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Three E’s of Fund Discipline

railroad, discipline

At a dinner earlier this week, a Fund I GP shared how she had recently hosted her first AGM (annual general meeting). Of which, she spent a few hundred dollars to plan the whole thing. She called in favors on venue. Sponsors to cover food. And the only thing I believe she spent money on were gifts for her LPs. For comparison, when I caught up with a firm with 10+ active funds, they said they spend about $2M on their annual summit.

For the uninitiated, the annual summit or AGM is typically the event VC firms hold once a year for their investors, as well as for their portfolio to recap the year and share what’s next. I won’t go too deep here, but for those curious, I wrote a post last week on this.

Naturally, I had to tip my hat off. Not only is hosting a large event like an AGM time-consuming, to minimize the damage to one’s wallet to only a few hundred is a Herculean feat. And yes, she single-handedly pulled it off. While I wasn’t there myself, A+ for executional discipline.

One of three kinds of discipline that LPs expect of GPs. What are the three?

  1. Entry discipline
  2. Exit discipline
  3. Executional discipline

The three E’s.

Did I force myself to find three words that start with E’s that fit? I’m glad you noticed. Originally, called it: investing discipline, exit discipline, and operational discipline. But I digress.

Let me elaborate.

Entry discipline

Entry discipline is all about what and how you invest. It’s the one GPs talk about the most. While it is important – one of the three legs of the stool, it’s not the only one that matters. Nevertheless, it’s a bet on the investor.

These include:

  • Entry prices (pre-money versus post-money valuation)
  • Ownership on entry
  • Sourcing / picking / winning
  • Due diligence process (references, legal diligence, tech diligence, operational diligence, etc.)
  • Prepared mind
  • Terms of investment (you’d be surprised the number of
  • Pro rata rights, and drag along, and right of first refusal (ROFR)
  • Information rights
  • Portfolio governance (board versus board observer seats)

Exit discipline

In the words of Renaissance’s Jeff Rinvelt, “the one that wasn’t baked in for a lot of these firms was the exit manager – the ones that help you sell. […] If you don’t have it, there should be somebody that it’s their job to look at exits.”

Exit discipline is all about how you think about portfolio construction on a broader sense. And of course, how and when to exit positions. It’s the one LPs care about most in a liquidity-starved environment. It matters especially so for venture that’s known for long illiquidity periods. Still matters for buyouts and other assets, but those have shorter time horizons. When am I going to get my money back? Is there a plan? And while mileage will always vary fund to fund, are you at least primed to react when there are opportunities? Will it be consistent or will you suffer from opportunistic whiplash? It’s a bet on the fund manager. Or really in Jeff’s words, the exit manager.

These include:

  • Strategy on when AND how to sell. Simply, how much upside to cap to protect your downside.
  • Proactive and explicit communication on fund lifespan and extensions
  • Relationships with secondary buyers
  • Recycling
  • Early distributions (after the recycling period)
  • Enterprise value to breakeven. To 3X. To 5X.
  • The exit manager, if applicable

Executional discipline

To quote the amazing Ashby Monk, “the difference between your gross return and your net return is an investment in their organization.” In other words, executional discipline is a bet on the team. Is the team uniquely positioned to scale execution? Are they incentivized in the long-term to do the right thing for both founders and LPs? How is knowledge passed down?

These include:

  • Fees on capital committed versus capital deployed
  • Fund expenses (travel, meals, hotels, fund admin, legal, accounting, etc.)
  • Talent
  • Events, AGMs, brand-building exercises
  • Content engine, if one pays for such
  • GP salaries
  • Culture (deal attribution, short and long-term incentive plans, manifestos, succession planning, promotions, vesting schedules, etc.)
  • Carry
  • Reporting (Monthly, quarterly, or annually. It doesn’t matter which, just stick to it. Be consistent.)
  • Valuation Policy / Marks (FYI, SAFEs and convertible notes are not marks. But also, if a portfolio company is overvalued, what’s your valuation policy?)
  • LP Advisory Committee (LPAC)
  • LP Agreement (LPA) / Subscription Agreement
  • Capital calls
  • Cybersecurity policy / Information policy (Who gets access to what information?)
  • Compliance / PR

In closing

Obviously, as your track record and returns grow and speak for themselves, you accumulate a new type of currency in the karmic bank account: trust. You should always never exceed your means to pay. That your credit balance never exceeds your debit, but you undeniably have a greater credit line to operate the institution.

To simplify…

Entry DisciplineExit DisciplineExecutional Discipline
The betThe bet on the investorThe bet on the
fund manager		The bet on the
team

Note that for an emerging fund, these three disciplines are expected of the same individual. In many ways, much harder than if you had a fully staffed team.

Photo by Ales Krivec 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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The Holiday Special | Nakul Mandan and Ben Choi | Superclusters | S4PSE1

ben choi, nakul mandan

“VC is more about the ground game than the air game.” – Nakul Mandan

“Entrepreneurs think it’s going to be like the Michael Keaton version, and the good ones, they actually have to work through the Christopher Nolan version of Batman.” – Ben Choi

Nakul Mandan is the founder of Audacious Ventures. Audacious is a seed stage venture firm managing ~$250M. Audacious’ foundational belief is that ultimately startup success comes down to two key ingredients: Large markets and A+ teams. Accordingly, the Audacious team focuses on two jobs: 1/ Invest in force of nature founders; 2/ Help them recruit an A+ team. Then they get out of the way. Prior to founding Audacious, Nakul was a GP at Lightspeed.

