Author: David

VC Scout by day. Story Scout by night.
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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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The Inside Peek Into How Family Offices Gather | Samira Salman | Superclusters | S5E11

samira salman

“The revenue and economic models for groups are misaligned with how human nature functions.” – Samira Salman

Samira Salman is a generational force—a rare blend of financier, strategist, and connector—revered for her ability to move capital, catalyze ventures, and cultivate the kinds of high-trust relationships that shape industries and define legacies. With over $5.5 billion in closed transactions spanning multiple asset classes, she is not merely a dealmaker—she is a trusted consigliere to some of the world’s most sophisticated families, investors, and visionaries.

Samira is the Founder & CEO of Salman Solutions, a bespoke advisory firm, and the visionary behind Collaboration Circle, an invitation-only global ecosystem recognized by Fortune Magazine as the premier “by families, for families” platform—curating aligned capital, deal flow, and meaningful connection across generations of wealth. She also serves as Chief Operating Officer of a private single-family office, overseeing a portfolio that blends venture capital, direct investments, and multi-generational governance.

Educated as a mergers and acquisitions tax attorney, Samira’s early career at Arthur Andersen, Deloitte, KPMG, and Shell Oil laid the foundation for her structural brilliance and financial fluency. She holds an LL.M. in Taxation, a JD, and a BS in International Trade and Finance—with a minor in Economics. Her legal acumen, combined with a deep intuition for human behavior, gives her a unique edge in structuring elegant, effective solutions that drive growth, mitigate risk, and unlock hidden value.

Samira’s proprietary methodology for business growth and ecosystem development has positioned her as one of the most connected and trusted figures in private finance. Her work spans advisory mandates, capital formation, co-investment syndication, family office strategy, and the orchestration of transformational events for UHNW families and industry trailblazers. She is the rare operator who bridges worlds—money and meaning, structure and soul, intellect and instinct.

Her multicultural upbringing and global exposure across dozens of countries have imbued her with a refined sensibility, cultural fluency, and a fierce commitment to authenticity. Samira doesn’t just build businesses—she builds trust-based systems that endure. Her work is rooted in the principle that Relationships Under Management (RUM) are the new AUM—and she is the embodiment of that thesis.

A passionate advocate for women’s economic empowerment, arts and culture, and global impact, Samira has served as an Honorary Advisor to the United Nations for Social Impact Projects and the NGO Committee on Sustainable Development. She has held board roles with numerous arts, education, healthcare, and professional institutions including the Houston Ballet, Center for Contemporary Craft, and Fresh Arts.

You can find Samira on her socials here:
LinkedIn: https://www.linkedin.com/in/samirasalman/
X / Twitter: https://x.com/samira_salman

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

OUTLINE:

[00:00] Intro
[02:27] How did Samira find herself at TASIS?
[04:17] How did TASIS feel when she first arrived?
[07:27] From tax lawyer to family offices
[09:55] How did Samira decide to quit being a lawyer?
[17:12] Why did Samira want to be a tax lawyer?
[19:44] Journaling
[22:39] The blessing of a lawyer brain
[25:19] The Oprah episode that changed it all
[29:45] How did Salman Solutions start?
[33:28] Samira’s first interaction with family offices
[36:43] Show and tell with Samira’s journals and pens
[41:27] What did Samira mean that most family offices fall short of raising their own capital?
[42:54] What is the common family office hero arc into VC?
[44:05] Family office trends that Samira’s seen
[47:17] The starting point for families interested in VC
[50:13] Advice to a friend who wants to invest in VC
[53:31] Book, podcast and conference recommendations
[55:42] How does one qualify for Collaboration Circle?
[56:21] Content recommendations, continued
[59:57] How Collaboration Circle started
[1:06:59] The 3 pieces of Collaboration Circle
[1:09:49] Community economic models and human nature misalignment
[1:12:43] How to create safe environments
[1:18:02] The Dior bag tradition
[1:21:20] Reminders that we’re in the good old days

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“The very first thing everybody has to do is give themselves permission to lean into what they are interested in and what does it for them and what they understand and what they have an affinity for, regardless of what everybody else says you should be doing.” – Samira Salman

“Never doubt that a small group of thoughtful, committed, citizens can change the world. Indeed, it is the only thing that ever has.” – Margaret Mead

“The revenue and economic models for groups are misaligned with how human nature functions.” – Samira Salman

“Numbers and volume are not what programs humans to feel safe and to be authentic and to create. In order for us to do our best work and be our most thoughtful, our most creative, we have to be fully dropped down into our bodies and safe in our nervous systems. And some of the environments our industry has curated are literally the exact opposite of that.” – Samira Salman

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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#unfiltered #95 Loose Food-For-Thought from LPs

food, buffet

Let me caveat that there is no right answer. The purpose of me sharing the below is not to convince you one way or another. Literally, just food-for-thought. Maybe it’ll inspire new perspectives you may not have considered before.

