Category: Being an LP

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“I Write-Off Every Sourcing Slide” | Alex Felman | Superclusters | S7E2

alex felman

“The game you play as you’re building a reputation becomes a different game than when you have a reputation. And I tend to find, from an LP’s perspective, when you’re building reputation, that’s actually when you deliver the most value.” — Alex Felman

Alex Felman is an entrepreneurial and family office professional. For over 10 years, as a second-generation member, he has run his own family office, Felman Family Office, and works with family offices around the world through his family’s multifamily group, MSF Capital Advisors. Using his expertise in Molecular Toxicology and Bio-entrepreneurship (B.A from University of California -Berkeley, MBA from Copenhagen Business School), he advises them in biotechnology, healthcare, and other futuristic tech industries with the goal of maintaining long-term wealth through innovation. He regularly speaks at family office and private wealth events on topics such as tech investment, manager selection, generation and succession issues, rising generation trends, and more.

He has used his experience within the family office industry and 20 year background as an educator to create Exponential U, a family office education program designed to help families become multigenerationally sustainable. His proprietary L3 framework (Learn, Leverage, Legacy) allows the holistic development of family members to ensure a smooth leadership transition.

You can find Alex on his socials here:
LinkedIn: https://www.linkedin.com/in/alexwfelman/

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

OUTLINE:

[00:00] Intro
[04:36] The ‘tastemaker’ for family offices
[05:54] Exploration vs discipline
[08:15] The hero’s journey in investing
[09:49] The life line
[13:39] Building and having reputation
[16:06] Risk appetites for asset owners & allocators
[18:44] Why won’t an institution invest in me?
[19:50] The quiet thing LPs don’t talk about
[25:15] When did Alex get involved with his family office?
[29:09] Writing off sourcing slides
[35:33] Different flavors of “sourcing from YC”
[38:41] Emerging GPs are “investments-as-a-service”
[40:08] Fund power law is greater than startups’
[43:44] Emotional value of investing in funds
[44:45] Most VC funds are scams!
[50:01] Optimistic cynic
[51:43] Reminders today about the good ol’ days
[54:17] Late stage capitalism
[59:10] Post-credit scene: Dave Chappelle and podcasts

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“Every great conversation dances on the line of your understanding. You dance between both sides of the line and try to find out where what you know and what they know intersect and end. Good conversation is like play.” — Alex Felman

“With my background from the family offices, I almost believe that most family offices moving forward will need their own personal tastemaker or sommelier. Someone who’s curating the world specifically for the needs of that family.” — Alex Felman

“People get into trouble when they’re using the wrong tool or trying to do something for a different purpose. For example, I’m going to try to do discovery when I’m in my routine. Ok, you’re probably running into problems. Or routinizing my discovery. Those two things are in conflict with each other.” — Alex Felman

“One of the things people always forget—… What they remember from the hero’s journey is adventure, and we fight the dragon, and we get the treasure. But at the end of the hero’s journey, you’re supposed to bring that back to your community. And you’re supposed to forward it to your community. And you’re supposed to make your community better from the dragons and the treasure that you fight or find. Most people often leave off that last part. And I actually think that last part is extremely important.” — Alex Felman

“The game you play as you’re building a reputation becomes a different game than when you have a reputation. And I tend to find, from an LP’s perspective, when you’re building reputation, that’s actually when you deliver the most value.” — Alex Felman

“If you have a family office where you’ve actually outsourced it, your employee is more of an allocator than an owner. And in that case, that allocator is often making decisions to save their own job. Or to ensure that they continue to have a job.” — Alex Felman

“What I find is slightly sad is that ultimately because of security and comfort reasons, things like people’s pensions which should be more secure, are actually, in my opinion, taking riskier bets. And bets that will lead to worse outcomes.” — Alex Felman

“I believe that the amount of due diligence you do doesn’t matter depending on the deal size. So let’s say they’re writing five $100 million checks compared to 100 $5 million checks, that is literally 20 times the amount of work. So even if they’ll get a better return on that 100 $5 [million checks], on a realistic level, it forces them to play certain types of games.” — Alex Felman

“With at least funds on a standard two and twenty, somewhere around $75-100 million fund size is where the incentives shift from being carry-oriented to management-fee oriented. Once you get larger than that, then it actually becomes more incentivized for the fund managers to build up their funds than the actual returns itself.” — Alex Felman

“I would argue that power laws apply even more to funds than to startups.” — Alex Felman

“The intersection of venture as a product or service meets venture as a job career. And there are a lot of fund managers who see venture as a job career and essentially want to use it as a way to get a paycheck. And because of that, they’re going to put out a fairly boilerplate fund.” — Alex Felman

“Many venture funds are basically scams. I believe it’s a scam if you knowingly sell something you know you can’t deliver on. And the dirty secret in venture is if you purely look at venture from a financial point of view, most fund managers know they cannot hit their targets and yet they still sell that promise anyway. And I think that starts to become kind of scammy.” — Alex Felman

If you somehow made it to the bottom of these show notes, I’m also trying a new experiment where I write my reactions to the episode on my second blog, Superclusters After Hours. For Alex’s episode, you can find my reactions here.

