Jeff is a partner at Renaissance Venture Capital an innovative venture capital fund of funds. Jeff’s diverse background in venture capital and technology and his experience working in various start-up ventures uniquely position him to advise startups. In addition, Jeff is quite active in the Michigan start-up community, volunteering his time to mentor young entrepreneurs, judge pitch competitions, and guest lecture student classes and organizations. Through Jeff’s work on the Fund, his volunteer efforts, and his role as the chair of the Michigan Venture Capital Association’s board of directors, his passion for fostering a productive environment for venture capital investment in the State of Michigan is evident.
Martin Tobias is the Managing Partner and Founder of Incisive Ventures, an early-stage venture capital firm focused on investing in the first institutional round of technology companies that reduce friction at scale.
Martin was previously at Accenture and Microsoft and is a former Venture Partner at Ignition Partners. Martin is a 3X venture-funded CEO rising over $500M as CEO with two IPOs who has also invested in hundreds of companies and is a limited partner in over a dozen VC funds. Martin was an early investor in Google, Docusign, OpenSea, and over a dozen Unicorns.
Martin is the father of 3 daughters, a cyclist, surfer, poker player, and life hacker. Martin tinkers with motorcycles on the weekends. He writes about Venture Capital on Incisive Ventures blog and Twitter.
[00:00] Introducing Jeff Rinvelt and Martin Tobias [04:14] What was Jeff’s pitch to their LPs for Renaissance Capital? [06:30] Why did Jeff pivot from being a founder to an LP? [08:10] Renaissance Capital’s portfolio construction model [13:00] Jeff’s involvement in non-profits [15:56] How did Martin become an angel investor? [18:03] The big lesson from being an LP in SV Angel’s Fund I and II [20:10] Why is Martin starting a fund now? [26:07] A lesson on variable check sizes [28:53] What is Martin’s value add to founders? [33:29] What stood out about Martin’s deck and email when it arrived in Jeff’s inbox? [35:43] The 2 biggest worries Martin had in sharing his deck with Jeff [36:47] What does Jeff think about generalists? [40:49] What held Jeff back from making an investment in Incisive Ventures? [42:37] What kinds of conversations does Martin usually have with LPs? [47:05] One of the greatest professional lessons Jeff picked up as a manager [49:07] Martin’s greatest lesson from his days as a CEO [51:57] Thank you to Alchemist Accelerator for sponsoring! [54:33] Like, comment and share if you enjoyed the episode
“One of the things a lot of investors don’t do is go back and be honest about where they got fucking lucky and where they had a thesis that they could potentially replicate in future investments.”
Samir Kaji is the CEO and Co-Founder of Allocate, a private markets technology company that pairs origination with portfolio management tools to allow investors to efficiently construct and manage their alternatives portfolios.
Prior to Allocate, Samir spent 22 years in venture banking between SVB and First Republic Bank and closely worked with and advised over 700 venture capital and private equity firms. During this time, he completed over $12B in structured debt transactions and has invested personally in over 75 funds and companies, including early-stage investments into Carta (seed), Side (seed), PolicyGenius (Series A), and FanDuel (Series B) as well as Growth investments into Reddit, Alto Pharmacy, and Carbon Health. He has also invested in over 40 funds across various investment types.
Samir completed a finance undergraduate degree at San Jose State University, a finance MBA from Santa Clara University, and completed the prestigious Kauffman Fellows venture program in 2017. Samir is also the host of Venture Unlocked, a top venture capital podcast available on Itunes, Spotify, and Substack.
[00:00] Intro [04:15] What will be the biggest change in the next decade for the LP universe? [08:45] Portfolio allocation for emerging LPs [12:32] How has Samir’s LP investment strategy evolved over the years? [16:04] Why Samir invested in Bullpen Capital’s Fund I [17:43] GP-business model fit [19:40] GP red flags [21:00] The one question Samir asks to see if GPs understand how to do portfolio math [23:31] The art of asking good questions [29:44] What is the Minimum Viable Fund? [36:14] How to pick 10 funds out of 4000 VC funds [42:19] How did Samir pitch Allocate to his investors? [48:11] The first hires at Allocate [50:53] How Samir defines work-life integration [56:38] The first two emerging fund managers Samir backed at First Republic Bank [59:41] The lesson Samir’s father shared with him when he thought about leaving SVB [1:02:41] What happens when you overanalyze [1:07:27] Thank you to Alchemist Accelerator for sponsoring! [1:10:02] If you liked it, give us a like or share!