The below is a collection of thoughts I’ve heard from LPs in the last few weeks. Some may conflict with others listed below.

  1. If anyone uses the word “largest” or “biggest” in their event description, the event is automatically ignored. The pursuit towards quantity maximization leads to the perception of quality minimization.
  2. The sourcing of every select deal in the data room / pitch deck seems to triangulate around:
    • (a) I knew this founder for a long time
    • (b) I used to work with this founder
    • (c) The VC who’s leading this round is someone I used to work with / knew for a long time
    • Yes, there are others. But the majority of featured deals seems to fall in the above 3 buckets. Relationships are king. Even for hot rounds Series A and before, founders seem to be only letting in people they know.
  3. Lots of discussion threads floating around with GPs asking their LP base if they should do a hot, exclusive deal that’s off-thesis (ie valuation and off-sector are the primary reasons). Of those who are doing these off-thesis deals, building a plan on when to sell seems to be a prescient conversation. Doesn’t happen all the time, but more than once.
  4. A surprising number of LPs I meet (mostly US based) know what MCP is + named seed deals. AI is what everyone’s talking about even for non-VC-focused LPs. Or maybe I shouldn’t be surprised ’cause my parents who’s not in tech ask me about AI deals too.
  5. AI sentience is a thought that is hovering around. Also large acqui-hires. LPs have started putting together a bingo card of names of who will be the next VP AI / Chief AI Officer at a Fortune 100 co.
  6. Past DPI doesn’t matter in underwriting EMs. Early DPI also doesn’t matter. VC is a power law business where the majority of returns are generated in years 9-15. Funds are also underwritten to be 15 years. “If you’re investing in VC and want early DPI, you’re in the wrong asset class.”
    Note: Funnily enough, am in some group chats where there are some really heated debates on early DPI and DPI at fund term. No right answer.
  7. Families who invest in EMs invest in outliers. Most decks look the same. Problem/market opportunity. Fund strategy. Track record. A few testimonials. Etc. If you want to stand out, your deck has to look different from every other one. Very different.
    Note: I know many fund of funds, endowments, pensions would prefer the exact audience. All in all, know your audience.
  8. Your job as a GP is to find a needle in a haystack. And if that’s the JD, bring a magnet. What do you do/stand for that attracts great founders to come to you? How are you spending time fishing and farming, instead of hunting?
  9. Don’t underestimate the value families can offer you and your portfolio. LP relationships, potential customers, G1 offering advice on how they built an enduring business, etc.
  10. Organic wisdom is learned through experience. Synthetic wisdom is learned through “textbooks” — reading, podcasts, books, blogposts, conversations on other people’s experience, and theoretical discussions. When shit hits the fan, the one with organic wisdom reacts faster and more acutely. Those who have only gained synthetic wisdom either are slow to react or forget to react properly in stressful situations altogether. Naturally, investors often prefer to invest in people with organic wisdom.

Photo by Samantha Fields on Unsplash

#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.

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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Should VCs Scale? | El Pack w/ Screendoor | Superclusters

screendoor

The entire Screendoor team joins me 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.

Kyber Knight Capital’s Linus Liang asked about why LPs choose to bet on new managers as opposed to investing in more established funds.

NOMO Ventures’ Kate Rohacz asked about what parts of venture do LPs think is most opaque.

Articulate’s Helen Min asked if every emerging manager should scale into a larger firm.

The Screendoor team is a powerhouse of experienced LPs, bringing together institutional investment experience that spans over a decade. Lisa Cawley, Layne Johnson, and Jamie Rhode have each built institutional venture programs within innovative family offices, financial institutions, and pensions. They have invested in venture capital across stages, sectors, and geographies, and in particular are known as a go-to for emerging managers.

