Through the Looking Glass: Lo Toney

Lo is the founding managing partner of Plexo Capital. Previously, Lo was an investing partner at GV and Comcast Ventures. Lo has held executive roles at both startups and global consumer brands. He was the general manager of Zynga Poker, the gaming company’s largest franchise, and held operating positions at and eBay. You can follow Lo on Twitter @lo_toney.

I would love to hear a little bit of background on what led you to start Plexo. 

This all started when I was at GV. We were looking for a way to get access to a lot more deal flow to fill the top of the funnel. One of the things that we noticed was the dramatic increase in 2015 in the number of seed-stage funds. I realized that was a great way to get access to deal flow: building relationships with folks that are upstream. 

Then one of the things that we noticed was that along with the increase in the number of firms in that particular stage of investing, there was much more diversity than you would see at larger billion-dollar funds. The thing that was interesting to us in conversations -- and this was not a surprise to me -- was that the path for women and people of color was a non-traditional path relative to other folks in venture capital, and, as a result, women and people of color ended up with really interesting networks. Also, they had a different lens to evaluate deals. 

There's a number of other things but those two, in particular, are important because we realized that by establishing relationships with those folks, it would allow us to get some differentiated deal flow. One thing I have noticed is that as an African-American VC, I will see a lot of deals from African-American entrepreneurs. They almost seek me out and I've heard this anecdotally from female VCs as well: if you're a female, often you'll get deal flow from a little bit outside of your network or from referrals from other female entrepreneurs. That's an interesting way to tap into deal flow that other folks may not be seeing. 

I think what's interesting about the different lens that women and people of color have in certain instances is that there's not a lot of data. If a company is going after a particular market or a problem that the GP has familiarity with, or if the problem has some relevance to the ethnicity or gender of the GP, and there's not a lot of data to show that the company has traction yet, then, there may be an ability for women and people of color to identify very promising companies earlier. I think those two things were pretty interesting at GV. We made five LP Investments into seed-stage funds led by women or people of color, and it worked for us.

I saw the potential to scale that model up and around February of 2016, I started to think about what that model could look like. I spent some time researching it and got a lot of support, which was great. I approached it like an entrepreneur would approach building a company.

I would say that this journey has been much more entrepreneurial in nature than venture-like in nature. The first thing to do was to really understand the market, the problem on both sides --

  1. both for LPs trying to deploy capital, and, in particular, if they were looking to deploy capital in diverse GPs, and 

  2. the challenges that some of the GPs have with trying to raise capital 

-- in other words, really trying to frame the problem or the opportunity and then determine how big the market for that strategy is.

If my fund was going to be investing as an LP into diverse GPs, how many of these diverse GPs even exist? If there are only five, then there may not really be a model there. But there are many more than five. That's the good news. Then I began thinking about what I could do to differentiate the model and position it differently in the marketplace. I thought the hybrid structure of investing both as an LP as well as directly into deals was interesting. Then I got back to the roots of this, thinking about how I could work with LPs like GV: what if I could get the interest of a downstream investor to invest and feed them deal flow as well?

I started to have conversations with those who would ultimately become some of our LPs such as Cisco Investments, Intel Capital, the Royal Bank of Canada, Hampton University, Kapor Capital, the Ford Foundation and others, to really try to see if there was something interesting around this model. I even had some conversations with LPs that like to both invest directly as an LP into GPs and then also do directs. They saw Plexo as a way to ultimately learn more about GPs that they then might be interested in investing in directly. So once I started to kind of gather all of this feedback, doing my own customer development work on all the different sides of the market, I came up with what I thought was the right approach.

That was right after Thanksgiving of 2016 and then I started to work on it full-time in December of 2016. I incubated it at GV, really started the journey of raising capital, and ultimately spun it out after we did our first close in March of 2018. We brought in our founding LPS, including our anchor Alphabet, and as part of that structure, we brought the original 5 LP Investments that were done at GV. This made sense because at the end of the day, GV was not in the business of trying to manage LP investments. It really was a good match as GV was able to continue the relationship with me and continue to get access to the deal flow, while we could get started with that track record of the original 5 LP Investments. 

Can you share more about the value proposition of offering your LPs access to the direct deals, given that Plexo can also invest directly into Plexo’s GPs’ deals?

Our GPs are mainly mentoring and investing in a company at the pre-seed, and GV, Intel Capital, Cisco are all downstream investors, investing at the later stage. There have been instances where we identify companies through our GPs that are interesting, and we might invest alongside our GPs at the pre-seed or seed, or we might invest after our GPs have invested. Usually, we try to not have our initial entry point be too far down the road for a company. We try to stay at pre-Series A/B (or below a $150m post-money valuation). 