“When you think about investing in any fund, you’re really looking at three main components.
It’s sourcing ability. Are you seeing the deals that fit within whatever business model you’re executing on?
Do you have some acumen for picking?
And then, the third is: what is your ability to win? Have you proven your ability to win, get into really interesting deals that might’ve been either oversubscribed or hard to get into? Were you able to do your pro rata into the next round because you added value?
“And we also look through the lens of: Does this person have some asymmetric edge on at least two of those three things?”
“When you’re investing in a fund, especially when you’re making an ex ante decision, meaning you’re not buying a secondary, you’re actually just looking at what’s the probability of success in the future. You want to focus on process, more than just outcomes in the past. The process is how they think.”
Howard Lindzon has over 20 years of experience in both public and private market investing. He previously founded and managed the hedge fund Lindzon Capital, and is currently the founder and General Partner of the early-stage venture capital firm Social Leverage. Through Social Leverage, he and his partners have been seed investors in startups like Robinhood, Beehiiv, and Manscaped to name a few. Howard was the founder of Wallstrip (acquired by CBS), and is the the co-founder and Chairman of Stocktwits, the leading social platform for traders and investors. Throughout his career, Howard has strongly advocated for and helped drive the decentralization and democratization of investing. He resides in Phoenix, AZ and Coronado, California.
[00:00] Intro [01:51] Howard’s biggest misses as a startup investor [06:21] What happens when you trust a single reference too much in the diligence process? [10:24] What kind of company does Howard think Carta should be? [14:52] Howard’s two beliefs on selling positions [24:29] What types of fund managers did Howard invest in as an individual LP? [30:46] How did Howard write a $150K LP check in Multicoin [36:06] Why Howard likes GPs who struggle to fundraise [41:16] How Howard raised his fund of funds [44:19] Howard’s LP investment thesis [47:16] How much of investing is luck vs skill? [51:57] Reframing curiosity and risk [57:37] Market risk vs execution risk in your career [59:18] Howard’s advice to young professionals [1:03:40] A founder or GP’s first interactions with Social Leverage [1:08:25] Does succession planning matter to Social Leverage? [1:10:16] The big lesson about follow-on financing from Social Leverage’s Fund I [1:14:49] Thank you to Alchemist Accelerator for sponsoring! [1:17:25] Legal disclaimer
“You can’t be a good investor if you haven’t been in there and go ‘Ahhh, that was a dumb idea.’”
“Sell when you can, not when you have to.”
“They gave me money because I’m weird. They gave me money because they trusted me, but they also know that I’m weird. Therefore, if I start to think like them, we’re all screwed. So I have to think like me.”
“If you’re curious, it’s pretty hard not to stand out over time.”
Ben Choi manages over $3B investments with many of the world’s premier venture capital firms as well as directly in early stage startups. He brings to Next Legacy a distinguished track record spanning over two decades founding and investing in early-stage technology businesses. Ben’s love for technology products formed the basis for his successful venture track record, including early stage investments in Marketo (acquired for $4.75B) and CourseHero (last valued at $3.6B). He previously ran product for Adobe’s Creative Cloud offerings and founded CoffeeTable, where he raised venture capital financing, built a team, and ultimately sold the company.
Ben is an engaged member of the Society of Kauffman Fellows and has been named to the Board of Directors for the San Francisco Chinese Culture Center and Children’s Health Council. Ben studied Computer Science at Harvard University before Mark Zuckerberg made it cool and received his MBA from Columbia Business School. Born in Peoria, raised in San Francisco, and educated in Cambridge, Ben now lives in Palo Alto with his wife, Lydia, and three very active sons.
[00:00] Intro [02:44] Ben’s childhood [07:54] What is Ben’s superpower? [16:58] What aspect of being a VC do most founders fail to appreciate? [18:46] What do GPs fail to appreciate about LPs? [21:24] The similarities between VC and the intelligence industry [24:00] What’s changed about being a VC since 2006? [27:14] How does Ben tell signal from noise? [32:46] Past track record portability [37:24] A case study on how a syndicate investor became a lead investor [41:00] Ben and David nerd out about free T-shirts [44:26] An example of how a GP convinced Ben to invest in their fund [47:53] Succession planning in a VC firm [56:51] How Legacy Venture started [1:01:28] Next Play + Legacy Venture = Next Legacy [1:04:05] Which non-profits do the carry go to? [1:05:48] What kind of GP impresses Ben? [1:07:58] Ben’s biggest professional lesson in 1998 [1:12:56] Thank you to Alchemist Accelerator for sponsoring! [1:15:32] Legal disclaimer
“The integrity of information. Does this actually stand on its own not because someone said so, but because the mechanics behind it make sense. Does this have internal integrity to it?”