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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“Venture is a Who Business, Not a What Business” | JD Montgomery | Superclusters | S7E1

jd montgomery

“One thing that is unique to private equity and venture capital is persistence is a little easier because of the brand. ‘They did good deals, so therefore, the good deals come to find you.’ If you were in a long-only private equity shop or hedge fund, Amazon is not going to come find you because you invested in Shopify.” — JD Montgomery

JD Montgomery leads the Family Office division at Canterbury Consulting and is a seasoned advisor with nearly four decades of experience serving prominent families with a focus on strategy, organization and measurement. Based in Newport Beach, he serves a select group of multi-generational families and helps them navigate the complexities of wealth, purpose, and legacy. Mr. Montgomery partners with his clients to help them optimize the allocation of their resources across generations. Over the years, Mr. Montgomery has developed a deep network of relationships in the venture capital industry. He has helped his clients gain meaningful exposure to venture funds and direct investments and develop relationships with leading innovators and investors globally. He is a Managing Director, shareholder, and board member at Canterbury Consulting. He graduated from Stanford University and holds the Chartered Alternative Investment Analyst (CAIA) designation.

You can find JD on his socials here:

LinkedIn: ⁠https://www.linkedin.com/in/jd-montgomery-6161341b/⁠

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

OUTLINE:

[00:00] Intro
[02:18] The “some day” exercise
[11:12] Why does JD do “some day” every 6 months?
[12:33] JD’s life line
[16:44] When JD is 85 years old…
[18:05] JD’s relationship with fatherhood despite the trauma
[22:40] Annual dad report cards
[25:33] Intentionality with GPs
[28:41] How to avoid one-hit wonders
[33:43] How to transfer self-esteem
[36:05] How do you get GPs off of their talk track?
[37:36] Non-obvious things JD looks for in GPs
[41:43] Is selling 0.2X DPI in the first 4 years meaningful?
[44:27] Should you recycle capital or deploy out of the next fund?
[46:34] Why did JD choose to work with families?
[48:07] “Never eat alone”
[51:34] How does JD think about time allocation?
[55:06] How many new GPs does JD meet with?
[59:07] How did JD pass on then back Founders Fund?
[1:03:22] The difference between unexplored gold veins and rotting trash
[1:08:13] Mayan Mocha at Austin’s Picnik
[1:08:58] JD’s secret street taco recipe
[1:11:09] JD’s reminder that we’re still in the good ol’ days
[1:13:20] Post-credit scene: No garlic and onions

SELECT LINKS FROM THIS EPISODE:

SELECT QUOTES FROM THIS EPISODE:

“I don’t have a mentor per se. My mentor is hundreds, probably thousands of people—I’m sure thousands—people that I’ve met where I try to learn just the amazing talent that person has and I smush it with the next person that I meet that might be most kind person that I meet or the most organized. So it’s this blend of a lot of people that really becomes the mentor.” — JD Montgomery

“DOD – dear old dad.” — JD Montgomery

“Kids grow up like trees and saplings. And a sapling needs a guiding post to hold them up when it’s windy.” — JD Montgomery

“One of the other questions I will ask is: ‘Tell me about the hardest thing you’ve ever done in your life.” — JD Montgomery

“To whom much is given, much is expected.” — JD Montgomery

“In estate planning, you can transfer money, but you can’t transfer self-esteem. Self-esteem is gained by going through the school of hard knocks and doing things and relying on yourself.” — JD Montgomery

“One thing that is unique to private equity and venture capital is persistence is a little easier because of the brand. ‘They did good deals, so therefore, the good deals come to find you.’ If you were in a long-only private equity shop or hedge fund, Amazon is not going to come find you because you invested in Shopify.” — JD Montgomery

“If they’re passionate about something—if they want to leave the world just a little different—their ding in the universe—and they want to give back, money doesn’t ruin them.” — JD Montgomery quoting a North Carolina professor

“I am not in a ‘what’ business; I’m in a ‘who’ business.” — JD Montgomery

“Gross IRR; gross performance. I don’t care. I care about net. It’s okay to show gross and then net. I prefer net. But if you show gross only, it’s just gross.” — JD Montgomery

If you somehow made it to the bottom of these show notes, I’m also trying a new experiment where I write my reactions to the episode on my second blog, Superclusters After Hours. For JD’s episode, you can find my reactions here.

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

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

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

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The Texture of a Thesis

Meriam-Webster defines texture as “the visual or tactile surface characteristics and appearance of something” or “the disposition or manner of union of the particles of a body or substance.”

A more interesting definition, at least on the tactile front, might be the resistance you feel when your skin brushes against a substance. The friction you feel. The subsequent expressions of rough or smooth follow the amount of friction you experience.

