Tag: startups

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The Work I Do with GPs

work, hands

I’m fortunate enough I get to work with some of the most interesting and stellar GPs out there. It’s never been a business I’m actively trying to grow. Outside of me backing managers myself, every so often I’ll get a friend who refers their friend to me and asks me to help them out with thinking through fundraising. It’s always been opportunistic. And even when I work with folks, it’s not primarily about intros. In fact, in all my working relationships, I never offer intros as part of the agreement. But more so working with them to understand how the GPs can better tell their story and run a more institutional fundraising process. Occasionally, I would get asked to advise when a firm should bring in an investor relations professional. But that last part, a piece for the future. So, all that to say:

  1. I’m not an expert in everything, but I do try to actively learn best practices in the market. If I don’t know something, I will find it out for you and/or put you in touch with the best practitioner on it.
  2. I’m now overcapacity. I don’t have the bandwidth to work with every manager that comes my way. I have other things I want to do and am working on.
  3. My primary job is still to support the GPs I back myself.

So, I’m just going to share below exactly what I do when I work with a GP, so that you don’t have to come find me for help. Because we do effectively the below. This approach has also evolved over time. And this is my current approach, circa September 2025. My job is also to help GPs better understand LPs and where they come from. So, while the saying goes as “If you know one LP, you only know one LP,” my job (and personal fascination) is to define and delineate the nuance. The only things I cannot help with if you’re only reading the below are:

  1. Be your accountability partner. Part of my role with GPs is also making sure GPs stick to their promises. Discipline. It’s easy to plan. Hard to execute.
  2. Debrief on LP conversations and pipeline management.
  3. And figure out your LP-GP fit, or your ideal LP archetype as a function of your fund size, your strategy, your experience level and your story.

This might also be one of the few pieces I write that some pre-reading may help contextualize what I will write below.

Most of the time I work with folks who are mid-raise. Not always, but most of the times. So I’m stepping in where there’s already some infrastructure, but not a lot, usually bootstrapped and duct taped together. Not a bad thing. As long as it works, I don’t touch much during the raise itself. Then we work on things and cleaning up systems post-raise or in-between raises. The best time to strategize and plan for a raise is at least six months in advance. But that’s neither here nor there. So what do I do?

  1. I ask the GP(s) to pitch me the fund. We simulate email exchanges, first meeting, second meeting, and due diligence as if I were the target LP persona. I offer no commentary. I am purely the observer. You can do this with most people who do not know your strategy well. Friendly LPs. Other GPs. But I find it most helpful if you can to do this with people who have a great attention to detail, specifically in the literary sense: lawyers, authors, therapists, podcasters, professors, editors, scriptwriters, showrunners, and so on.
  2. Then, I share all the risks of investing in said manager that I can think of. What are the elephants in the room? What parts of the GP, the GP’s story, the strategy, the track record, and the complexity of the story would make it really hard to pass the investment committee (IC)? What might be moments of hesitation? No matter how big or small. There’s a saying that a friend once told me, “When your spouse complains about you not washing the dishes, it’s not about the dishes.”
  3. Label and categorize each risk as a flaw, limitation, or restriction.
    • Flaws: Traits you need to overcome within 1-2 fundraising cycles (~2-5 years). The faster, the more measurable, the better. You can’t just say you’re going to overcome these flaws. You need to have KPIs against each of these.
    • Limitations: Risks that the world or that particular LP believes is true. Like being a Fund I. Or being a solo GP.
    • Restrictions: What you prevent yourself from doing. Think Batman’s no killing code. In GP land, it’s only investing in a particular demographic or vertical. It’s only investing in the Bay Area. And so on.
  4. Stack rank all of them. Depending on the LP you’re pitching, figure out the minimum viable risk list that LP may be willing to accept. It’s not always obvious.
  5. You should always address limitations as early on in the conversation. My preference is in the email exchange or at the very minimum, in the first two slides of the deck. In other words, “here are the primary reasons you shouldn’t invest in me if you don’t like…” Think of it like the elephant in the room. Make it explicit. Don’t wait for LPs to have private investment committee (IC) conversations without you in the room. Or worse, they implicitly, whether consciously or subconsciously, think of the limitations in their head. Having been in multiple LP conversations and a fly on the wall in IC meetings, sometimes an LP can’t fully describe why they’re passing, just that they are.
  6. Next, figure out for each LP in your existing and future pipeline when are flaws also limitations. When are restrictions also limitations?
    • When a restriction is a limitation, there isn’t an LP-GP fit. So, you need to go find LPs, who don’t see your restrictions as limitations. Another reason you should address elephants in the room as early as possible.
    • When a flaw is a limitation, you need to fire yourself before the LP fires you. You need to say “No” before an LP does. Be respectful of their time, but maintain that relationship for the future. Reaching back out every 1-2 quarters to catch up is something I highly recommend. Any longer, LPs will forget about you. And no, that does not mean, “Can I add you to my monthly/quarterly LP update?” No LP will say no, but almost always will your updates die in their inbox. If you don’t care about your relationship with them, why should they?
    • Are you ready for an institutional fundraise? How much of the institutional data room (use this as a reference if you don’t know what that means) do you have ready? And for each flaw and restriction, do you have something in the data room (even if it’s in the FAQ/DDQ) that helps hedge against it?
  7. All that said, you also need to figure out what your superpower is. And you usually only need just one, but you have to be god-tier in that one superpower. There cannot be a close second. Oftentimes, it’s less obvious than you think it is. With all the hedging of risks above, you also need to give an LP to be your champion. You must spike in something that impresses the LP and despite all your flaws and restrictions, that you’ll still go far. And the more closely your superpower is aligned with at least 2-3 of the five (sourcing, picking, winning, supporting, exiting), the better. And you must make sure that it is made explicit to the LP as early in your conversations as possible.

Photo by Ümit Bulut on Unsplash

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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Goldilocks and the 3 Secondaries

3, three, hot air balloon

“We need to rewrite our early DPI blogpost.”

Two years ago, Dave and I sat down less than five blocks away from where we were sitting when those words escaped the clutches of Dave’s mindscape. That piece has since been cited a number of times from fund managers I’ve come across. And sometimes, even LPs. While each part of that piece was written to be evergreen knowledge, what we want to do is to add nuance to that framework, along with examples of how we might see the internal conflict of early distributions and long-term thinking manifest.

In effect, and the premise for this blogpost, you’re in Year 7 of the fund. You’re now raising Fund III. What do you need to do?

The urgency to sell at Year 7 is relatively low. Although booking some amount of DPI may motivate LPs to re-up or invest in Fund III. The urgency to sell at Year 12 is much higher. So, what happens between Years 7 and 12? If you do sell, do you sell to the market or to yourself via a continuation vehicle?

For starters:

  1. Knowing when to sell WHEN you have the chance to sell is crucial. The window of opportunity only lasts so long.
  2. Consider selling some percentage of your winners on the way up to diversify, but be careful not to sacrifice too much potential future DPI. Yes, this is something we’ll elaborate more on with examples of what exactly we mean.

Optimize selling price efficiency

At the moment the next round is being put together, you have no discount to the current round price. The longer you wait to transact, the more doubt settles in from outsiders, the deeper the discount as time goes on. And so, if you have the chance to sell, sell into the (oversubscribed) primary rounds in order to optimize for price efficiency. Unless maybe, you’re selling SpaceX, OpenAI, Anthropic, Anduril, Ramp, just to name a few. There is a BIG tradeoff in TVPI (versus future DPI) when selling a fast-growing asset early (assuming it keeps its pace of growth). There is also a BIG risk to holding on to a large unrealized gain if the company stumbles or the market crashes.