“If you see a thread and you pull it, does it come out as a single piece of thread? There’s no integrity right there. If you pull it and the whole fabric starts to warp–… if you pull it and other pieces start to move, there are connections. That thread is actually holding this together.”
Courtney Russell McCrea enjoys over 30 years of venture capital and private equity investment experience including 13 years of fund investing and 18 years of direct principal investing.
Courtney is Co-Founder and Managing Partner of Recast Capital, a 100% women-owned platform investing in and supporting emerging managers in venture, with a focus on diverse partnerships.
Prior to co-founding Recast, Courtney was a Managing Director of Weathergage Capital, a boutique fund of funds that provided its clients with access to premier venture capital, growth equity and micro-VC partnerships. Venture fund commitments included both brand name funds and emerging managers. In addition to fund investment responsibilities, Courtney led the direct co investing program at Weathergage. During her 10 year tenure at Weathergage, Courtney made commitments to 100 funds and seven direct co-investments.
Prior to Weathergage, Courtney was a General Partner with Weston Presidio, a leading diversified private equity firm based in San Francisco. After 7 years at Weston Presidio, she left in 2004 and founded Silver Partners, a private equity advisory firm where she evaluated secondary and co-investment opportunities and advised consumer growth businesses. Courtney was also a Director at Sterling Stamos, where she managed investments in buyout funds, venture capital funds and hedge funds.
Earlier in her career, Courtney made equity co-investments as an Assistant Vice President at PPM America. She also spent 5 years at GE Capital where she worked on private equity, senior and subordinated debt investing.
Courtney has an M.B.A., with honors, from the Kellogg Graduate School of Management and a B.A. in Economics from the University of Illinois, Champaign-Urbana. She is a member of the Kauffman Fellows Class 3.
Courtney is a member of the NVCA Forward Board of Directors and the Alzheimer’s Association Northern California and Nevada Board of Directors.
[00:00] Intro [02:37] What of Courtney’s past helped her co-found Recast Capital [04:02] Three reasons to invest in emerging managers [05:17] What does “institutional quality of emerging managers” mean? [06:52] How to diligence emerging managers [10:30] How to do reference checks on GPs [14:40] How has being a Kauffman fellow helped Courtney build Recast’s Enablement and Accelerate programs [19:51] How do alumni GP stay active in Recast Capital’s community [20:59] Zoom vs. in-person education for GPs [23:00] What kind of managers do Recast Capital invest in versus who ends up joining the Enablement Program versus who joins the Accelerate program [28:33] Why are the Enablement Program and Accelerate program free [30:25] Spinouts from larger funds [32:12] What are emerging manager red flags? [34:03] Should emerging managers have answers to questions on succession planning? [36:00] Challenging the 1% GP commit: How much should different archetypes of GPs commit to their own fund? [40:52] Lessons from arguments between GPs [46:30] Getting Courtney to say yes [47:46] Courtney may make some enemies with this statement! [48:54] Thank you to Alchemist Accelerator for sponsoring! [51:30] Legal disclaimer
Jamie Rhode is Principal at Verdis Investment Management, focused on venture capital, private equity and hedge fund investment sourcing and due diligence.
She joined Verdis from Bloomberg, where she held roles in both equity research and credit analysis. There, she created, managed and leveraged an extensive library of statutory and financial and market data for buy and sell-side clients that 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.
