Toronto-based venture capital (VC) fund Gambit Partners aims to de-risk pre-seed investing with the help of its limited partners (LPs).
Relay Ventures vice president (VP) Simon Sokol and VTS VP Chris Krzyzanowski launched Gambit in 2021. The pre-seed fund began as a modest means of providing the pair’s friends and former colleagues with access to private market deal flow. Since then, it has grown into a $2-million CAD investment vehicle with 43 LPs from across the tech ecosystem that serves as a “quasi-feeder fund” for Relay.
Gambit views its LP base as the “raw materials” of the product that the fund is selling to founders.
In an exclusive interview with BetaKit, the two Gambit co-founders and general partners spoke about the VC fund’s origin and evolution, how they hope to de-risk pre-seed investing by leveraging their existing networks and Gambit’s LP base of Canadian tech operators, and what has changed about early-stage VC since economic conditions have deteriorated.
Sokol and Krzyzanowski met in middle school and became friends before pursuing careers on two different sides of the tech industry. Sokol got into investing, joining Toronto-based early-stage VC firm Relay Ventures five years ago before becoming VP in 2021. At Relay, Sokol has helped source, evaluate, and spearhead some of the firm’s tech investments.
Meanwhile, Krzyzanowski became an operator, working first as director of finance and business operations and then CFO at Toronto-based proptech startup Lane Technologies. He joined New York’s VTS after the latter acquired Lane in 2021, becoming VP of strategic finance. During this time, he’s helped oversee multiple fundraises and acquisitions, among other duties.
Sokol and Krzyzanowski—who still work at Relay and VTS, respectively—each dabbled in angel investing prior to Gambit but found it difficult to build a diverse portfolio with such small amounts of capital. Around the same time, while investing with Relay, Sokol said he noticed a gap in the Canadian market at the pre-seed stage and saw an opportunity to help address it.
According to Sokol, Relay often has to refrain from investing in strong founders because they were too early for the firm, which like many institutional seed-stage VC funds in Canada, typically makes initial investments in seed rounds for businesses with a product generating early signs of commercial traction.
In 2021, the pair set out to raise their own pre-seed fund called Gambit, seeking $500,000 from folks familiar with the startups they planned to back. But they quickly realized that the appetite for what they were building was even greater. “Basically, none of those retail investors were ever invited to participate in something like this, but all really wanted to do it,” said Sokol.
“I think aligning a portion of someone’s investment portfolio to how they actually spend most of their day … was a pretty compelling opportunity for a lot of them,” added Krzyzanowski.
Today, Gambit’s LPs include Lane co-founder and former CEO Clint Robinson, theScore alum and Thoughtworks head of product and design Jonathan Savage, ex-Top Hat and Lane VP of revenue Josh Guttman, and undisclosed directors at Shopify, Amazon, Slack, and Meta.
Gambit views its LP base as the “raw materials” of the product that the fund is selling to founders. Sokol claims that the group of LPs Gambit has assembled is “uniquely situated” to help early-stage entrepreneurs with hiring, fundraising, and tech problems, noting that Gambit can bring in LPs to analyze prospective investments, solve issues at portfolio companies, or—in some cases—even join them.
Sokol believes that the relationships that he and Krzyzanowski have built through Relay and Lane with other institutional VC funds—at the seed, Series A stages, and beyond—also stand to benefit Gambit portfolio companies, particularly as they look to raise future funding rounds.
By leaning on their networks and LP base, Sokol and Krzyzanowski believe that Gambit can take some of the risk out of pre-seed investing and generate “pre-seed returns at seed risk profiles.”
Gambit’s backers consist exclusively of individual, accredited investors. Sokol noted that they intentionally kept Gambit separate from Relay, but acknowledged that the two firms share deal flow, work together on certain investments, and that one of Gambit’s LPs is Jake Cassaday, a Relay venture partner.
Gambit has made 11 investments to date, backing a group that includes Toronto-based automatic workout-tracking app Train Fitness, real-estate legal services startup Doormat, and tech-enabled international college admissions coach Halp. The fund’s portfolio also includes BorderPass, FanUp, Robinland, Medici, and TriplePlay—which Gambit recycled its return from after TriplePlay was acquired by Roblox last summer. Gambit has made four co-investments with Relay so far.
Gambit’s average cheque size is $50,000, which Sokol said enables the fund to participate in “almost any deal.” Though Gambit is sector-agnostic, Sokol and Krzyzanowski have experience in transportation, financial, sports, and proptech—and a network of LPs that naturally clusters around these segments.
The pair plan to deploy 70 to 80 percent of their capital in Canada, while also making some investments in the United States. According to Sokol, so far, Gambit has only spent about 30 percent of its $2 million, including management fees, which they hope to recycle through early exits.
Gambit launched its fund less than two years ago during a particularly hot period for the tech industry. During the low interest rate-fuelled VC investment boom and the bull market of past years, which culminated in a record-breaking 2021, many investors encouraged venture-backed tech startups to postpone profitability and pursue growth at all costs. At the time, VC funding was more abundant and easier to obtain than it is today.
As Krzyzanowski noted, amid these conditions, some VCs saw success solely by virtue of their participation in the market. “By the nature of macroeconomic tailwinds, largely low interest rates, a lot of investors would have been perceived as brilliant in the last 10 years,” he said.
“It was easy to get a markup two to three years ago, but it’s not so easy now.”
But when broader market conditions began to worsen last year amid the Russia-Ukraine war and interest rate hikes to combat mounting inflation, fundraising became more difficult for startups and VC funds alike, borrowing became more expensive, and investors—including Gambit—pulled back.
As the fundraising environment deteriorated, Sokol and Krzyzanowski exercised caution. During the second and third quarters of 2022, Gambit continued meeting with entrepreneurs but refrained from making investments as its general partners waited to see how things would play out and slowed down its deployment pace.
Gambit has since resumed investing in a much different environment. Company valuations have dropped and the bottom line has become important again. In the current market, Krzyzanowski believes that VC investing has become more merit-based. “It was easy to get a markup two to three years ago, but it’s not so easy now,” he added.
According to the Gambit co-founder, early-stage entrepreneurs are also more receptive to questions about business fundamentals.
“If I were to ask some founders three years ago, how are you going to price this, how are you going to become profitable, they’ll look at you like you’re insane because no one has ever asked them that question before,” said Krzyzanowski. “I feel good being able to ask that and not have an allergic reaction to it.”
Feature image courtesy Gambit Partners.