I was reading Scott Belsky’s latest blogpost. In which, he wrote the following:

“The more you remember, the more you will feel you have lived. I can’t vividly remember the details of more than a couple beach vacations, because they all blend together. But I vividly remember a night out in Tokyo at a tiny bar with my friend Joe, the first time I skinned up a mountain in Colorado, the longest run I ever took in the rolling hills of Tuscany, and getting lost in the streets of Kyoto with my daughter. The experiences I remember most are those that had texture — some sort of surprise or hardship that implanted them in my brain. These experiences create “core memories” that remain distinct and persistent, no technology required. My thesis on the future of humanity is that we will optimize for more of the experiences we’ll never forget. We will seek activities with texture to create memories that grip. And when we look back, the more of these textured memories we have, the longer we will feel we have lived.”

In a similar way, the ‘texture’ of life includes the moments we most struggled. And in the physical and metaphoric definition of ‘texture,’ leaves us scar tissue that protect our body from future similar experiences. It’s hard to recall the vivid details of life when it was all smooth sailing, but near impossible to forget our greatest character-building moments.

I’m a big believer that theses are the same. A product of our past experiences. And the restrictions we place on ourselves are a function of that. So regardless if an investment thesis is specialist or generalist, what I find more interesting are areas a GP chooses not to invest in, which include what they have never invested in, or have and will never again. Even more interestingly, assuming one only had the chance to interpret the “visual” nature of the thesis, what are the types of investments most people would think falls under a GP’s thesis, but a GP still will not invest in? The latter of which is the “tactile” nature of a thesis. The contact sport. That unless you interact directly with the GP, it is hard to tell.

Oftentimes, the GP may have more boundaries for themselves than we as LPs place on them. And that is always worth digging into.

The texture of the thesis.

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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Spiky, Lumpy, Smooth

spiky, hedgehog

A number of investors I’ve had conversations with recently used the word “spiky” to describe their investments and investment prospects. Both VCs who described founders that way and LPs who described GPs that way. With the latter, I want to caveat that these LPs were fund-of-funds and smaller family offices. The investment profile of a larger LP may look quite different given the incentives of the organization. But I digress.

What is “spiky?” Spiky, or ‘spikey’ (I’ll let you decide what your preferred spelling is), is an adjective used to describe someone who has a few traits that excel quite extremely. Not many, just a few. The implicit understanding is that sometimes they can be poorly proficient in many other areas. For example, you can be the world’s greatest AI researcher, but not know how to make scrambled eggs or cook at all for yourself. But in the areas where an individual is “spiky” in, they are in the world’s top 0.01% with very little other competition.

I’m also personally a big believer, that you really do have to be in at least the top 0.1% on something if you want to have a chance at top decile (10%) returns because by order of you needing to take on other responsibilities in a company and/or firm where you might not spike in those as much, your overall “spikiness” slips two decimal points. So, as an LP who aims for top decile minimum, I look for people who would be 1 in 1000. An a startup investor/VC, to bet on the 100Xers, the top 1% per say, you need to find people who have 1 in 10,000. Metaphorically speaking, the bar is higher since you’re less diversified compared to LPs.

So if that’s spiky, what is “lumpy?” You’re better than others in many areas. Potentially most areas. If 3.0 was the grade point average of your competition, you’re a 3.5 or 4.0. Numerically better, but you don’t particularly excel in any particular area. Or at least not in ways that make you an N of 1.

In emerging GP land, there are a lot of ‘lumpy’ people. Investors who are probably already in the top quartile, even top decile of the human population. To have the ambition, the track record, the network, and the wherewithal to start a fund requires a certain state of privilege, luck and effort that most can’t afford or have. They have just enough to be better, but not enough to be the best. These are, at least for me, the hardest people to say no to (assuming they’re good people). They’re people that I’ve described to other allocators (when they do diligence) as “good human beings” and “people I really enjoy hanging out with.” All true statements, by the way.

But even for spiky people, is their differentiator enough to create portfolio divergence? Sometimes, it doesn’t. Arguably, oftentimes, it doesn’t. Then the question becomes is their portfolio converging with others to a point where there’s still alpha? And for the (established) firms they’re converging with, (a) will they continue to converge (i.e. will the other firm(s) always want this investor around for their spikiness?), and (b) are the other (established) firm(s) best days ahead of them or behind them?

Expectedly so, you are now underwriting the other firm(s) as well.

I wish it were an easy judgment call, but it isn’t. And I’m likely to be wrong more often than I’m right. As most of us will be.

Then, there are people who are “smooth.” Some may call them generalists. Others may say well-rounded. And while both can be true, in a world of attention scarcity, whether in the mind of founders or co-investors or other LPs, you need to stand for something. And “smooth” people are easily forgotten. We don’t talk about them much because we forget about them.

Photo by Sierra NiCole Narvaeth 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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AI-Native VC Firms

wall e, ai, robot

There’s been this term that’s been thrown around as of late. By GPs. Funnily enough, not by a single LP so far. The “AI-native” venture firm.

Somehow everyone seems to think they’re the only ones doing so. But they’re not. While not everyone approaches it in the same way—and the definitions do get muddled a little—there is a growing audience of GPs building a firm leveraging agentic tools.