[00:00] Intro [04:27] What skills did Jamie acquire while working at Bloomberg [08:45] What inspired Jamie to go into equity research [11:55] Verdis’ original allocation model [13:27] How Verdis first built their deal flow in 2016 [15:26] What Jamie likes in a cold email [16:41] What kind of cold email to VCs won Verdis an 80% response rate? [20:27] Verdis’ inbound vs outbound deal flow over the years [22:34] Why Verdis’ mandate is to invest in diversified portfolios as opposed to concentrated portfolios [27:50] The downsides of early distributions [32:12] The benefits of early distributions [36:01] Luck versus skill [40:15] Why does Verdis measure “outliers” as opposed to unicorns [44:37] The relationship between proprietary deal flow and portfolio allocation models [45:55] How does Verdis decide which portfolio funds get re-ups [48:52] Why GPs shouldn’t conform their strategies to LPs’ mandates [51:08] Why LPs should also have consistent strategies [53:28] Why Verdis invests a third of their fund in funds based in Los Angeles [58:50] A case study on what happens when you skip a step in the due diligence process [1:02:57] The two things a GP can do to win Jamie over [1:05:32] When does Verdis like to receive their tax documents from GPs? [1:08:46] Thank you to Alchemist Accelerator for sponsoring [1:11:23] Legal disclaimer
“Diversified managers have struggled a lot more to raise capital than more concentrated managers. I think it’s a little bit of a contrarian approach.”
“That venture capital bucket is the compounding machine for the family. We don’t look to that bucket for liquidity.”
“If you’re compounding at 25% for 12 years, that turns into a 14.9X.If you’re compounding at 14%, that’s a 5. And public market which is 11% gets you a 3.5X.”
“90% of your overall return comes from asset allocation, not individual investments.”
“If that asset is compounding at 20%, still the last 20% of time produces 40% of your return.”
“Outliers don’t truly emerge until 8-10 years after the investment.”
“If you provide me exposure to the exact same pool of startups [as] another GP of mine, then unfortunately, you don’t have proprietary deal flow for me. You don’t enhance my network diversification.”
Eric Woo is co-founder and CEO of Revere, where he leads product development and investment analysis & due diligence efforts.
Prior to starting Revere, he was Head of Institutional Capital at AngelList, the world’s largest online venture capital investment platform that supports over $10B in assets and has participated in the financing of over 190 “unicorn” companies. At AngelList, Eric worked closely with investors to curate early-stage fund and deal opportunities. He also developed systematic and data-driven strategies for institutional investors.
Over the last 12 years, Eric has helped allocate over $160 million in venture funds and direct co-investments. Notably, he played a key role in establishing the emerging manager investment programs at Top Tier Capital and Northgate Capital, organizations that collectively have more than $15B in AUM. Eric is an acknowledged thought leader in the VC emerging managers ecosystem.
Before his venture career, Eric worked in pricing and risk management for a large insurance company and financial guarantor. He also has experience in online marketing and private market research. A Bay Area native, Eric graduated with a B.S. degree in Mechanical Engineering from UC Berkeley and has been a CFA charter holder since 2004.
[00:00] Intro [03:30] How did Eric pivot from being an engineer to an asset manager? [09:52] Building emerging manager programs at Top Tier and Northgate [15:25] How does Eric define conviction? [17:23] What was the thesis that Eric raised his fund of funds on? [20:00] How much does an established fund’s portfolio is allocated to emerging managers? [23:48] How did Eric pitch institutional LPs to join AngelList? [32:48] How does Eric measure the ROI on hosting events? [36:24] How does Eric pitch Revere to my relatives? [39:29] How does Revere rate emerging managers? [47:49] What are telltale signs of a fund’s outperformance? [51:36] The value of community [58:10] What are subconscious decisions LPs make that deserve a double take? [1:02:09] Why strategy drift is not a bad thing [1:04:57] What VC firm turned identity into culture? [1:07:39] What is Eric’s nighttime routine? [1:09:50] Angel investing is to tipping as LP investing is to ____ [1:13:45] What is one thing Eric recommends GPs do but no one ever listens? [1:15:18] What is an investment opportunity Eric missed because of what he didn’t do rather than what he did? [1:18:21] Thank you to Alchemist Accelerator for sponsoring! [1:20:58] Legal disclaimer
Soooooooo… (I know, what a great word to start a blogpost) I started this essay, with some familiarity on one subject. Little did I know I was going to learn about an entirely different industry, and be endlessly fascinated about that.
The analogy that kicked off this essay is that re-upping on a portfolio company is very much like re-signing a current player on a sports team. That was it. Simple as it was supposed to sound. The goal of any analogy was to frame a new or nuanced concept, in this case, the science of re-upping, under an umbrella of knowledge we were already familiar with.