We live in a world now that multi-stage venture funds have become asset management shops. Their primary goal will be to own as much of an outlier company as possible to maximize their potential for returns. As such, they will choose, at times, to buy out earlier shareholders’ equity.

To sell your secondaries, you have a very small window of opportunity to sell. Realistically, you have one to two quarters to sell where you can probably get a fair market value of 90 cents to the dollar of the last round valuation. Ideally, you sell into the next round at the price the next round values the company. As Hunter Walk once wrote, “optimally the secondary sales will always occur with the support/blessing of the founders; to favored investors already on the cap table (or whom the founders want on the cap table); without setting a price (higher or lower than last mark) which would be inconsistent with the company’s own fundraising strategy; and a partially exited investor should still provide support to the company ongoing.” If you wait a year, some people start questioning the data. If you wait 2 years, you’re looking at a much steeper discount. And if it’s not a “Mag 10” of the private markets—for instance, Stripe, SpaceX, Anduril, just to name a few, where there is no discount—you’re likely looking at 30-60% discounts. As Hunter Walk, in the same piece, quotes a friend, “‘I think friendly secondaries are easy, everything else feels new.’” As such, Dave and I are here to talk through what feels “new.”

So, how do you know how much to sell?

First of all, lemons ripen early. In Years 1-5, you’re going to see slow IRR growth. Most of that will be impacted by businesses that fall by the wayside in the early years. In Years 5-10, IRR accelerates, assuming you have winners in your portfolio. And in the latter years, Years 10 onward, IRR once again slows.

Before we get too deep, let’s address some elephants in the room.

Why are we starting the dialogue around secondaries at Year 5? Five things. Year 5, 5 things. Get it? Hah. I’m going to see myself out later.

One, most investment recycling periods are in the first four years of the fund. So, any non-meaningful DPI is recycled back into the fund to make new investments. While this may not always happen, it usually is a term that sits in the limited partner agreement (LPA).

Two, most investments have not had time to mature. Imagine if you invested in a company in Year 1 of the fund. Five years in, this company is likely to have gone through two rounds of additional funding. If you come in at the pre-seed, the company is now at either a Series A or about to raise a Series B, assuming most companies raise every 18-24 months. If you were to sell now, before the company has had a chance to really grow, you’re losing out on the vast majority of your venture returns. And especially so, if you’ve invested in a company in Year 3 of the fund, you really didn’t give the company time to mature.

Three, by Year 5, but really Year 7, venture’s older sibling, private equity, should have had distribution opportunities. And even if we’re different asset classes by a long margin, allocators will, even subconsciously, begin to look towards their venture portfolio expecting some element of realized returns.

Four, QSBS grants you full tax benefits at Year 5. And yes, you do get some benefits with new regulation sooner by Year 3. But if you’re investing in venture and hoping to get to liquidity by Year 3, you’re in the wrong asset class.

Five, you will likely need to show (some) DPI in Fund I, in order to raise Fund III or IV. It’ll show that you’re not only a great investor, but also a great fund manager.

Outside of our general rule of thumb in our writeup two years ago, let’s break down a few scenarios. The obvious. The non-obvious. And the painful.

  1. The obvious. Your fund is doing well. You’re north of 5X between Years 7 and 10. You have a clear outlier. Maybe a few.
  2. The non-obvious. Your fund is doing okay. This is the middle of the road case. You’re at 3-5X in Years 7-10.
  3. Then, the painful. You’re not doing well. Even in Year 7, you haven’t crested 3X. And really, you might have a 1.5-2X fund, if you’re lucky. 1X or less if you aren’t. But your job as a fund manager isn’t over. You are still a professional money manager.

In each of the three scenarios, what do you do?

It’s helpful to frame the above scenarios through four questions:

  1. How much do you sell?
  2. When do you sell it?
  3. What is the pricing efficiency of those assets?
  4. And what is the ultimate upside tradeoff?

The obvious (5X+ TVPI)

Here, it’s almost always worth booking in some distributions to make your LPs whole again. Potentially, and then some. At the end of the day, our job as investors is to—to borrow a line from Jerry Colonna’s Reboot—“buy low, sell high.” Not “buy lowest, sell highest.” As such, you should sell some percentage of your big winners to lock in some meaningful DPI. Selling at least 0.5X DPI at Year 7 is meaningful. Selling 1-2X DPI at Year 10 is meaningful. As you might notice, the function of time impacts what “meaningful” means. The biggest question you may have when you have solid fund performance is: How much should you sell knowing that in doing so, it might meaningfully cap your upside? Or if you should even sell at all?

Screendoor’s Jamie Rhode once said, “If you’re compounding at 25% for 12 years, that turns into a 14.9X. If you’re compounding at 14%, that’s a 5. And the public market which is 11% gets you a 3.5X. […] If the asset is compounding at a venture-like CAGR, don’t sell out early because you’re missing out on a huge part of that ultimate multiple. For us, we’re taxable investors. I have to go pay taxes on that asset you sold out of early and go find another asset compounding at 25%.” Taking it a step further, assuming 12-year fund cycles, and 25% IRR, “the last 20% of time produces 46% of that return.” She’s right. That’s the math. And that’s your trade off.

But for a second, we want you to consider selling some. Not all, just some. A couple other assumptions to consider before we get math-y:

  • 20% of your portfolio are home runs. And by Year 5 of your fund, they’re growing 30% year-over-year (YoY). And because they are great companies, growth doesn’t dip below 20%, even by Year 15.
    • For home runs, we’re also assuming you sell into the upcoming fundraising round. In other words, perfect selling price efficiency. Obviously, your mileage, in practice, may vary.
  • 30% of your portfolio are doubles, growing at 15% YoY. And growth doesn’t fall below 10%, even by Year 15.
    • For doubles, just because they’re less well-known companies, we’re assuming you’re selling on a 50% discount to the last round valuation (LRV).
  • 20% of your portfolio are singles, growing at 7% YoY. Growth flatlines.
    • For singles, even less desirable, we’re assuming you’re selling on an 80% discount to LRV.
  • The rest (30%) are donuts. Tax writeoffs.
  • For every home run and double, their growth decays by 5% every year.
  • We’re assuming 15-year fund terms.

Example 1:
Say you have a $25M fund, and at Year 10, you choose to sell 50% of the initial fund size ($12.5M). If you didn’t sell at Year 10, by Year 15, you’d have a 5.7X fund. But if you did sell at Year 10, you’d have a 3.8X fund. To most LPs, still not a bad fund.

vc secondary

The next few examples are testing the limits of outperformance and early distributions. Purely for the curious soul. For those, looking for what to do in the non-obvious case, you can jump to this section.

Example 2:
Now, let’s say, in an optimistic case, your home runs—still 20% of your portfolio—are growing at 50% YoY in Year 5. All else equal. If you didn’t sell at Year 10, by Year 15, you’d have a 11.6X fund. If you did sell at Year 10, by Year 15, you’d have a 9.3X. In both cases, and even when you do sell $12.5M of your portfolio at Year 10, you still have an incredible fund. And not a single LP will fault you for selling early.

secondary sale on 50% growth

Example 3:
Now, let’s assume your home runs are still growing at 50% YoY at Year 5, but only 10% of your portfolio are home runs and 40% are strikeouts. All else equal. If you sell $12.5M at Year 10, at the end of your fund’s lifetime, you’re at 4.8X. Versus, if you didn’t, 6.6X.

secondary sale 10% outlier

Hell, let’s say you’re not sure at Year 10, so you only sell a quarter of your initial fund size ($6.25M). All else equal to the third example. If you did sell, 5.6X. If you didn’t, 7.4X.

vc secondary sale 25% at year 10

Example 4:
Now let’s stretch the model a little. And play make believe. Let’s take all the assumptions in Example 1, but the only difference is your home runs are growing at 100% YoY by Year 5.

