years, biggest investor, angel investor in Europe. They invest in 150 company a year for the past 11 years.

Justin Donald: Wow.

Yotis Tonnelier: Now, they reinvest. So, it's a 15 million investment because it's a 150K ticket. But what is going on is that they can do that because they invest in 150 companies. So, even if they lose 70% of the investment in all the companies, they are making so much return on the 10, 20 person that the strategy works. And so, it's just about the strategy between quantity and quality. We work on the quality game. And so, that's why we go to that Series B and C. That's really our sweet spot. And also, because we work as VC/PE so we have the structure of VC, but we have the mentality of a PE as well. And of course, banker, because of my two partners, Sunny Patel and Loren Katzovitz.

But what is going on is that when you look to even of our Fund I track records, and we can go back to that, where we were making the most return was on this B and C companies, even before we invest in seed. It's just that it doesn't make sense for us now with the deal flow we have to take the risk to invest on those company. Because again, on our fund, we are going to make 20 more investment, 20 investment, and then just keep a big part of that to do the follow-on. So, it's also, yeah, back to the segmentation of our market now.

Justin Donald: Yeah. And I want to dive deeper into both, into really the spaces and niches that you're in, but then also the performance on your first fund. Before I do, I just want to comment that I do a lot of research on what single-family offices do and multifamily offices, and specifically for families that have net worth of 100 million or greater. I really study that data. I like to democratize that, especially on the single-family office side when you kind of hit billionaire status, because the playbooks are great playbooks. And you don't have to have a billion dollars to do the same playbook. But what I notice in asset allocation is they're all in venture capital, I mean, across the board, somewhere between 4% and 10%, some that are a little bit more aggressive, maybe they're going on up to 15%, maybe a little higher than that.

But there is an asset allocation that is like it's a given. It is for sure they're going to invest in this space. You see it a lot less on the early side, right? As an angel, seed, pre-seed, it's like 1% or less than 1%. But you see a lot of these families, and for me, I like kind of being in that 10%, even sometimes depending on whenever we're rebalancing the portfolio. Because I've done so well in venture, we're often pushing 12% or 14% for us as a family. So, I love the space. But some of your numbers the first time around in your first fund are just, like, incredible, right? A 14.6% gross return across the board. And this was what blows my mind because I feel like in venture, I learned when I first started investing in this space, you're going to have a bunch of losers.

But the winners are going to balance out the losers, and that's virtually what everyone says. You guys are the opposite. So, you had zero losers. You invested in 14 companies. Fourteen of which will have, I think 12 already did, two more are coming.

Yotis Tonnelier: Yes. So, we are at nine already done. We have two positions that we still have, Canva and Mercury, that our biggest positions, but both companies are going pretty well, so we can get liquidity to that tomorrow if we want. And then we have three others that are early-stage. Might go south. It's not the case. For the moment, everything is going well. So, no markdown for the moment. But even if the three company not going well, we will still be at 14X.

Justin Donald: No, you're way in the money.

Yotis Tonnelier: 14X DPI at the end. So, doesn't matter, but yeah, that's the…

Justin Donald: You're just getting started with this because a lot of these companies are still climbing. And then by the way, out of the 14 companies, five of them are unicorns. So, I just feel like your ability to find the deals is incredible, and you've got this high criteria of what it takes to actually get in. So, let's talk about, like, what does it take to get into, like, for you to actually invest, and then secondly, what categories are you guys focused on? Because you're focused on the spaces that I personally love, so it was just perfect for me when we met. I was like, "Well, heck yeah, this is already where I'm investing anyway.”

Yotis Tonnelier: Yes. No, that's a great question. I think there are two differences between Fund I, our Fund I, and now our Fund II, because industry change, and you need to play the game as well. So, for the Fund II, yes, it's AI, workflow, space, military tech, robotic, deep tech, and a little bit of fintech. That's where we are focused on. On the first question about how to find a deal, I think it's my story, because I got very early age inside an incubator in Paris because I was working for a startup that got incubated there, that was called The Family.

Justin Donald: What a great name, The Family. I love it. So cool.

Yotis Tonnelier: Yeah, they are a little bit down now because the partner fight, but they were really, really great. We had Peter Thiel and all those great people at that time in early 2010 in Europe. Imagine coming to the incubator, so it was great.

Justin Donald: That's awesome.

Yotis Tonnelier: So, I was getting classes for free because I was an employee inside of their portfolio company. And what happened is I started using, you know, the first investment I made was TransferWise, that is Wise now.

Justin Donald: Wise, yep. Great pick.

Yotis Tonnelier: But in 2015, it was TransferWise. And what happened is that I was looking for a solution to transfer some money to the US and started making my due diligence like a customer, find TransferWise. And before that, I was using, I forgot the name, a very well-known one, not TransUnion. What is the name?

Justin Donald: Western Union.

Yotis Tonnelier: Western Union. Sorry about that. And I use Wise, and the interface was so much better. It was so much better. It was so much easier. It was so much cheaper. No problem. I mean, it was like blow-minding for me as a customer. And so, because I was already inside and I was exposed to that VC at early age, my brain was, "Okay, let's see where they are in their funding. You know, what is the valuation? What is the team? What is..." But because I was exposed to early age, it allowed me to do that. And so, start doing that, and then to respond to your question to the allocation, that's where the funny part is starting. I mean, first investment, small ticket, it's impossible to go in. So, I discovered them in series A, tried to go in. Of course, sorry for my language, but they just closed the door.

Justin Donald: Yeah, they were oversubscribed.

Yotis Tonnelier: Yeah. I mean, they don't want you. I mean, I am nobody, you know? My ticket was not like millions of dollars.

