Winter Mead, the founder and CEO of Coolwater Capital, tells us about Coolwater, a new organization that’s changing the way venture capital investors build new firms. Winter takes us behind the scenes to show us how venture capital works and how LPs think about the industry.
Winter Mead, the founder and CEO of Coolwater Capital, tells us about Coolwater, a new organization that’s changing the way venture capital investors build new firms. Winter takes us behind the scenes to show us how venture capital works and how LPs think about the industry.
In this episode, you’ll learn:
3:25 Why supporting emerging managers is critical to the growth of the venture capital ecosystem
8:53 How limited partners choose VCs
19:05 Why the venture capital ecosystem needs more innovation.
Non-profit organization that Winter is passionate about: First Graduate
Winter Mead is the Founder and CEO of Coolwater Capital. Winter’s mission is to enable capital markets by bringing transparency to venture capital. He has worked as a Limited Partner specializing in venture capital, and invested approximately $1-billion across 80 firms. He has been involved with two leading industry organizations: as a member of the National Venture Capital Association (NVCA) and at the committee level of the Institutional Limited Partners Association (ILPA).
Winter has authored the book “How To Raise A Venture Capital Fund: The Essential Guide on Fundraising and Understanding Limited Partners”, an enlightening read for any emerging VC.
Coolwater Capital (formerly Oper8r) is one of the world’s leading VC accelerators, striving to build the next generation of institutional VCs with their programs and resources. Coolwater views its core benefit for aspiring fund managers as demystifying the world of limited partners.
Subscribe to our podcast and stay tuned for our next episode.
Follow Us: Twitter | Linkedin | Instagram | Facebook
Winter Mead: If I'm an LP and I'm underwriting a new team, like really understanding their motivation because it's the same thing a VC will do when they're looking to underwrite a founder is they're looking for, okay, it's going really tough. You want to give up, right? You've wanted to give up for months. You have to make a decision.
Like, am I being dumb while I keep going? Or do I have an actual insight here that gives me the confidence to keep going?
Gopi Rangan: You are listening to The Sure Shot Entrepreneur, a podcast for founders with ambitious ideas. Venture capital investors and other early believers tell you relatable, insightful, and authentic stories to help you realize your vision.
Welcome to The Sure Shot Entrepreneur. My guest today is Winter Mead. He's the founder and CEO of Coolwater. Coolwater is a new organization that is changing the way venture capital investors build new firms. We're going to learn about how he views the market, how he supports new VCs, and how that has a downstream impact on the ecosystem.
Winter, welcome to The Sure Shot Entrepreneur.
Winter Mead: Thank you Gopi for the invitation. Wonderful to be here. Really appreciate it.
Gopi Rangan: You're welcome. Let's start with you. Tell us about yourself, starting with where you grew up. You grew up on a farm in New England, right?
Winter Mead: That's right. Yeah. So it was funny when we were catching up earlier, you asked which city I grew up in and it's hard to describe the city. It was five miles outside of a town of 2000 people. So, definitely, not really city living in the first years of my life.
The first time I had real exposure to the big city was when I went off to college. I went to college in Boston. I did grad school over in England, and then I moved to the Bay Area in 2009 timeframe. Worked for a few digital media startups in line with my grad school dissertation. I just found that whole world fascinating at the time and really try and understand digitization and how it was affecting value chains and how it was affecting different industries. It was really good foundational knowledge for understanding how VC works. Shortly thereafter, being in Silicon Valley, I had a friend who invited me to work for a multi-family office on the private equity team.
So I transitioned there in late 2010, early 2011 timeframe. I've been in LP for the last 10-plus years now. I worked for two institutions that built very great businesses around investing in managers and I spent a lot of time on emerging managers. About three years ago, I started dedicating all of my time to helping emerging managers. That's a long and winding road but that's what's led to the current manifestation of the current iteration of Coolwater, and of my continued willingness to really be a good support platform for new managers, first-time funds, new investors on a global scale.
Gopi Rangan: For those who are new to venture capital, VCs who go out and start a new firm are called emerging managers. They manage money so they're managers and they haven't really made it. They're still emerging. That's why they're called emerging managers. I see that you're passionate about supporting emerging managers. Why do you like venture capital and why do you support emerging managers?
Winter Mead: Yeah, your definition is great. I'll use a lot of terms. Emerging managers is one of those. If you're talking to a pension fund, emerging manager means any early-stage - meaning fund one fund to fund three; under a billion dollars in AUM (assets under management) - which is very different than the emerging manager that I'm talking about.