Some of the companies Nakul has backed over the last decade include: Gainsight, People.ai, WorkOS, Multiverse, Marketo, 6Sense, BuildingConnected, Vartana, Tezi and Maxima, amongst others.

You can find Nakul on his socials here:
X / Twitter: https://x.com/nakul
LinkedIn: https://www.linkedin.com/in/nakulmandan/
Personal Website: https://www.nakulmandan.com/

Ben Choi manages over $3B investments with many of the world’s premier venture capital firms as well as directly in early stage startups. He brings to Next Legacy a distinguished track record spanning over two decades founding and investing in early-stage technology businesses. Ben’s love for technology products formed the basis for his successful venture track record, including early stage investments in Marketo (acquired for $4.75B) and CourseHero (last valued at $3.6B). He previously ran product for Adobe’s Creative Cloud offerings and founded CoffeeTable, where he raised venture capital financing, built a team, and ultimately sold the company.

Ben is an engaged member of the Society of Kauffman Fellows and has been named to the Board of Directors for the San Francisco Chinese Culture Center and Children’s Health Council. Ben studied Computer Science at Harvard University before Mark Zuckerberg made it cool and received his MBA from Columbia Business School. Born in Peoria, raised in San Francisco, and educated in Cambridge, Ben now lives in Palo Alto with his wife, Lydia, and three very active sons.

You can find Ben on his socials here:
X / Twitter: https://x.com/benjichoi
LinkedIn: https://www.linkedin.com/in/bchoi/

And huge thanks to this episode’s sponsor, Alchemist Accelerator: https://alchemistaccelerator.com/superclusters

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

Brought to you by Alchemist Accelerator.

OUTLINE:

[00:00] Intro
[04:14] Why is Nakul fascinated by Batman?
[06:41] Does entrepreneurial motivation often come from inspiration or frustration?
[10:33] Nakul’s childhood and early upbringing
[14:37] How Nakul grew from introvert to extrovert
[16:19] Did Ben see the ambition in Nakul from the day they first met?
[18:19] How did Ben’s parents’ work in Chinatown influence Ben as a teenager?
[22:47] How did Ben and Nakul meet?
[28:50] Would Nakul have raised in 2020 if he knew how hard it would be?
[33:49] Why did Next Legacy not invest in Fund I, but in Fund II?
[37:49] How did Nakul react to the pass on Fund I?
[39:56] The kinds of people at Next Legacy’s dinners
[43:49] Why Audacious kept a low profile in 2021
[49:01] Why Audacious deployed Fund I over 4 years, instead of 3
[51:46] Balancing the paradox of one of Audacious’ cultural values
[55:14] The difference between pitching individuals and institutions
[1:00:42] What is it like to be married to an interior designer?
[1:02:40] Nakul’s favorite coffee shop, bar, and restaurant
[1:05:56] What makes a sock special to Ben?
[1:07:17] Why does Ben still like venture?
[1:08:10] Why does Nakul still like venture?
[1:11:36] Thank you to Alchemist Accelerator for sponsoring!
[1:12:37] If you enjoyed this holiday episode, and want more like this, do let me know!

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“The risk is slow failure. And actually that’s the worst kind of failure even for entrepreneurs that we back. They’re all talented people. Some ideas work; some don’t. It’s when they end up spending seven, eight years and then it doesn’t work. Then it takes out seven, eight years of their life.” – Nakul Mandan

“Entrepreneurs think it’s going to be like the Michael Keaton version, and the good ones, they actually have to work through the Christopher Nolan version of Batman.” – Ben Choi

“If you don’t wear ambition on your sleeve, how do people know you’re ambitious?” – Nakul Mandan

“VC is more about the ground game than the air game.” – Nakul Mandan

“Always remember there’s a human on the other side of every conversation.” – Nakul Mandan

“The thing about working with self-motivated people and driven people, on their worst day, they are pushing themselves very hard and your job is to reduce the stress in that conversation.” – Nakul Mandan

“If you have an understated personality, wear something really bright.” – Ben Choi

Follow David Zhou for more Superclusters content:
For podcast show notes: https://cupofzhou.com/superclusters
Follow David Zhou’s blog: https://cupofzhou.com
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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The Year 1-3 AGM “Playbook”

conference, agm, summit, annual general meeting

A good friend, who’s hosting an annual general meeting (AGM) for his LPs in his first year of the fund, pinged me the other day asking if he should include the IRR metrics in his presentation day of. For context, it was negative because well, that’s how the math works. It’s almost always negative for any venture fund you invest in, in years 1-3. As you’re investing more money, the portfolio has yet to get marked up and raise a new round. So alas, negative rate of return.

Given that he had a lot of first-time LPs in his fund, he wasn’t sure if they would understand the context of the IRR metric if he just put it on a slide. So he was biased with not including it. To which I responded with… of course you should. For the bread and butter of being a fiduciary of capital, you should always bias towards transparency and honesty. But you should educate them every year in your first three years of the fund on what each number means and what is industry standard. Moreover, the biggest thing you’ll be measured against in the first three years of any fund is the discipline you exhibit. Did you do what you said you were going to do?

Then it brought on a larger question. What should GPs include in their AGMs in the first three years?

So I thought I’d write a blogpost about it.