Lisa Cawley is the Managing Director of Screendoor. Previously, Lisa worked with a private multi-billion-dollar global investment firm where she was involved in all aspects of managing the firm’s private market portfolio, including sourcing and manager due diligence, asset allocation and forecasting, and creating and implementing the firm’s investment data tools and analytics. Lisa started her career at Ernst & Young, where she served on private equity, venture capital, and public CPG clients. Lisa earned an MBA and an MSF from Loyola University Maryland, and she obtained a BBA in Accounting with a double minor in Information Systems and Spanish from Loyola University Maryland. She is a CFA Charterholder and holds a CPA.

You can find Lisa on her socials here:
LinkedIn: https://www.linkedin.com/in/31mml/

Layne Johnson is a Partner at Screendoor. Previously, she led the Venture & Growth Equity manager selection effort at the Teacher Retirement System of Texas (“TRS”). At TRS, Layne was responsible for setting the venture capital strategy, including portfolio construction, new manager sourcing and diligence, and increasing exposure to emerging venture managers. She had previously been at Goldman Sachs, since 2012, in the External Investing Group (“XIG”), based out of the New York and San Francisco offices. At GS, Layne initially worked on the hedge fund manager selection team and then moved over to the private side of the business to focus on technology and venture manager selection and secondaries. She also helped lead the Launch with GS Program, including sourcing, investing in, and building portfolios of diverse managers. Layne holds a BA in History from Yale University and currently serves on the St. David’s Foundation Investment Committee.

You can find Layne on her socials here:
LinkedIn: https://www.linkedin.com/in/layne-johnson-4b71b571/

Jamie Rhode is a Partner at Screendoor. She previously spent 8 years at Verdis Investment Management, an institutional single family office that manages capital for generations 7 through 10. At Verdis, Jamie focused on venture capital, private equity, and hedge fund investment sourcing and diligence. Using a data-driven approach, she helped revamp the asset allocation strategy and rebuild these portfolios. Specifically, through Verdis’s first institutional venture fund program, Jamie played an integral role in shifting the portfolio’s exposure from multi-stage to emerging managers and early-stage VC. Prior to Verdis, she spent four years at Bloomberg, where she held roles in both equity research and credit analysis. There, she created, managed and leveraged an extensive library of statutory, financial and market data for buy and sell-side clients who use Bloomberg to make investment decisions. A licensed Chartered Financial Analyst, she earned her bachelor’s degree in Finance and Marketing from Drexel University’s College of Business Administration.

You can find Jamie on her socials here:
Twitter: https://x.com/lady10x
LinkedIn: https://www.linkedin.com/in/jerrcfa/

And huge thank you for Linus, Kate, and Helen 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
[05:58] Enter Linus and Kyber Knight Capital
[10:06] Why take the risk of betting on an emerging manager?
[18:40] The types of pushback Linus got when he was fundraising
[19:47] The incentives of an LP when investing in VC
[21:49] How do GPs ask LPs how they’re compensated?
[24:47] Enter Kate and NOMO Ventures
[28:31] What part of venture is most opaque?
[38:18] The things venture LPs look at beyond the metrics
[43:47] “Bad” advice from LPs
[46:27] Enter Helen
[46:48] Helen’s new podcast, Great Chat
[49:34] What is Articulate?
[52:43] Should emerging funds scale?
[1:00:47] How often do GPs say they want to scale
[1:03:03] Layne’s advice for GPs
[1:03:39] Jamie’s advice for LPs
[1:04:55] Lisa’s advice for LPs and GPs
[1:07:35] David’s favorite moment from Jamie’s episode
[1:09:53] David’s favorite moment from Lisa’s episode

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“My original intention was never to target emerging managers. My intention was actually to target funds that were the first institutional check into a startup because I was looking for a way to compound capital at an extremely high rate. And that just led me to backing emerging managers because finding a fund that was willing to invest at the pre-seed/seed consistently over a very long term either meant by the time they had a track record that underwritable with DPI, I couldn’t get in or they were an established manager that was slowly creeping up into bigger and bigger fund size so they were closer to Series A and Series B. What I ended up realizing is to go access that part of the market, I had to do emerging managers.” – Jamie Rhode