If you sell at Year 10, by fund term, you’re at 108.8X. If you don’t sell at Year 10, you have 110.7X.

vc secondary 100% growth

And as we play with the model some more, we start to see that assuming the above circumstances and decisions, selling anything at most 1X your initial fund size at Year 10, at Year 15, you lose somewhere between 2X and 3X DPI.

If you sell three times your fund size, assuming you can by Year 10, you lose at most around 5X of your ultimate DPI at Year 15. If you sell five times your initial fund size (again, assuming the odds are in your favor), you lose at most 7X of your final DPI by Year 15.

Now, we’d like to point out that Examples 2, 3, and 4 are merely intellectual exercises. As we mentioned in our first blogpost on this topic, if your best assets are compounding at a rate higher than your target IRR (say for venture, that’s 25%), you should be holding. Even a company growing 50% YoY at Year 5, assuming 5% decay in growth per year, will still be growing at 39% in Year 10, which is greater than 25%. That said, if a single asset accounts for 50-80% of your portfolio’s value, do consider concentration risk. And selling 20-30% of that individual asset may make sense to book in distributions, even if the terms may not look the best (i.e. on a discount greater than feels right).

Remember what we said earlier? To re-underscore that point, it’s worth saying it again. There is a BIG tradeoff in TVPI (versus future DPI) when selling a fast-growing asset early (assuming it keeps its pace of growth). There is also a BIG risk to holding on to a large unrealized gain if the company stumbles or the market crashes.

If you’d like to simulate your own secondary sales, we’ll include the model at the very bottom of this post.

The non-obvious (3-5X TVPI)

This is tricky territory. Because by Year 7-10, and if you’re here, you don’t have any clear outliers (where it might make more sense to hold as the assets are compounding faster than your projected IRR), but you don’t have a bad fund. In fact, many LPs might even call yours a win, depending on the vintage and public market equivalents. So the question becomes how much DPI is worth selling before fund term to make your LPs whole, and how much should you be capping your upside. How much of your TVPI should you be selling for your DPI knowing that you can only sell on a discount?

We’re back in Example 1 that we brought up earlier, especially if you have a single asset that accounts for 50-80% of the overall portfolio value. Here if the companies are collectively growing faster than your target IRR—say 25% on a revenue growth perspective, hold your positions. If your companies are growing slower than your target IRR and are valued greater than 1.5X public market comparables, you should consider selling 20-30% of your positions to book meaningful distributions.

The painful (1-3X TVPI)

You’ve got a dud. No two ways about it. You’re really looking at a 1.5X net fund. Maybe a 1X. And mind we remind you, it’s Years 7-10. It’s either you sell or you ride out the lie you have to tell LPs. LPs will almost always prefer the former. And for the latter, let’s be real — hope is not a (liquidity) strategy. And if put less charitably, check this Tina Fey and Amy Poehler video out. I don’t have the heart to put what’s alluded to in writing, but the video encapsulates, while humorously framed, the situation you’re in. You’re going to have to try to sell your positions on heavy discounts.

In closing

If you made it thus far, first off, you’re a nerd. We respect that. We are too. And second off, you’re probably looking for the model we used. If so, here you go.

We also do cover how this blogpost came to be in the first ever episode of the [trading places] podcast. And if you’re interested in the topic of secondaries, the [trading places] podcast might be your new guilty pleasure.

Photo by Tucker Monticelli on Unsplash

Shoutout to Dave for the many iterations of this blogpost and building the model in which this blogpost is based around!

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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Gratitude and Deal Flow

thank you, gratitude

A few months ago, my good friend Sam hosted a happy hour for LPs, which he invited me to. There I caught up with a former fund-of-funds (FoF) manager who has booked some of the most impressive returns I’ve ever heard of for a pure FoF play. For context, more than one fund generated over 15X net distributions to their LPs. The numbers were enough to impress me. But I had to ask: “Across all the funds you were a part of, what is something that you look for that you’re reasonably confident others don’t?”

He said two things, but one stood out. “Gratitude. I look for managers who never forget who put them in business.”

In all honesty, I found that odd. Not because I disagreed. I love folks who recognize and are grateful to the people who got them to where they are today. But because it didn’t occur to me that it should be the top two things one should optimize for when picking managers. Naturally, it kept gnawing at me.

In my own experience, gratitude seems to compound. Grateful individuals thank you often and sometimes when you least expect it, and more often than not, assuming you’ve done real work to help them, they compliment behind your back. The people they talk to end up learning about you. Their teammates learn about you. And you’ve earned multiple occasions to meet their teammates and those close to them. When a GP or founder’s teammates leave and start new things, those people often think to call you first.

Grateful GPs often hire talent who are just as humble, and in turn, as second nature, extend their appreciation often. Those same GPs are more likely to invest in people who have similar traits as well. So, it begins this flywheel.

As an LP, I look for emerging GPs whose network and deal flow compounds over time. That the first moment I meet them is the smallest network they will ever have again. So I expect and underwrite a GP’s ability to compound deal flow over time. So Fund n+1 is better than Fund n, and Fund n+2 is exponentially better than Fund n. Gratitude is one way GPs can increase the surface area for serendipity to stick. For there to be more quality inbound opportunities in the future.

Photo by Jonny Gios on Unsplash

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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How to Increase Dialogue with your LPs | El Pack w/ Kelli Fontaine | Superclusters

kelli fontaine

Kelli Fontaine from Cendana Capital joins David on El Pack to answer your questions on how to build a venture capital fund. We bring on three GPs at VC funds to ask three different questions.

The Council’s Amber Illig asked what happens when a solo GP is incapacitated or passes away.

Oceans Ventures’ Steven Rosenblatt asked why most LPs follow the decision-making of other LPs.

NeuCo Academy’s Jonathan Ting asked what LPs think about GPs asking for help.

From investing in great fund managers to data to investor relations, Kelli Fontaine is a partner at Cendana Capital, a fund of funds who’s solely focused on the best pre-seed and seed funds with over 2 billion under management and includes the likes of Forerunner, Founder Collective, Lerer Hippeau, Uncork, Susa Ventures and more. Kelli comes from the world of data, and has been a founder, marketing expert, and an advisor to founders since 2010.

You can find Kelli on her socials here:
X/Twitter: https://x.com/kells_bells
LinkedIn: https://www.linkedin.com/in/kellitrent/

And huge thanks to Amber, Steven, and Jonathan for joining us on the show!

Listen to the episode on Apple Podcasts and Spotify. You can also watch the episode on YouTube here.