So, inspired by a recent conversation with my man Arkady, here’s me offering my definition of what an AI-native VC firm is. It’s a set of workflows that even the large incumbents cannot replicate by adding more people to the problem, despite the fees they draw. It’s where technology is at the core of the firm, as opposed to humans. It’s where experience actually becomes an inhibitor to investment innovation. Call it the legacy tax. Or experience tax. Or as Bret Taylor puts it, the strategy tax.

In a recent Uncapped episode, Sierra‘s Bret Taylor put it this way when speaking of SaaS business models. “In these moments of big platform shifts, what were your strengths can become weaknesses. […] You start to say that ‘Well, I don’t want to just start from scratch. We’ve got all these assets. So how do we do it in a way that takes advantage of all of our assets.’ And so all of a sudden, you’re like, ‘Let’s not just build a great product. Let’s transition from this product to that product.’ […] ‘That’s our strength, we should play to our strength.’ And you start to basically make all these decisions that sound sound very clever because you’re playing to your strengths. And in practice, if the technology wave is bigger than the category, which I think the web was as an example, you end up chipping away at doing a pure play value proposition.

“It can also work with business models though. In that time, you have perpetual license software and moving to software-as-a-service, that’s a huge change for a business to make. For your customers, that goes from being CapEx to OpEx. For you as a company, it changes ratable revenue. Shantanu did this at Adobe. Very few companies can make that transition. You have to sell it differently. You have to compensate salespeople differently. Revenue recognition is different. So you have the product strategy tax. You have the business model strategy tax. You have even the incentives of sales people—there’s a strategy tax. […] All the advantages that you had, all of a sudden, become anchors that are holding you back from doing the right thing.”

But I’m probably not the only one that can see the transposition of venture models on this analogy of SaaS models. I’ve also been in a few rooms where LPs are starting to slow to halt their pacing into investing in AI companies and funds. If so many of these products can be built overnight with Opus/Cowork, Codex, Cursor, Replit, Base44, Emergent, OpenClaw (and all of its clones in the last 2 weeks) and the list goes on, how many of these application layer AI companies will be stripped of their value almost immediately. And likely, in one month’s time from writing this piece (if not within the next few weeks), the list may already be obsolete.

In fact, I was catching with my LP friend (who’s not technical) last week and he used one of the above tools to build a portfolio management tool in two hours that has more functionality than what I’ve seen from companies trying to solve the exact same problem who’ve raised up to 9-figures. And I wish I could say I was joking. He told me, “Tools for us have historically been limited by the marriage of domain expertise and technical expertise. Most of us didn’t have both. But with these tools, they solve the technical expertise part, which empowers domain experts to build their own tools. So why bother paying for any other tool that doesn’t have the same depth of data that I’ve accumulated across decades?”

Henry Ford has that line many of you are probably aware of, “If I had asked people what they wanted, they would have said faster horses.” Most investors—big and small, multi-stage and emerging, generalist and specialist, solo GP or partnerships—are building faster horses.

So an AI-native firm has to reimagine the way the venture business is done. That isn’t an AI-written memo. That’s not just an agent strapped onto a data scraper. Assume everyone at some point can discover and find every company out there. Today’s firms who claim being AI-native (in my anecdotal experience) are highly focused on sourcing. What pools of data aren’t actively being collected now that software can relentless dig into. Today’s firms aided by AI are leveraging tools to make more informed investment decisions. The picking. It still requires, for the most part, a human in the mix to make the final call. There are very, very few, arguably no one, truly leveraging AI nativity to win deals.

In venture, there used to be the classic question VCs would often ask founders: “What’s stopping Google from what you’re doing?” Now it’s “Why can’t OpenAI or Anthropic just do what you do?” Analogously, why can’t a16z or GC do what you do? Historically, the answer, if there is a good one, is tied down to:

  • Business model and portfolio construction, which is still a valid point if you plan to stay as a first check purist.
  • Or, it’s come down to the person. You have lived experience that no one else does in cybersecurity or leading healthcare systems. You have privileged relationships no one else has. You’ve built communities that are centered around you as the central node. It’s usually been a “people” answer.

But with AI-native firms, the answer must be technological. Even if large firms were empowered with the idea, why will they still fail in the technological implementation of it? Why can’t these large multi-stage funds:

  • … “see” the volume you do? Are you pulling data from non-obvious hubs or non-public datasets? How defensible is it in the longer term?
  • underwrite deals at an earlier stage like you do? Are you doing diligence at scale? How do you get the “truth” from sources that other firms powered primarily by human capital cannot?
  • provide the portfolio value (at scale) like you do? Do you give your portfolio companies access to the same systems you’ve built? Can they leverage your tools to empower their customers and/or talent?
  • provide the same liquidity opportunities to LPs at a predictable pace like you can? Not sure if agentic software will be good enough here for now, given how much humans themselves are still figuring this out. But a goalpost for some visible future.
  • provide their co-investors with the same value as you can? This one might be hard. There’s always the balance of what is unique to you versus unique to others. The more you share, potentially, the less of an edge you’ll have. But my stance has always been, if access to certain analyses or information will be inevitable at some point, it’s better to be the rising tide that raises all ships than the last drop of rainwater in the ocean.
  • provide LPs with the same depth and/or breadth of value like you do? This last one is probably not something any AI-native firm I’ve talked to is focused on, but given that all venture firms are marketplaces at the end of the day, answering this question would be extremely powerful.