But, I soon learned of the complexity behind re-upping players’ contracts, as one might assume. And while I will claim no authority over the knowledge and calculations that go into contracts in the sports arena, I want to thank Brian Anderson and everyone else who’s got more miles on their odometer in the world of professional sports for lending me their brains. Thank you!
As well as Arkady Kulik, Dave McClure, and all the LPs and GPs for their patience and willingness to go through all the revisions of this blogpost!
While this was a team effort here, many of this blogpost’s contributors chose to stay off the record.
The year was 1997.
Nomar Garciaparra was an instantaneous star, after batting an amazing .306/.342/.534. For the uninitiated, those are phenomenal stats. On top of batting 30 home runs and 11 triples – the latter of which was a cut above the rest of the league, it won him Rookie of the Year. And those numbers only trended upwards in the years after, especially in 1999 and 2000. Garciaparra became the hope for so many fans to end the curse of the Bambino – a curse that started when the Red Sox traded the legendary Babe Ruth to the Yankees in 1918.
Then 2001 hit. A wrist injury. An injured Achilles tendon. And the fact he needed to miss “significant time” earned him a prime spot to be traded. Garciaparra was still a phenomenal hitter when he was on, but there was one other variable that led to the Garciaparra trade. To Theo Epstein, above all else, that was his “fatal flaw.”
Someone that endlessly draws my fascination is Theo Epstein. Someone that comes from the world of baseball. A sport that venture draws a lot of inspiration, at least in analogy, like one of my fav sayings, Venture is one of the only types of investments where it’s not about the batting average but about the magnitude of the home runs you hit.
If you don’t follow baseball, Theo Epstein is the youngest general manager in the history of major league baseball at 26. But better known for ending the Curse of the Bambino, an 86-year curse that led the Red Sox down a championship drought that started when the Red Sox traded Babe Ruth to the Yankees. Theo as soon as he became general manager traded Nomar Garciaparra, a 5-time All-star shortstop, to the Cubs, and won key contracts with both third baseman Bill Mueller and pitcher Curt Schilling. All key decisions that led the Red Sox to eventually win the World Series 3 years later.
And when Theo left the Red Sox to join the Chicago Cubs, he also ended another curse – The Curse of the Billy Goat, ending with Theo leading them to a win in the 2016 World Series. You see, in baseball, they measure everything. From fly ball rates to hits per nine innings to pitches per plate appearance. Literally everything on the field.
But what made Theo different was that he looked at things off the field. It’s why he chose to bet on younger players than rely on the current all-stars. It’s why he measures how a teammate can help a team win in the dugout. And, it’s why he traded Nomar, a 5-time All Star, as soon as he joined, because Nomar’s “fatal flaw” was despite his prowess, held deep resentment to his own team, the Sox, when they tried to trade him just the year prior for Alex Rodriguez but failed to.
So, when Danny Meyer, best known for his success with Shake Shack, asked Theo what Danny called a “stupid question”, after the Cubs lost to the Dodgers in the playoffs, and right after Houston was hit by a massive hurricane, “Theo, who are you rooting for? The Dodgers so you can say you lost to the winning team, or Houston (Astros), because you want something good to happen to a city that was recently ravaged by a hurricane.”
Theo said, “Neither. But I’m rooting for the Dodgers because if they win, they’ll do whatever every championship team does and not work on the things they need to work on during the off season. And the good news is that we have to play them 8 times in the next season.”
You see, everyone in VC largely has access to the same data. The same Pitchbook and Crunchbase stat sheet. The same cap table. And the same financials. But as Howard Marks once said in response how you gain a knowledge advantage:
“You have to either:
Somehow do a better job of massaging the current data, which is challenging; or you have to
Be better at making qualitative judgments; or you have to
Be better at figuring out what the future holds.”
For the purpose of this blogpost, we’re going to focus on the first one of the three.
What is value?
To begin, we have to first define a term that’ll be booking its frequent flier miles for the rest of this piece – expected value.
Some defined it as the expectation of future worth. Others, a prediction of future utility. Investopedia defines it as the long-term average value of a variable. Merriam-Webster has the most rudimentary definition:
The sum of the values of a random variable with each value multiplied by its probability of occurrence
On the other hand, venture is an industry where the beta is arguably one of the highest. The risk associated with outperformance is massive as well. And the greatest returns, in following the power law, are unpredictable.