Justin Donald: They call it smart money. They wanted smart money, strategic money. Yeah.

Yotis Tonnelier: And so, started working my way in, you know? I started asking to the network, who is already an investor? What fund to invest? You know, tried to make relationship? And so, worked my way in, in Series C. Series B, no, impossible. In Series C, take other co-investor to have a bigger ticket, and went in. And so, that has been for the five first company we invested. It was the case. Every time it was the case. Canva, that now it's a 14X, 49X position for us.

Justin Donald: Wow

Yotis Tonnelier: Was exactly the same scenario. I used them, and I'm not a designer at all, but I wanted to do some stuff.

Justin Donald: I do all my keynotes in Canva. It's awesome. It's brilliant.

Yotis Tonnelier: Yeah, it's awesome. And so, Series A, "No, there is no place for you. We don't know you. You are nobody. No, thanks." And then work Series B, same. And Series C, go in through relationship that you work in. And it's funny because when I moved to the US, and in 2019, we did the deal with Mercury. We did in Series A. We got accepted in Series A. But I was already in the market for like five years and working my way in and looking everywhere to make…

Justin Donald: That’s right. You were building relationships early.

Yotis Tonnelier: To building relationship. That's how you get the allocation. There is no magic to that.

Justin Donald: Right. You got to know people. Plain and simple.

Yotis Tonnelier: Exactly. After that, when you are Sequoia or a16z, and you work as a partner whatsoever at that fund, it's a completely different game. But if you are an independent and don't have that big track record and stuff like that, now it’s fun too, and you know, because you know the deal that we work on. It's much easier. We have bigger ticket, more power. We are known. And we have the track records, so it's a completely different game.

Justin Donald: So, I obviously know I cannot mention the company name or what's going on here, but when I told people in my community, in my circle of influence, one, who you had access to, and two, the amount that you had available, people were blown away. And it was like, "Wait a minute, how did he get access? Like we wanted this. This is incredible." So, it's really just a testament to the way that you have built your reputation to the networking that you've done. I certainly want to talk about that a little bit more because I bet we can get more precise on how to build that and reputationally how to grow for other people that want to do that over time.

But before you do it, it's nice to find the people like you that can do that on your behalf, right? I don't have these relationships, but for me as an LP, I'm able to get access to these things that I myself don't have access to. Even though I've got a wide reach and I've got a lot of relationships, there are definitely some spaces I am not known very well in, or I haven't built the reputation or whatever it is that you need to do.

Yotis Tonnelier: Yes.

Justin Donald: Okay, but let's first go back in time. Okay? So, you're from Belgium originally.

Yotis Tonnelier: Yes. The French part of Belgium.

Justin Donald: Yes. And it's pretty fun actually, because we had another guy, another PEF, post-exit founder, at our event Wednesday night, also from Belgium, which is cool. We had a Finnish guy that was there as well. So, it was nice kind of having that part of the world represented. So, like you're an investor now. You're picking these awesome companies to invest in. Prior to this, you started a couple of companies. You were an active operator. You had two different exits. And I know, one, you're probably more at liberty to talk about than the other, but I'd love to understand, have the audience understand a little bit about that, like what you did and how that transpired, and what kind of led you to come to the other side of the table.

Yotis Tonnelier: Yes. I think I was discussing with Connor about that, your Connor that worked with you.

Justin Donald: Yes. Connor Merida. He's awesome.

Yotis Tonnelier: Yeah. And it's funny because we were talking about my story, and because I was more working for that family office, Saudi family office, making investment in Europe, and then moving to Miami, and continue to invest before ever be an operator. And when I got the first exit, I become a CFO, and Connor told me, he said, "What was your study? How you become a CFO?" And I said, "I never studied that." And that's true. He said, "But I don't understand how you got the job." And said, “I think I'm a good seller. I'm a good pitcher. I'm good with number, of course, as an investor. So, I learned how to be that.” And so, after that, I stay in the company for seven months because we negotiate an offer to a PE. And the PE, I was the one, because of my network to bring that PE, so it was a great exit for me.

Justin Donald: That's awesome.

Yotis Tonnelier: But only seven months. And then directly after that, a funny story. I have a friend that has a cousin working in Miami. He had a credit repair, a business. I never heard about that in my life, B2C, little bit of B2B. And he wanted to have a CEO that have this tech-oriented knowledge. And so, he said, "Come to work with me. I give you 15% of the company." And I said, "Listen, if I come to work with you, I want to be your partner. It's 50/50, or I'm not taking the deal."

Justin Donald: That's a big jump, 15 to 50, but.

Yotis Tonnelier: But I was in the position to negotiate. I didn't need to work. If I don't want to work for 10 years, I don't want to work for 10 years.

Justin Donald: That's right. You had a really nice exit.

Yotis Tonnelier: And I can go back to what I love, that is investing, so it doesn't matter.

Justin Donald: I tell people this all the time. It's the beauty of, like, having more options in life.

Yotis Tonnelier: Leverage.

Justin Donald: You have a nice exit. You don't have to do anything. So, it's got to be the right fit, the right people, the right culture. Just everything has to be right. And I always tell people, "Hold off. Hold off until you find a perfect scenario for you," which it sounds like you did.

Yotis Tonnelier: Yeah. And so, I told him that. And two weeks after that, he say, "You are crazy. I'm not giving you that." He was doing around 1 million at that time. And, I said, "Okay. No problem." Two weeks after that, he say, "Okay. I'm giving you the 50%." What is funny is when I check the company, I had the same due diligence, thinking when I was an investor. So, that's what's coming from my investor side, what I learned from everything I'd done before. And so, when I checked the company, it was doing that revenue without any automatization. And that's why it got me excited, because I knew with what I knew. With simple tools, I will completely bring the company up. And that's what happened. I think in six months, we were at 4.8 million revenue.

