Lo Toney x Outlandish Speaker Series

For February’s Outlandish Speaker Series, we spoke with Lo Toney of Plexo Capital.

Lo Toney is the Founding Managing Partner of Plexo Capital, which he incubated and spun out from GV (Google Ventures), based on a strategy to increase access to early-stage deal flow. Plexo Capital invests in emerging seed-stage VCs and invests directly into companies sourced from the portfolios of VCs where Plexo Capital has an investment. 

Prior to founding Plexo Capital, Lo was a Partner on the investing team at GV where he focused on marketplaces, mobile, and consumer products. Before GV, Lo was a Partner with Comcast Ventures, leading the Catalyst Fund and working with the main fund focusing on mobile messaging marketplaces. He also worked with Zynga as the GM of Zynga Poker with full P+L responsibility for Zynga’s largest franchise at that time. During his leadership, web bookings increased by over 150% with margin expansion. Lo has also held executive roles with Nike + eBay as well as startups funded by top-tier investors.

Lo received his M.B.A. from the Haas School of Business (University of California at Berkeley), where he completed the Management of Technology program: a joint curriculum program with the College of Engineering. Lo received his B.S. from Hampton University in Virginia.

Lo spoke with Outlander’s Paige Craig about investing in emerging managers, diversity in venture capital, and the future of work. Listen to the full conversation or hit the highlights of our Q&A:

There’s been criticism by folks that the recent spotlight on diversity in corporate America and other institutions is all for show. In our world, what do we do to not let it be just for show?

This national conversation about race wouldn’t have really gotten to the point it’s at today without the unfortunate events of last summer. Without question, I think everyone can agree that this wave of protests felt different. But I also think there is a feeling—and I’ve heard it and I feel it as well—that it may be kind of waning now, that it is just a moment. We don’t want that to happen. We want to see it turn into a movement.

So we’re staying focused on these issues, especially in highlighting the great things that happen when we can get capital into the hands of these Black GPs who data shows often have more diverse portfolios than their peers. More capital into the hands of diverse GPs is more capital into their more diverse portfolios, and once their portfolio companies get access to that capital to execute their strategies, those diverse founders also go down a wealth creation path which ripples out into their communities. 

Data also shows that these diverse-led companies also end up hiring a more diverse early employee base. And when those diverse employees have access to capital, the opportunities change for them because they’ve got a financial backstop they didn’t have before. They can go and start a company or invest in one of their peers. And then capital goes back to the GPs, and if the GPs have enough liquidity events, they go down the wealth creation path and capital goes back to the LPs. This model leverages a great strategy to drive alpha and produce returns with the by-product—which I’m really passionate about—of diversifying the ecosystem is working, and we should all triple down on this.

And this is very similar to what happens in a geographic ecosystem, right? Just look at what’s happening in Atlanta: money paid to employees of bigger businesses is used to start companies investing in early-stage startups, thus creating a whole ecosystem for startup funding. Atlanta is really interesting because we can actually see that vertical ecosystem built around people of color, Black people in particular. So, I look at places like Atlanta as a kind of proof of what can happen when there’s inclusion at the earliest stages of the development of an ecosystem.

“Atlanta is really interesting because we can actually see that vertical ecosystem built around people of color, Black people in particular. So, I look at places like Atlanta as a kind of proof of what can happen when there’s inclusion at the earliest stages of the development of an ecosystem.”

— Lo Toney, Founding Managing Partner, Plexo Capital

With the recent attention on funding for Black founders, are we actually seeing an increase in funding for Black-led startups?

Based on all the individual anecdotes that I’ve seen, it is clear that more capital has gone into Black-led companies within the past 12 months, but not as much as we would like. I’m anxiously awaiting the actual data to come out because I think what we’ve seen is probably an increase, especially in later-stage companies like Calendly in Atlanta or Squire in New York. The most visible examples have been at the later-stage companies, where we had never really seen any dollars go into Black-led companies at the later stages before.

Part of the problem is also the lack of Black venture capitalists. Then within the Black VCs, there are even fewer Black limited partners, and within the Black LPs, there are only really two types: the majority being professionals that work for the endowments and foundations of the world and the minority of Black LPs are people like me who are controlling their own pool of capital. And we don’t tend to see as much activity by the pension funds in early-stage venture capital due to their obligations and liabilities to their constituents.

One of the recurring obstacles I hear about from diverse emerging managers is the fee structures—especially for smaller funds—and the GP commit. What’s your advice for how they pay themselves and deal with the GP commit?

First and foremost, this is an issue that actually keeps a lot of potentially great GPs out of the market. One of our GPs actually told me about pitching a prospective LP—a retired venture capitalist—who listened to the GPs challenges and said, “Well, maybe you’re not rich enough to be a VC.” And I was shocked. First of all, there’s no data that I’ve seen that says the richer you are the better of a venture capitalist you’re going to be, right? But, to your question, there is a financial reality to being a successful venture capitalist as well.

We’ve estimated that it takes about $1-2M to get things rolling. And how do we get to that number? Well, it’s a combination of things. For one, foregoing their salary for what we estimate will take about 24 months from the time that a data room is open with an LPA until the final close happens. They’ve got to finance their lifestyle so they can focus fully on raising a fund, which is really difficult especially for an early manager. If you’re an emerging fund manager, you might have 50 LPs to 100 LPs, and that alone takes a lot of hustle over a long period of time even pre-pandemic. There are travel, pre-marketing, and hiring expenses, not to mention one of the bigger expenses, if it’s not able to be deferred, of legal aid for fund formation. All of which a GP is paying out of pocket. Then, once that first close happens, there is the ability to recoup fund formation.