Generally, it's below $100 million in AUM, which still sounds like a large number in certain places, but those fund sizes flex down all the way to $1 million. I've worked with some very early-stage investors that are just getting started.
To answer the question of why help emerging managers, why do I like venture capital? I think it's when you're just starting to build something before you have the traction, that's when people need the most support. If you're an early-stage VC who's investing in early-stage companies, you're doing so usually because you have a philosophical bend to helping people early when they really need the help. If you think of the capital stack over time, like when you're a mid-stage or late-stage company, you need less help. You need less advice, you need fewer network connections. They're still very valuable. Like if you're delivering advice, but it's a different type of advice. It's a different type of customer you're going after, maybe the product is not built yet.
I think of it in the same way, where if I'm helping an early investor, what is the product that they're building? They're building effectively a fund product and there are different pieces to that they need to understand to build it well. I look at my role as being able to provide knowledge and information and context around building that fund product. The hope is that I can play a very valuable role in the first few funds and really set myself up for a great partnership with those investors over a long period of time.
The question around why venture capital, I think this came from having worked earlier on in my career at a multi-asset class investment firm. We would invest in public equities, we would invest in real estate. We would invest in private equity. Underneath private equity was venture capital and what I noticed about venture, I think what a lot of people notice, those that are really in the technology arena is that this type of capital financing serves as the research and development of many things to come.
The people that are in this industry are very excited to help shape the future and venture capital is that piece that is a requisite piece to building a company. Like you need to spend some amount of money. It's cheaper to start a company now than it was 10 or even definitely 20 years ago. But it's still an essential piece. You still need capital to build that initial product, to pay your bills, to hire people, to build out the infrastructure of the company.
I see my role really as supporting the capital markets piece of early-stage venture capital and making sure that, again, if there are ambitious entrepreneurs and founders that are trying to shape the future of the world we live in, how do they get financed? How do they get supported? Are those people that are representing the capital markets piece of that equation well-trained? Do they have a perspective on how to manage an asset management firm and how to build out a portfolio, so that they as venture capitalists can be successful?
It's a community, it's an ecosystem. It's not just the founders building in a vacuum. Maybe sometimes it is but in very few cases. In venture capital, the way I've seen it, and the way I've built my perspective is, there are different pieces to that ecosystem, including founders, venture, capitalists, limited partners, those investors that are investing into the venture capitalists. They each represent something that can be very valuable to the prolongation of venture capital as an ecosystem.
Gopi Rangan: So you are the investor behind the investor. Capital formation is an important part of the ecosystem. It's a moment when things really come together, and capital formation for a new VC firm is quite challenging. It is not easy to build a new VC firm. Pretty much everybody who has been a guest on this podcast is an emerging manager and they've all been through this process. Thanks for the support of the limited partner community that has made it possible for new VC's to build firms. This will be very interesting because how entrepreneurs choose VCs will be very similar to how limited partners choose VCs, or I hope that it will be similar. They can learn from your comments because this is a very unspoken area. I'm curious to understand what kind of emerging managers you support. What do you look for in these VCs?
Winter Mead: Yeah, I think it's a great question. I don't know if it's the same. There are different entrepreneurs with different needs and different stages of their companies. If we're talking about early-stage entrepreneurs, where do they need complementarity in the early days? Or where do they need support or which VCs do they think are very experienced and can bring some type of value-add perspective in the early days or industry network in the early days that can help them reach milestones that'll lead to additional financing. The framing of being an entrepreneur and choosing a VC is different than going to the LP side of the table, looking at VCs, and saying, "okay, where do I want to allocate my money?"
As an LP, you're buying a product. As an entrepreneur, you're taking capital. You're creating a long-term relationship with the provider of that capital. I think it's definitely a different perspective. It's hard to generalize, but if we were to take a crack at generalizing, you'd probably say: institutional LPs have specific mandates tied to their pools of capital and they invest based on those mandates. And that might say, you know, I'm only going to invest into venture capital funds in Canada. It might be a geographic mandate. Or, I'm only going to invest in growth-stage venture capital funds. So it might be a stage-focused mandate. There can be different mandates behind different reasons and reasons behind how you invest as an LP, but they might also be looking at patterns in the past of "okay, let me look at my portfolio. What were the pieces of data that I feel I can pull out of looking at my own portfolio, my investments over sometimes decades and decades? And what we're the pieces that I was making a bet on that actually led to value creation on a historical basis over time?"
