Dan Kimerling | Deciens Capital

Venture Wishlist shares ideas and themes VCs want to fund. Brought to you by Purpose Built venture studio.

Dan is managing partner at Deciens Capital, a venture capital firm focused on early-stage investments in fintech companies. Founded in 2017 by Dan Kimerling, Deciens has $258M in assets under management (AUM). They focus on pre-seed and seed investments, writing first checks up to $3M.

Dan’s venture wishlist:

• 🏦 Alternative Asset Managers and Other Next Gen Financial Services: The next generation of financial institutions.

• 🏢 PE & Insurance: Owning a piece of PE/insurance firms.

• 🎵 Music pricing: Digital distribution and data-driven finance business models that harness the music industry's changing value chain.

• 💊 Pharmacological super cycles: Financial services built around massive disruptive changes, like changes to health insurance caused by shifting life expectancy and healthcare needs heralded by GLP-1 drugs.

• 🧓 Aging market: Companies addressing the needs of an aging population by developing products and services tailored to the elderly.

Other insights:

• 🧑‍💻 Beyond pure software: Pure software is overinvested.

• 🕶️ Venture blind spots: The traditional venture funding model of raising money every couple years introduces existential financing risk that requires even higher returns, leading to false consensus on what can be “venture scale.”

• 📈 Compounding growth + capital efficiency: Businesses that can grow at target hurdle rates of 25-30% while maintaining low existential risk — by broadening what is considered “venture investable.”

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Full interview

Is there a type of company or a particular idea that you'd love to fund?

As a firm, we look at the broader economy for which there is massive disruptive change and think about how we build financial services businesses around those changes. 

In general, my energy is less in software and more in the use of software to create the next generation of great financial institutions. My general view is that software is becoming less valuable. I think it's becoming much more commoditized. Plus, there are so many people trying to invest in software today. It's a very crowded space. Why try to compete with them when we can do our own thing that nobody else is really working on? 

So what are you thinking about these days? 

The equity value of a bank, insurance company, hedge fund, or private equity firm is quite high. You can compound equity at very high rates of return for many years on a very low dilution trajectory if you own the management company of a hedge fund, because the equity value of a hedge fund is quite high.

My team and I have spent some time studying these kinds of alternative asset management platforms that are publicly listed. And it's fascinating to study these business models. Can you deliver venture scale returns? The answer is unequivocally yes. That's one thing that's certainly occupying my mind right now.

Just as an example, the second largest private equity firm in Europe, which is called CVC Capital, went public in Amsterdam recently. And basically until relatively late, it was profitable since day one. And so part of the line of thinking here while everyone is trying to sell software to private equity firms, maybe venture capital firms should help start private equity firms and own a piece of the private equity firm itself.

Conventional wisdom would be that they don't scale fast enough, but they are nice, cash flowing businesses once you get them to scale.

How fast is fast enough? One of the things that I've thought about is a target IRR of 25-30% net of dilution on a net basis.

And really what you want is to fund businesses that can grow at this target hurdle rate, 25- 30%, whatever it may end up being, and can do so for many years and have relatively low existential risk associated with them.

That's the thing that a lot of LPs and GPs don't fully internalize. LPs have very long term capital, sometimes permanent capital, and they want VC to take a long duration.

But the way venture capitalists operate is they invest in a company, and two or three years down the road, the company needs to raise more money. And then two or three more years down, the company needs to raise more money and so on and so forth.

This doesn't make a ton of sense because each time you have to raise money, you're introducing existential financing risk. And oftentimes that existential financing risk is not the fault of the company, but for other exogenous reasons.

One of the things I think a lot about is: is it better to profitably double every year and have zero existential risk, or is it better to burn a lot of cash and 3x, knowing that every other year you take on a fairly substantial amount of existential risk?

In asset management business, your customers are investors, admittedly a different kind of investor than you might raise money from. Does that amount to the same thing that you're exposed to the same underlying risk of investor sentiment?

Well, not in the sense that in an asset management business, especially an asset management business with a long duration capital, you can be confident that the management fee stream will be there for many years. 

What are other trends you’re exploring at Deciens? 

My colleague Ishan has been very focused on the question of music and the changing value chain in the music ecosystem, especially around how music is financed, securitized, collateralized, and the payments associated therein. There’s massive disruptive change because of the role of digital distribution. If I can now watch my favorite artists on YouTube, why do you need a record label?

Is digital distribution a “why now?” Recently we’re seeing trends in establishing higher payout levels for streaming, which makes it more attractive. The changing interest rate environment also affects how people think about royalty streams and securitization. I'm not sure if that's a tailwind or a headwind. What’s your opinion? 