“A lot of what we do in underwriting is backward-looking, but really in VC, you want to be forward-looking. So it’s really important to be taking in those datapoints, but if you’re making a majority of your decision on those backward-looking datapoints, I would argue that you’re probably missing the mark when it comes to emerging managers. You actually want to be asking how do I know this firm–this team–is still going to have an edge in, inevitably, what would be a new market environment. There are going to be new competitive forces. There are going to be new technologies–new innovation. New at every level.” – Lisa Cawley

“I’m a firm believer that if you are waiting to see the proof smack you in the face, you’re actually not participating in the proof. You’re not getting that performance. You’re not getting those returns. You’re sitting and you’re waiting. And by the way, everyone else is doing the same thing, so you’re competing against them. Just because someone can identify that’s a great brand at that point, it doesn’t mean just because you have capital, you can get access.” – Lisa Cawley

“Don’t get swayed by capital.” – Jamie Rhode

“You can’t be all things to all people.” – Lisa Cawley

“Scaling is not synonymous with increasing fund size. To me, scaling means you’re increasing in sophistication. You’re increasing in focus. And that’s really a sign of maturity and fund size is a byproduct of that.” – Lisa Cawley

“GP-market fit is so crucial and you want to make sure you’re setting yourself up for success by being able to shine in what you’re best at and what your background and experiences set you up for as well.” – Layne Johnson

“Speed to fundraise does not always equate to a strong investor.” – Lisa Cawley

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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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

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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My Worry with AI

I was grabbing lunch with my buddy Rahul the other day. And we were talking about how frickin’ tough it was for us to become proficient at our respective sport. Tennis for him. Swimming for me. On one hand, both of us wish it were easier. That he could pick up the racket for the first time, and win matches without breaking a sweat. That I could execute a perfect dive and a sub-20-second 50-sprint with just six months of practice. But the truth is neither of us could. We had select teammates who could though.

I remember one teammate who was two years older than I was. 14 to be exact. He swam with us for two months with no formal training prior, then went to his first competition. Broke 30 seconds for 50-yard freestyle in that very first race. A few months later, broke 25-seconds. In his first year, he never lost a sprint. It got to a point that while the rest of us were swimming six days a week. 2-4 hours a day. He swam with us twice, at best thrice a week. And he still won.

Was I envious? Hell ya. No doubt about it.

It wasn’t till later that year, where he was competing in meets a step above Junior Olympics — Far Western to be specific — that he lost his first race. Then at the next one again. Then again. And the guy broke. He took his anger out on the rest of us. Beat some folks up as well. Just, give or take, 18 months after he had started, he quit. I never saw him again.

Had he stuck with the sport, I’m confident he would have been one of the best. Some people do have the genetic disposition to do well in a certain craft. They won the genetic lottery. And I’m really happy for them. If you do have it, you should definitely lean into it. Why waste the free bingo tile you’ve been given?

Circling back from earlier… on the other hand, Rahul and I are both glad it took a shitload of effort to actually win for the first time. And even more the second time. Then the third. Which by the way, really fucking sucked. I once beat the shit out of a wall in my parents’ home with my bare knuckles ’cause I was so frustrated at plateauing. Much to my parents’ horror.

But it made us better people. We are the sum of all our mistakes. The sum of all our blood, sweat and tears.

The last few months I’ve been lucky to be a part of conversations about the intersection of AI and investing. So many funds we see have built out AI screening tools, automated email management, and memo creation. Some LPs too. The latter is few and far in between. And there were multiple discussions from senior LPs and GPs that they became the investor they were today because they did the work of putting together the memos and hunting down references and details. That they made mistakes, but learned quickly why certain mistakes were worse than others. Some miscalculations were more egregious than others. That they were scolded. Some fired. The younger generation may not have the same scrutiny. And with AI, they might not fully understand why they need to do certain things other than tell AI to put together a memo.

Similarly, so many companies are building things incredibly quickly. Vibe coded overnight. They’re getting to distribution faster than any other era of innovation. It’s not uncommon we’re seeing solid 7-figure revenues in year one of the company. Annual curiosity revenue from corporates is real. Likely temporary, but real. And it’s created a generation of puffed chests. Founders and investors, not prepared for the soon-to-come rude awakening.

As first-check investors, we bet on the human being. We bet on not only the individual’s vision, but all the baggage and wherewithal that comes with it. We bet on the individual’s ability to endure. Because unless we see a mass market of overnight acqui-hires for companies younger than three years, our returns are generated in years 9-15. The long term. And shit will hit the fan.