Justin Donald: Okay. That's great.

Yotis Tonnelier: So, completely grow the business. And what happened is that… And that's another true story, and a funny story is that he was not coming at the office anymore. I was handling everything. And at the start, it was really a 50/50. So, I was not happy, and I knew the relationship will not continue on the long term. So, I wanted to exit. So, I was ready to sell my share. And so, I went to the office that day, and he come to the office, and he said to me, "Say, Yotis, you know, I like you, I want to keep you as friend, but I think we should separate ourselves."

Justin Donald: Perfect.

Yotis Tonnelier: But it changed everything. Because the number I had, I did 5X on the number because it's different if you want to sell your part to him because we had an agreement on that, or if him ask you to buy you out.

Justin Donald: Yep.

Yotis Tonnelier: And so, that day I was pretty happy when he said that. Inside of me, I say, "Oh, yeah!"

Justin Donald: That's cool.

Yotis Tonnelier: So, we negotiate, do a buyout with the revenue of the company. And, yeah, and I was out. But what I understand is I am not able to focus on one project more than six to seven months. I like different industry to feel, like, excited. That's my personality. And so, yeah, going back to investor, as a VC, it's what you get. Because I'm getting every industry. I'm getting, like, 15 decks a day. So, I'm learning. It's different. Every day is different, you know? And so, that's why it keeps me excited.

Justin Donald: Well, it's great because you're building the skill set along the way as an entrepreneur for what it's going to be like once you are officially an investor. And for most entrepreneurs, they are horrible investors. I mean, I speak to entrepreneurs all the time because it's a different mindset. There are skills that are learned. Very few people transition from entrepreneur to investor very well without losing a good deal of money first or at least learning the habits. It seems like you really did. You may have been more predisposed to some of the details, and being an investor, even as an operator, though.

Yotis Tonnelier: I think it was because of my story. So, I was first employee's assistant. I was the assistant of a COO and co-founder of a startup in Belgium. And so, the guy was much older but already had a couple of exits before. And I learned so much just to be with him in the room, because I was his assistant. So, I was exposed to everything as an operator already at that time. And then I go inside The Family, the incubator. So, I was exposed because the incubator they were taking, like, three person at that time, so I was exposed to that. I was exposed to investment. And then we receive an offer from a Saudi family office. And founder refused the offer at the end, but the director wanted access to The Family because he had a mandate where he was investing in pre-seed and seed in Europe. That was the mandate, okay?

And he told me, he said, "You know, you are all the time at The Family, you have all that deal flow," and at that time it was the best deal flow in Europe, to be honest with you. "Come work with us. You can keep your job but come work with us as a scout. You stay here. We don't need you anywhere. You stay here. And this is our investment thesis, this is what you need to do." And that's how I learned. My second job was that. It was what I'm doing today, but it was 12 years ago.

Justin Donald: Way back when. Yeah.

Yotis Tonnelier: So, that's how I learned all those by first working with them, and then moved to Miami, continued to invest with my own money, and also with a co-investor. And that's all the story. I just teach myself deal by deal. Yeah.

Justin Donald: One of the things that I want to talk about with you, because I think you guys are really pioneering a new model in the venture space. So, I've got a big complaint that I try to voice quite regularly, and that is that I feel most people that are raising money or managing money have misaligned incentives from the people that are their clients or their investors. And so, it bothers me so much seeing people making money when the investors are losing money. And so, even in, like, PE venture, I feel like for too long it's kind of just been this 2 in 20, and now you're seeing, like, I mean, I saw some deals to get into SpaceX, like 5 in 30. Like, crazy numbers, right?

And so, as I quote that, for those of you that are unfamiliar, it's like 5% admin fee or 5% fees and 30% carry. Two in 20 is pretty standard, but there are ways to structure it that are in much better alignment to your investors, and I feel like you guys are doing this the right way. I'd love to hear your thoughts, number one, on why you're doing it, because you don't have to. Industry standard could allow you to just keep doing this. But then, number two, there has to be, like, a reason. I've got to imagine you've experienced something traumatic or something that allowed you to recognize the value of being in such alignment with your investors.

Yotis Tonnelier: Yeah. I think there is two stories. I think there is an inner story that I never share, I think, to anyone. The first story is that my father was at some day was an investor. So, he invest with someone that was a manager, and at the end of the day, the manager didn't work well with the money, you know? So, he lost all his investment.

Justin Donald: Ah, that's brutal.

Yotis Tonnelier: And I think when I was younger, and I know that, it was really painful as a young kid. And so, I think that marked me inside me, and I said, "You know what? I want that any LP needs to live that anymore. It cannot happen. You need to be very transparent. And so, to respond to your second question about what is going on, I think the market is broken, is really broken on the fee, because it has not been performing for the past six to seven years. Even now, you have SpaceX, and that is going to give liquidity. But after that, the LP starts looking and say, "Okay. I'm giving you 2% for what? For return of 1.3% on my money?" I mean, it doesn't make any sense. And I'm going to give you a story and might have some enemies after that. But that's live and that's true, so I can share it.

I know someone that just raised a 600 million fund. And so, of course, he's doing the 220. He has a couple of partner and analysts and whatsoever, so he has a team with him. But I know he pay them really, really bad. And so, there is 12 million every year.

Justin Donald: That's a lot.

Yotis Tonnelier: It's a lot of money.

Justin Donald: By the way, where's the incentive now to perform if you're making that kind of money? This is my big issue.