OUTLINE:

[00:00] Intro
[01:26] Kelli’s new data discoveries
[04:32] How did Kelli underwrite a manager with no LinkedIn?
[06:19] Is too much data ever a problem?
[08:18] Vintage year benchmarking
[09:49] Telltale signs on GPs’ social profiles
[10:57] Data Kelli wishes she could collect
[15:59] Enter Amber and her new podcast
[18:08] Amber’s background and The Council
[19:08] How does Amber define top companies?
[24:25] How can a solo GP set the firm up well in case they’re no longer there?
[26:11] Kelli’s number one fear with solo GPs
[28:30] Best practices for generational transfers
[32:28] Solo GPs and their future plans
[36:51] Enter Steven and Oceans
[42:38] Would Kelli ever include AI summaries as part of the get-to-know-someone phase?
[44:18] Why do LPs follow other LP’s decision-making?
[48:43] What are the traits of an LP who is likely to have independent thinking?
[51:16] Why don’t LPs talk directly with founders?
[57:59] Enter Jonathan and NeuCo Academy
[1:00:05] Is Kelli seeing more secondaries firms?
[1:01:56] How often should GPs lean on LPs for help?
[1:07:22] Are most LPs helpful?
[1:12:21] What kinds of questions does Kelli get from her own GPs?
[1:15:39] Kelli’s last piece of advice

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“If that fund deployed over a year versus a manager of ours that deployed over four years, they’re going to look very different. So we do vintage-year benchmarking to see how their MOIC stacks up against how the revenue of companies stack up.” – Kelli Fontaine

“Team risk is the biggest risk in venture.” – Kelli Fontaine

“The same top ten firms are not the same that they were 15 years ago, and probably Silicon Valley. Generational transfer is very hard.” – Kelli Fontaine

“If you make the brand bigger than just you that it comes from DNA, support systems, things that you stand for that have had support to get there—so once that brand is made, the other team members embody that brand as well. That’s the way to do it. It’s really empowering other team members to own a part in that brand-building—outwardly and inwardly in decision-making.” – Kelli Fontaine

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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Intro Policy

dogs, meet, intro

I used to send intro requests for as many people as I humanly could. Admittedly, a sillier, more naive me a long, long while back.

The most number of intro requests came from people I did not know. Usually founders. Given that I had just entered the venture world at that time, I was labeled as an investor or, at least, someone, who was connected to the investor world based on my LinkedIn. I also had a habit of adding anyone who reached out to connect (unless they were obviously spam). At the time, I thought, “What was the downside?”

Spoiler alert: There is a downside.

They would try to tell me about their startup. Then asked if I would invest. I’d say no, so they’d ask if I knew anyone who might be interested. A fair question. And a natural lead-in, had I offered any names, to: Can you intro me to them?

In trying to be a good Samaritan, I’d ask for the deck and blurb in a forwardable email. Half of them would. Half of them would say something to the effect of “You know enough about my company already; you write the email.”

And my dumbass, fearing to offend, would go out of my way to write intros for strangers who didn’t even bother to write anything themselves. So, I’d send that email to a friend or colleague in the industry. “You interested?” along with the email they sent me. And if they didn’t, just their LinkedIn, website, and/or deck.

Naturally, most would say no. Some would ask for my take on them. To which, I’d share that I didn’t know much about them outside of the obvious. I wasn’t investing myself, but they wanted to meet. 10-20% of the time, some friends and colleagues would say yes. (To this day, I wonder if it was just their policy to say yes to all warm intros or they were trying to be considerate of me. Some, over the years, I’ve asked. As such, it’s all the above.)

Over time, I would just include “I’m not investing. Only met them once.” in addition to “You interested?” in those emails.

Then one day, and I don’t remember when I first thought to myself, why the hell am I putting my reputation on the line each time for someone I don’t know and personally haven’t bothered to dig deeper only to write an email to show I also didn’t care about them? Why would I put myself through that? It had also become emotionally taxing to me to go through all those actions only to disappoint the founders (and myself) 99% of the time. Not only would I feel bad (often delayed disappointment and resent at myself), but I also wasn’t doing anyone any good.

So I stopped. Full stop. Period.

Around the early innings of the pandemic when it felt like there was a greater influx of deals and noise.

My rule became, and still is, unless:

  • I’m investing/invested
  • I’m advising (investing my time)
  • I’ve worked with you before and I would instantly jump at the chance to work together again
  • I’ve hired you
  • I’ve known you for so long and to a level we’ve become good friends and I feel like you’re a good reflection of the people I choose to surround myself with (that does not mean you have to be successful, but that you need to have good values and the discipline to pursue them)
  • You are someone I care about
  • Or someone, that has wowed me in a fundamental way.

AND I know the other person who you want an intro to well enough…

I’m not writing any intros.

I still read every email I get. Cold or not. And I still respond to every warm email I get. But for my fragile heart that can’t stand disappointing more people and the volume of emails I get, I’m not responding to any emails that look like they’re templated, AI-generated, or written without care. So I can focus on the ones that matter.

Photo by Collins Lesulie on Unsplash

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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81% of America is Underfunded | Vijen Patel & Grady Buchanan | Superclusters | S5PSE1

vijen patel, grady buchanan

“19% of our GDP attracts about 55% of capital inflows, aka venture activity, and 81% is underinvested.” – Vijen Patel

We’re back with one of our crowd favorite formats, where we bring on one LP and one GP, and share why that LP invested in this GP. This time, we have Grady Buchanan, co-founder of NVNG, and Vijen Patel, founding partner of The 81 Collection.

Vijen Patel is an entrepreneur and investor. He founded The 81 Collection, a high growth equity firm in boring industries. Previously, he founded what is now known as Tide Cleaners. He bootstrapped what eventually became the largest dry cleaner in the country (1,200 locations) before selling to Procter & Gamble in 2018. Before Tide Cleaners, he worked in private equity, McKinsey & Company, and Goldman Sachs. He lives in Chicago with his wife and two kids.

You can find Vijen on his socials here:
LinkedIn: https://www.linkedin.com/in/vijenpatel/
X / Twitter: https://x.com/itsvijen

Grady Buchanan is an institutional and risk-based asset allocation professional with a passion for bringing venture capital to those who have the interest. He founded NVNG in late 2019 and oversees investment strategies, the firm’s venture fund pipeline, manager sourcing, due diligence, and external events. Before launching NVNG, Grady worked with the Wisconsin Alumni Research Foundation’s (WARF) $3B investment portfolio, focused on private equity and venture capital initiatives, including fund diligence, investment strategy, and policy. Grady is based in Milwaukee, WI.

You can find Grady on his socials here:
LinkedIn: https://www.linkedin.com/in/gradynvng/
X / Twitter: https://x.com/GradyBuchanan

Listen to the episode on Apple Podcasts and Spotify. You can also watch the episode on YouTube here.

OUTLINE:

[00:00] Intro
[02:41] The pressure of quitting a PE job for dry cleaning
[05:09] Vijen’s self talk as a founder
[06:50] How to overcome doubt
[09:00] How Vijen learned customer success
[10:35] What did Pressbox become?
[12:41] The dichotomy between society’s needs and what gets funded
[14:19] How did Grady go from selling pancakes to being an LP?
[23:51] Why did Grady think he bombed the LP interview?
[29:15] What is The 81 Collection?
[32:22] How did Vijen meet Grady?
[34:39] How is Vijen fluent in Spanish?
[36:40] How did Grady meet Vijen?
[42:21] How did Grady underwrite 81 Collection?
[44:44] What about Vijen made Grady hesitate?
[48:35] What’s one thing about 81 Collection that could’ve gone wrong?
[50:33] The 3 things that create alpha
[52:42] Why does NVNG have the coolest fund of funds’ names?
[53:47] The legacy Grady plans to leave behind
[56:06] The legacy Vijen plans to leave behind

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“I wrote down everyone’s concerns, and I just sat on it. A lot of the founders we like to work with, the ones who we really love are the ones who take it in and listen, write it down, then take some time to synthesize everything and then they’ll act with conviction. ‘Why is this stupid? Tell me why. Let’s go deeper and deeper.’ And oftentimes these reasons are very rational and slowly over time, what if I derisk this by doing that?” – Vijen Patel

“19% of our GDP attracts about 55% of capital inflows, aka venture activity, and 81% is underinvested.” – Vijen Patel

“There’s this crazy stat we recall often: the 50 richest families on Earth, who often build in this 81, they’ve held, on average, their business for 44 years.” – Vijen Patel

“We invest in only amazing managers; we will not invest in every amazing manager.” – Grady Buchanan

“Alpha’s three things: information asymmetry, access, and, actually, taxes.” – Vijen Patel

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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Uncompensated Risks in VC | Wendy Li | Superclusters | S5E12

wendy li

“It’s not the probability; it’s the consequence. It’s not the probability when something goes wrong. It’s the consequence when it goes wrong.” – Wendy Li

Wendy Li is the co-founder and Chief Investment Officer at Ivy Invest, a fintech investment platform bringing an endowment-style portfolio to everyday investors.