Usually, for a smaller fund, I’d say you probably no more than $250K or so. You’re likely not going to recoup any of that lost salary or travel expenses, but the legal expenses are non-negotiable. And to your question, Paige, your salary is not going to be what it was—if you’re lucky, it’ll be half or maybe a third until you can stack a couple of funds to have stacked management fees. And, then, you’ve still got to turn around and pledge 1-2% as the GP commit, which is a significant financial hurdle for a lot of people to enter the space.

I’ve seen people handle this a little more creatively than how I answered above. I know I was lucky in that I was able to basically be an entrepreneur in residence while I was working on my fund at GV. And if you can find an opportunity to work inside of a fund, I highly recommend doing it to get a little bit of salary and a little bit of infrastructure as you build. And to touch on diversity again, that’s a great way that firms can help diverse emerging managers, right? My other recommendation is to see if you can defer your legal fees. If you can go to one of these larger shops, they might be willing to defer the legal fees, which is a big help to not have to pay those until after there’s a close.

“One of our GPs actually told me about pitching a prospective LP—a retired venture capitalist—who listened to the GPs challenges and said, “Well, maybe you’re not rich enough to be a VC.” And I was shocked. First of all, there’s no data that I’ve seen that says the richer you are the better of a venture capitalist you’re going to be, right? But, to your question, there is a financial reality to being a successful venture capitalist as well.”

— Lo Toney, Founding Managing Partner, Plexo Capital

Do great investors make great fund managers?

At the end of the day, our objective is to make sure our Plexo Capital GPs can make that transition from being a great investor to a great fund manager. And there is a difference. It’s one thing to be able to pick and support portfolio companies, but a whole other ball-game having investors in your own fund and managing that process with other people’s money. For instance, it requires having lawyers craft the LPA, negotiating that LPA to meet objectives with the investors, creating a cadence of communication that makes sense for your investors, reporting that gives your investors the information that they need, the insight into what it is and isn’t working with our strategy, putting together a go-to-market strategy for a fundraising process, and more. All of those things don’t really have anything to do with being a great investor. Those are skills of a great fund manager, which is what we’re really trying to help our GPs transition into.

Say you’re an emerging fund manager who’s allocated most of Fund I. Things are still coming to fruition but you want to raise Fund II at a higher AUM to keep up the momentum. Do you double down on the thesis of Fund I? Or reframe to share learnings from Fund I and how you’re adjusting for Fund II?

It really just depends. My first thought is that this goes back to something called strategy drift, which is when a company doesn’t change with technology or with competition and continues to do business the same as it always has been doing it. And the one thing that LPs don’t want to see is strategy drift. For instance, when you look at the data about what actually produces the majority of manager churn inside of a portfolio, it’s not usually tied to any fund performance metrics but more often a combination of strategy drift, general partnership issues, and poor communication—all elements that really are more about whether or not you’re a good fund manager, not a great investor.

So, my feedback for this emerging fund manager is to go in with a thesis and a strategy, then execute against it. In that strategy, there must be lessons learned in Fund I that are going to support the elements of the strategy of moving forward into a successor fund as well as any required modifications. The key is the ability to be able to provide that insight to the prospective investor as to why these decisions are being made, so really focus on being consistent in your strategy while also recognizing and adapting the lessons learned in Fund I.

Also, keep in mind that a lot of times when a fund manager is interacting with an LP, the LP is going to want to build a relationship over time because we’re preparing for multi-decade relationships. And it may be the case that the LP looking at the current fund is not going to invest until the next fund because they want to see a full cycle, right? Your ability to demonstrate the lessons learned in Fund I that made you stick to your strategy and even make necessary tweaks to that strategy is critical to building trust with your LPs.

In light of the global pandemic, what industries are you most interested in watching right now?

When I think about the things that were gaining traction pre-pandemic, there was a lot of focus on delivery services that enabled consumers to reclaim their time. Then from an operational perspective, we were thinking about the fundamental shifts and logistical measures that needed to happen to get those things to consumers quickly and with minimal effort on their part. 

For example, we’ve invested in this virtual kitchen company, which looks at all the data around people’s preferences for types of food, where those people live, and then creates a hub-and-spoke model with ghost kitchen restaurants that look like they’re brick and mortar in terms of their online presence. But they’re not! They’re solely geared towards UberEats-style delivery. Pre-pandemic, we saw these ghost kitchens climbing higher and higher on the algorithm because of all the data that they’re using to understand preference and location. Then the pandemic hits, and all of a sudden there’s a steep rise and increase in demand for that type of service. 

For consumers, there’s been an acceleration in these delivery services, as well as anything to do with the screen. Driven by the insatiable demand for content from Netflix, Amazon Prime, and Disney+ and the uptick in playing video games together and remotely, the demand for an infrastructure required to be able to deliver those services has also increased.

On the enterprise side, think about all of the naysayers that were laggards when it came to accepting remote work and a distributed workforce. There was a psychological barrier as well as a financial barrier because even if people agreed that it was going to be productive, they didn’t necessarily have the infrastructure in place to be able to support remote work or a distributed workforce. But then the pandemic hits, and now the naysayers have been forced to deploy billions of dollars into building that infrastructure. It would have taken years to get the investment that we’ve seen into all the infrastructure required to have a secure system for remote access work, but we’ve seen this massive acceleration when the pandemic first started.

We’ve seen massive amounts of money going into these different services for both consumers’ and for enterprises’ new normals, which I think are likely going to persist long-term. That’s where a lot of new opportunities are going to happen. The downside, of course, is that these great new innovations are juxtaposed against the pain and suffering of so many people across the globe. So, for investors, it’s really important to think about the things that we can invest in that can help narrow socioeconomic gaps as a by-product of what they do as opposed to widening those gaps.