Yotis Tonnelier: I have a question for you. Let's exchange role. How much he's paying himself yearly?

Justin Donald: Well, I mean, he's paying his team… No. I mean, he's not paying his team even 2 million, so he's probably clearing 10 himself, 10.5.

Yotis Tonnelier: You're good. He’s taking 10 million every year on the... I mean, come on. I mean, you cannot pay yourself 10 million and then be focused on the performance for your LP. It's impossible.

Justin Donald: Right.

Yotis Tonnelier: You need to have an incentive. Okay? And so, that's why also I know you just do a deal to just make a little bit over 1.5 in return and already raised for another fund.

Justin Donald: Right.

Yotis Tonnelier: And that's where…

Justin Donald: Well, this is common.

Yotis Tonnelier: Yeah, that's what's going in the market.

Justin Donald: This is industry standard. It's like now we're raising the next fund so we can get some more fees.

Yotis Tonnelier: Exactly.

Justin Donald: And by the way, if you're making this much upfront, and this is... So, when I talk to people, even this is in real estate, this is in private credit, this is in any other space, PE, if you are making all these fees on the front end, you're actually disincentivized to see things to the end. I actually want people to not make much until the end, and realize, like, you actually have to be a good performer. You make your money at the end, so that you are a steward of my money for the full life of the fund.

Yotis Tonnelier: Yeah. I think it's more... It's not about the 2% that is the problem, and all the LP I'm talking about. It’s not the 2%, because they understand that they need employees. They need to have money to run the fund. What we have done with YXS Capital on the fund, too, is that every money that we receive from LP first, we return 100%. And then all the management fee that we ever receive, we return it to the LP as well.

Justin Donald: Oh, I love that.

Yotis Tonnelier: But after our LP make 3X net, so not gross, net back in their pocket, we get an incentive. What is the incentive? After that, we're getting 20% carry. It's just showing our LP, and it works pretty well with family office and wealth manager that we work with, that we are there for the big commission. And don't get me wrong, I'm here to make money. You know what I mean? I'm transparent with that. But I will make money, and even more money with my LP, when the LP they have the money in their pocket. It's funny because there is some fund that use the American waterfall. Do you know that?

Justin Donald: Which is brutal.

Yotis Tonnelier: Oh my God.

Justin Donald: Yes, it's the worst structure. By the way, you're from Europe, so of course you're going to prefer the European waterfall.

Yotis Tonnelier: Oh, no. But no, of course.

Justin Donald: It's not even anything to do with countries. Like, the European waterfall is brilliant because that's how you should invest, right? Because you make your money first, right, which is really important.

Yotis Tonnelier: Yeah. All the LP needs to get the money first before the GP can get any carry.

Justin Donald: So, actually, let's have you break each down just so people understand this.

Yotis Tonnelier: Yeah. So, European waterfall is when we need to give back all the principal of the LP back before calculating the carry. Us in our position, in addition to that, we reimburse. We send back the management fee. And then, so it's an ultra-American waterfall. Let's call that like that.

Justin Donald: So, it's European-friendly. I just want to say, so European waterfall, super LP friendly.

Yotis Tonnelier: Yeah, exactly. The American waterfall is deal by deal. So, let's say you invest in a fund. The fund do an exit, a nice exit. They are going to calculate a pro rata to send back to the LP, and then directly make carry on that deal. The problem, and the industry, they don't work like us on quality, more on quantity. So, there is a lot of deals where you lose your money. On those deals, nothing happened. So, that means it's really not LP-friendly at all. It's the opposite. Because manager are getting money and bonus on good deals, but they don't have any return for a bad investment they are making, any consequences. And so, that's already a misalignment when you have that structure.

Justin Donald: So, you got a misalignment first with the fees, typically, and then secondly, now the waterfall is lopsided to the sponsor. So, now do you think the sponsor in an American waterfall that just had a big exit with one of their companies is actually as incentivized as before to see things through to the end? No, they've just made a windfall of cash.

Yotis Tonnelier: Yep.

Justin Donald: So, I love your model and the way that you guys are doing it. I think that that's really smart to be in alignment. And by the way, of all the funds I've looked at, I look at a ton of funds, I've done a ton of due diligence across the board. There are only two funds that I've ever come across that are doing what you're doing that have this model. By the way, there are probably some others out there, but I'm talking about, like, thousands of funds. I've found two.

Yotis Tonnelier: I think it's going to be more and more, to be honest with you. I think that's where if you want to raise and make LP happy and respect your LP, I think it's going to go that way. Let's face it. Maybe in 5, 10 years, but it's going to go that way. It's the same with liquidity. Before it was 10 years with two years addition, so during 12 years, sometimes you don't see your money back.

Justin Donald: That's right.

Yotis Tonnelier: And that's where it's bad also for the management fee, because you're paying the management fee during 10 or 12 years.

Justin Donald: That's right.

Yotis Tonnelier: So, imagine the money you're losing, because they don't reimburse that in this classic structure. And so, what we do, we…

Justin Donald: You haven't gotten your money back that long because the fund's not going well.

Yotis Tonnelier: Yeah.

Justin Donald: So, not only is there not much on the carry side for you, you're paying out the fees.

Yotis Tonnelier: And that's why the industry is broken. That's why a lot of LP are going to the big fund that can have great performance instead of have more medium and small fund. But what you need to do in the industry right now is this 10, 12 is going to change as well. Because you have the secondary, and we can talk about that, secondary market.

Justin Donald: We should. Let's talk about that next.