So, if you boil it down, it really comes down to team, strategy, performance. You're really making a bet on who those investors are, where they're coming from, what their experience is. Do you think that that work and experience can actually help them execute their strategy in a meaningful way going forward? So like the fund product, you have a strategy, it's an assumption, but it's a strategy and you think you can execute on it. The LP is basically making a bet on whether or not you as the founding VC team of that VC fund can actually execute on that strategy.
And then I think the audience here is more early stage. It's hard to make a bet as an institution on unproven managers. Past performance, while they say it's not an indicator of future results, could be an indicator but it's not a guarantee of future results. It's definitely something that institutional LPs value a lot. I think where it can change is if you're focusing on emerging managers, where I spend a lot of time. Coming from being an institutional LP, having made now over 90 investments into private equity funds and venture capital funds, I understand how institutional investors think and how they underwrite, the pieces of information they're looking at to make an investment decision, how they underwrite the VC funds. But you have to be flexible with how you define potential because I think that's different than making a bet on a more mature investment. So think of it like the analogy here would be: if you're a growth investor and you're investing into a company that has let's say $10 million in revenue or more, that's going to be a very different decision that you're making as an investor than if you're the first investor into that company. You're going to have to think about the future of markets differently if you're that first investor into a pre-seed company or maybe it's even a friends and family round. Whatever you want to call it, it's that first check into the company. You're going to be thinking about that investment very differently. You're going to be thinking about the potential of the team as well as what the team has actually done. You're going to be thinking about the insight that the team has, their ambition to shape the future of an industry or market. The strategy isn't going to be perfect, but you're going to have to know a lot of context around whether or not that strategy can be executed, versus like, "okay, this strategy has been executed. I'm just putting more capital behind the strategy. When it comes to performance, you're going to have to be more flexible around the early potential.
There's a metric that institutional LPs will look at called distributed to paid-in capital [DPI]. Right? It's the money that they've actually gotten back from their investments. As we know, we're talking about private alternative markets, in which your capital's locked up for a long period of time before you get it back.
And so, a lot of the managers I'm working with actually quite a few have DPI and their initial investments, but it's something you have to be flexible on. You can see markups instead of DPI. You can talk with founders and understand how founders are really getting value out of this new investor that's coming to market and wants to raise the VC fund. That requires references. That requires having a network to be able to diligence those new investors. And so I think there is a difference. Hopefully, I'm answering your question and kind of giving context around. How the decision-making process can be different if you're an institutional LP, looking to make an investment into a more mature venture capitalist that has an existing track record of investments, versus if you're in the space where I play, which is I'm looking at all of that from an institutional LP's lens, but I'm also willing to be more flexible across those categories in which you have to do the underwriter, not in a way that dilutes outperformance in the future, but in a way that catches these high-potential investors early, and then I've built this company around supporting those managers, where in the past, because of how underwriting has worked with institutional LPs, they're usually ignored until they get to that place where they're more mature. Sometimes that can be a multi-year journey, five years or more at times. So, that's five years when you're an emerging manager and you don't have a support system.
With Coolwater, it's really emphasizing, programming, education, community, and doing that in a very managed way to be able to help these investors that are being helpful to founders. Both the new investors and the founders are taking a huge risk in their careers. They're definitely doing it for future glory, I'm assuming, but in the beginning, it's not very glorious. It's very hard. Creating a support network and ecosystem for those new investors is really the motivation and goal of what I'm trying to accomplish at Coolwater.
Gopi Rangan: This is incredible. You're giving an insider view of how the VC world works. When we evaluate a growth-stage company, we look at hard metrics, data, revenue, gross margins, profitability, and various other things. Those same companies, when you look at them much earlier, the investors who evaluate them go with the strategy, the team. They may look at what they have done before, although it may not directly correlate to what they could do in the future, the information from the past is used as a proxy. As a limited partner, you do the same. You invest in emerging managers, you support emerging managers, and you're looking at the team, the strategy. And the performance from the past. That helps you understand what they could be doing in the future and whether you think that could be great and it'll be a different kind of VC firm. I'm glad you mentioned that a lot of the VCs who start new firms often give up much more lucrative, more prestigious roles elsewhere. It's an opportunity cost, especially in the prime of their career when they go out and start VC firms. They're really betting on themselves, just like how entrepreneurs bet on themselves. You watch for that, like, who are these VCs? What opportunities do they give up and why do they start these companies? What's their conviction in the mission of the firm?