AI is amazing in so many ways. But it has made it harder to underwrite willpower.

I’m not a religious person. But a line I really like from my friends who are Christian in faith is, “Don’t pray for an easy life. Pray for the strength and courage to overcome a hard life.”

It’s why I have a bias to folks who have scar tissue. Or what Aram Verdiyan calls “distance travelled.” What others call “people who have seen shit.”

Years ago, a friend of mine told me that famous people live one of two lives. A life to envy. Or a life to respect. A life to envy is one where that individual gets things handed to them on a silver platter. They got everything in life they asked for. Rich kids with rich parents oftentimes. A lot of people would love to have lived that person’s life. A life to respect is one where the individual goes through trials by fire and eventually came out on top. They’re riddled with scars. And while many people would want to be in that person’s shoes today, they wouldn’t want to have lived the life that individual lived.

As investors, we bias towards people who have gone through the latter or is capable of going through the latter.

Photo by Yogendra Singh 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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We Need Mega Cap VC Funds | Nicky Sugarman | Superclusters | S5E10

nicky sugarman

“All these sorts of things that are quite frankly boring, monotonous, tedious, unglamorous, or not sexy, they are the sorts of things that can make or break whether a fund is good or not. Because you can be a great investor, but if the experience of the LP is awful, it doesn’t matter how good the fund is.

“Ultimately, somebody’s got to deal with you. They’ve probably got people to report to themselves. If you’re giving them a headache because you can’t do the aspects of it, then that’s where you’re going to lose LP appetite. That can tell apart who sees themselves as an investor and who sees themselves as a fund manager.” – Nicky Sugarman

Nicky Sugarman is a highly sought after advisor to both family offices and venture investors. Prior, he was also a partner at Stanhope, a $40B multi family office, running their private equity and venture practices. Moreover he, along with Jonathan Hollis at Mountside Ventures, launched the program for the emerging manager to learn the institutional lens.

You can find Nicky on his socials here:
LinkedIn: https://www.linkedin.com/in/nicky-sugarman-98188636/
X / Twitter: https://x.com/NickySugarman

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

OUTLINE:

[00:00] Intro
[02:36] Nicky and LEGOs
[05:24] LEGOs or cars
[05:59] What Nicky’s dad taught Nicky
[06:45] Why does the world need another fund accelerator?
[08:35] The curriculum at the fund accelerator
[10:21] The difference between a fund manager and investor
[12:04] Thoughtful examples to the previous question
[14:12] Diligence vs stalking
[16:29] Nicky’s most used app
[17:28] Why are mega cap funds necessary?
[21:21] Why VC becoming PE is inevitable
[24:48] The best types of LPs for multi-asset portfolios
[26:33] Why do LPs speak in IRR, not multiples?
[29:06] Understanding a GP’s valuation policy
[33:46] Communicating news from GPs to LPs
[36:03] How does Nicky know if a GP is in for the long haul?
[38:33] Nicky’s favorite answers to how a firm scales
[39:48] First critical hires at a VC firm
[40:45] Ideal traits of a VC COO
[41:38] How much should a good COO get paid?
[42:50] Should people get paid at the 50th percentile?
[45:28] How much should GPs pay themselves?
[48:30] The one what-if that keeps Nicky up at night

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“All these sorts of things that are quite frankly boring, monotonous, tedious, unglamorous, or not sexy, they are the sorts of things that can make or break whether a fund is good or not. Because you can be a great investor, but if the experience of the LP is awful, it doesn’t matter how good the fund is. Ultimately, somebody’s got to deal with you. They’ve probably got people to report to themselves. If you’re giving them a headache because you can’t do the aspects of it, then that’s where you’re going to lose LP appetite. […] That can tell apart who sees themselves as an investor and who sees themselves as a fund manager.” – Nicky Sugarman

On GPs answering questions on operational excellence… “The best answer I could ask from a GP is for them to be super honest and say, ‘These are the people I’ve leaned on to help me understand what best practices look like.’” – Nicky Sugarman

As an LP… “If you’re hearing [your portfolio news] in the news first, that’s a bad sign.” – Nicky Sugarman

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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300 WhatsApp Messages Later: Our Risk Framework for Backing Emerging VCs

jenga, risk

One of my favorite things to do is collabing with friends on content. Especially on topics not covered well or ever publicly, but should. My buddy Ben is one of those rare souls I never hesitate to collab with. Be it through the podcast or our first joint piece together on underwriting the risks of investing in emerging managers below.