We’re often blessed with hindsight bias, but every early-stage investor in foresight struggles with predicting outlier performance. Any investor that says otherwise is either deluding you or themselves or both. At the same time, that’s what makes modeling exercises so difficult in venture, unlike our friends in hedge funds and private equity. Even the best severely underestimate the outcomes of their best performers. For instance, Bessemer thought the best possible outcome for Shopify was $400M with only a 3% chance of occurring.
Similarly, who would have thought that jumping in a stranger’s car or home, or live streaming gameplay would become as big as they are today. As Strauss Zelnick recently said, “The biggest hits are by their nature, unexpected, which means you can’t organize around them with AI.” Take the word AI out, and the sentence is equally as profound replaced with the word “model.” And it is equally echoed by others. Chris Paik at Pace has made it his mission to “invest in companies that can’t be described in a single sentence.”
But I digress.
Value itself is a huge topic – a juggernaut of a topic – and I, in no illusion, find myself explaining it in a short blogpost, but that of which I plan to spend the next couple of months, if not years, digging deeper into, including a couple more blogposts that are in the blast furnace right now. But for the purpose of this one, I’ll triangulate on one subset of it – future value as a function of probability and market benchmarks.
In other words, doubling down. Or re-upping.
For the world of startups, the best way to explain that is through a formula:
E(v) = (probability of outcome) X (outcome)
E(v) = (graduation rate) X (valuation step up from last round) X (dilution)
For the sake of this blogpost and model, let’s call E(v), appreciation value. So, let’s break down each of the variables.
Graduation rates
What percent of your companies graduate to the next round? I shared general benchmarks in this blogpost, but the truth is it’s a bit more nuanced. Each vertical, each sub-vertical, each vintage – they all look different. Additionally, Sapphire’s Beezer recently said that it’s normal to expect a 20-30% loss ratio in the first five years of your fund. Not all your companies will make it, but that’s the game we play.
On a similar note, institutional LPs often plan to build a multi-fund, multi-decade relationship with their GPs. If they invest in a Fund I, they also expect to be there by Fund III.
Valuation step ups
How much greater is the next round’s valuation in comparison to the one in which you invested? Twice as high? Thrice? By definition, if you double down on the same company, rather than allocate to a net new company, you’re decreasing your TVPI. And as valuations grow, the cost of doubling down may be too much for your portfolio construction model to handle, especially if you’re a smaller sub-$100M fund.
It’s for the same reason that in the world of professional sports, there are salary caps. In fact, most leagues have them. And only the teams who:
Have a real chance at the championship title.
Have a lot in their coffers. This comes down to the composition of the ownership group, and their willingness to pay that tax.
And/or have a city who’s willing to pay the premium.
… can pay the luxury tax. Not to be too much of a homer, but the Golden State Warriors have a phenomenal team and are well-positioned to win again (at least at the time of this blogpost going out). So the Warriors can afford to pay the luxury tax, but smaller teams or teams focused on rebuilding can’t.
The Bulls didn’t re-sign the legendary Michael Jordan because they needed to rebuild. Indianapolis didn’t extend Peyton Manning’s contract ‘cause they didn’t have the team that would support Peyton’s talents. So, they needed to rebuild with a new cast of players.
Similarly, Sequoia and a16z might be able to afford to pay the “luxury tax” when betting on the world’s greatest AI talent and for them to acquire the best generative AI talent. Those who have a real chance to grow to $100M ARR, given adoption rates, retention rates, and customer demand. But as a smaller fund or a fund that has a new cast of GPs (where the old guard retired)… can you?
Dilution
If a star player is prone to injury or can only play 60 minutes of a game (rather than 90 minutes), a team needs to re-evaluate the value of said player, no matter how talented they are. How much of a player’s health, motivation, and/or collaborativeness – harkening back to the anecdote of Nomar Garciaparra at the beginning – will affect their ability to perform in the coming season?
Take, for instance, the durability of a player. If there ‘s a 60% chance of a player getting injured if he/she plays longer than 60 minutes in a game and a 50% of tearing their ACL, while they may your highest scorer this season, they’re not very durable. If that player missed 25% of practices and 30% of games, they just don’t have it in them to see the season through. And you can also benchmark that player against the rest of the team. How’s that compared with the team’s average?
Of course, there’s a parallel here to also say, every decision you make should be relative to industry and portfolio benchmarks.