This won’t be a two-hour documentary, nor a 300-page novel. But rather, just the governing principles of how I think about running annual summits for your LPs. So, as a general compass for the rest of this post:

  1. The basics to share
  2. Content at large and what to expect for the duration of the programming
  3. Gifts

The basics

First things first, the basics. What are the metrics to share?

  1. MOIC and/or TVPI
    • I prefer both gross and net, but most really just share net
  2. IRR
  3. # of investments (total)
  4. Capital called
  5. Capital deployed
  6. # of investments per pillar/vertical in your thesis (if relevant)
  7. # of investments broken down by stage (if relevant)
  8. Average check size
  9. Average entry ownership
  10. Average entry valuation
  11. Notable wins / progress in portfolio companies, and why it matters
  12. Asks for LPs
  13. Where is the market today?
  14. Where is it going? Notable trends

The first 10 are required as a fiduciary of capital. The last 4 means you’re playing professor for a bit. LPs invest in you for your opinion, for your perspective. Also it’s important to note, if more than 20% of your LPs are first-time LPs, you may want to lean more on being a professor of sorts to set expectations. And how to interpret your data. And yes, it’s worth being honest here. In good and bad times.

Do note that in the first 2-3 years, your IRRs will suck. TVPI will be roughly 1X. DPI is either negligible or non-existent. These are all things that are worth highlighting to first-time LPs in the venture space. Focus on why discipline matters more than performance in the first 3-4 years. Did you do what you said you would do?

Also, it is quite normal to invite both your current fund LPs, as well as the LPs you would like to have one to two funds from now. Although if you’re inviting the latter, do be cognizant on sharing sensitive data about your portfolio. Regardless, the AGM is an opportunity to deepen any relationships — current and future.

And, just like a Dreamforce or TwitchCon or WWDC, it’s a chance to reinvigorate your audience about why they should care about you.

Content at large

I’m not the first to say it, nor is it the first time I’m writing about it. For instance, here and here. But GPs are evaluated on primarily three things: sourcing, picking, winning. There are more yes. GP-thesis fit. Differentiation. Portfolio construction. Ability to build an enduring firm. Selling and exiting positions. And so on. But if VCs can boil everything down to team, market, and product, this is the LP equivalent.

And well, the truth is you’re always being evaluated. Even after the fundraising sprint. As in another 2-3 years, you’re going to ask the same LPs to re-up their capital, just like a founder to a multi-stage VC would.

All that to say, in the AGM, you should find ways to highlight each through the content you present. To share some examples:

  • How you source
    • Have your companies share how you first met. The crazier the story, the better.
    • If you have a community/newsletter/podcast, bring in a really high quality advisor or speaker from there.
    • If you champion yourself on outbound sourcing, find an impressive speaker that you cold emailed.
  • How you pick
    • Showcase 1-2 companies with strong growth
    • If you had a track record prior to the firm with an obvious win (i.e. you were a seed investor in Airbnb), bring the founder in to speak.
    • Share market insight that no one else knows. What is your prepared mind?
    • Request for startups.
  • How you win
    • Showcase a skillset that you have through someone else. That someone else can be a former colleague, a name-brand co-investor, or founder. Have them talk about you and that skillset. Stories are always better than facts.
    • Showcase 1 hot company in your portfolio that everyone wanted to get access to but only very few got in. Have that founder share why they picked you.

Of course, you don’t have to be explicit with the above, but nevertheless, a useful framework for planning content.

Also please don’t have your entire portfolio present. Nor any more than 4-5 companies. Two is ideal. Ideally, you want a diverse cast of speakers. And I mean, diverse by job title.

Gifts

I’m always biased towards gifts. It is one of my primary love languages, but also in any event I host or help host, I think a lot about surprise and suspense.

Surprise is relaying information to someone where they do not expect it. Suspense is relaying information where they expect it, but don’t know how or when it’ll drop. Surprise is what gets people talking about your event after. Suspense is what brings people to the event.

The earlier section on content is suspense. Gifts are usually surprises at AGMs.

In terms of what kinds of gifts to give, the most important guiding principle here is to be thoughtful. As Zig Ziglar / Mark Suster once said, ” People don’t care how much you know until they know how much you care.”

It’s less about the gift you give; it’s more important about how you deliver it.

Some examples of thoughtful ones I’ve seen at AGMs in the past:

  1. A GP’s favorite book they read that year
  2. A signed copy by the author of a deeply meaningful book that shaped the way the GP thinks today
  3. A letter at each LP’s seat of the first interaction between the GP and each of the LPs.

In closing

AGMs are the one of the few times in a year, hell, in fund cycle, to remind LPs of why they love you. Are they thinking about you when they put together the following year’s budget and allocation schedule?

And yes, you do need to remind LPs on why they love you. Just like, even if you’re in a happy marriage, every so often, you need a date night. Keep the kids at home. Get a babysitter. And do something wild with your spouse.

Pat Grady has this great line. “If your value prop is unique, you should be a price setter not a price taker, meaning your gross margins should be really good.” In a similar way, you want to be a schedule maker, not a schedule taker. And to do so, you need to get people excited. And well, you need to be unique. You need people to look forward to your AGM, and not see it as a chore. Since, let’s be honest; if I’ve been to two dozen or so AGMs, not as an LP in most of them, then a seasoned LP is definitely invited to many more.

Earlier this year, I flew over to San Diego for an AGM. I found out two other friends were also flying in to SD for an AGM that same Thursday. The three of us agreed to catch up during the happy hour, assuming all of us were going to the same one. Turns out, we each went to a different AGM. Same day, same time. All within a 10-minute Uber ride from each other. Spoiler, we later escaped our respective events during the happy hours to catch up elsewhere.