Winter Mead: That's right. You mentioned mission. I think there's something about the founder mentality that is forgotten when it comes to emerging VCs. When I'm thinking about expanding my community at Coolwater, that is something that I think about a lot, which is: why are you doing something? A lot of the people that will come into the cohort program, for example, are leaving good jobs. Those can be very lucrative operating jobs, but they're mission-driven in a sense to build something.
Why does a new VC firm spring up? Some VC firms are better at marketing than others, but I think you've heard the narrative that goes like this: "I'm a founder and entrepreneur, and I was the CEO of my company and I couldn't get what I wanted from my VCs. It still led to a successful outcome, despite all of these headwinds that I realized there's a gap in the market, and I'm creating this new VC firm to address this gap in the market. I'm becoming the VC that I never had."
It doesn't have to play out in that exact narrative, but that type of thought process, I think creates this recognition of what isn't in the ecosystem now. Maybe it's hard to find because there are so many new investors now in so many new VCs, but I think it's that level of thoughtfulness, it is a very premeditated, highly experiential multi-year journey for you to figure out what that gap is in the market. That's the reason you're starting that firm. Maybe that falls under team. Like if I'm an LP and I'm underwriting a new team, really understanding their motivation, because it's the same thing a VC will do when they're looking to underwrite a founder. They're looking for, okay, it's going really tough. You want to give up, right? You've wanted to give up for months. You have to make a decision. Like, am I being dumb? While I keep going or do I have an actual insight here that gives me the confidence to keep going despite the massive headwinds right now, and the fact that I don't have a lot of money, the fact that I'm seeing my peers raking it in and getting all these great perks and benefits at these bigger companies. There really has to be a labor of love for a little bit in the emerging manager world and, I think, that coupled with this founder mentality is a big thing you have to look for. You have to identify and understand it. You have to look for it too. That's what's interesting as I continue to build out Coolwater. It's trying to understand those types of people. Those are the people I want to support. They're going to be in it for a very long time because they have a bigger mission to execute on than just making money as a VC.
Gopi Rangan: You found a gap in the market and that's why you started Coolwater. A lot of things are changing in the industry. New rolling funds that are solo GPs have become far more successful than teams. There are crowdfunding platforms, syndicates galore, different types of ways to set up special purpose vehicles. There are different types of teams also. Some are part-time VCs. They have a full-time job elsewhere as a founder or something else, and they raise funds and it's perfectly fine to be able to do those things. There are also many platforms like AngelList and many others that proliferate the change that is already happening. In this sea of changes, where do you see opportunities, and are all these changes good? Are there some problems happening as well? And feel free to give some examples from VCs that have worked with.
Winter Mead: What you just described, the rolling funds, the syndicates, the part-time VCs. There's a willingness to understand how venture capital is changing. Founders or people that are working at startups, I believe they have a higher risk tolerance than other people, but I also think that many of them are very curious. They look to understand things and they also have networks and they have access to people, friends, companies, and other founders that are doing really interesting things. They think similarly, in terms of how they're looking to influence the future. That leads to needing to understand how venture capital works a little bit more, especially if you want to build a portfolio.
So I do think there's a bifurcation between like, I'm an angel investor and I'm investing my personal money and I'm writing personal checks. I'm fine if all of those go to zero but I'm hoping they don't. I'm hoping there are actually really, really good multiples on those checks. The Coolwater ecosystem, while it recognizes that angel investors play an important role in the VC ecosystem, we don't have programming to support angels, because they're going to be investing on a more personal strategy basis. I think though that there are a lot of angel investors that want to understand how to pull together syndicates, or they want to understand whether it makes more sense to do a rolling fund or a traditional fund. There's this level of knowledge you need to understand. There are these trade-offs you need to understand. Where is venture capital today in terms of innovation? How do you actually use these different products? How do my future investors, if I go down the VC path, actually think about these different products? There's a whole, let's call it base of knowledge that needs to be understood if you go that first layer past being an angel investor.
We've built this program that will launch in spring 2022. It is very much focused on that profile- senior-level individuals working at technology companies that have done very well. Or, there are founders that are investing on the side because they've developed a specific view of the world in a specific thesis, and they want to understand what it means maybe to go down the VC path at some point or become a venture capitalist or fund manager of their own fund at some point.