Before Ivy Invest, Wendy was Managing Director of Investments at the Mother Cabrini Health Foundation, where she built the Investment Office from the ground up and managed a $4 billion portfolio. Prior to Mother Cabrini Health Foundation, Wendy was Director of Investments at UJA-Federation, investing across a broad range of asset classes. Wendy began her career in the Investment Office at the Metropolitan Museum of Art. She has a Bachelor of Arts degree from Columbia University and is a CFA charterholder.

You can find Wendy on her socials here:
LinkedIn: https://www.linkedin.com/in/wendy-li-cfa/
X / Twitter: https://x.com/askwendyli

Listen to the episode on Apple Podcasts and Spotify. You can also watch the episode on YouTube here.

OUTLINE:

[00:00] Intro
[02:29] Wendy’s family’s history with Columbia University
[07:55] The importance of understanding family history
[11:09] Why Wendy chose to work at The Met
[15:16] How did Wendy know in the interview that Lauren would be her mentor?
[19:18] Specialist vs generalist in 2006
[22:58] Pros and cons of using AI as an LP
[29:02] The 80-20 rule for how an LP thinks
[29:29] The one mistake EVERY SINGLE LP makes
[33:27] What is the Takahashi-Alexander model?
[39:38] Who do you learn from when your LP institution is so small?
[41:22] The wisdom of an open-sourced LP reading list
[45:34] What is headline risk?
[47:09] What does ‘uncompensated risk’ mean?
[50:20] Why now for ‘endowment-in-a-box’
[55:07] Wendy’s proudest dish from her mom’s recipe book
[57:09] Wendy’s last piece of advice

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“Where [using AI] is a challenge and can present a challenge to somebody’s development is in the utilization of these tools where perhaps there’s not an innate understanding of why the data is important.” – Wendy Li

“The pattern of mistakes that I certainly made and I saw the others make—and I know those listening and are earlier in their investor journey—will inevitably make-… We all make it. Even knowing this is a trap that we all fall into… even though they are all going to be aware of this trap, they’re still going to make the same mistake because we all do it, but we all have to learn this one and develop our own scar tissue on this one. It’s the exciting investment manager that other really smart LPs are invested with that is a ‘hard-to-access’ manager – that has a window in which they will take your capital. And there’s this sense of urgency. Sometimes real, sometimes forced. And there’s this sense that all these really smart investors are doing this thing. And the added layer on the endowment foundation side is oftentimes that there’s an investment committee member who is super excited about the investment because—and I’ll use a real quote that someone once said to me, ‘It would be a trophy manager to have in the portfolio’—and that is invariably a mistake that we all make in our investment careers. I would say that when I have been regretful of avoidable mistakes, it has had that pattern.” – Wendy Li

“I deeply subscribe to, ‘There’s always another train leaving the station.’” – Wendy Li

“There’s a great risk in being overconfident. There’s a great risk in assuming a normal distribution of events and returns.” – Wendy Li

“It’s not the probability; it’s the consequence. It’s not the probability when something goes wrong. It’s the consequence when it goes wrong.” – Wendy Li

“In-the-moment decision-making is always harder than you might remember post-mortem.” – Wendy Li

Follow David Zhou for more Superclusters content:
For podcast show notes: https://superclusters.co/superclusters
Follow David Zhou’s blog: https://superclusters.co
Follow Superclusters on Twitter: https://twitter.com/SuperclustersLP
Follow Superclusters on TikTok: https://www.tiktok.com/@super.clusters
Follow Superclusters on Instagram: https://instagram.com/super.clusters

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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LP Relationship Management: The 2 Frameworks You Need to Build Trust

A while back, my friend Augustine, CEO and founder of Digify, asked me to write something for his company, Digify’s blog, about how I think about maintaining relationships between fundraising cycles when I was still an investor relations professional. As such, I wrote a mini two-part series on the frameworks and tactics I use to maintain LP relationships. Been given the liberty to cross-post on this humble blog of mine, in hopes that it helps any emerging managers or IR professionals here.

Voila, the first of two!

Author’s note [aka me]: My promise to you is that we’ll share advice you’ve likely never heard before. By the time you get to the end of this article, if you’re intimidated, then we’ll have done our job. Because that’s just how much it takes to fight in the same arena as people I’ve personally admired over the years and work to emulate and iterate daily. That said, this won’t be comprehensive, but a compilation of N of 1 practices that hopefully serve as tools in your toolkit. As such, we will be separating this piece into Part 1 and 2. The first of which is about overarching frameworks that govern how I think about managing relationships. The second of which focuses on tactical elements governed by the initial frameworks brought up.

One of the best pieces of advice I got when I started as an investor relations professional was that you never want your first conversation with an allocator to be an ask. To be fair, this piece of advice extends to all areas of life. You never want your long-anticipated catch up with a childhood friend to be about asking for a job. You never want the first interaction with an event sponsor to be one where they force you to subscribe to their product. Similarly, you never want your first meeting with an LP to be one where you ask for money.

And in my years of being both an allocator and the Head of IR (as well as in co-building a community of IR professionals), this extends across regions, across asset classes, and across archetypes of LPs.

So, this begs the question, how do you build and, more importantly, retain rapport with LPs outside of fundraising cycles? The foundation of any successful LP relationship lies in consistent engagement beyond capital asks.

To set the context and before we get into the tactics (i.e. what structured variables to track in your CRM, how often to engage LPs, AGM best practices, etc.), let’s start with two frameworks:

  1. Three hats on the ball
  2. Scientists, celebrities, and magicians

“Three hats on the ball”

This is something I learned from Rick Zullo, founding partner of Equal Ventures. The saying itself takes its origin from American football. (Yes, I get it; I’m an Americano). And I also realize that football means something completely different for everyone based outside of our stars and stripes. The sport I’m talking about is the one where big muscular dudes run at each other at full force, fighting over a ball shaped like an olive pit. And in this sport, the one thing you learn is that the play isn’t dead unless you have at least three people over the person running the ball. One isn’t enough. Two leaves things to chance. Three is the gamechanger.

The same is true when building relationships with LPs. You should always know at least three people at the institutions that are backing you. You never know when your primary champion will retire, switch roles, go on maternity leave, leave on sabbatical, or get stung by a bee and go into anaphylactic shock. Yes, all the above have happened to people I know. Plus, having more people rooting for you is always good.

Institutions often have high employee turnover rates. CIOs and Heads of Investment cycle through every 7-8 years, if not less. And even if the headcount doesn’t change, LPs, by definition, are generalists. They need to play in multiple asset classes. And venture is the smallest of the small asset classes. It often gets the least attention.

So, having multiple champions root for you and remind each other of something forgotten outside of the deal room helps immensely. Your brand is what people say about you when you’re not in the room. Remind people why they love you. And remind as many as possible, as often as possible. This multi-touch approach is essential for nurturing a robust LP relationship strategy.

Scientists, celebrities, and magicians

My buddy Ian Park told me this when I first became an IR professional. “In IR, there are product specialists and there are relationship managers. Figure out which you’re better at and lean into it.” Since then, he’s luckily also put it into writing. In essence, as an IR professional, you’re either really good at building and maintaining relationships or can teach people about the firm, the craft, the thesis, the portfolio, and the decisions behind them.