Along the same wavelength, in October this year, I was moderating a talk in a building, where there were two other AGMs happening in the same building at the same time. And three others within a five-block radius in SF… at the same time. Those were only the ones I knew of. That said, it was SF Tech Week.

Simply, you’re fighting for attention. And everything above is just table stakes. It’s the bare minimum. But what sets the great ones apart from the forgettable ones is a reminder of what makes that GP or set of GPs special. Their own flavor. Their own touch. And it’s a combination of thoughtfulness and personality. And if you have those, the small bumps in the road don’t matter.

Hope the above helps.

P.S. Why am I sharing this?

  1. I don’t think knowledge is ever perennially proprietary. Today it may be, tomorrow it will not.
  2. If you’re a GP reading this, this is pretty much exactly what I share with all the funds I’ve worked with to help plan their annual summits for LPs. So, you won’t have to hire me anymore to help you with your annual summits. I don’t care about making a living helping other people plan and organize AGMs. But I would like to go to higher quality events in general. 🙂
  3. A rising tide raises all ships.

Photo by Jakob Dalbjörn 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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LPs Should Get Paid More | Ashby Monk | Superclusters | S4E5

ashby monk

“Innovation everywhere, but especially in the land of pensions, endowments, and foundations, is a function of courage and crisis.” – Ashby Monk

Dr. Ashby Monk is currently a Senior Research Engineer, School of Engineering at Stanford University and holds the position of Executive Director of the Stanford Research Initiative on Long-Term Investing.

Ashby has more than 20 years of experience studying and advising investment organizations. He has authored multiple books and published 100s of research papers on institutional investing. His latest book, The Technologized Investor, won the 2021 Silver Medal from the Axiom Business Book Awards in the Business Technology category.

Outside of academia, Ashby has co-founded several companies that help investors make better investment decisions, including Real Capital Innovation (acquired by Addepar), FutureProof, GrowthsphereAI, Long Game Savings (acquired by Truist), NetPurpose, D.A.T.A., SheltonAI, and ThirdAct. He is co-founder and managing partner of KDX, a venture capital firm focused on investment technologies.

He is a member of the CFA Institute’s Future of Finance Advisory Council and was named by CIO Magazine as one of the most influential academics in the institutional investing world. He received his Doctorate in Economic Geography at the University of Oxford, holds a Master’s in International Economics from the Université de Paris I – Pantheon Sorbonne, and has a Bachelor’s in Economics from Princeton University.

You can find Ashby on his socials here:
X / Twitter: https://x.com/sovereignfund
LinkedIn: https://www.linkedin.com/in/ashby-monk-208a479/

And huge thanks to this episode’s sponsor, Alchemist Accelerator: https://alchemistaccelerator.com/superclusters

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

Brought to you by Alchemist Accelerator.

OUTLINE:

[00:00] Intro
[03:44] “I don’t know what to do with my hands”
[04:44] The origin story of Ashby’s LinkedIn skills
[09:04] Ashby’s obsession with the worst title out there
[12:54] Titles at institutional investment firms
[17:05] Building the right incentives for institutional LPs
[20:54] The decision to buy or build for pension funds
[22:36] What’s a smart way to think about the difference of gross and net?
[23:17] When are management fees not justified?
[26:06] When managers charge fees on SPVs
[28:12] When are GPs still grateful for your LP capital?
[29:40] Challenges with the endowment model in PE and VC
[31:14] Why LPs misrepresent what budget fees come out of
[35:28] Compensation structure of a pension fund
[37:59] CalPERS compensation structure
[39:19] The highest paid employees in government jobs
[42:39] Traits of an incredibly talented investor
[47:06] Hire hard, manage light
[51:07] Ashby’s journey into the LP space
[56:05] Why should a young professional work at a pension
[1:00:24] Who outside of investments influences the way Ashby thinks about investing?
[1:02:28] What is organic finance?
[1:07:08] The post-credit scene
[1:12:32] Thank you to Alchemist Accelerator for sponsoring!
[1:13:33] If you enjoyed the episode, would love if you shared it with one friend who would enjoyed it as well!

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“The fastest way to become a billionaire in America today is to set up an alternative investment firm and manage pension capital. Literally. That’s the fastest path. Faster than starting a tech company.” – Ashby Monk

“Many pension plans, especially in America, put blinders on. ‘Don’t tell me what I’m paying my external managers. I really want to focus and make sure we’re not overpaying our internal people.’ And so then it becomes, you can’t ignore the external fees because the internal costs and external fees are related. If you pay great people internally, you can push back on the external fees. If you don’t pay great people internally, then you’re a price taker.” – Ashby Monk

“You need to realize that when the managers tell you that it’s only the net returns that matter. They’re really hoping you’ll just accept that as a logic that’s sound. What they’re hoping you don’t question them on is the difference between your gross return and your net return is an investment in their organization. And that is a capability that will compound in its value over time. And then they will wield that back against you and extract more fees from you, which is why the alternative investment industry in the world today is where most of the profits in the investment industry are captured and captured by GPs.” – Ashby Monk

“[LPs] want to solve the problem for their sponsor by reducing the cost of a promise.” – Ashby Monk

“Innovation everywhere, but especially in the land of pensions, endowments, and foundations, is a function of courage and crisis.” – Ashby Monk