I’m not saying that’s the only way to do business. That’s not the only way to invest. I’m confident that even when GPT 15.0 and “Opus” 9.4 comes out, there will still be firms that operate primarily around a core set of individuals as opposed to technologies. We have mass-produced cars, but there is still a great demand for hand-crafted luxury vehicles. The same is true for fashion and accessories. So yes, there will still be a world even if they’re not the largest players by market cap where people prefer the luxury of the human touch.

Photo by James A. Molnar 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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Will AI Take Over LP Investing?

I recently watched Brandon Sanderson’s keynote on whether AI is art or not.

It’s a great talk. And I highly recommend you check it out even if you don’t work in the creative industries.

We’ve seen writer strikes in Hollywood as well as a proliferation of AI use cases in creative industries. James Cameron joined the board of Stability AI. The Russo brothers behind Marvel’s superhero sequel prowess have created their own AI studio. Pouya Shahbazian as well, using AI over the next four years to create 30 AI-generated films. The list goes on. As such, the question of “Is AI art?” is an interesting one to answer. And admittedly, harkens to a series of conversations I’ve had with allocators on leveraging AI in investing practices.

From the VC/GP side, there are folks like Yohei, Sarah, and Ben and Matt, just to name a few who’ve all been building and incorporating AI recently into their workflows and deal flow pipelines. Yes, I know I’m missing a lot more names. But you get the point. From the LP side, progress is still slower, but many younger LPs are quickly adopting AI as well. The conversations I’ve had come from senior allocators on whether it makes sense to use AI. And if so, how much?

Which begs the question: If AI can do your job, do you still have a job?

I was at a dinner last year where the CIO of a large endowment shared that the reason she knows what to look for in managers today, how to underwrite funds, and how to build a venture portfolio was due to the fact she made a plethora of mistakes on her way up the allocator ladder. Small mistakes, like mixing up a decimal on the spreadsheet which led to a venture fund needing a $10B outcome instead of a $1B outcome. Or like Jamie Rhode once said on Superclusters, that she failed to check before she made a commitment to a fund if the fund actually had the commitments that the GP advertised, leading to her check being a larger proportion of the final fund size than she anticipated.

A lot of senior leaders in the LP space seem to be quite skeptical of what AI can do for investment decisions in its current state, yet junior team members seem to widely adopt it to write memos, to inform investment decisions, to create portfolio construction models, and so on. And so far, there’s been a general consensus that AI, at least with respect to investment decision-making, has yet to reach its desired state. In one comment at the same dinner, a senior allocator remarked that one of her direct reports submitted a fund construction model that was built via AI and suggested that in order to return the fund, they needed almost a quarter of the companies to become unicorns. And when questioned, the junior allocator saw nothing wrong with the model. Only to further defend their choice. Or as Brandon Sanderson says in the talk, the problem with AI “is because they steal the opportunity for growth from us.”

“The process of creating art makes art of you. My friends, let me repeat that. The book, the painting, the film script is not the only art. It’s important, but in a way, it’s a receipt. It’s a diploma. The book you write, the painting you create, the music you compose is important and artistic, but it’s also a mark of proof you’ve done the work to learn because in the end of it all, you are the art. The most important change made by an artistic endeavor is the change it makes in you. The most important emotions are the ones you feel when writing that story and holding the completed work.

“I don’t care if the AI can create something that is better than what we can create because it cannot be changed by that creation. Writing a prompt for an LLM, even refining what it spits out, will not make an artist of you because if you haven’t done the hard part—if you haven’t watched a book spiral completely out of control, if you haven’t written something you thought was wonderful and then had readers get completely lost because your narrative chops aren’t strong enough, if you haven’t beat your head against the wall of dead ends on a story day after day until you break it down and find the unexpected path—you’re not going to have the skill to refine that prompt. The machine will have done the hard part for you and it doesn’t care.”

Growth comes from making mistakes. It comes from the struggle. The “distance travelled,” to borrow a term Aram Verdiyan used before. This is why investors often prefer partnerships and co-founderships. It’s why many firms have “red teams.”

There is probably a day when AI can do our job. But for now, the art of investing is in the friction it takes to make a decision. The character-building moments. The moments where you question your own priors. So if AI enables you to have more nuanced dialogues with yourself, if it challenges the way you think in ways you hadn’t considered before so that you look for evidence that either proves or disproves the null hypothesis, then there will still be room for the use of AI in investing. Otherwise, if you’re regurgitating scripts based on singular uninspired prompts, then you likely won’t have a job for long.

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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Diligence on a GP’s Social Media Presence

social media

A lot of what I will say applies similarly to assessing founders and with senior talent, but for the sake of this blogpost, I’m going to focus primarily on doing diligence on GPs.