To caveat ‘relationship managers,’ I believe there are two kinds: sales and customer success. Sales is really capital formation. How do you build (as opposed to maintain) relationships? How do you win strangers over? This is a topic for another day. For now, we’ll focus on ‘customer success’ later in this piece.

There’s also this equation that I hear a number of Heads of IR and Chief Development Officers use.

track record X differentiation / complexity

I don’t know the origin, but I first heard it from my friends at General Catalyst, so I’ll give them the kudos here.

Everyone at the firm should play a key role influencing at least one of these variables. The operations and portfolio support team should focus on differentiation. The investment partners focus on the track record. Us IR folks focus on complexity. And yes, everyone does help everyone else with their variables as well.

That said, to transpose Ian’s framework to this function, the relationship managers primarily focus on reducing the size of the denominator. Help LPs understand what could be complex about your firm through regular catchups—these touchpoints are crucial for maintaining a strong LP relationship:

  • Why are you increasing the fund size?
  • Why are you diversifying the thesis?
  • How do you address key person risk?
  • Why are you expanding to new asset classes?
  • Are you on an American or European waterfall distribution structure?
  • Why are you missing an independent management company?
  • Who will be the GP if the current one gets hit by a bus?

The product specialists split time between the numerator and the denominator. They spend intimate time in the partnership meetings, and might potentially be involved in the investment committee. Oftentimes, I see product specialists either actively building their own angel track record and/or working their way to become full-time investment partners.

One of my favorite laws of magic by one of my favorite authors, Brandon Sanderson, is his first law: “An author’s ability to solve conflict with magic is directly proportional to how well the reader understands said magic.”

In turn, an IR professional’s ability to get an LP to re-up is directly proportional to how well the LP understands said magic at the firm.

My friend and former Broadway playwright, Michael Roderick, once said, the modern professional specializes in three ways:

  1. The scientist is wired for process. The subject-matter expert. They thrive on the details, the small nuances most others would overlook. They will discover things that revolutionize how the industry works. The passionately curious.
  2. The celebrity. They thrive on building and maintaining relationships. And their superpower is that they can make others feel like celebrities.
  3. The magician thrives on novelty. Looking at old things in new ways – new perspectives. The translator. They’re great at making things click. Turning arcane, esoteric knowledge into something your grandma gets.

The product specialists are the scientists. The relationship managers are the celebrities. But every IR professional, especially as you grow, needs to be a magician.

Going back to the fact that most LPs are generalists, and that most venture firms look extremely similar to each other, you need to be able to describe the magic and your firm’s ‘rules’ for said magic to your grandma.

For the next half, I’ll share some individual tactics I’ve worked into my rotation. Most are not original in nature, but borrowed, inspired, and co-created with fellow IR professionals.

This post was first shared on Digify’s blog, which you can find here.

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

Any views expressed on this blog are mine and mine alone. They are not a representation of values held by On Deck, DECODE, or any other entity I am or have been associated with. They are for informational and entertainment purposes only. None of this is legal, investment, business, or tax advice. Please do your own diligence before investing in startups and consult your own adviser before making any investments.

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How to Underwrite Angel Track Records in Less than 2500 Words

angel

You know that feeling when you enjoy something so much, you have to do it again. That’s exactly what happened with my buddy Ben Ehrlich. There’s a line I really like by the amazing Penn and Teller. “Magic is just spending more time on a trick that anyone would ever expect to be worth it.”

Ben is exactly that. He’s a magician with how he thinks about underwriting, arguably, the riskiest class of emerging managers. This piece originated opportunistically from another series of intellectual sparring matches between the two of us. Both learning the lens of how the other thinks. It was pure joy to be able to put this piece together, just like our last. Selfishly, hopefully, two of many more.

You can find the same blogpost under his blog, which I highly recommend also checking out.

Venture is a game of outliers. We invest in outlier managers, who invest in outlier companies, capitalizing on outlier opportunities. 

Angel investments have excelled at catching and generating outlier outcomes. However, in recent years, angel checks are not just a critical piece of the capital stack for startups, they are also a way where amazing people can learn and grow into spectacular investors. In the past 20 years, angel activity has gone from a niche subsection, to a robust industry with angel groups all over the world, and the emergence of platforms to facilitate their growth. 

As LPs, we see this every day. A common story that we diligence is the angel turned institutional VC. This process is what allows aspiring GPs who come from all walks of life, with often quite esoteric track records, to raise funds and prove they can be exceptional venture capitalists. These people are often the outliers at the fund level. The non-obvious investors who are taking their angel investing experience and turning it into elite cornerstones of the venture ecosystem. For example:

Each of these angels-turned-investors returned their earliest believers many times over. And these are far from the only examples.

So, as an allocator, it is logical to want to pattern match to the angel investor turned GP as a way to assess how good a manager might be in building their firm.  However, with more venture firms than there have ever been, and more ways to access angel-investing, differentiating signal from noise has never been harder. The hardest being where the track record is too young, too limited, and there’s not enough to go on. So it begs the question: How the hell do you underwrite an angel track record that’s still in its infancy?

The simple answer is you don’t. At least not completely. You look for other clues. Telltale signs.

So, our hope with this piece is to share what we each look for – most of which is beyond the numbers. The beauty of this piece is that even while writing it, Ben and David have learned from each other Socratically on how to better underwrite managers. This is one that can be pretty controversial, and we don’t agree on everything. So, let us know what you think….

Understanding the returns

Every pitch deck we look at has a track record slide. Usually this is some amalgamation of previous funds (if they have any), advisor relationships, and angel investing track record. Angel investing track record is usually the largest number in terms of TVPI or IRR. However it also has the least clear implications, so we need to be careful in understanding what it means. Here are the steps we take in understanding the track record.

Step 1: Filtering the Track Record

First, we get aggressive with filtering the track record the GP shows you. Not the select investments track record on the deck, but the entire track record including advisor shares, SPVs, funds, and any other equity stake. We do this as angel track records are usually the result of opportunistic or  inbound access over a long period of time. The companies in their angel portfolio don’t necessarily relate to their thesis or plan for their fund. So cutting the data by asset type and starting with thesis vs off thesis investments is a helpful starting point.

Next, it’s helpful to understand the timeframe. Funds have fixed lifespans1, and strict deployment time periods, which we call vintages. In order to understand the performance, we break down the time periods of their investments including entry date, exit date, values relative to median at that time, and average hold period. Naturally, also, we do note entry valuation, entry round, exit valuation, and ideally if they have it price per share. Having the afore-mentioned will help you filter returns, especially if a GP is pitching you a pre-seed/seed fund, but the bulk of their returns come from one company they got into at the Series B.

Lastly, it’s helpful to group investments into quartiles. Without sounding like a broken record, it’s important to remember that venture is fundamentally outlier-driven. Grouping the investments, understanding them at the company specific level vs aggregate is critical to the next phase, which is understanding the drivers of the track record.

Also, it’s important to note that some vintages will perform better than others. And as an LP, it’s important to consider vintage diversification (since no one can time the market) and what the public market equivalent is. For a number of vintages, even top-quartile venture underperforms the QQQ, SPY, and NASDAQ. A longer discussion for another post. Cash, or a low-cost index is just as valid of a position as a venture fund.