At the same time, we’re trying to surface companies that might be interesting to some of our LPs -- GV, Intel Capital, Cisco Investments, even RBC to a degree. Most of our LPs are really Series B and C investors. We're completely happy if our LPs identify deals that are not a good fit for us or that are at a later stage than we like to participate in -- or, we can also invest alongside our LPs as well. 

We have actually done one deal with GV, Blavity. We surfaced Blavity, a media company based in Los Angeles, founded by former Intel executive Morgan DeBaun -- I think about it as a Huffington Post for millennials of color. We had been tracking that company at Plexo since the start. Two of our GPs had invested. We surfaced it to GV, which led the Series A. We (Plexo Capital) participated in that Series A as well. 

When you look at the criteria for selecting emerging managers, are you looking specifically at demographic criteria of diversity or are you looking at other factors as well? 

At the moment, we're looking for people who are not well represented in the venture community by ethnicity and gender.

I’m sure you’ve seen the stats from the work that Richard Kirby, formerly of Venrock, now of Equal Ventures based in New York, did. He has looked at probably over 1,500 VCs and he found, I believe, about 18%  are women, and I know that 3% are African American (2% African American men and 1% African American women).

We try to use the representation within the venture community as our way to determine who is underrepresented and use that criteria -- so it ends up being mainly people of color and women within the United States.

We also look at other geographies. We have made an LP commitment to a GP in Latin America. We have looked at Southeast Asia and the UK as well, though we have not pulled the trigger there yet. We are also looking at the continent of Africa, mainly sub-Saharan Africa, where we will likely pull the trigger. Our criteria remain the same; we're still looking primarily at GPs by gender or by ethnicity. We like GPs outside of the United States within local markets that are large enough to have good outcomes to give us the returns that we need from our LP commitments. We also like international GPs to have strong ties to the United States in the event that they do come across a company that has the ability to achieve global unicorn status, as those markets typically don't have a venture community with pockets deep enough to get those companies over the finish line.

It sounds like a lot of the GPs you’re evaluating are emerging fund managers. They may or may not have institutional track records. How do you evaluate performance or manager quality?

We are completely comfortable investing into a first-time fund. We do not like to invest or commit to first-time managers. So, with our model, it's very important for the GP to have a track record either as a result of the fund that we're evaluating being Fund II or Fund III, or from the GP coming from an existing shop where they have a verifiable track record. We have to be able to see the deals that they were responsible for sourcing, the deals that they were the lead on, the deals where they took a Board or Board Observer seat. Then we look to understand which firms  invested both before and after.

There have been instances where the GP may be at a first-time fund without coming out of an existing shop. However, they do have some type of verifiable track record; e.g, they could be a prolific angel investor.. Prolific angel investor does not mean having two investments of $5k each, though I encourage people who want to get a feel for investing to look at something like that as a start. What we like to see for an angel investor is investing in great companies alongside or in front of great institutional investors and being able to understand how that translates into the strategy that they would like to use for their first-time fund moving forward. So, it's very important for us to have a verifiable track record, even if not part of a prior fund, because it's part of our analysis and process that we use to understand the judgment of the GP.

And do you have a minimum allocation or minimum fund size? 

For the most part, we invest in sub-$100 million funds where the primary point of entry is pre seed or seed. If it's a sub-$10 million fund, we will typically invest a straight $500,000. If it's $10m-$100m, we look to make commitments of $1-5m dollars depending on the portfolio construction. Is it thematic or generalist? We factor all those things into the context of our overall portfolio, the impact on our projected returns, and the health of the portfolio. 

We like GPs who typically take leadership positions for the bulk of their investments. We do like commitments for follow-on. We will look at either a concentrated or a larger portfolio. It depends on the approach of the manager and really comes down to whether the funds are thematic or generalist. 

Like I said earlier, we will look outside of the United States. In fact, deciding to think globally at the outset was a critical decision. 

How would you define concentrated at the seed stage? 

It is typically 15-20 companies -- a very, very small number of portfolio companies. And typically, those are going to be ones where the GP is taking leadership positions.

We run across it more in thematic investors who are investing in a particular area such as enterprise or hardware. Even then, it kind of depends. I don't have a hard rule about the portfolio size for a GP. It really depends on the strategy of the GP and their network.