Ishan's really the expert here, so I don't want to overstep my own knowledge. My general view is that artists do not want to sell their intellectual property. They do it only because working with a record label generally requires them to do so.  

The second is digital distribution. 

The third is the use of data. Historically, the way that record labels underwrite artists is using something called A&R. And A&R is, broadly speaking, the taste of certain individuals. But using data, you can actually produce highly predictive forecasts of the decay curves of music over time, and finance artists based on the statistically accurate models of how their music will perform.

You can go from a non-data-driven ownership model, which uses something like an equity-like structure to a data-driven, debt-like structure.

We have a very important company doing exactly this called beatBread, which is quite a scaled player now. And Ishan's been working with them since they were basically two guys in the PowerPoint deck. And that's an incredible journey to watch, and I'm very thankful for Ishan's advocacy and work on that for sure.

What other themes are you exploring? What other opportunities are you spotting?

We have also been spending more time at the intersection of financial services and healthcare, especially around the impact of massive changes that are occurring. 

My general view is that I think we are going to enter a pharmacological super cycle. 

Innovation comes in waves. Then, there are years and years and years of, what you would call basic research to come to kind of like a tipping point. And then, the innovation really speeds up because it kind of builds on years and years of this research.

And so if you think that we're starting to enter a massive super cycle based around the GLP-1 drugs, that's going to be massive. There's a world in which literally every adult takes one once a week or once a month. And you may know that there's quite a bit of evidence that GLP-1s are effective on Alzheimer's and Parkinson's. It's effective on cardiac diseases. It's obviously effective on various metabolic conditions. It's surprisingly effective at helping people manage substance abuse and so on and so forth.

So if you think we're about to enter a pharmacological supercycle, that's going to have some real impact on many, it's going to have real knock on effects. 

What will this do to life insurance? And what opportunity does this create? With all these advanced biologic techniques for drug development and what is that going to do to the financial services industry? What is that going to do to the morbidity and mortality tables? And what is the opportunity in the insurance industry to play on this pharmacological supercycle?

So if lifespan increases, how does that change the health and life insurance industry? 

Well, in this case, it would be life insurance. Health insurance in the US is actually not insurance in the traditional sense of the word. It’s a misnomer that we call health insurance “insurance.” 

It's a bundle of things, including discounts and access. 

There's not the collective risk aspect of it. One way to think about it would be: if you have high risk groups, and if you use drugs, you become a low risk group. 

Can you charge the high risk group that is now low risk, medium risk pricing and capture super premium economics on that? How do you ensure compliance with the drug regime and so on and so forth?

You're talking about combining underwriting life insurance with a specific pharma regime?

If we're going to go through a pharmacological supercycle where obesity becomes something that is easily medically treatable through the use of these drugs, then there are lots of people who were “high risk” that will no longer be high risk. Is there an opportunity to create an insurance company that plays on that trend?

Conversely, I was saying in this, if we're going through a massive pharmacological super cycle where drug, where the next generation of biologic drugs makes massive changes to morbidity and mortality, that will have some very material knock on effects in financial services and in the economy broadly We should be thinking hard about what those are likely to be and how to invest against that trend.

Walmart has already said that they believe it will dramatically reduce the total addressable market of food sales in the United States.

This is the CFO of Walmart. We're not talking about some venture capitalist on Sandhill Road, spouting his mouth off. Walmart has already seen a reduction in food sales that they attribute to the rise of these drugs. You should go listen to their earnings call about it.

One final question for you. Are there any specific customer profiles or problems that you would want to point founders towards that we haven't touched on?

We tend to look for areas of great change. And within that, that is because we observe that change creates opportunity.

One huge change is the rapidly aging population in the United States. I see so many entrepreneurs targeting teenagers — and teenagers are great! But you know who’s better? Old people. They have money. 

I wonder why everyone focuses on teenagers over the elderly. 

Is it because they think teenagers are more likely to be early adopters and are easy to find initial customers? Is it because they themselves have been teenagers before? 

I don't have a great answer for you. I think what you mentioned is a valid theory. Another could be that they have teenagers at home. So, they see the problem up close and personal in their daily lives. 

As more people have to engage in kind of taking care of or being responsible for elderly relatives and that, there is a massive opportunity to build products and services for the retirees, for the elderly and their caregivers.

We've done some investing in this space. Good results so far, but I think it is a customer profile which is massively under explored.

This interview has been edited for length and clarity.