“The highest people paid in state jobs are football coaches.” – Ashby Monk

“I often tell pensions you should pay people at the 49th percentile. So, just a bit less than average. So that the people going and working there also share the mission. They love the mission ‘cause that actually is, in my experience, the magic of the culture in these organizations that you don’t want to lose.” – Ashby Monk

“The job of an investor is to look at the same data that you and I are looking at, and be ready to make a different conclusion. That’s how you outperform.” – Ashby Monk

“Hire hard; manage light.” – Ashby Monk

“The way best practices are communicated in this industry is through role models. So, Yale model, Canadian model, Norway model… There are no schools of investing. […] And the way models emerge is you get an innovation that results in outperformance.” – Ashby Monk

“I do research projects on nothing.” – Ashby Monk on research into solutions that don’t exist in the world yet

“There are two types of innovation. There’s innovation as an invention. And there’s discovery. And a lot of what I do is discover and apply.” – Ashby Monk

Follow David Zhou for more Superclusters content:
For podcast show notes: https://cupofzhou.com/superclusters
Follow David Zhou’s blog: https://cupofzhou.com
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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The Most Common Rejection Email for Transformative Startups

The most common VC rejection by founders who end up building the world’s most transformative companies seems to be:

The market is too small.

Other variations:

  • Unfortunately, the size of the market didn’t make sense for our investment model.
  • The price of the round felt too expensive for our strategy. (An indirect assumption that the exit-to-entry multiple would be south of a 100X. In other words, there’s a cap on market size. Aka small market.)

There are plenty of public examples of founders (i.e. Airbnb, Instacart, Uber, Facebook/Meta, Shopify, eBay, Ford, NVIDIA, etc.) sharing their rejection emails from the first couple hundred VCs they’ve met. But also, I’ve been lucky enough to read a lot of the memos that GPs and partners have written in the decades past on their anti-portfolio.

Yep, that’s the blog post for today.

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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Listening to the Heartbeat of the Market | David York | Superclusters | S4E4

david york

“Markets have a mind of their own.” – David York

David York’s thirty plus years of industry knowledge and networks uniquely equip him to be a liaison and international ambassador not only for Top Tier’s brand, but also the broader venture community. In 2000, David joined Phil Paul to lead the fund of funds team at Paul Capital, which spun out in 2011 to form Top Tier.

David has been active in the global venture capital community since the early 1990s. As a founder of Top Tier, he has led the development of the Firm for over twenty years and has been involved in every aspect of it. His involvement in the industry has led him to participate in numerous industry events and conferences, and also the NVCA, where he is an active board member. David led the fund of funds business at Paul Capital Partners, before spinning it out and founding Top Tier. Prior to Paul Capital, David spent seventeen years on Wall Street running various trading desks. In 1999, he was Managing Director at Chase H&Q, where he ran Equity Capital Markets liquidity, and from 1994 to 1999 he ran Venture Services for Hambrecht & Quist, a San Francisco-based, technology-focused investment bank acquired by Chase Bank.

You can find David on his socials here:
LinkedIn: https://www.linkedin.com/in/david-york-2407295/

And huge thanks to this episode’s sponsor, Alchemist Accelerator: https://alchemistaccelerator.com/superclusters

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

Brought to you by Alchemist Accelerator.

OUTLINE:

[00:00] Intro
[02:52] David York’s role models over the years
[07:06] Is the LP model broken?
[11:34] What David would like to see in private markets
[15:27] How did David raise $500M in the dotcom crash
[23:09] Breaking down when large LPs are ready to be pitched
[25:37] What does a thoughtful email look like?
[28:40] The liquidity needs of different kinds of LPs
[33:29] David’s favorite restaurant in Tokyo
[36:41] David’s secret starter dough recipe
[40:13] Secret post-credit scene
[40:46] Thank you to Alchemist Accelerator for sponsoring!
[41:47] If you learned something from this episode, I’d love it if you could share it with one other friend!

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“Markets have a mind of their own.” – David York

“If you look at venture capital investments in general, partnership agreements are too short.” – David York

“Going to see accounts before budgets are set helps get your brand and your story in the mind of the budget setter. In the case of the US, budgets are set in January and July, depending on the fiscal year. In the case of Japan, budgets are set at the end of March, early April. To get into the budget for Tokyo, you gotta be working with the client in the fall to get them ready to do it for the next fiscal year. [For] Korea, the budgets are set in January, but they don’t really get executed on till the first of April. So there’s time in there where you can work on those things. The same thing is true with Europe. A lot of budgets are mid-year. So you develop some understanding of patterns. You need to give yourself, for better or worse if you’re raising money, two to three years of relationship-building with clients.” – David York

“To me, rejection is simply ‘not now,’ not a ‘no.’” – David York

DZ: “What do most GPs, or first-time LPs, fail to appreciate?”
DY: “The exit.”

Follow David Zhou for more Superclusters content:
For podcast show notes: https://cupofzhou.com/superclusters
Follow David Zhou’s blog: https://cupofzhou.com
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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Developing Taste as an LP

taste, donut, bite

Brian Chesky did a fireside chat recently where he talks about how he hired for roles at Airbnb, especially in the early days. To which, I highly recommend you checking the above link. Lots of nonobvious lessons worth noting. One thing especially stood out. Probably due to the recency bias of having a few friends text me who were thinking about investing in their first fund.

“Executives have more experience bullshitting you than you have experience detecting their bullshit. So it’s like an asymmetric game where you’re a white belt fighting a black belt and they’re just going to punch you in the face repeatedly.”