How great of a percentage are you getting diluted with the next round if you don’t maintain your ownership? This is the true value of your stake in the company as the company grows.
How does one use the appreciation value equation?
E(v) = (graduation rate) X (valuation step up from last round) X (dilution)
If the expected value is greater than one, the company is probably not worth re-upping. And that probably means the company is overhyped, or that that market is seeing extremely deflated loss ratios. In other words, more companies than should be, are graduating to the next stage; when in reality, the market is either a winner-take-all or a few-take-all market. If it is less than or equal to one, then it’s ripe to double down on. In other words, the company may be undervalued.
And to understand the above equation or for it to be actually useful (outside of an abstract concept), you need market data. Specifically, around valuation step ups as a function of industry and vertical.
If you happen to have internal data across decades and hundreds of companies, then it’s worth plugging in your own dataset as well. It’s the closest you can get to the efficient market frontier.
But if you lack a large enough sample size, I’d recommend the below model constructed from data pulled from Carta, Pitchbook, and Preqin and came from the minds of Arkady Kulik and Dave McClure.
The model
The purpose of this model is to help your team filter what portfolio companies are worth diving deeper into and which ones you may not have to (because they didn’t pass the litmus test) BEFORE you evaluate additional growth metrics.
It is also important to note that the data we’ve used is bucketed by industry. And in doing so, assumptions were made in broad strokes. For example, deep tech is broad by design but includes niche-er markets that have their own fair share of pricing nuances in battery or longevity biotech or energy or AI/ML. Or B2B which include subsectors in cybersecurity or infrastructure or PLG growth.
Take for instance…
Energy
Energy sector appreciation values and follow-on recommendations
The energy sector sees a large drop in appreciation value at the seed stage, where all three factors contribute to such an output. Valuation step-up is just 1.71X, graduation rates are less than 50% and dilution is 38% on average.
Second phase where re-upping might be a good idea is Series B. Main drivers as to such a decision are that dilution hovers around 35% and about 50% of companies graduate from Series A to Series B. Mark ups are less significant where we generally see only an increase in valuation at about 2.5X, which sits around the middle of the pack.
Biotech
Biotech sector appreciation values and follow-on recommendations
The biotech sector sees a large drop in appreciation value at the Seed stage. This time, whereas dilution seems to match the pace of the rest of the pack (at an average of 25%), the two other factors shine greater in making a follow-on decision. Valuation step up are rather low, sitting at 1.5X. And less than 50% graduate to the next stage.
In the late 2023 market, one might also consider re-upping at the Series C round. Main driver is the unexpectedly low step-up function of 1.5X, which matches the slow pace of deployment for growth and late stage VCs. On the flip side, a dilution of 17% and graduation rate of 60% are quite the norm at this stage.
In closing
All in all, the same exercise is useful in evaluating two scenarios – either as an LP or as a GP:
Is your entry point a good entry point?
Between two stages, where should you deploy more capital?
For the former, too often, emerging GPs take the stance of the earlier, the better. Almost as if it’s a biblical line. It’s not. Or at least not always, as a blanket statement. The point of the above exercise is also to evaluate, what is the average value of a company if you were to jump in at the pre-seed? Do enough graduate and at a high enough price for it to make sense? While earlier may be true for many industries, it isn’t true for all, and the model above can serve as your litmus test for it. You may be better off entering at a stage with a higher scoring entry point.
For the latter, this is where the discussion of follow on strategies and if you should have reserves come into play. If you’re a seed stage firm, say for biotech, using the above example, by the A, your asset might have appreciated too much for you to double down. In that case, as a fund manager, you may not need to deploy reserves into the current market. Or you may not need as large of a reserve pool as you might suspect. It’s for this reason that many fund managers often underallocate because they overestimate how much in reserves they need.
If you’re curious to play around with the model yourself, ping Arkady at ak@rpv.global, and you can mention you found out about it through here. 😉
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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.
Beezer Clarkson leads Sapphire Partners‘ investments in venture funds domestically and internationally. Beezer began her career in financial services over 20 years ago at Morgan Stanley in its global infrastructure group. Since, she has held various direct and indirect venture investment roles, as well as operational roles in software business development at Hewlett Packard. Prior to joining Sapphire in 2012, Beezer managed the day-to-day operations of the Draper Fisher Jurvetson Global Network, which then had $7 billion under management across 16 venture funds worldwide.
