E229: Inside Industry Ventures: The $8 Billion Firm Backing 650 Venture Funds
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
In this episode, Jonathan Roosevelt, Managing Director at Industry Ventures, explores how his $8B venture platform leverages a network of 650 funds to create competitive advantages in co-investing. The conversation delves into Industry Ventures' evolution from a pure venture secondaries firm to a diversified platform offering secondaries, co-investments, fund-of-funds, and tech buyouts. (01:09) Roosevelt explains how the firm's unique position allows them to identify and validate investment opportunities through their extensive manager network, emphasizing the critical distinction between investing at seed versus later stages.
- Core theme: The fundamental differences between seed-stage and mid-stage venture investing, and how Industry Ventures uses their platform to bridge this gap through rigorous due diligence and customer validation processes.
Speakers
Jonathan Roosevelt
Jonathan Roosevelt is Managing Director at Industry Ventures, where he focuses on co-investments and direct investing after spending most of his career as an operator. He has been with Industry Ventures for almost nine years, helping build their co-investment platform that now manages over $4 billion in AUM. Roosevelt brings operational experience to venture investing, having learned from his own mistakes as an entrepreneur about the critical importance of customer engagement and sales leadership in building successful companies.
Key Takeaways
Customer Validation is Ground Truth
Roosevelt emphasizes that customers represent the ultimate validation of any investment opportunity. (25:01) Unlike seed-stage investing where you're betting on potential, mid-stage investing requires concrete evidence that customers not only want the product but are willing to pay for it consistently. The key is not just talking to the customers the CEO provides, but finding your own customer base through third-party services like Gerson Lehman Group. Roosevelt recommends getting specific about purchase timelines, what would cause customers to churn, and having them force-rank competitive alternatives rather than accepting generic positive feedback.
Believability Over Relationships
Drawing from Ray Dalio's concept of "believability," Roosevelt explains that successful co-investing requires evaluating whether fund managers have both a proven track record and a repeatable process at the specific investment stage. (08:27) Only about 25% of Industry Ventures' 250 primary fund managers have earned the "stamp of approval" for later-stage deals. This isn't about integrity - most managers genuinely believe in their opportunities - but rather about their ability to shift from qualitative seed-stage questions to quantitative growth-stage analysis.
Different Questions for Different Stages
Seed-stage investors focus on two fundamental questions: "Is this a great team who can build a product customers will want?" But mid-stage investors must ask a fundamentally different question: "Is this a great business?" (05:29) Roosevelt uses Warren Buffett's distinction between "something that can be huge" versus "something that can make money," citing airlines as an example of a massive market that historically hasn't generated good investor returns. This cognitive shift is challenging for many managers who fall in love with companies at the seed stage.
Asymmetric Information Creates Alpha
Roosevelt identifies two critical elements for successful co-investments: asymmetric information and inflection points. (17:24) In private markets, it's legal to trade on insider information, and Industry Ventures leverages their board-level relationships with 650 managers to access non-public insights about portfolio companies. They look for inflection points that may not yet be reflected quantitatively but can be validated through customer conversations and triangulation with multiple sources.
Focus on N-of-1 Companies
Roosevelt's key advice from a decade of investing: don't miss companies you believe are truly special (N-of-1) because of valuation concerns. (39:56) Instead of using comparable company multiples, which often aren't truly comparable for unique businesses, investors should work backward from potential exit valuations and underwrite to their target returns. Many VCs miss great opportunities by viewing them as expensive relative to companies that aren't actually comparable because they lack the same N-of-1 characteristics.
Statistics & Facts
- Industry Ventures manages "a little over $8 billion" in AUM, divided roughly equally between secondaries and co-investments, with smaller allocations to fund-of-funds and tech buyouts. (01:14)
- The firm has relationships with 650 total funds - 250 through primary investments in seed/Series A focused managers, and 400 through secondary purchases of LP stakes. (03:56)
- Only about 25% of their 250 primary fund managers have earned credibility for later-stage co-investments, meaning 75% haven't yet proven their ability to evaluate Series A/B/C opportunities effectively. (13:07)