In a similar way, a lot of new LPs in venture have also yet to develop their taste for quality in the venture asset class. If you’ve never hired an executive, you have no idea what a great executive looks like. And if you’ve never invested in a fund, or seen a few, you have no idea what a great fund looks like. Most GPs, given the volume of LPs they pitch to, have more experience bullshitting you as an LP than you have experience detecting their bullshit.

And that’s okay. Everyone starts off this way. So the question then becomes how do you develop taste?

  1. Talk to as many as you can. Don’t overoptimize for quality. You have no idea what quality looks like, so don’t delude yourself that you do. Ask friends who they’ve talked to. Ask Twitter. And ask the GPs you talk to who are friends they respect who are also building a fund. Hell, try your luck at asking certain “influencers” in the space if they have recommendations. Realistically, if you raise your hand and say you’re an LP, GPs will flock to you. In 2024, deal flow, as measured by quantity, isn’t really hard for any LP out there.
  2. Prioritize references.

On the first point, as is the advice I give most first-time angel investors investing in startups, don’t invest in the first startup you see. Unless it’s for a reason outside of financial gain. To support a friend. To learn. For impact. To give back. All great reasons. But not if because your friend told you to.

Along the same thread, don’t invest in the first fund you see. Talk to at least 30-50 fund managers. Get a good understanding of what the average fund looks like. What is actually special about a GP versus what they say is special. Most of the time when someone claims that they are the special one, they usually aren’t. For instance, only [insert big name fund] invests with us. Or we are the only [insert industry or function] fund. Hell, if anyone gives you any sort of superlatives, they’re usually wrong. Only. Always. Best. Most. I’m sure there are more, but the rest are escaping me.

Secondly, prioritizes references over your initial judgment when interviewing and doing diligence. Dan Stolar from Colibri and I had a conversation recently about references, where the questions you ask are paramount. If you’re short on time, I’d recommend starting from the 25:50 mark.

In short, to existing LPs, ask:

  1. How did you get to conviction?
  2. Who else did you talk to that were comparable to this GP before you reached an investment decision?
  3. Is there anything you learned about the team after you made the investment?
  4. What kind of person do you think they should bring onboard either in the next fund or after they get to a close?
  5. Would it be possible to share your investment memo with me?
  6. What were some of the pushbacks or hesitations when this deal reached your investment committee?

To LPs more broadly:

  1. What are your primary motivations to be an LP in venture?
  2. How do you think about portfolio construction?
  3. Who are the GPs you’ve talked to that seem to stand above the rest? And why?

To co-investors/other GPs:

  1. How often do you share deals with this GP?
  2. How often do they share deals with you?
  3. Who are your top 3 emerging managers that you love seeing deals from and why?
  4. Is there an emerging manager you would hire to be a partner or GP at your firm if you could?
  5. How would you rate this GP on a scale of 1-10, with 10 being perfect?
    • What would get this GP to a 10?
  6. Did you or have you considered investing in their fund?
  7. What are some of this GP’s hobbies that I might not guess?
    • This shows you how well people know each other. You can also use this question for other reference archetypes.

To former colleagues and friends:

  1. If you were to hire someone under this GP, what traits or skillsets would you look to hire for?
  2. I hate surprises. Is there anything that could go wrong I should know now about this GP, so that I wouldn’t be surprised when it happens?
  3. Who is someone you would hire or work together again in a heartbeat?
    • Notice if they mention that GP. You don’t have to probe as to why they didn’t mention if they didn’t. But worth noticing. Also probably worth talking to that person they did mention to keep a strong talent network around you.

Obviously the above list isn’t all-inclusive. But nevertheless I imagine they’ll be good starting points. Also, I want to note that going deep is often more insightful than going wide.

Remember, almost everyone is incentivized to say good things about others. Or at least, there is little to no incentive to talk smack about anyone you know. So finding the best way to ask questions that unearth different perspectives and facets of a person is important.

Funnily enough and unintentionally, last week I wrote a similar post from the perspective of a GP, this one happened to be more for the LP.

Photo by Thomas Kelley 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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The Difference Between GPs who Can and Should Raise | Dan Stolar | Superclusters | S4E3

dan stolar

“GPs and LPs are both equally busy, but different kinds of busy where on any given day, we’ll probably have the same amount of calls and all these things going on, but [LPs are] going to know [they’re] busy three months ahead of time and a GP won’t.” – Dan Stolar

Dan Stolar is a Principal at Colibri Equity Ventures, a single family office based in NYC and San Diego. Dan leads the venture capital strategy and also participates in all alternative private investments, including sports investing and private equity. As part of the venture strategy, Dan particularly focuses on investing in emerging venture capital funds. Since launching the strategy in late 2022, the firm has invested in ~15 managers. Dan started his venture capital journey as an intern at Viola Credit, a venture debt fund in Tel Aviv, before spending time in investment banking at Peter J. Solomon Co. (now Solomon Partners) where he focused on consumer and retail mergers & acquisitions. After banking, Dan spent ~5 years at Alpha Partners, a late-stage venture firm that partners with early stage managers helping them follow on in their late stage deals. Dan is still involved with Alpha as a Venture Partner. Dan is a proud New Jersey native, and a graduate of the University of Michigan (Go Blue!).

