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
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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.

Micro(scopic) 10X Funds

young, kids, students

I wrote both a Twitter thread (I know it’s X now, but habits die hard) and a LinkedIn post recently on student and recent graduate funds. A good friend and I have been seeing a number of small sub-$10M funds run by college students and/or recent grads. And even more since the afore-mentioned social posts came out. In a way, it was my flag in the sand moment inviting additional conversations on the topic.

Full LinkedIn post here. Truncated this to make it easier to read.

The TL;DR version of the post, although the post itself is at most a two-minute read, is that these student funds are interesting. Most will die. But a small, small few will deliver insane returns. As such, as LPs, the underwriting for these funds, where sourcing is extremely predictable (i.e. invest in their peers), needs for these funds to be 10X funds, as opposed to 5X net for the typical seed fund or 3X for the typical Series A fund. Also, we know going in that most, if not all, of these funds won’t be enduring. Most likely one and done.

And so what does the underwriting look like?

I actually elaborated on this in response to a comment that asked what percent of unicorns were founded by students, but thought it made sense to expand here in this blogpost as well.

Venture, at the end of the day, is a game driven by the power law. I’m not the first to say that. And I won’t be the last. In other words, in VC, we are applauded not by our batting average (like buyouts or hedge funds), but by the magnitude of our home runs. We can miss on the vast majority, but as long as we strike one Uber or Coupang or Google or Facebook and it returns multiple times of our portfolio, then… we did it.

To quote a Midas list investor (who’ll go nameless for now, until I have his permission to share his name), who at the time was presenting on stage, “The only reason you are listening to me today is because I’m on the Midas list. And the only reason I’m on the Midas list is because of this one investment I made [redacted] years ago.”

Obviously, there was definitely some modesty there. In fact, he’s hit a number of exits in the years since. Nevertheless, when said in broad strokes, his point stands.

So to the comment that started it all. By numbers, a rather small number of unicorns were founded by active students. I don’t know the exact number (writing this on vacation, and I don’t have Pitchbook access on this small device), but I’m willing to bet that only a small percentage of unicorns are founded by students. And even less when you consider realized unicorn exits. Excluding the crazy markups of 2020-2022. It’s why the average age of a startup founder is 42 at the inception of the company.

That said, “Among the top 0.1% of startups based on growth in their first five years, [an HBR study finds] that the founders started their companies, on average, when they were 45 years old.” In fact, in the same study, they found “[r]elative to founders with no relevant experience, those with at least three years of prior work experience in the same narrow industry as their startup were 85% more likely to launch a highly successful startup.” In a separate Endeavor study, it’s also why there’s only a small sliver of founders with no work experience prior to the founding of their unicorn company.

All that to say, from Alexandr Wang to Jeff Bezos to Mark Zuckerberg to Patrick and John Collison, all were in their early twenties (or earlier) when they started their companies. Each, in their own right, an outlier.

To build a hypothetical portfolio — forgive my generalizations, but doing so for nice, even numbers…

Say one allocates a $10M fund of funds portfolio. It’ll write 10 $1M checks into $5M funds. In other words, for a 20% stake at the fund level. In a bad economy, where $200M is the median ARR to go public, and if we assume a 10x multiple on exit, a $2B unicorn exit in that $5M VC fund returns ~$2.2M in the fund of funds portfolio. 0.6% equity valued at $12M. A 2.4X on the $5M fund alone. And a little over $2.2M back to the LP, as the GP takes 20% carry. This assumes $100K checks, 2% ownership on entry and 70% dilution by the time of exit. Naturally, no reserves. needing about 10-11 unicorns to 2x. A lot to expect for a portfolio of student funds. 10 unicorns out of 400 is quite hard even for most seasoned investors.

And so one must believe that these student funds can find true outliers. And before anyone else. Additionally have enough downstream capital relationships to facilitate intros to funds who will lead current and future rounds. Which luckily for them, a lot of GPs of multi-stage funds are individual LPs in these funds. Playing a pure access approach.

And so, if there’s a $10B exit in one of the VC portfolios, under the same fund strategy assumptions as earlier, a single $10B company exit returns the whole fund of funds portfolio. Every other exit will just be cherries on top. So out of a 400 underlying startup portfolio, only one decacorn exit is needed. Instead of multiple unicorns.

Separately, and worth noting, although I’ll be honest, I haven’t had a single conversation with a young GP where any were as deliberate with their sell strategy as this, there are multiple exit paths today outside of M&A and IPO, most notably secondaries (portfolio and fund) (something that the one and only Hunter Walk wrote recently in a blogpost far more eloquently than I could have put it). And so even in a crazy AI hype right now, there are paths to liquidity in these multi billion valuations at the Series B and C, if not earlier. In the increasing availability of such options, my only hope is that these young fund managers have the wherewithal to be disciplined sellers. Perhaps, an additional reason these young VCs should have LPACs.

A blogpost for another day.

Photo by 🇸🇮 Janko Ferlič 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.