Step 2: Understanding the Drivers

Once you have broken down the data, we want to understand the real drivers behind the returns from the track record. We tend to start by asking these questions: 

  • Are there other outliers in the off-thesis investments?
  • What are the most successful on-thesis investments?
  • Has any money actually been delivered, or is it entirely paper markups?
  • What is the GP’s valuation methodology?2 3
  • For the on-thesis investments that returned less than 10X the check size, what did this individual learn? How will that impact how this GP makes decisions going forward?
  • How much of a GP’s track record is attributed to luck?
  • And simply, do the founders in the GP’s supposed track record even know that the GP exists?4

With respect to the second-to-last question, if their on-thesis track record has more than 10 investments, we take out the top performer and the bottom performer, is their MOIC still interesting enough? While there is no consistency of returns in venture, it gives a good sense of how much luck impacts the GP’s portfolio.

The last question is extremely prescient, since the goal of a GP trying to build an institution – a platform – is that they need the surface area for serendipity to stick to compound. Yesterday’s source of deal flow needs to be worse than today’s. And today’s should be eclipsed by tomorrow’s. As LPs, we want the GPs to be intimately involved in the success of their outliers not because attribution of value add matters, but because great companies bring together great teams. Great teams aggregate and spawn other ambitious people. Ambitious people will often leave to start new ventures. And we want the GP to be the first call. More on that in the next section.

Step 3: Transferability to a Fund

Lastly, the analysis will need to shift from purely quantitative to qualitative guided by the quantitative. We are moving from the realm of backward-looking data, into forward projection. The main question here is how do all the data points we have point to the success of the fund and the differences in running a fund versus an angel portfolio such as:

  • Fixed deployment periods
  • Weighted portfolio risks
  • Correlation risk between underlying portfolio companies
  • Information rights and regulatory requirements
  • Angel check size vs fund’s target check size

One heuristic that we use is that of finding the “hyper learner.” The idea is basically, how fast is this person growing, learning and adding it into their decision-making around investing. Do they have real time feedback loops that influence their process, and can they take those feedback loops to the next level with their fund? Essentially, understanding that what matters with emerging VCs is the slope, not y-intercept, so can you see how their decisions will get better?

While everyone learns differently, some of the useful thought experiments to go through include:

  • What is the GP’s information diet? Where are they consuming information through channels not well-documented or read by their peers?
  • How are they consuming and synthesizing information in ways others are not?
  • How does each iteration of their pitch deck vary between themselves?5
  • Do you learn something new every conversation you have with the GP?

Overall, this is more a bet on the person learning how to be a great fund manager, and can’t all drive from just pure angel investing track record. 

The details the numbers can’t tell you:

“We spend all our time talking about attributes because we can easily measure them. ‘Therefore, this is all that matters.’ And that’s a lie. It’s important but it’s partial truth.” — Jony Ive

Angel track records can point to how serious the potential GP is about the business of investing. At the same time, there are factors outside of raw numbers that also offer perspective to how fund-ready a GP is. Looking through the details, it is important to ask in the lead-up to making the decision to run a fund, how have they spent their time meaningfully? For example:

  • What advisory roles have they taken? What impact did they deliver in each? For those companies and firms, who else was in the running? And why did they ultimately go with this individual?
  • Have they taken independent board seats? Why? What was the relationship of the founder and board member prior to the official role?
  • If they’re a venture partner or advisor to another VC firm, what is their role in that firm? When do they get a call from the GPs or partners of that firm?
  • Is the angel/advisor part of non-redundant, unique networks?
  • Does the angel/advisor have a unique knowledge arbitrage that founders want access to?
  • Does the GP’s skillset match the strategy they’re proposing?

Money isn’t the only valuable asset. Time, effort, experience, and network are others. Especially if an angel has little capital to deploy (i.e. tied up in company stock, younger in their career, saving up for a life-impacting major purchase like a house), the others are leading indicators to how a network may compound for the angel-turned-GP over time.

Anti-portfolio

Lastly, one of the hardest parts of understanding angel investing track record is the anti-portfolio as popularized by BVP. As picking is such an important aspect of a GP’s job, understanding how the person has previously made investment decisions based on the opportunities they are pursuing and what they missed out on is critical. 

The stopwatch really starts counting when the angel decides that she wants to be a full-time investor one day. The truth is no third party will really know when that ticker starts, outside of the GP’s own words. And maybe her immediate friends and family. While helpful to reference check, it’s her words against her own.

Instead, we find their first angel check or their first advisory role as a proxy for that data point. The outcome of that check isn’t important. The rationale behind that check also matters less than the memos of the more recent checks. Nevertheless, it is helpful to understand how much the GP has grown.

But what’s more helpful is to come up with a list of anti-portfolio companies. Companies within the investor’s thesis that rose to prominence during the time when that individual started to deploy. And within good reason, that individual may have come across during their time angel investing or advising. In particular, if the angel has not been able to be in the pre-seed. More often than not, folks investing in that round are friends and family. If they are in the seed round, the questions that pop up are:

  1. Did she not see it?
  2. Did she not pick it?
  3. Or, did she not win it?

For the latter two questions, how much has she changed the way she invests based on those decisions? And are those adjustments to decision-making scalable to a firm? In other words, how much will that scar tissue impact how she trains other team members to identify great companies?

Contradictions

One of the most important truths in venture is that to deliver exceptional returns, you have to be non-consensus and right. This ultimately derives from someone being contradictory, with purpose throughout their life.

There is beauty in the resume and the LinkedIn profile. But it often only offers a snapshot into a person’s career, much less their life. So we usually spend the first meeting only on the GP’s life. Where did she grow up? How did she choose her extracurriculars? Why the college she chose? Why the career? Why the different career inflection points?

We look for contradictions. What does this GP end up choosing that the normal, rational person would not? And why?

More importantly, is there any part of their past the GP does not want us to know? Why? How will that piece of hidden knowledge affect how she makes decisions going forward?

Naturally, to have such a dialogue, the LP, who more often than not are in a position of power in that exchange, needs to create a safe, non-judgmental space. Failure to do so will prevent candid discussions.

In Closing

It is extremely easy to over-intellectualize this exercise. There are always going to be more unknowns to you, as an LP, than there are knowns. Your goal isn’t to uncover everything. Your time may be better spent investing in other asset classes, if that’s the case. Your goal, at least with respect to underwriting emerging managers, is to find the minimum number of risks you can stomach before having the conviction to make an investment decision.

And if you’re not sure where to start with evaluating risks, the last piece (Ben’s blog, cross-posted on this blog) we wrote together on the many risks of investing in emerging managers may be a good starting point.

Photo by Csaba Gyulavári on Unsplash

  1.  We are choosing to ignore evergreen funds for the purpose of this article, but we know they exist. ↩︎
  2. Beware of GPs who count SAFEs as mark ups. While we do believe most aren’t doing so with deception in mind, many GPs are just not experienced enough in venture to know that only priced rounds count as marks. ↩︎
  3. Separately, is the GP holding 2020-early 2022 marks at the last round valuation (LRV)? Most companies that raised during that time are not worth anything near their peak. Are they also discounting any revenue multiples north of 10-20X? How a GP thinks here will help you differentiate between who’s an investor and who’s a fund manager. ↩︎
  4. This may seem callous, but we have come across the instance multiple times where an aspiring GP over states (or in one case, lied) their position on the cap table. Founder reference checks are a must! ↩︎
  5. David sometimes asks GPs to send every version of their current fund’s pitch deck to him, as an indicator on how the GP’s thinking has evolved over time. Even better if they’re on a Fund II+ because you can see earlier funds’ pitches. Shoutout to Eric Friedman who first inspired David to do this. ↩︎

Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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Venture Capital is DEAD! | El Pack w/ Chris Douvos | Superclusters

chris douvos

Ahoy Capital’s founder, Chris Douvos, joins David on El Pack to answer your questions on how to build a venture capital fund. We bring on three GPs at VC funds to ask three different questions.