You can find Dan on his socials here:
LinkedIn: https://www.linkedin.com/in/danielstolar/
X/Twitter: https://x.com/dan_stolar

And huge thanks to this episode’s sponsor, Alchemist Accelerator: https://alchemistaccelerator.com/superclusters

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

Brought to you by Alchemist Accelerator.

OUTLINE:

[00:00] Intro
[02:29] Dan’s high school scavenger hunt
[07:33] Telltale sign of excellence #1 in a GP
[09:29] How telling intros are
[11:16] Telltale sign of excellence #2
[13:46] Underwriting a Fund II vs Fund I
[17:40] What do LPs think of deadlines that GPs set for closes?
[18:48] What does a no that turns into a yes look like?
[22:26] Not all positive references are created equal
[25:50] Questions to ask an existing LP in a GP during diligence
[28:30] Reasons an investor would leave a firm
[30:13] The difference between a GP who can and should raise a fund
[33:01] Fund track records that aren’t scalable
[33:56] The one question that most GPs don’t have a good answer to
[35:09] Responsiveness between a GP and an LP
[38:39] Inbox overload for LPs
[41:21] What trivia does Dan excel at?
[45:07] Biking through snowstorms in NYC
[48:08] Thank you to Alchemist Accelerator for sponsoring!
[49:08] If you learned something from this episode, it would mean a lot to me if you could share it with one friend who might also enjoy it!

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“I think a lot about someone’s transactional ability – or how transactional they actually are – correlates with how successful they’re going to be. […] Who you lift up is a much better indication of how good you are.” – Dan Stolar

“Getting an LP is like pulling a weight with a string of thread. If you pull too hard, the string snaps. If you don’t pull hard enough, you don’t pull the weight at all. It’s this very careful balancing act of moving people along in a process.” – Dan Stolar

“GPs and LPs are both equally busy, but different kinds of busy where on any given day, we’ll probably have the same amount of calls and all these things going on, but [LPs are] going to know [they’re] busy three months ahead of time and a GP won’t.” – Dan Stolar

“When a GP passes on a deal, the deal’s done. You’re not going to see that company again. When I pass on a fund, I might see that fund for another 12 years. So I’m going to be on those updates and those check-in calls.” – Dan Stolar

Follow David Zhou for more Superclusters content:
For podcast show notes: https://cupofzhou.com/superclusters
Follow David Zhou’s blog: https://cupofzhou.com
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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Overwhelming and Underwhelming — When to Know You Are Just “Whelming”

fireworks, light, night

One of my favorite sections in Danny Meyer’s Setting the Table (H/T to Rishi and Arpan from Garuda who not only gifted me that book, but also one of the nicest bookmarks I own today) is when he talks about whelmers.

“I ask our managers to weigh one other critical factor as they handicap the prospect. Do they believe the candidate has the capacity to become one of the top three performers on our team in his or her job category? If people cannot ever develop into one of our top three cooks, servers, managers, or maître d’s, why would we hire them? How will they help us improve and become champions? It’s pretty easy to spot an overwhelmingly strong candidate or even an underwhelmingly weak candidate. It’s the ‘whelming’ candidate you must avoid at all costs, because that’s the one who can and will do your organization the most long-lasting harm. Overwhelmers earn you ravers. Underwhelmers either leave on their own or are terminated. Whelmers, sadly, are like a stubborn stain you can’t get out of the carpet. They infuse an organization and its with mediocrity; they’re comfortable, and so they never leave; and, frustratingly, they never do anything that rises to the level of getting them promoted or sinks to the level of getting them fired. And because you either can’t or don’t fire them, you and they conspire to send a dangerous message to your staff and guests and ‘average’ is acceptable.”

In an industry where everyone is incredible — in many ways, you can’t, or at least it’s really hard to, be a GP without being overwhelming in your past in one way or another… INcredible becomes credible. So, it’s quite hard when you have a limited sample size to know who is incredible among the already incredible.

Almost everyone today is overqualified for the job, compared to the 1970s, 80s, and 90s, when most were underqualified.

So, unless you’ve been an LP, how do you know if you’re overwhelming versus just whelming?