You can find the same blogpost here on his Substack. Separately, one of my favorite blogposts Ben wrote happens to be the one where he lays out how he communicates with GPs. A practice I’d love for the broader industry to adopt at some point.

Nevertheless, without further ado…

Ben and I were messaging in Whatsapp the other day debating the risks of investing in a particular early-stage venture fund. After going back and forth laying out our thinking we had the bright idea to create a short post laying out which ones were important to us and to give a chance for other allocators to weigh in. This post is the result of that idea plus about 300 more Whatsapp messages. We hope you enjoy it, and take the opportunity to debate with us.

As an allocator, risk is the one word you can never run away from. You have to define it, price it against the relevant upside and recognize that it is always there, lurking in every opportunity. 

As we are not traditional allocators, and instead choose to back the riskiest sub section of the riskiest sub section of asset classes: early stage emerging venture capital managers, evaluating risk is probably the single most important part of our job.

All day, we talk with people who want to raise a venture fund, to go invest in companies changing the world, to fund innovators — to fund individuals and ideas that can’t be reduced to a single sentence, who will redefine life as we know it, and to many, will seem crazy. In short, we back people who can’t stand the fact that someone else might be able to make the world a better place better than them. 

But, when you’re doing a job that is about mitigating risk, and you’re also trying to invest in world changing technology, by definition you’re taking a risk on approach. You have to have a pretty nuanced and thorough view on the topic.

So, as you might’ve guessed after we said the word “risk” 7 times before you found yourself here, this is our piece on how to define the risk of investing in venture capital emerging managers. Hopefully, you get to learn a little more about how we think:

Operational Risk: 

This risk can be summarized as the things unrelated to investing, which can impact the ultimate DPI number. 

Operating a fund is a distinctly different animal than other businesses. There are easy mistakes that drive the amount of investible capital down, liability up, and make DPI harder and harder to reach. Picking the right legal team (shout out to Sam at Pilsbury for setting the standard here), admin, bank account, and setting the right internal spending policies are all crucial. 

The smaller the team, the more operationally inexperienced people are, the greater this risk. Do they know how to structure capital calls? Do they have an information and cybersecurity policy set up? If applicable, do they know how to warehouse their prior deals? How about QSBS structures? Do they know that SAFEs don’t kickstart the QSBS countdown and only priced rounds do?

If the GP(s) are planning to hire an associate or an operations person, do they know how to set that individual up for success? Or are they merely outsourcing what they don’t want to do? In fact, there are a surprising number of investors who spin out of their prior shop who realize the operational complexity for the first time. And without a good back office team, the investible capital can slowly be eaten away. As one of our mutual friends, Ashby Monk once said, “The difference between net and gross return is your investment in the organization.”

Vintage Risk:

This can be summarized as: in the next 2-4 years, can this person actually get into the best deals in their area?

We often see angel investing track records shown as a proxy for fund investing track record. However, these are two totally different functions/ . Returns from part time angel investing is a result of choosing the best deals where you have allocation. However, funds have fixed deployments and timelines. This means you HAVE to allocate, you can’t just wait until a deal you like is offered to you. It’s like switching from a gatherer mindset to a hunter mindset. You have to go out and find the very best deals, or else you’re going to go hungry.

Win-Rate Risk:

Most emerging GPs start in one of two areas:

  1. Operator angel
  2. Spinout/career VC

Yes, there are others, and you can cross-apply a similar framework for them, but for the purpose of this piece, we’ll focus on these two.

As an angel, everyone loves you. You’re a small check. Everyone else who’s participating wins their ownership targets. The lead. The 1-2 sub-anchors. And there’s often still room for others. But as you now have a fund, even a small one writing $100-250K checks, you will eventually want to invest in a round that has capacity constraints You are now asking a founder to make a choice: Do they want your check or are others more valuable than you are in the longer term?

Additionally, with how the markets are changing now, large multi-stage funds are taking as much ownership as they can to make their economic models work. There is an uncanny valley appearing, with everyone between the lead investor and really small, strategic angel checks getting squeezed out of the round. And as an emerging fund manager, you now have to not only win the favor of the founders but also not draw the ire of the lead. 