Yotis Tonnelier: You know more. But now you need to be at six, seven years lends other fund with a two-year additional, but that will, for me, be the norm, and that's what we're pushing to as well with YXS. So, less fee, more on the performance, and quicker to liquidity, of course, because of the secondary market. We can do that now. That five to 10 years before, it was impossible.

Justin Donald: Well, and for me as an investor, I like that because you're saying, "Hey, I'm so good that I can make my money on the deals we're doing," right? Like, "I can send you back your original principle. We're sending you back the fees. Like, we're good enough that we can make money in what we're doing." I like that confidence as an LP. Super important.

Yotis Tonnelier: I think it's not, and I don't like to say I'm too good, and stuff like that. That's not true. I think we have investment thesis that really allow us to do that because we de-risk maximum the investment. And so, when you invest in Series B on our industry tech of market that are really booming like AI, robotic, military tech, space tech, you know that if you’re doing the right due diligence and investing on the right company, 12 months after that, you are already going to double your money because another raise is going to happen. And then you going to the secondary market to get liquidity if you need to go to get liquidity. That's where all the strategy change that before you needed to wait, what, IPO, or a full buyout, or a merger.

And even merger, sometimes you don't get any cash. It's more new equity on the new business. So, it changed everything. And so, that's why we don't touch pre-seed and seed because it doesn't make sense with our strategy.

Justin Donald: Even though, likely in time, secondaries will touch that space too. But let's talk about them because we went through an IPO drought, so not only was that one of the only ways to have an exit, it was basically nonexistent for the last couple of years, right? Anyone that did didn't do well. There weren't very many of them. It was very much of a drought. So, now it's good seeing that SpaceX had a successful IPO. You've got a bunch of others that are coming along, right?

Yotis Tonnelier: Waiting 2027.

Justin Donald: Yeah, 2027's going to be probably a pretty exciting time.

Yotis Tonnelier: That's the year for every investor in SpaceX.

Justin Donald: Yeah, it's incredible. And for like our mastermind, a ton of us invested in X, xAI, SpaceX, OpenAI, Anthropic. I mean, there's a crack in... I mean, there's a ton of them that are going to go public, which is super fun, and it's neat seeing our members having that opportunity. But Secondaries are like a game-changer for the industry. So, if you can expand, like so, for me as an investor, I love secondaries. There's a lot of reasons I like secondaries. I like that you can see because these are companies are further along, so you actually know how they're doing. A lot of them are profitable. Sometimes you're getting employee shares. You're getting them at a discount.

I mean, there are just so many things to like about it. But I'd love to hear you unpack how secondaries have kind of unlocked capital. They've provided exits, and then they've provided the people that are exiting with capital that might be really needed. A lot of the times it's employees that they're in it day one or early days. So, it's like they had a huge windfall, they could use the money right now, and then you come in at a discount.

Yotis Tonnelier: Yes. And I think secondary is like the public market, but with a little bit of more time if you want really value on your investment. But like you said, it changed everything for a lot of people because it gave liquidity to private company at almost from, I will say now, Series A or B, B to C, D, E. And so, that changed everything as a manager. Again, depending of let's say you are pre-seed investor, even a fund, and you're going to Series B. If you invest well, a Series B is going to give you a minimum 20X, 25X, really minimum of your investment. I mean, depending of what your LP are looking for or your performance, it's great to go out. At the end, if you are not needed to do 100X, it's a great opportunity to get in the track records, to get DPI, to give back to the LP, and just play the long term.

Justin Donald: And you don't have to sell all of it.

Yotis Tonnelier: No.

Justin Donald: You know? I mean, you can just take some chips off the table.

Yotis Tonnelier: Of course.

Justin Donald: Right?

Yotis Tonnelier: And there is a lot of employees doing that. It's funny because we are on the deal. I cannot say the name. It's another deal that big company in…

Justin Donald: This who we talked about this morning?

Yotis Tonnelier: No, it's another one. It's another one.

Justin Donald: Okay. because I was excited about that one too.

Yotis Tonnelier: Yeah, yeah, yeah, yeah. I cannot say the... I'm going to give an info. It's the competitor of Waymo.

Justin Donald: Okay.

Yotis Tonnelier: Based in Europe. If I don't say the name, a lot of people will know which company I'm talking about.

Justin Donald: I've got it. I know what you're talking about.

Yotis Tonnelier: So, great opportunity. So, it's a funny story is that this opportunity, again, about the allocation and getting the allocation, I got the deal from someone that I know for 10 years in back to the family where everything start for me.

Justin Donald: Oh, that's so cool.

Yotis Tonnelier: And so, now full circle, now is one of the biggest and the best in secondary in Europe. And so, he called me and say, "I have something for you that’s crazy good," and it's employees selling share to the market, to the secondary market, and a great valuation. I think based on the last round, we are getting 30% discount. So, some opportunity, again, showing the secondary market, employee is getting liquidity from guys like us that want to invest in Series B. But I don't have a problem to hold that and sell in Series C. Depending of the return I'm going to make, of course, on the time and the X I'm going to make on the investment. But again, we can do that, and I'm talking personally with YXS, because we're looking to do 5X on a two to three years holding. And so, all my investment in my head, and decision I'm making, is based on that.

Justin Donald: Yeah. Can we do this? If not, it's a no.

Yotis Tonnelier: Yeah. No losing money and 5X in two or three years holding. That's what…

Justin Donald: And hopefully it's greater, but it's like 5X is your number, which…

Yotis Tonnelier: Yeah, because after that, you cannot control. Let's face it, when you invest in a company, you know the potential, but you cannot predict like 10X, 15X, 20X. If someone’s telling that, it's a liar. Sorry to say that.