In 2016, Beezer led the launch of OpenLP, an effort to help foster greater understanding in the entrepreneur-to-LP tech ecosystem. Beezer earned a bachelor’s in government from Wesleyan University, where she served on the board of trustees and currently serves as an advisor to the Wesleyan Endowment Investment Committee. She is currently serving on the board of the NVCA and holds an MBA from Harvard Business School.
[00:00] Intro [02:57] Who was Beezer’s first mentor? [06:57] How did Beezer get to work with the founder of eBay? [10:45] The strength of diverse backgrounds [14:11] How Hustle Fund convinced Foundry Group to invest in their fund [15:27] Why should another venture fund exist in this world? [19:41] What does proprietary “access” to deal flow mean? [23:53] Superpowers on the Sapphire Partners team [25:35] How does Sapphire resolve disagreements? [27:11] Why does entire Sapphire team meet with GPs? [28:18] A sneak peek into Sapphire investment process [33:34] What does Sapphire look for in a pitch deck? [34:58] The art and science behind Sapphire’s own portfolio construction [43:37] How does Sapphire look at fund managers’ portfolio construction? [47:50] Meaningful fund metrics in the first 5-7 years of a VC fund [52:44] How to think about recycling [56:15] What keeps Beezer humble? [58:22] What is an investment opportunity Beezer missed because what she didn’t do? [1:04:03] Thank you to Alchemist Accelerator for sponsoring! [1:06:39] Legal Disclaimer
“It’s the access and why do the great people pick you that is much harder. And that speaks to what it is that you, the investor, are bringing to the table. There’s an LP-GP corollary to this too. The strongest GPs can pick their LPs, what gives the access from the LP side. So it’s a really different way of saying why are you so special. But it’s repeatable.”
“The good and the bad of being an LP is that you’re the peanut gallery to the show. So yes, a VC doesn’t exist unless LPs back them. The LPs are limited partners. We’re limited, which is there for a reason. You’re not driving the bus. There’s humility in that. I liken it to being a parent. There’s all sorts of things you take pride in in your kids. But at the end of the day, it’s your fund; it’s not me. You’re the one making the choices. The same way, it’s the entrepreneurs that make the companies.”
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. In addition to successfully identifying and catalyzing nascent funds, he bridges a gap between the providers of capital and the consumers of capital by creating platforms for transparent dialogue. Chris authors the blog SuperLP in which he chronicles his adventures investing in venture capital and private equity; and his brick oven pizza parties, small gatherings of LPs, GPs, and entrepreneurs, are well-known in the Valley. He is sought after not only for investment capital, but also for his advice, and serves on numerous managers’ advisory boards.
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. He started his business career as a strategy consultant at Monitor Company. Chris regularly speaks at industry conferences and business schools and is a frequent resource for tech and business media. He earned his B.A. with Distinction in history from Yale College in 1994 and an M.B.A. from Yale School of Management in 2001. He was awarded the CFA Charter in 2004.
[00:00] Intro [03:01] What Chris learned from the founder of Greylock and the Chief Investment Officer at Yale’s Endowment. [06:25] How a timber pitch and losing the nose game earned a Chris a front-row seat to venture capital. [10:35] How 2001 is similar to 2023. [12:44] What legislation makes California special? [13:11] Do firms need to have geographical presence? [16:44] How did Chris first start to build his deal flow? [23:17] What needs to go in a good cold email [24:53] Breaking down how Chris constructed his first opinion on great venture capital firms [30:04] How did Josh Kopelman build ‘ecosystem as a service’ in 2004 [33:28] How did Chris end up backing Data Collective [37:52] What are the 4 leading indicators of fund manager outperformance? [48:46] Which firm of Chris’ recent portfolio is willing to be wrong and alone? [51:32] Chris’ Peter Dolan impression [56:09] Thank you to Alchemist Accelerator for sponsoring [58:45] Legal disclaimer
“Entrepreneurship is like a gas. It’s hottest when it’s compressed.”
“Have an opinion. Have a viewpoint. There are so many investors who are just caught up in these tides. They’re heat-seeking missiles, looking for the new, new thing. The reality is that by the time, the new, new thing is new to them, it’s already a little bit longer in the tooth in the ecosystem — all the great deals have been done.”
“I’m looking for well-rounded holes that are made up of jagged pieces that fit together nicely.”