The GP Data You’ve Never Collected Before | Kelli Fontaine | Superclusters | S4E1

kelli fontaine

“Neutral references are worse than negative references.” – Kelli Fontaine

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 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
[02:11] How Kelli became a figure skater
[06:59] Kelli’s football fandom
[08:47] Picking schools for critical thinking for children
[10:55] The difference between likeability and founder-friendliness
[13:35] Correcting biases as LPs
[15:07] Examples of what makes GPs unique
[19:53] What kinds of data was Cendana NOT measuring when Kelli joined?
[21:58] What are datapoints that LPs should measure but aren’t?
[23:45] Startup metrics that LPs should track
[26:16] Can you trust the data out there?
[32:05] How does one start building a GP dataset from scratch?
[37:38] Why does Cendana do 40 reference checks per fund?
[39:47] Neutral references are worse than negative references
[42:28] The questions Kelli asks founders when diligencing GPs
[43:44] How Cendana does monthly calls with all their GPs and large LPs
[47:57] How often does Cendana send investor updates?
[49:13] The difference between monthly calls and taking an LPAC seat
[51:19] Kelli’s indelible sports moments to witness
[52:37] What makes Kelli laugh?
[56:14] Thank you to Alchemist Accelerator for sponsoring
[57:15] If you enjoyed this episode, it would mean a lot to me if you shared it with one other friend!

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“Neutral references are worse than negative references.” – Kelli Fontaine

“What is unique about their background that gives them a right to win today?” – Kelli Fontaine

“Everybody uses year benchmarking, but that’s not the appropriate way to measure. We have one fund manager that takes five years to commit the capital to do initial investments versus a manager that does it all in a year. You’re gonna look very, very different. Ten years from now, 15 years from now, then you can start benchmarking against each other from that vintage.” – Kelli Fontaine


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.

! > ? > , > .

comment, bubble, feedback

Yes, that’s the title of this blogpost. And no, that’s not in Wingdings font.

And yes, that’s also an equation.

Surprises do better than suspense, which do better than pauses, which do better than full stops.

The first is indelible. The last is forgettable.

Let me elaborate.

Notation MeaningExplanation
!Surprise(For all you coders, the exclamation point does not stand for “not.”)

You’ve shared something interesting, shocking, unexpected… something non-consensus or nonobvious. This is the easiest justification for someone to take a meeting. You not only have their attention, but their curiosity.

It’s a point of contention. It allows for debate. At face glance, it may not sound right. It may outright be shocking.
?SuspenseWhy? How? You’ve posed an interesting question that begs an answer. People will follow up. They may or may not take the meeting, which is highly dependent on their bandwidth and your luck in their schedule.

Oftentimes, the follow up will seek some level of external validation. You need to appeal to a higher authority. References. Facts/data, and starting from universal truths. Or sometimes, a higher form of logic and reasoning.

In the words of Siqi Chen, questions are “tell tale signs of objections politely withheld.” For the purpose of gauging interest, quiet objections out loud may work in your favor.
,PauseYou’ve introduced a subclause before the clause. The subclause itself must be interesting enough for them to want to finish the sentence. It’s the difference between a feature and a product. If it is interesting enough, there may be a follow up, but things will usually stay asynchronous.

Oftentimes, this manifests in the form of taking a large leap of faith in logic. Either one starts a premise, but has no conclusion/solution. Or the other way around. You deliver the punchline, but has no build-up.
.StopA quick conclusion can be drawn. No further questions or curiosities. There’s nothing special. Nothing worth noting. This neither grabs attention or begs curiosity. The same as saying the sky is blue.

While that may seem obvious, the equivalent in the startup world is “We are a B2B SaaS product leveraging AI to deliver insights.” You’ve said nothing. And unfortunately, all of which is forgettable.

All that to say, if the goal is to get a conversation going, the above is a formula I often advise the founders and GPs I work with.

Then once you have the meeting, of all the meeting requests I get, the two most common reasons are:

  1. I need money
  2. I need feedback

Oftentimes, not mutually exclusive.

For the purpose of this blogpost, and as I’ve written about the former in the past, I’ll focus on the latter.

The vast majority of people also suck at asking for feedback. Take pitch decks, for example.

Most founders and GPs ask: “Can you give me some feedback on my deck?” Unfortunately, the ask is nebulous. What kind of feedback are you looking for? How honest can I be? What are my parameters?

Should I be worried about hurting your feelings? Are you looking for validation or constructive criticism?

Am I the best person to give you feedback on this? Am I supposed to give feedback from the perspective of me as [insert your name] or a different persona?

So, unless you’re best friends with the person you want feedback from AND they are the ideal archetype you’re trying to target, you need to be more direct and focused on what you’re looking for.

One of my favorite set of questions of all time happens to be something that was designed to be asked in groups of strangers. Something that came from the social experiments I hosted pre-COVID. Not original, but I forget the attribution.

  1. Who did you notice? Who, for whatever reason, rational or not, did you like?
  2. Who, for whatever reason, did you not like or feel it may be hard to be friends with them?
  3. And after all that, who did you, for whatever reason, not notice at all?

Similarly, in the case of deck feedback…

  1. Could you go through the whole deck, spending an average of half a second on each slide? While you do so, could you note, which slides you spend longer than one second on, for whatever reason?
    • FYI, leave it up to them if they want to elaborate. Sometimes you don’t need to ask. Oxygen usually rises to the top.
  2. If you were to keep just one slide and throw everything else out, which slide would you keep?
  1. Could you spend up to five seconds per slide? Which slides do you dislike, for whatever reason?
  2. Why?
    • FYI, typical feedback is usually too messy, no punchline (I don’t get what you’re trying to say), or I don’t agree. The last of which is actually not always bad, depending if it’s a point of view of the world or you’re misrepresenting a fact.

These are not questions you ask the feedback giver. Rather, these are questions for introspection.

  1. Which slides did the person giving feedback totally ignore?
  2. Why might they have?

More often than not, these are table stakes slides. Delete these slides if you can.

Photo by Volodymyr Hryshchenko 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.