Justin Donald: Now, here's an interesting thing that I'd love to touch on, because I have heard some horror stories, and luckily, this has never happened to me. But I've heard some horror stories of people trying to buy secondaries on their own, or secondaries that haven't been perfected, or…

Yotis Tonnelier: I know what you're talking about.

Justin Donald: Even the counterparty risk that exists if an employee changes their mind because the company goes back up.

Yotis Tonnelier: Are you talking Anthropic?

Justin Donald: Yeah. So, there's tons of risk in this if not done correctly. If you do it correctly, all works great. If you have a path directly in the cap table, I think that makes sense. But can you explain, like, how to do it the correct way versus, like, what the risks are that people should be careful of?

Yotis Tonnelier: Yeah. The simplest way is what happened with Anthropic, cutting all these multiple layer of SPV. I think secondary is great but now needs to in every new industry needs to have some down problem to make some rules. I think to make it more simple is when you invest in SPV, make sure that the share is all inside SPV. You are making the investment. There is no more simple than that. You cannot invest in an SPV that have the right to buy the share. For example, if you have that with employees of Anthropic, and that happened, because I know from a couple of LP that we have that are in this situation, after that, the employees, they say, "You know, I don't want to sell. I don't want to sell anymore because, in six months, I just like 15X my position."

And in addition, the company say, "Anyway, we didn't sign for the transfer." That's it. You cannot do anything. So, you need to be careful on that. But the best way, make sure that they have the transfer or they have the share inside the SPV you are making your money. You are investing your money, sorry.

Justin Donald: Yeah, it's good. So, as much as I love secondaries, I just want to say beware. You got to do it the right way. I think that's super important. Something else I want to talk about. You've invested all over the world, you know? You’ve invested in Belgium, you've invested in France, you've invested in a number of other countries. I mean, we can talk…

Yotis Tonnelier: Not Asia

Justin Donald: Not Asia.

Yotis Tonnelier: Never Asia.

Justin Donald: Okay. But all over Europe. You've invested here in the US. So, if you were to say, "Hey, right now I'm most bullish," like, are you most bullish on US companies? Is it European companies? Is it still a little bit of both? Because I know the success you had in your first fund was very heavy, if not all US companies, right?

Yotis Tonnelier: It was a mix. Depend what is the calculation you want, are you calculating on the result, on the cash result of the performance, or on our own investment? So, that's two different things.

Justin Donald: That's good.

Yotis Tonnelier: Yeah. On the two, it depends also because we have Canva, and Canva, it's an Australian-based company, but now they have Delaware, and we invest when they were in Delaware, so let's count as an American company. We are at, I would say, 80/20 on the performance from Fund I. We are going to be around that. I think we are going to be 85 US, and then 5, 10 Europe. And a little bit over, because I don't like to really close my mind to geography. We don't look Asia because I don't have any contact, really, nobody. I don't have experience. So, we are not touching Asia. But in Dubai, there is couple of deals that I've seen. And I went last time to Dubai. I was impressed by the quality. Of course, Europe's still good. Israel is good, too. Israeli company is good.

Justin Donald: Yeah, you've done some. And by the way, on the tech side, they can be outliers.

Yotis Tonnelier: Yeah, on the tech side. And after that, you have the US, but that will be what we are looking for.

Justin Donald: Now, let me ask you this. And you may not have connections in Africa, but you had said fintech is one of the niches that you like. And Africa's kind of, you know, a lot of countries over there that are really like taking form. And Latin America on the fintech side of things. I know you invest in Latin America.

Yotis Tonnelier: Yeah. So, Latin America is great. It's a great market. More mature. Africa, I have a friend that talk to me about it, and I've seen deals. Honestly, again, I don't have any experience, and the deal we are making right now it's great deal where we have control. We have relationships everywhere on those deals. So, I'm not going to look Africa. I think there is a big opportunity, don't get me wrong. But that's not a market that really excites me. I think it's more risky. You need to keep in mind that I like to say that I'm in ventures, but I'm not a big risk-taker.

Justin Donald: Right. I like that.

Yotis Tonnelier: It's funny. My partner, Sunny Patel, that was an investment banker for many years is telling, and that's true. We are really in venture, but with the PE mentality, investment banker mentality, even on the due diligence.

Justin Donald: Boundaries.

Yotis Tonnelier: That's really what defines us, you know?

Justin Donald: That's right. All bankers have pretty hard boundaries on the safety side of things, right? More of a conservative approach by nature, make your money, figure that out, right? But I like that. It's like a PE mindset in the venture space with a unique structure that's LP-friendly.

Yotis Tonnelier: Exactly.

Justin Donald: But then in specific lanes where you have the relationships and you feel like the returns could kind of be outlier-type of returns.

Yotis Tonnelier: I think for Fund II, I'm going to be honest with you. When we make our investment, I'm really focused on the 5X return on the growth, let's say growth 5X. I think first fund we did 14X, and that's incredible. Of course, there is part of luck, but you need to provoke it. How do you say that in English?

Justin Donald: Yeah. Provoke.

Yotis Tonnelier: Okay, provoke luck. And so, inside of me, I have a number that I want to reach for Fund II. But based on also now the value-add, because we have value-add with YXS and the team, the first one is really on the Fortune 500 commercialization of every company we invest in. So, every company we invest in, before investing, we have rules that we need to add value from day one.

Justin Donald: Okay. I like that.

Yotis Tonnelier: So, that's another rule that we have before investing. If we cannot provide value, of course, in addition to money, we don't make the deal. So, that's one, Fortune 500. We are inside NVIDIA VC Alliance with Fund II. So, great, great, partnership with NVIDIA. We close to Pfizer, we close to Verizon at an executive level. So, we have this real network that we leverage for our portfolio company. And then we are B2G. So, B2G, connected to the American government, but also government in Europe and the GCC. So, that's really our true value add when we are looking to deal and making a deal.