As a spinout, the question looms: Was a GP successful because of the team/brand at her last firm? Or was the firm successful because of her? Here, deal attribution really matters. Not only who got the deal over the finish line, but also who was most valuable – customer introductions, talent, hiring needs, downstream capital introductions, syndicating valuable supporters on the cap table, etc. – post-investment. Even better, if it was pre-investment.

It’s also worth noting that win-rate risk exists both at the time of the initial check, as well as the pro-rata check. And as such, should be evaluated separate from each other. The initial check is what we talked about above. The follow-on check is a function of are you valuable even after the initial investment was made.

Yes, pro rata or right of first refusal is usually a legal right, but if you’ve been in venture long enough, you’ll know those rights aren’t enough. Large and/or downstream investors will almost always force you to give up your pro rata. And it’s the GP’s job to provide immense value, make sure the founders know and are willing to fight for you, and be able to prove to later-stage investors that you can still be valuable later.1

Team Risk:

This can be summarized as: is this the right GP(s) for the right strategy? 

Do these GPs really get the space? Does their past make this thesis painfully obvious? We’re looking for deep specialized  expertise and a strategy that actually fits. If they’re concentrating, can they actually get into the best deals? That means founders need to want them in the round. Beyond that, do they have the right skillset from sourcing to closing? Red flags pop up when a team is running concentrated without the ability to win allocation, doesn’t really understand why founders win, or just lacks the diligence ability.

The other dimension of this risk is whether the GP is solo or part of a team. While it’s easy to see the risk involved from the perspective of a solo GP (e.g. what if this person gets hit by a bus?), teams may introduce more risk. With each N increase in a team, you are introducing N2 amount of process before making an investment. You are also introducing interpersonal dynamics around investment decision making. Also, the key-person risk doesn’t necessarily go down either. What happens if a team of two that compliment each other breaks up? Did adding that second person really do anything to lower the risk? We have seen teams work, and Solo GPs work well. The key is to not rely on maxims here that one is better than the other. 

Sector Risk

This can be summarized as: do we think this sector has enough high density talent to support a VC strategy?

Exceptional outcomes need exceptional people. It’s not enough for a sector to just be “hot.” We need to see high-density talent flocking to it. That means tracking where the very best minds are going – whether that’s looking at top colleges, prior professional successes, or other ways to measure talent. If the talent pool isn’t there, you simply won’t find the people capable of building the companies that drive fund returns.

Downstream Capital/Graduation Rate Risk:

Related to sector risk, but worth explicitly defining, is there immediate downstream capital for a fund’s portfolio companies? Many hard industries – for instance, life sciences, hardware, energy, just to name a few – don’t have obvious players who would immediately lead the next round. In these specific instances strategics tend to be the biggest players, but they are more opportunistic.. 

The GP needs to actively spend time helping larger, later-stage investors understand the value of their sector and their portfolio companies or inject enough capital in their portfolio companies until they become obvious for everyone else. In these cases, it helps to know that the GPs are actively strengthening relationships with larger pools of capital, and specific partners , as well as having decision makers involved either as individual LPs or via their fund of funds.

The loss ratio in venture is much higher than other asset classes2. It’s not surprising that 50% of the portfolio dies. But being able to graduate at least a third of your portfolio to the next stage is the bare minimum. We do want to caveat that this is the bare minimum. Anything north of 50% is great, excluding the 2020-early 2022 vintages, where everything was getting funded.

Market Size Risk 

This can be summarized as: is the focus of the GP big enough to generate multiple billion dollar+ outcomes. 

We’re looking for funds that can 5x. That means the company outcomes need to be massive. So, you need to be in a space with room to grow. Are there enough potential buyers to support huge valuations? Is there enough investor demand to keep fueling that growth? Think about it this way: you could be the best fax machine investor in the world, but even if every business had one, the market’s just too small to generate those billion-dollar exits needed for fund-level returns.

Decade Risk:

This can be summarized as: does this fund have the staying power to be an exceptional team a decade from now. 

It all comes down to the “why.” Why are these GPs doing this? Do they see themselves building something generational? They don’t need to be the next Founders Fund, but what’s incentivizing them to stick around for the long haul and keep pushing for those top-tier returns?

Are they getting rich on fees or carry? Are they aware how fees can compound in the future? What will keep them going 2 years from now? 5 years from now? 10 years from now?

When they’re financially successful already, why bother? What has historically kept them motivated?