Pachamama Ventures’ Karen Sheffield asked about how GPs should think about when and how to sell secondaries.

Mangusta Capital’s Kevin Jiang asked about how GPs should think about staying top of mind with LPs between fundraises.

Stellar Ventures’ David Anderman asked Chris about GPs who start to specialize in different stages of investment compared to their previous funds.

Chris Douvos founded Ahoy Capital in 2018 to build an intentionally right-sized firm that could pursue investment excellence while prizing a spirit of partnership with all of its constituencies. A pioneering investor in the micro-VC movement, Chris has been a fixture in venture capital for nearly two decades. Prior to Ahoy Capital, Chris spearheaded investment efforts at Venture Investment Associates, and The Investment Fund for Foundations. He learned the craft of illiquid investing at Princeton University’s endowment. Chris earned his B.A. with Distinction from Yale College in 1994 and an M.B.A. from Yale School of Management in 2001.

You can find Chris on his socials here:
Twitter: https://twitter.com/cdouvos
LinkedIn: https://www.linkedin.com/in/chrisdouvos/

And huge thank you for Karen, Kevin, and David for jumping on the show.

Listen to the episode on Apple Podcasts and Spotify. You can also watch the episode on YouTube here.

OUTLINE:

[00:00] Intro
[01:03] The facade of tough times
[05:03] The last time Chris hugged someone
[06:53] The art (and science?) of a good hug
[08:32] How does Chris start his quarterly letters?
[10:35] Quotes, writing, and AI
[15:13] Venture is dead. Why?
[17:33] But… why is venture still exciting?
[21:13] Enter Karen Sheffield
[21:48] The never-to-be-aired episode with Chris and Beezer
[22:55] Karen and Pachamama Ventures
[24:19] The third iteration of climate tech vocabulary
[26:55] How should GPs think about secondaries?
[33:53] Where can GPs go to learn more about when to sell?
[36:53] Are secondary transactions actually happening or is it bluff?
[38:44] “Entrepreneurship is like a gas, hottest when compressed”
[42:26] Enter Kevin Jiang and Mangusta Capital
[44:21] The significance of the mongoose
[46:36] How do LPs like to stay updated on a GP’s progress?
[59:35] How does a GP show an LP they’re in it for the long run?
[1:03:57] David’s Anderman part of the Superclusters story
[1:05:41] David Anderman’s gripe about the name Boom
[1:06:31] Enter David Anderman and Stellar Ventures
[1:10:21] What do LPs think of GPs expanding their thesis for later-stage rounds?
[1:21:43] Why not invest all of your private portfolio in buyout funds
[1:25:48] Good answers to why didn’t things work out
[1:28:13] Chris’ one last piece of advice
[1:35:18] My favorite clip from Chris’ first episode on Superclusters

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“Every letter seems to say portfolios have ‘limited exposure to tariffs.’ The reality is we’re seeing potentially the breakdown of the entire post-war Bretton Woods system. And that’s going to have radical impacts on everything across the entire economy. So to say ‘we have limited exposure to tariffs’ is one thing, but what they really are saying is ‘we don’t understand the exposure we have to the broader economy as a whole.’” – Chris Douvos

“Everybody is always trying to put the best spin on quarterly results. I love how every single letter I get starts: ‘We are pleased to share our quarterly letter.’ I write my own quarterly letters. Sometimes I’m not pleased to share them. All of my funds – I love them like my children – equally but differently. There’s one that’s keeping me up a lot at night. Man, I’m not pleased to share anything about that fund, but I have to.” – Chris Douvos

“There’s ups and downs. We live in a business of failure. Ted Williams once said, ‘Baseball is the only human endeavor where being successful three times out of ten can get you to the Hall of Fame.’ If you think about venture, it’s such a power law business that if you were successful three times out of ten, you’d be a radical hero.” – Chris Douvos

“Tim Berners-Lee’s outset of the internet talked about the change from the static web to the social web to the semantic web. Each iteration of the web has three layers: the compute layer, an interaction layer, and a data layer.” – Chris Douvos

“Venture doesn’t know the train that’s headed down the tracks to hit it. Every investor I talk to—and I talk mostly to endowments and foundations—is thinking about how to shorten the duration of their portfolio. People have too many long-dated way-out-of-the-money options, and quite frankly, they haven’t, at least in recent memory, been appropriately compensated for taking those long-term bets.” – Chris Douvos

“Entrepreneurship is like a gas. It’s the hottest when it’s compressed.” – Chris Douvos

On communication with LPs, “come with curiosity, not sales.” – Chris Douvos

“Process drives repeatability.” – Andy Weissman

“The worst time to figure out who you’re going to marry is when you’re buying flowers and setting the menu. Most funds that are raising now, especially if it’s to institutional investors—we’re getting to know you for Fund n plus one.” – Chris Douvos

On frequent GP/LP checkins… “Too many calls I get on, it’s a re-hash of what the strategy is. Assume if I’m taking the call, I actually spent five minutes reminding myself of who you are and what you do.” – Chris Douvos

“One thing I hate is when I meet with someone, they tell me about A, B, and C. And then the next time I meet with them, it’s companies D, E, and F. ‘What happened to A, B, and C?’ So I’ve told people, ‘Hey, we’re having serious conversations. Help me understand the arc.’ As LPs, we get snapshots in time, but what I want is enough snapshots of the whole scene to create a movie of you, like one of those picturebooks that you can flip. I want to see the evolution. I want to know about the hypotheses that didn’t work.” – Chris Douvos

“We invest in funds as LPs that last twice as long as the average American marriage.” – Chris Douvos

“The typical vest in Silicon Valley is four years. He says, ‘Think about how long you want to work. Think about how old you are now and divide that period by four. That’s the number of shots on goal you’re going to have to create intergenerational wealth.’ When you actually do that, it’s actually not very many shots. ‘So I want to know, is this the opportunity that you want to spend the next four years on building that option value?’” – Chris Douvos, quoting Stewart Alsop

When underwriting passion… “So you start with the null hypothesis that this person is a dilettante or tourist. What you try to do when you try to understand their behavioral footprint is you try to understand their passion. Some people are builders for the sake of building and get their psychic income from the communities they build while building.” – Chris Douvos

“There’s pre-spreadsheet and post-spreadsheet investing. For me, it’s a very different risk-adjusted return footprint because once you are post-spreadsheet—you talk about B and C rounds, companies have product-market fit, they’re moving to traction—that’s very different and analyzable. In my personal opinion, that’s ‘super beta venture.’ Like it’s just public market super beta. Whereas pre-spreadsheet is Adam and God on the ceiling of the Sistine Chapel with their fingers almost touching. You can feel the electricity. […] That’s pure alpha. I think the purest alpha left in the investing markets. But alpha can have a negative sign in front of it. That’s the game we play.” – Chris Douvos

“Strategy is an integrated set of choices that inform timely action.” – Michael Porter

“I’m not here to tell you about Jesus. You already know about Jesus. He either lives in your heart or he doesn’t.” – Don Draper in Mad Men

“If there are 4000 people investing and people are generally on a 2-year cycle, that means in any given year, there are 2000 funds. And the top quartile fund is 500th. I don’t want to invest in the 50th best fund, much less the 500th. But that’s tyranny of the relativists. Why do we care if our portfolio is top quartile if we’re not keeping up with the opportunity cost of equity capital of the public markets?” – Chris Douvos

“In venture, the top three funds matter. Probably the top three funds will be Sequoia, Kleiner, and whoever gets lucky or whoever is in the right industry when that industry gets hot.” – Michael Moritz in 2002

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Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!

The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.

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