Sequoia’s Pat Grady co-wrote a piece on AGI that’s been making its rounds the last few days. FYI, this post has nothing to do with AGI, so don’t get your hopes up. But in it, he shares:

Source: Pat Grady’s X post on AGI

Note the highlights above are all around how to better understand an individual’s internet presence. While not all-encompassing, understanding someone’s brand via their social media is more than just how many followers, likes, comments, and shares. As my good YouTuber friend once told me, “Not all subscribers are created equal. English-speaking personal finance content get paid the most per impression.” Analogously, the same is true for LinkedIn or Twitter/X content.

Just because you have 25K followers, how often are you just resharing your employer’s content? Or your portfolio company’s content? How often do you share your thought leadership? Do people follow you because of your perceived status or do people follow you because of the weight of your ideas? There’s a great Simon Sinek talk about the former Under Secretary of Defense on this, which I won’t bore you with the details, but if you want the full story, it’s here. In summary, if you no longer held the job title you do today, would people engage with you differently?

That’s what I’m trying to figure out.

The first filter is: What is your insight per post ratio? This includes reshares and comments they make on other people’s posts. At a high level, do you recognize what good content looks like?

The second filter is: What is your original insight per post ratio? How much of your activity is original ideas? Is that what people engage with? Or do they engage more with your reshared content? When they do engage, how?

  • Level 1 is a like. The least number of clicks to engage with you.
  • Level 2 is a reaction other than a like. It takes a second longer to do so, but is more intentional. To be fair, a spam-like content (i.e. “LFG”, “Proud of you”, “Excited”, etc.), I also put in this tier.
  • Level 3 is a thoughtful comment that you can’t use on any other post. They’ve read and thoughtfully engaged back. Also on this tier is a quick reshare.
  • Level 4 is a thoughtful reshare. Or on Twitter (still not easy to call it X), a “quote retweet.” You’re staking not only your personal brand and reputation with your own followers, but you’re also letting others know how you’ve thought about the content being shared.

It’s not a perfect scorecard, but I do keep a rough mental tally (which goes into my own memo) of what a GP’s social brand is. And at what point was there an inflection in their thinking and/or following. Usually quite correlated with each other.

Other things I find interesting to observe, but cannot be understood in isolation:

  • Most frequent commenters and reshare your content
  • Reactions-to-follower count ratio
  • Connections-to-follower ratio
  • How similar/different their content on LinkedIn vs Twitter/X vs Instagram/TikTok vs podcast platform is
  • AI-search optimization (AEO): What keywords and/or questions do certain GPs own in search traffic? How does it compare across ChatGPT vs Claude vs Gemini? And in incognito AI search.
  • Frequency of getting tagged by others on social media outside of viral periods
  • Endurance of content even when little to no engagement, usually for podcasts, blogs and newsletters. And why do they continue doing so even when it’s not producing the results they desire (more of a qualitative understanding on the personality traits of a GP)
  • Frequency of guest appearances on others’ content channels and how do those appearances’ views compare to said influencer’s average view-to-subscriber ratio

Photo by dole777 on Unsplash

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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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What is Adverse Selection?

directions, adverse selection, sunset

One of the most interesting self-reflective questions I think GPs should ask is: If someone else had the exact same strategy and offered the exact same terms, why would someone not pick you over another VC? That’s adverse selection.

One of the three pillars (or five pillars, depending on who you ask) of underwriting a venture fund is winning. The others being seeing and picking (and supporting and selling). But sometimes what’s more interesting than underwriting why a GP wins is understanding all the reasons they won’t win.

It’s an interesting thought exercise I like working through with a GP. “Why won’t a founder let you invest?” or “Assuming you wanted to invest, why would you lose out on a deal?”

The most common answers are always:

  • “I missed the timing.”
  • “There was no more space left.”
  • “They weren’t raising at the time.”

In my opinion, while possibly true, all cop-out answers. Then I follow up: “Assuming you wanted to invest, and there’s space left, and they’re currently raising, why would a founder say no to you?” Or “Why wouldn’t you be able to invest?” More often than not, I get an answer along the lines of: “I win (almost) every deal I want.” Or “I have yet to raise my fund.”

Even if true historically, it doesn’t answer the question. It’s like asking a job candidate: “Tell me about your weakness.” And they respond with, “I’m too honest.” Or worse, “I have no weaknesses.”

What I’m trying to get at in these questions is not the “right” answer. There is none. But rather what are the reasons you’ll fail to win a deal. Which of those reasons are areas where you would like to improve upon? Which of those reasons are areas where you will continue to be unrelenting on? What will you not change? Only then can I get a better understanding of the GP you will become 2-3 funds from now. And if so, does it make sense to do business with each other today?

There’s a Fund I GP I ended up investing in. When I first asked him the question above, he reached the conclusion that his pitch and value-add resonated more with second-time founders than first-time founders at the pre-seed stage. And given that he wanted to grow into a lead investor eventually, what he had to figure out was how to build a strong enough brand with first-time founders, requiring both education and intentional positioning. For me as an LP, it became easy for me to see how he would grow into a Fund II GP. Between then and his next fundraise, I’d just track how many first-time founders he invested in, try to spend time with them at events, and ask why did you take this GP’s check and what did you really want from him.