  1. LPs who have seen at least 200 funds in the last 2-4 years tell you you’re the “only” one who is pursuing this strategy
    • They have large enough of a sample size to make an assessment. While not perfect, it’s enough to be in rarified air.
  2. You’ve been to the major LP/GP conferences (i.e. RAISE, Bridge, All Raise, SuperReturn / SuperVenture, Upfront Summit, Milken, EMC Summit, etc.) and have seen how other GPs pitch where you personally have a sample size of at least 100.
    • Even better, if you’ve been to the Demo Days or showcases for Coolwater, Recast, VC Lab, just to name a few, and you’ve seen other GP’s pitches
    • Do note what GPs say on podcasts are usually (in my experience) what they pitch to LPs.
  3. You can cold email LPs and they’ll respond.
    • LPs are notoriously closed off to cold emails. As an institution that makes only 1-3 new investments per year in an asset class, it doesn’t make sense for them to keep the doors open as much as venture investors do for founders. And even then, a lot of VCs are also averse to cold emails. That said, if you’re a GP that consistently gets meetings booked from cold emails, you might have something special.
    • More often than not, admittedly, this is due to a strong brand, either via media, personal brand, strong returns, or word of mouth.
    • Important to note that you’re never as good as they say you are, but you’re also never as bad as they say you are.
  4. When you are THE first call exited founders ($100M+ exits) make when they’re brainstorming their next company
    • Them needing a sparring partner on their next career move also counts.
    • You getting invited to whatever large event they host next does not. Including birthday parties, weddings, etc. As much as it feels good to me, you’re not overwhelming. If it puts things into perspective, I get invited to these, and I know I’m not an “overwhelming” venture investor.
    • Also if you’re the fifth person they call, you’re just “whelming.”
  5. You are cited by other investors and founders alike as the source material of an ideology or a framework.
  6. Different founders (or people in general) reach out to you consistently on topics that is not fundraising/them pitching you. In fact, they may never reach out to you on fundraising because you’re known for excellence in other areas.
  7. The best talent in the world want to work with you and they’ll find any way to do so. They’ll say things like, “What if we worked together on a small project first together?” or “How about this together?” The same world-class talent will not only prioritize your goals but also not forsake their own. ‘Cause frankly, the world’s best have their own pursuits and they are transparent and honest about it. Beware of people whose goal you don’t know and those that “give up” their dreams for yours.
  8. You have a memory like a steel trap. You quote books, passages, movies, lessons, anecdotes, stories, history, podcasts, presidential speeches from back in the day, and music in ways most people cannot fathom but make complete sense. You quote in ways where people wonder if you have photographic memory or a chip in your brain, but you actually don’t.
    • This is more or less intellectually “overwhelming”, although overwhelming may not be the right terminology. But someone who is profusely well-read and cultured in a diverse amount of material. Think Da Vinci. Or maybe a modern-day equivalent, Patrick Collison, David Senra, or Ben and David on Acquired.

The one thing I won’t include on this list, while undeniably “overwhelming,” is intuition. People with phenomenal intuition are just different. Overwhelmingly different. But in the world of venture, the word intuition is often overused and has lost its true meaning. Many investors who bet well in hindsight attribute luck to intuition. And hell, the reason I’m not including it in the above list, is that many investors think they’re heavily intuitive, which in my experience usually means:

  1. They hate math. Spreadsheets and the like. In fact, they’re likely just to be bad at it.
  2. They hate diligence. The homework that’s actually required to be a great investor.
  3. If they’re pre-economic success, they’re often spinning a tale to us. Or worse, lying to themselves.
  4. If they’re post-economic success, there’s a good chance they have hindsight bias.

That said, there are a rare few number of times where I meet someone (often not an investor) and they’re able to deduce the person I am with a glance with very little other context. To me, that feels like magic. Something that very few have. But at the same time, I do believe can be trained.

Photo by Jeffrey Hamilton 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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The Case for Concentrated Portfolios | Jeff Rinvelt | Superclusters | S4E2

jeff rinvelt

“The line that sits for me is you got to pick well, you got to coach well, and then you got to finance well – and the financing includes the exit.” – Jeff Rinvelt

Jeff Rinvelt is a partner at Renaissance Venture Capital an innovative venture capital fund of funds. Jeff’s diverse background in venture capital and technology and his experience working in various start-up ventures uniquely position him to advise startups. In addition, Jeff is quite active in the Michigan start-up community, volunteering his time to mentor young entrepreneurs, judge pitch competitions, and guest lecture student classes and organizations. Through Jeff’s work on the Fund, his volunteer efforts, and his role as the chair of the Michigan Venture Capital Association’s board of directors, his passion for fostering a productive environment for venture capital investment in the State of Michigan is evident.

You can find Jeff on his socials here:
Twitter: https://twitter.com/rinvelt
LinkedIn: https://www.linkedin.com/in/rinvelt/

And huge thanks to this episode’s sponsor, Alchemist Accelerator: https://alchemistaccelerator.com/superclusters

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

Brought to you by Alchemist Accelerator.

OUTLINE:

[00:00] Intro
[02:28] When Jeff went from engineering to finance
[06:26] An introvert in an extroverted industry
[07:42] Jeff’s transition from founder to investor
[11:06] The need for a fund of funds in Michigan
[13:54] Why start a fund of funds instead of joining another fund
[15:32] The minimum viable fund size for a fund of funds
[21:46] Renaissance’s portfolio construction
[24:15] Why Renaissance measures GP performance by net IRR
[28:18] How does Jeff assess a GP’s portfolio construction model?
[31:20] Jeff’s stance on reserves
[34:39] Who is the exit manager?
[37:22] Should VCs be public market investors?
[42:43] What would Jeff do if he had evergreen capital?
[44:01] Do the best GPs in Jeff’s portfolio send the deck first or have the meeting first?
[45:11] Why is Jeff trying to break your heart?
[48:32] Thank you to Alchemist Accelerator for sponsoring!
[49:33] If you enjoyed the episode, please do share this episode with ONE other person you think would enjoy it.

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“Net IRR is the one that’s probably going to work. It takes a while for it to bake though – 5 or 6 years in.” – Jeff Rinvelt

“The line that sits for me is you got to pick well, you got to coach well, and then you got to finance well – and the financing includes the exit.” – Jeff Rinvelt

On portfolio construction models… “We are not in the Monte Carlo simulation game at all; we’re basically an excel spreadsheet.” – Jeff Rinvelt

“A lot of those skills [to be a fund manager] are already baked in. The one that wasn’t baked in for a lot of these firms was the exit manager – the ones that help you sell. […] If you don’t have it, there should be somebody that it’s their job to look at exits. ” – Jeff Rinvelt

Follow David Zhou for more Superclusters content:
For podcast show notes: https://cupofzhou.com/superclusters
Follow David Zhou’s blog: https://cupofzhou.com
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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