We spend some time looking at the sourcing network of the GP to understand if their network and background align with their approach. We want to see disciplined managers and make sure that they have a very clear portfolio construction strategy. The number one complaint of most LPs is strategy drift. We just like to make sure that when a GP says that they're going to approach investing in a certain way that they follow through and do that. That's the most important thing for us.

Tell me a little bit about what the process is for an LP to evaluate you. 

I'm in this interesting position because we do raise like a GP as well. At GV, where Alphabet is the sole LP, there was no true fundraising. Obviously, there's an annual meeting with the Alphabet execs and founders, Larry and Sergey, but it's different than actually going out as a GP into the market and pitching family offices, fund of funds, endowments, pension funds, etc. That was a new world for me, and since we do have this hybrid approach, the first thing we look for is whether we’re a good fit for the LP, given we do have corporate investors who have different motivations.

We do have normal institutional investors LPs as well. We've got a big large European family office that behaves much more like an institutional investor. They have a CIO and in their process for evaluating us, it was clear that they were looking for returns, but they were also very interested in being able to better understand the tech market in the United States at the seed stage. The family office wanted to get a feel for interesting GPs they could commit to directly. They saw Plexo as a very simple way to be able to make a commitment and really begin to understand the market and meet some of the interesting GPs in the market. We have made a number of introductions to GPs we have committed to, and some we haven't committed to, and the family office has made some commitments to some of those GPs.

We have also received a commitment from an endowment, Hampton University, which is where I went to school for undergrad. So I was very excited about that. Hampton is a Cambridge client and looked at Plexo purely based on returns. I don't think of Plexo as a fund-of-funds. I truly do think of us as a hybrid using a strategy of making commitments to GPs to get better access and get to direct opportunities that can provide great returns more efficiently.

I’ve learned that there is a certain view of the market around fund-of-funds, and it's the extra layer of fees. What's interesting is that if you look at the research that's out there in the marketplace, there's a good bit of research that the only place where it makes sense for the type of model that we have -- investing as an LP form a pooled asset -- is in the very early stage because of the power law nature of the returns. If you have the ability to pick the right managers, the data shows that you can actually have better performance by investing through an entity that's going to be focused on the seed-stage fund market with a deep understanding of the players and the right funds. The returns are actually better than the returns of investing in multiple later stage funds. Part of the reason is that the power law really doesn't exist at the later stage, so you get a normalized distribution. And because of that, you take a hit for the extra layer of fees.

Often, we will have conversations with LPs and we just won't be a good fit for whatever reason. What I enjoy is the ability to be able to say, ‘Well, Plexo Capital is not a good fit, but let me tell you about some of our GPs that are in the market that you should take a look at’ so both sides can leave every conversation feeling super productive. I've made a number of LP introductions for our GPs, in some cases for GPs who we haven't committed to but I know are interesting funds despite not being a fit for us. I know how hard it is to raise money and if you think about it from your perspective as a GP, what's the thing that's most helpful to an entrepreneur? At the end of the day, all an entrepreneur wants is customers, employees to build the product for the customers, and financing to pay the employees to build the product for the customers. This is very similar for a GP as well -- all a GP really wants is the LP commitment so that they can go out and find the entrepreneurs. So, if I can help with that, that's the biggest value add that I can provide. 

How do you think about things like succession planning? 

Super important. In my opinion, there are a few things that come into play.  Let’s say there is a situation where a firm started by a solo GP decides to bring in another professional, either as a partner or someone that can be groomed to become a partner. I’ll make a parallel back to GP investing when GPs invest into a company: a prospective LP needs to think about whether the new professional has enough economics in the fund they were raising to remain with the fund moving forward.  It is difficult to find experienced partners, so prospective LPs need to think about the risk of a junior partner being lured away by a larger firm.

In this sense, starting an early stage fund is similar to starting a company; the equivalent being how does a startup hang onto an employee when Google or Facebook could come knocking and pay this person a million dollars a year?

I had to have that conversation because that's the reality of our market: if you have good experience, you're getting headhunted every week. So that became an important conversation and a lot of the dynamics are again very similar to a start-up: Does this person have enough equity – or, in this case, carry -- for the economics to make it beneficial and worthwhile to keep this person long-term so that there can be a succession plan and handoff. 

Do you look at management company ownership? 

Management company ownership is important, but I'm really more concerned about fund ownership and economics. How much of the carry are they going to have in that particular fund?  That said, management company ownership is important to understand as it can really come into play if the partners decide to split.

Speaking of team, who else is on your team? 