There is no right answer as to what founders wouldn’t want to work with you. It’s just an exercise of self-awareness, so you can figure out what’s worth working on and what’s not. Adverse selection reasons I’ve heard in the past, in no particular order, include:

  • Political alignment
  • Naming a firm after their own name instead of an ideal (yes, that is a real answer I’ve gotten before)
  • Speed to make a decision
  • High ownership targets
  • Response time, including taking the holidays/weekends off when their peers might still be dealmaking
  • Lack of brand awareness
  • No founding experience
  • No experience at a large established firm
  • No relationships with key potential customers
  • Values shared publicly / controversial opinions
  • Personality (i.e. too nice, people pleaser, argumentative, arrogant, name-dropping/logo-shopping, too humble, etc.)
  • Lack of talent networks
  • Having invested in a competitor
  • A homogenous partnership
  • A rumor that is widespread but may not have real credence
  • A single remark from an influencer in the ecosystem (or a close friend), then what’s more interesting is why someone would say something like that
  • The way a GP dresses (especially important in certain geographies outside of the US)
  • The initial outreach was done by a junior team member or a broker/dealer
  • Subsequent conversations done by a junior team member
  • A reference call with their network done in poor taste
  • Someone with no board experience asking for a board seat
  • Having someone else on the team take the board seat even though you did the deal and the founder wanted you
  • Aggressive term sheet terms (1X+ liquidation preferences – participating and preferred)
  • Having no respect for prior round investors (especially, in relation to their most helpful investors so far, often related to their pro rata)
  • Badmouthing their existing investors and/or teammates

Photo by Javier Allegue Barros on Unsplash

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

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

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How Trees Fall

lumberjack, felling a tree, axe, emerging lp

I caught up with a single family office over the holidays. Let’s call him Mark. Mark told me that he had caught up with a Fund I GP that I had passed on. Let’s call her Susan. In that conversation with that GP, he told Susan that I introed him to another GP “Charlie” whom she knew and whom I invested in, which he eventually passed on. And Susan asked Mark why I invested. That it made no sense. That Susan herself would have never invested in Charlie. As such, she didn’t know why I would invest in Charlie and not her. After sharing that last line, with no explicit question that plead for an answer, Mark looked at me, waiting to see how I’d respond.

I stared back at him. And he to I. And I to him.

As he felt seemingly unsatisfied with my reaction, I asked him, “If I put both of these GPs on a report card, how would you score each?”

He followed up, “Susan is more experienced. She’s done X and Y. And she came from Z.”

“You’re right. Susan is all of that. In fact, on a report card, it’s fair to say that her GPA is a solid B+, maybe an A-.”

He concurred.

I went on. “And Charlie would probably score a B, maybe B-, if we were really critical. But to you, did anything about Susan jump out at you?”

“Not exactly.”

“What about Charlie?”

“Well, there’s that…”

“I agree. For me, and you don’t have to agree with my assessment, Charlie is on paper a lower GPA than Susan, but Charlie spikes in very particular areas. Areas I personally believe puts him in a position to do really well. That he will have a good chance to outperform. Susan is factually better in almost every area than Charlie is, but she doesn’t spike in any area. At least it’s not obvious to me. I like her thesis. I think she has a great GP-thesis fit. And I do believe that her thesis has a really good chance of being right, but I’m not sure she’s the only person in the world who can do that, much less the best person in the world to do it. In fact, I can think of two other GPs who spike in that thesis area where she doesn’t.”

It’s harsh criticism. And it’s not my place to give non-constructive criticism. So what I said when I passed was that we had other deals in the pipeline that were a lot more interesting to us. Which is true. But it’s not my place to say “I don’t think you’re good enough.” And she probably felt my pass was unsatisfying. Because in her shoes, I’d probably feel the same.

I don’t invest in all-rounders. There’s a time and place and industry for those. But I don’t believe it’s venture. Even less early stage emerging managers. There’s a line I’ve long liked in the F1 world. “In Formula 1 it’s nearly impossible to go from 13th to 1st on a sunny day, but it’s possible on a rainy day.” In the uncharted territory of true early, early stage investing, it’s always a rainy day. And to go from 13th to 1st, you need to make bold decisions. Measured, well-timed, but risky decisions. You need to make certain sacrifices to do so.

To me, that meant comparatively lower grade-point averages, but much, much higher select individual subject grades. In fact, only an A++ would suffice. A spike must be at least three standard deviations from the mean. As an emerging manager LP, who plans to be an active participant in the journey, naturally with the GP’s permission, it falls on me and my peers to help our GPs raise their overall GPAs, but we can’t help them spike. But in that, we must know and recognize their flaws.

One of the most interesting spectacles I’ve always marveled at is how lumberjacks fell trees. The first cut is the notch cut that indicates the direction the tree will fall. The second is the felling cut that catalyzes the tree to fall, acting as the hinge.

