Chris Paik: How I Raised $400M; Substack's Broken Business Model; Music on TikTok vs IG | E1011

Professional Background and Firm Genesis

• Chris Day's entry into venture capital was accidental; he lacked prior knowledge of the industry as a college student and entered the New York tech scene via "hackers and founders" meetups.
• Day joined Thrive Capital at age 25–26 despite having no traditional credentials, attributed to a culture at Thrive that prioritized potential and ambition over pedigree.
• The catalyst for leaving Thrive to found Pace was a confluence of factors: a desire to own his professional trajectory, a belief that Thrive was Josh Kushner's life's work, and a growing conviction that Thrive's increasing fund size would necessitate checks that didn't align with Day's interest in early-stage investing.
• Day's framework for talent selection at Pace mirrors Thrive's approach: evaluating candidates on "first principles" of thought quality and raw frameworks rather than university pedigree or past job titles.
• Day acknowledges that junior hires are essentially a coin toss, noting that even with rigorous selection, one will miss on 99% of picks; the strategy relies on survivor bias where one major right decision offsets numerous failures.

Pace Fund Structure and Operating Model

• Fund Details: Pace's first fund was $150M; the second fund is $250M.
• Portfolio Construction: The firm targets a concentrated portfolio of 10–20 companies, aiming for an average ownership stake of 20% (or higher) in each.
• Partnership Model: Pace operates as an equal partnership (no majority/minority split) to incentivize owner mentality and maximize recruiting/retention of high-potential talent who might otherwise be under-recognized by hierarchical firms.
• Scalability Strategy: The founders plan to scale by recruiting more equal partners (GPs) rather than increasing individual workload, aiming for a final structure of 5–6 equal partners.
• Investment Deployment: Fund 1 had a 3.5-year deployment period; the firm prioritizes patience over speed, avoiding deals solely due to valuation misalignment.
• Service Model: Pace explicitly rejects "portfolio-added support" services (e.g., shared legal, marketing teams), opting instead for deep, direct, one-on-one relationships with a handful of founders to avoid dilution of focus.

Investment Thesis and Frameworks

• The "Un-describable" Thesis: Day argues against the industry standard of pitching a company in a single sentence, contending that truly innovative, category-defining companies are too complex to be summarized pithily and that such constraints stifle imaginative scope.
• Atomic Value Swap: The core analytical tool is identifying the essential value exchange between a product and its user (e.g., Twitter offers distribution in exchange for content, while Substack offers economic monetization).
• Price Discrimination: Companies like DoorDash and Instacart succeed by pricing based on "price discrimination of laziness" and the subjective value of leisure time rather than the utilitarian cost of goods.
• Seven Deadly Sins as Motivators: Day reframes the Seven Deadly Sins (pride, envy, lust, gluttony, greed, sloth, wrath) as the seven core, enduring human motivators that drive consumer behavior and can be used to evaluate business models (e.g., Twitch monetizes creator "pride" and consumer "sloth/entertainment").
• Virtue vs. Enterprise Value: Day posits an inverse correlation between a company's proclaimed "virtue" and its potential for enterprise value creation, arguing that acting "not economically" (virtuously) detracts from the structural incentives required for massive capital efficiency.
• Enfranchising Disenfranchised Creators: Successful platforms (like TikTok) often succeed by structurally elevating content types that were previously marginalized by infrastructure constraints (e.g., audio/dance vs. visual/text).
• Market Timing: Day utilizes a surfing analogy: founders cannot "make waves" (change the tide) but must position themselves to surf them; being too early or too late results in failure.
• Market vs. Founder: Day favors a market-centric approach, agreeing that a "B-plus business with an A-plus team" often beats an "A-plus business with a B-plus team," and that a great founder cannot succeed in a structurally hostile market.
• Execution vs. Market Risk: Day argues that no venture investment is suitable if it lacks market risk; if a business has no market risk (validated demand), it is a non-venture business suitable for debt or traditional capital (e.g., a ball bearing factory or a standard polo shirt brand).
• Defensibility: Moats are not accidental; they must be deliberately engineered into the system design from day one, though they build over time through customer interaction and data accumulation.

Critique of the Venture Capital Industry

• LP/GP Misalignments:
  • Carried Interest: The current tax treatment (capital gains vs. income tax) for GP labor is viewed as a broken incentive that over-allocates talent to the industry.
  • Management Fees: Day argues management fees are structurally misaligned in closed-end funds, potentially leading to bloated teams and inefficiencies that don't exist in open-ended hedge funds with redemption mechanisms.
  • Commitments: The requirement for GP capital commitments is seen as arbitrary and exclusionary; Day argues commitment should be proportional to wealth and flexible.
  • Cross-Fund Clawbacks: Day advocates for a "cross-fund carry clawback" mechanism, where losses in one fund could claw back carry from prior successful funds to ensure true long-term alignment.
• Founder/Investor Misalignments:
  • Liquidity: Investors may push for exits or sales when founders prefer to hold for long-term value creation.
  • Acquisition Incentives: Acquirers often structure management incentive packages that benefit the acquiring company's employees while stripping value from the founder's cap table.
  • Round Construction: Leads may force co-investors onto rounds based on "reputation favors" rather than optimal strategic alignment for the company.
• Regulatory Suggestions: Day suggests that regulation, specifically regarding the taxation of carried interest and the structure of fund commitments, is the primary mechanism needed to fix the broken incentive structures of the industry.

Fundraising and LP Relations

• Transparency Strategy: Pace optimized for alignment over short-term outcomes by being transparent about potential weaknesses (e.g., the founders' limited time due to managing two businesses) and providing forward-looking data on the firm's 5-fund vision.
• LP Composition: Fund 1 had ~12 institutional LPs; Fund 2 grew to 15, with new LPs often emerging from relationships built during the deployment of Fund 1.
• Fundraising Mechanics: Both funds closed in a single close, rejecting multi-close structures that prioritize ego signaling over capital efficiency.
• Rejection Reasons: The most common reason for LP "no's" was the inability to extrapolate a performance curve from a single data point (the founders' first fund), highlighting the difficulty of judging judgment.

Key Reflections and Lessons

• Twitch Experience: Day views Twitch as his biggest hit; lessons learned include that poaching supply with minimum guarantees is an uphill battle against gravity, and that a great board serves as a "mirror" and therapist/coach rather than a prescriptive advisor.
• Personal Working Style: Day makes his best decisions without delegation (no associates/analysts), preferring to conduct all diligence personally to ensure high conviction.
• Future Vision: Day envisions Pace in 30 years as a firm of 5–6 equal partners, continuing to invest in "Platonic ideal" Series A companies, with himself potentially no longer involved in the firm.