Financial Security Risk:

Will they struggle to put dinner on the dinner table with their current fund size? Does that mean they’ll be distracted from doing their absolute best on delivering the best returns for us, the LPs and supporting the best founders to win?

We never want someone distracted from doing their life’s work. If they’re all in, we want to make sure they can go all in. Now and into the future.

Similarly, is this a part-time hustle? Do they have a main gig? What is their current list of priorities?

In Conclusion

The goal here isn’t that every GP has to address every risk. There are some, where we as LPs can help mitigate. There are others that are outside of our control. The goal is to figure out what the risks3 are, how the GP is controlling for them and what the ultimate upside is, before we write a check.

  1. This is one area where we use different heuristics: 
    – David’s rough litmus test is that a GP who wants to grow their fund to a firm must be able to prove value to a portfolio company for at least 4 years after the initial check. 
    – Ben’s take is looking at the super power, or one thing that GP can deliver to a founder better than anyone else in the near term.

    All this to say, the real work begins after the investment. ↩︎
  2. Loss ratio is a topic that is sensitive in venture. It matters more the later you go, and anything under like 90% can still lead to a tremendous seed fund. We decided to include it here as it is a risk, just take it with a grain of salt as you read the next few lines. ↩︎
  3.  And we’ve now said the word “risk” 30 times. Oops, 31. ↩︎

Photo by Valery Fedotov 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!

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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22 Years in Venture Secondaries | Abe Finkelstein | Superclusters | S5E9

abe finkelstein

“Buying junk at a discount is still junk.” – Abe Finkelstein

Abe Finkelstein, Managing Partner at Vintage, has been leading fund, secondary, and growth stage investments focused on fintech, gaming, and SMB software, among others, leading growth stage and secondary investments for Vintage in companies like Monday.com, Minute Media, Payoneer, MoonActive and Honeybook.

Prior to joining Vintage in 2003, Abe was an equity analyst with Goldman Sachs, covering Israel-based technology companies in a wide variety of sectors, including software, telecom equipment, networking, semiconductors, and satellite communications. While at Goldman Sachs, Abe, and the Israel team were highly ranked by both Thomson Extel and Institutional Investor. Prior to Goldman Sachs, Abe was Vice-President at U.S. Bancorp Piper Jaffray, where he helped launch and led the firm’s Israel technology shares institutional sales effort. Before joining Piper, he was an Associate at Brown Brothers Harriman, covering the enterprise software and internet sectors. Abe began his career at Josephthal, Lyon, and Ross, joining one of the first research teams focused exclusively on Israel-based companies.

Abe graduated Magna Cum Laude from the Wharton School at the University of Pennsylvania with a BS in Economics and a concentration in Finance.

Vintage Investment Partners is a global venture platform managing ~$4 billion across venture Fund of Funds, Secondary Funds, and Growth-Stage Funds focused on venture in the U.S., Europe, Israel, and Canada. Vintage is invested in many of the world’s leading venture funds and growth-stage tech startups striving to make a lasting impact on the world and has exposure directly and indirectly to over 6,000 technology companies.

You can find Abe on his socials here:
LinkedIn: https://www.linkedin.com/in/abe-finkelstein/

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

OUTLINE:

[00:00] Intro
[03:18] Abe’s first investment
[06:19] The definition of quality secondaries in 2003
[09:37] How did Abe know there would be capital to follow?
[15:45] Valuation methodology in the 2000s
[22:28] Minimum meaningful ownership for secondaries
[26:17] Why did founders take Vintage’s call in Fund I?
[30:41] The old-school way of tracking deal memos
[32:06] Our job is to play the optimist
[32:31] The headwinds of raising Vintage Fund I
[36:32] Moving Vintage’s physical books to the cloud
[39:06] How does Abe assign discounts to secondaries?
[42:23] Proactive outreach vs reactive deal flow
[46:18] What does Vintage do to stay top of mind?
[49:49] What’s changed in the secondaries market since 2000?
[55:32] Founder paranoia
[57:56] What does Abe want his legacy look like?

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“Buying junk at a discount is still junk.” – Abe Finkelstein

“Everything that’s going on in the market today, I actually feel people are overreacting to it because there are these ups and downs. Hopefully this current situation doesn’t get people too freaked out because these are the times you want to be investing in. People just don’t think that way. They see the blood on the streets and they run from it first, instead of going in.” – Abe Finkelstein

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.

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