In many ways, the GP spikes (and flaws) makes the first cut. Whether you count it as nature or nurture. The GP’s job is to figure out which direction they’d like to fall. Or to borrow a line from Mark Manson’s most important question of your life: “What pain do you want in your life? What are you willing to struggle for? How do you choose to suffer?” To further borrow, “What determines your success isn’t ‘What do you want to enjoy?’ The question is, ‘What pain do you want to sustain?’ The quality of your life is not determined by the quality of your positive experiences, but the quality of your negative experiences. And to get good at dealing with negative experiences is to get good at dealing with life.” All in all, it’s a GP’s job to make that choice. An LP cannot make that choice for the GP. And it is a function of the flaws they’re willing to overcome, and how they want to double down on their spikes.

The second cut is for investors, board and advisory members to nudge our investees towards the direction they so chose. As the great Tom Landry once said, “A coach is someone who tells you what you don’t want to hear, who has you see what you don’t want to see, so you can be who you have always known you could be.” But the prerequisite for the second cut is the first. The first requires intentional and special people.

Along a similar vein, my buddy Henry wrote a post recently I really liked.

“Is this founder special?” That’s probably the only question that has to be asked in every non-obvious investment decision. Maybe every investment decision. But especially true under imperfect information conditions. And special isn’t just about getting a high GPA.

Photo by Radek Skrzypczak on Unsplash

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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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On Investing in Generalist GPs

pull up bar, high bar

A quick thought on investing in generalist funds, inspired by a GP following up with me after I told him I prefer investing in “specialist” funds. Which he followed up with “I am a stage specialist.” Technically, he’s not wrong. But under that definition, almost all emerging managers are stage specialists. Their specialization just depends on which stage we’re talking about. But when most, including myself, use the word specialists, we really mean sector specialists.

A couple things to caveat before I go further:

  • I’m an emerging LP. I don’t have that many years or funds I’ve invested in at this point, so I need to spread my coverage wider than after I figure things out. But not too wide that I trend towards the median, also known as “indexing venture.” Median, even top quartile in today’s venture, is uninspiring. And there are far better liquid options that can deliver the same return profile as top quartile in venture.
  • I have a stage preference because I think it’s where you can build meaningful relationships while still figuring things out alongside the founder. As they say, a friend in need is a friend indeed.
  • I have a geographical preference because of my existing network, which makes certain opportunities easier to diligence.
  • I prefer sector specialists because I’m designing a portfolio where I can hopefully predict where 50% of my underlying portfolio will come from, and 50% where I can’t. Since most things in venture are opportunistic, and I give each of my managers that longer leash to make bets to be opportunistic (20%-ish; not a hard number, but can’t be 70%). Specialists are easier to underwrite how valuable they can be to a portfolio. Generalists, it’s harder to, unless I’m somehow convinced that a GP has a unique skillset I’ve never seen before in my career so far, which the bar just gets higher the longer I’m in business, AND that skillset is uniquely valuable to a founder across sectors.

I want to have exposure to 50-60 new companies/opportunities per year, with very little overlap. Stats suggest 30 of a sample size becomes statistically significant so anything less than that, I’m not giving my null hypothesis an honest chance. If I believe that 20 companies per year matter (not sure of the exact number, but this number feels directionally accurate), I want to know my managers collectively together has at least a 1 in 3 chance of hitting at least one. That means being in the right networks. Proportionally, some should spend their time hunting (i.e. actively spend time in interesting ways to find and chase after the best opportunities). Some should spend time fishing (i.e. building a brand so fish swim to or at least through their fishing hole). Some should spend time farming (i.e. cultivating relationships).

That said, my portfolio has yet to deploy into 50 new opportunities per year, so I am actively adding to it, in specific areas. Areas I don’t have good coverage over for now. So to invest in a new sector generalist manager, I likely need to “fire” one or more managers from my existing portfolio, which means I won’t re-up in them. And there are only a small handful o reasons I’ll won’t re-up into an existing manager.

  • Their investments have really deviated off of the thesis I underwrote them to have.
  • There’s a major team change that puts into question their ability to outperform.
  • Their fund size has drastically increased to a point I question the return profile that would get me excited.
  • They’ve made a series of bad bets where I question their ability to make decisions (i.e. I meet with their founders and they just don’t feel like high performers.).
  • They lose motivation to be a VC and hang up the cleats. In this case, I won’t have to say the “no.” They will for me. But on occasion, they’ll try to raise another firm, or hear whispers on how tough the market is, and they’ll choose not to raise another vintage.
  • I meet with a new GP covering an area an existing manager covers but materially better on almost all fronts. 10-20% better, even 50% better, is negligible, and also really hard to measure in foresight. And assuming the manager I’ve invested in learns quickly, that 50% gap will be closed shortly.

Luckily none of the above has happened yet. But I imagine, because I’m not perfect, at some point, one or some of the above will.

So if you’re a generalist covering 2-4 areas that my existing portfolio is covering AND has reasonable access to, in order to invest in you, I must believe that you’d be better than the firms I’ve already invested in, then subsequently fire them from my portfolio the next vintage.

That is a high bar. And only gets higher the more my portfolio grows.

Photo by Vitaly Gariev 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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