I'm the sole GP but we do have four venture partners. We have Ken Coleman, a true luminary, who really is more of a sage mentor -- given us good advice, made great introductions, introduced us to one of our LPs. 

We have Georganne Perkins, who spent 23 years at the Stanford endowment working on their LP investments in private equity and venture capital.

We have Laura Alber, the sitting CEO of Williams-Sonoma, who is really amazing at understanding general business strategy and also tech infrastructure, given that Williams-Sonoma is an omni-channel retailer.

We also have Keith Walton, who is the administrative officer for an infrastructure fund out of New York.

They’ve all been extremely helpful. We also have a couple of interns -- an MBA intern and an undergrad intern. 

In the long term, I won't be the sole GP. I do want to build a franchise, but I'm going to be very patient in trying to find the right person because I've seen what happens when you don't have the right team in place. It's hard enough when you don't have the right team or founding team in a start-up. It's even more difficult when you have a partnership because it's very hard to untie and untangle that.

Where do you find your interns? 

I went to Haas, and I am a big believer in Haas MBAs in particular. I have consistently tapped into that network to find quality people. We also have an undergrad intern from Cal Poly Pomona who is studying computer science and business.

You mentioned this notion of a lot of funds wanting to have an underrepresented investor on their team, this concept of token hires – are you seeing a lot of this? 

I like to think there is a positive side to it, but without question, there may be cases, and I can’t say with certainty because I just don't know what's going on behind the scenes, where it may just be window dressing. Entrepreneurs ultimately have the power and we've seen some examples of entrepreneurs saying, “Hey, I went with this firm because they have the same values that I do. They have a diverse team and that was important to me.”

I think there are going to be some firms that are going to say,‘We better get someone up on our webpage. We don't want to miss out on deals now’. I don't like that aspect of it. But you never know. I like to focus on what happens when you get someone that's a woman, a person of color, and then they now bring in a whole new set of relationships giving access to deals and some insight that may not have been part of that firm historically. 

What are your thoughts on how everyone in the entire ecosystem can be more intentional about intersectional diversity? 

You have to start somewhere. When someone invites me to a diversity-focused event, I always have to ask, ‘What's your definition of diversity?’ Because I’ve been like, ‘Okay, I'll come to that’, and then it's just for women -- and just white women. I do think that’s just being aware. 

Soraya at Trail Mix told me about these calls that she does where she gathers female GPs to cover a specific topic on every call. To be more intentional about intersectionality, when it is time for questions, she puts women of color at the front of the line so that their voice has an opportunity to be heard. I thought, ‘Wow, now that is very intentional’. The fact that she had the awareness to do that said a lot to me. 

How long do you think it'll be until this is no longer something that has to be an actual focus area and it's just sort of the default?

I've been thinking about that since the day I first thought about the strategy for the fund. It would be great to make this model obsolete and then for us to transition and have a model that wasn't directly associated with diversity on the LP side.

Unfortunately, I think there's an opportunity for our model because you just look at the numbers and we're so far behind on the representation really matching the demographics of our society, especially here in the United States. So, unfortunately, I think this model is going to be in place for us for at least several funds.

There's another aspect of this which isn't our model, but we look at a lot of funds that have this model: GPs that focus on making investments into companies based on diversity. We're an LP in Female Founders Fund. Female Founders Fund focuses on companies where there is at least one female founder, just as the name implies. I always thought that one was interesting just because half of the population is half female, right? So yeah, I mean, you're going to see a lot. Female Founders Fund, for example, sees every deal that's worth seeing that has a female founder. I thought that was pretty compelling. Their performance has shown that when you match excellent investors like Anu with a market opportunity of half of the population that really gets overlooked, some magic can happen. There are also funds that focus on specific ethnicity. We haven’t made commitments to those type of GPs yet, but I understand why that's necessary when you just look at the low numbers of entrepreneurs of color getting funded.

I think that we're going to see these funds out here, but the thing that has to happen across the board, both at my level (the GP level) and at the entrepreneur level, is everyone has to perform. It's nice for Plexo Capital to have the impact of moving the cause along for diversity and inclusion -- but it's a much more powerful when the performance is there, right?

But if the performance isn't there, then what I get concerned about is, are we going to muddy the water? Even though in Silicon Valley it’s often said, ‘Hey, failure is fine’ -- I don't know how well that applies to women and people of color. 

So I'm hopeful that once people of color get commitments at the GP level and get funding at the entrepreneur level, they will go on to really excel in terms of performance because that's going to be the best way to show the power of this model. It's not going to be simply having demographic data that improves over time. We have to deliver the returns as well.