That program doesn't take as much of a view of which path is right. It says venture capital today looks very different than venture capital 10 years. If you're a founder or an aspiring VC that wants to understand that, but you haven't decided that you want to be a VC for the next 30 years of your life, we've built an ecosystem for that. It's knowledge, it's training, it's education, it's peer-to-peer learning and it helps you get to a decision of whether or not you wanna be a VC or whether or not you want to continue to leverage the innovation that venture capital has seen over the last 10 years.
Some of those platforms you mentioned, different types of structures you mentioned, how do you actually take advantage of that to be an investor on the side? The core Coolwater program is more focused on someone that's doing this full time. Like you've decided you're going to be a venture capitalist and you've made a conscious decision that you love doing this. You have the founder mentality and you're going to do this for the next 10, 20, 30 years of your life. What do you need to understand if that's the case? If you're running a full-time business, you need to think about things a little bit differently than if you're running a side hustle.
I think the venture capital market has changed, to your point. It's gotten cheaper to start VC funds. Almost everything I think at this point can be outsourced, maybe except for investment discretion and access. That enables a lot more fund proliferation, as you've said. How does everything still work? Where do you fit in? How do you differentiate? Which path is right for you? All of that is something that, when I talked to early-stage investors, new investors, aspiring VCs, they're trying to figure that out.
Some of them have gotten to a decision where like, "I figured this out, I'm going to do the full-time VC thing and Coolwater is the right community for me." But there are lots and lots of people that haven't yet gotten to that decision and are still trying to figure out, "how do I do this? I hear all these terms, and I hear all these new fund structures that are popping up and these new ways to invest. How does that actually work? And how do I do this myself?" My take on it is if you understand that and you have the ability to be helpful to founders, let's call it the founder ecosystem, that's great. I'm very supportive of these new dynamics of how you invest in the companies. And I think that changes how people actually think about what it means to be a VC. It isn't just "I'm a traditional fund structure with this type of organizational structure that operates on this timeframe in this manner, ad infinitum." What innovation is doing to venture is really changing how people need to think about the definition of a venture capitalist. That's why you see so many new investors and fund proliferation because it's easier to do that. It's still very hard to be successful at it. It's very hard to do portfolio construction and all of those things that institutions care about, but it is creating these growth pains in the industry that we haven't fully sorted in our minds. We don't have a clear understanding yet anymore of like, where does the line stop between a VC and an LP and a VC and a founder.
Gopi Rangan: You have chosen to tackle one of the most difficult challenges in the industry. VCs invest in innovation. They invest in not just like marginal improvements. They invest in revolutionary change. But the VC industry itself hasn't innovated in decades. The way it has operated has been the same. The effort that you're putting in makes change happen. It's going to have a downstream impact on the entire ecosystem.
I'm very excited to see how Coolwater evolves and the kind of VCs you end up supporting. I'm looking forward to the next cohort of VCs that you would bring into Coolwater. I want to switch to the last part of our conversation and ask you about your community involvement. Is there a nonprofit organization you are passionate about? Which one?
Winter Mead: Yeah, there is, it's called First Graduate. My wife is on the board there and it's really focused on children that are the first in their family to go to college. It's a support program that starts with children when they're in middle school and guides them over multiple years in advance of applying to college and then through college. I think opportunity is really hard to come by for certain people. You either need to have an epiphany yourself. If you don't have the existing support network, or you need someone else that doesn't have to look out for you but is looking out for you in some way.
Those types of organizations inspire me in many ways. It aligns very much with my philosophical look at how the world should work. Everyone's been given an opportunity in some ways. So, how can you enable more opportunities? How can you manufacture serendipity? Underprivileged to me means you lack certain opportunities. How can you create systematic support structures that enable more opportunity for people that are exceptional and may not even realize they're exceptional yet or need a support system to help guide them a little bit and then they can take the reigns after a little bit of support.
Gopi Rangan: Winter, thank you so much for sharing insightful stories. You took us behind the scenes to show us how venture capital works, how LPs think about the industry, and what you are doing to revolutionize the sector. I look forward to sharing your nuggets of wisdom with the world.
Winter Mead: Thanks Gopi.
Gopi Rangan: Thank you for listening to The Sure Shot Entrepreneur. I hope you enjoyed listening to real-life stories about early believers, supporting ambitious entrepreneurs. Please subscribe to the podcast and post a review. Your comments will help other entrepreneurs find this podcast. I look forward to catching you at the next episode.