Justin Donald: Yeah, huge fan of B2G. That's been a very good segment for me personally.

Yotis Tonnelier: Of course.

Justin Donald: And especially in anything that, I mean, I love government contracts. And I also love when governments invest in companies in the form of a grant, so it doesn't dilute the investors, right? So, you see a lot of that, which is pretty cool. But some of my other favorite investments in that space are like the big boys, like what Saronic and Anduril, and I mean, just some of these companies are doing. And there's a handful of others that are doing amazing things. So, there's a group based out of here that I, Scout Ventures, I don't know if you're familiar with them. I think they're doing some awesome stuff. I'm friends with the founder.

Yotis Tonnelier: Scout Venture?

Justin Donald: Yeah.

Yotis Tonnelier: Yeah, I heard about them.

Justin Donald: And they have some pretty awesome relationships. And so…

Yotis Tonnelier: Well, B2G is even more relationship than everything else, right?

Justin Donald: That's right. That's right. So, let's say that you were getting started, you're brand new, you're not this awesome fund manager, but we've got people here watching and listening that are like, "Hey, I want to figure out what my next step is in building wealth."

Yotis Tonnelier: Okay.

Justin Donald: What are the niches and sectors that you are most excited about or would be most excited about? I would imagine there's some overlap, obviously, with what you're investing in. Maybe there are some things that you're like, "Hey, I love this space. Maybe we're not investing in it yet." So, I'm curious, like, what would you do? Like, you lost all... Let's just say that you're starting from scratch, you've got no money, and you want to go and find a niche or a couple of niches.

Yotis Tonnelier: So, if I lost all my money, that means I want to be an operator, correct?

Justin Donald: Yep.

Yotis Tonnelier: That's the case.

Justin Donald: Yep.

Yotis Tonnelier: That's a user case. Okay. on the operator…

Justin Donald: Actually, let's do both, operator and then investor.

Yotis Tonnelier: But if you have no money?

Justin Donald: If you have no money. So, right now we'll talk operator.

Yotis Tonnelier: It's going to be... No, but even with no money, if you still have the contact and stuff like that, there is a way. Okay. So, no money on the operating side. I know it is going to sound like easy a response, but you need to leverage AI, and you need to go to AI. I think there is way to find a co-founder that is really tech oriented on the AI and respond to a problem. Honestly, for the past 15 years, I think if you have no money and start a company, it has been exactly the same structure and the same, finding a good tech co-founder, depending of also your profile. If you are the tech, you need a CEO that can pitch and do the business.

Honestly, for me, every time we look to a deal, it's really the best team or that one. And then leverage what is on the market and responding to a problem. That will be on the operator side. On the investor side, if I don't have money, I will start from zero and go to YC, go to free event in the tech industry, and just get a relationship. And with those relationships, negotiate some company saying, "Hey, I'm looking to make some investors." Or even lying and saying that you have an investor somewhere that’s looking to make deal. You know, sometimes you need to do that. Can you share me some deck? And getting some deck, and just checking what is really unique company, and try to level up on the deal flow, get that deal flow.

And then with that deal flow, start building your network of investors that’s looking to that, but don't have your expertise or doing something else, like a lot of people that you know. And make sure that you propose good deal and take a carry on that. You know that the truth with Fund I is that the first couple of deals that we did, it was no management fee, zero.

Justin Donald: Wow.

Yotis Tonnelier: Because it was co-investment and structure-by-structure. And the first deal I was taking 5% carry.

Justin Donald: Wow.

Yotis Tonnelier: Because I didn't have much money, and I wanted to have a bigger ticket.

Justin Donald: Yeah.

Yotis Tonnelier: So, why you will put your money with me? I need to convince you and show, so I cannot ask to 20. So, I start with 5%, and then 10%, and then 20%. So, yeah.

Justin Donald: Wow. That's awesome. But I also love that, because it's like, "Hey, I'm willing to do less than market rates, and I'm willing to earn your trust," right? And it's also like, "I'm going to prove to myself that I have the chops to charge market rates."

Yotis Tonnelier: Exactly.

Justin Donald: So, I love that. One last thing I want to talk about here, and we've talked a little bit about it, but identifying great companies isn't the hardest part. Getting a seat at the table, having the relationships that can allow you to get in, that's the hardest part. And so, whether someone's investing in startups or real estate, private businesses, private credit, whatever it is, what lessons can they learn about building trust and really becoming the kind of investor that people want on the cap table?

Yotis Tonnelier: I think it's like the young kids, looking to Instagram and want to be rich in two days. It's exactly the same situation. You need to play the long term. You need to play the long vision. You need to have your own ethic saying, "I am going to look to a deal that I'm sure at 100% is going to make money." Because on the long run, those investors are going to go back to me and work with you. By the way, I think I told you the story that is a great example with one of our fund LP where I knew him and shared deals and invest with me in the past. And he told me when you're doing Fund II that we wanted to do Fund II more institutional, one bigger fund. He said, "Come back to me, and I will invest in your fund."

So, I went back to him and say, "We're ready. We want to do 100 million fund. Will you invest in my fund?" And, he said, "Listen, I know I told you that I would, but I cannot." And I say, "Why?" "Because I will need you to double the size because I don't want to be the only LP, and I'm going to put 100 million."

Justin Donald: Wow.

Yotis Tonnelier: But again, I mean, I knew the guy for so many years, and he knew that the deal we were making together before. And so, it was really important. And then we did that, and he's LP in a fund, and we increased our capacity. But to just show you that you need to gain the trust and you need the long term. Even if you can make money on a sh*tty deal, don't do it.

Justin Donald: Right. Right.

Yotis Tonnelier: Don't do it because after that, with investor and LP, you have one chance. If you don't make them money, they're not going to invest, and you are going to hurt your reputation.

Justin Donald: That's right. Yeah. You hurt your reputation, it becomes infinitely more challenging, if not impossible, to raise on future funds. But I love that problem that you had, where it was like, "Your fund is too small. I want to put in 100 million. Your fund is too small. You got to increase the capacity."

Yotis Tonnelier: I'm not the only one. Honestly, I've heard that story before from older GP. Yeah. I'm not the only one that happened.

Justin Donald: And I know you've got an investor that put in even more than that, which is awesome. So, it's got to be cool for you to, you know… It's like when I first started investing, it was like 10,000 or 25,000 or 100,000 or whatever the number was, and it kept going up, 250,000, a million, like whatever. As my income grew, my minimum investment grew. You on the fun side, I would imagine your smallest check is, like, 250 in the early days, and maybe you're going up to a million, five million. It's got to be really cool to get 100 million in one lump sum, 200 million, and really start connecting with a lot of these family offices, institutional investors that are coming in.

Yotis Tonnelier: I mean, it's exciting for sure, but I think it's more responsibility as well.

Justin Donald: For sure.

Yotis Tonnelier: Because that's…

Justin Donald: Puts a lot of pressure on you, doesn't it?

Yotis Tonnelier: Yeah. It's a lot of pressure. It's a lot of money, so you know that you have one chance. Again, it's the same. After that, it doesn't change that much. It's more exciting because, of course, it's a big number, so you know. But after that, honestly, the process and the pressure it's the same. It's even sometimes less because those kind of big wealth manager or RIA they have so many investments. They are managing billions. They are not going to be on top of you. That more strategic investor, that's a lot, even if it's smaller check, and I don't like to say that. It's different check, but they are there. You need to show them what you do, and you need to deliver. But, yeah. I mean, it's more like, you are more, like, proud on the fact that you can see where you start and where you are going.

And the kind of which room now you can enter, you know? And which table you are, and you are respected, and you convince people and individual like that to trust you.

Justin Donald: You earn it. That's what happens. You have to earn it.

Yotis Tonnelier: It's more that pleasure.

Justin Donald: Yeah. Building the trust and building a relationship, and delivering previously to help build that, which is awesome. Well, it's been a pleasure getting to know you, and Sunny, and Loren, and I'm just so excited for all the cool things you're up to. I'm excited that you're going to be coming into town more often.

Yotis Tonnelier: Yes.

Justin Donald: Where can people learn more about you, Yotis, and YXS Capital?

Yotis Tonnelier: I'm on LinkedIn. I think that's the only social media I'm using. So, I'm in LinkedIn, Yotis Tonnelier. Our website, we have a LinkedIn page, too. And yeah, that's where they can reach out to us. We have an email. I'm not going to give my direct email on the podcast, but we have a pitch@yxscapital.com for deck, but you can even send another emails. We see everything. I'm seeing everything, so, yep.

Justin Donald: Well, it's fun when you get to a point where you don't have to raise money, right? That the funds just keep populating themselves with previous investors, and the check sizes get bigger and bigger.

Yotis Tonnelier: We’re still raising money to be transparent.

Justin Donald: Very good.

Yotis Tonnelier: Fund II is not complete yet, but yeah, I would love to. And that's funny, that's a story I'm saying. If we return on the size of our fund right now, if we return 5X to our investor, I will not need to take my phone anymore for the next fund. And that's the goal. Because after that, honestly, it's really exciting, too, because you meet so many people in person. You have the time to travel, finding LP. You create those relationships. And so, it's not sexy to fundraising, and the same for a funder. It's funny because funder and GP, same world. It's not cool. But at the end, when you finished, you said, "Okay, I meet so much person, travel," and it's just, yeah, it gives you some experience.

Justin Donald: Yeah. What's the size of this fund going to end at?

Yotis Tonnelier: We are not sure. That's something we are not sure yet because in fundraising, you have a commitment, and even a signed commitment. But what I like to say, and I said that to all the funders, and I'm pretty sure funder that I've raised fund, will share my thinking, is that until the money is in the bank, you didn't raise anything, my friend.

Justin Donald: That's right. That's a great way of doing it.

Yotis Tonnelier: Yeah. Let's see. But honestly with you, we can stop now, and we'll be good to go.

Justin Donald: Yeah. I appreciate that you're raising more, if it makes sense, but I love that you are at a point where you didn't need to.

Yotis Tonnelier: It makes sense before, because of our deal flow and the allocation.

Justin Donald: You're getting more and more access, yeah.

Yotis Tonnelier: Yeah. And so, the deal is really good. And so, I will never raise to raise. It doesn't make sense. Again, why? We give back the management fee. I don't have any interest to raise for raising. My interest is only if I have the great deal and I'm going to deliver performance, because that's where my incentive is.

Justin Donald: That's right.

Yotis Tonnelier: That changed everything.

Justin Donald: Which, by the way, for those of you investing, find the alignment where you're finding people that have an incentive in the performance. Not in the fees, but in the performance. Awesome. Well, thank you so much for flying in, joining me here on this. And this has been a blast. I love ending every episode with a question for our audience. So, if you're watching this or if you're listening to this, what is one step you can take today to move towards financial freedom and really just move towards living a life that you desire on your terms, so not a life by default like most people, but a life by design? Thanks so much! And we'll catch you next week.