Ian Park is a Partner at Primer Sazze, a firm dedicated to investing in ambitious talent across East Asia and North America. Prior to Primer Sazze, he was a venture capital allocator at Korea Investment Corporation (KIC), one of the largest sovereign wealth institutions in the world, where he focused on investments into venture managers and founders. He’s also amassed a fervent following of AI, VC, and LP fans over the years through writing his newsletter and his YouTube channel. Prior to KIC, he’s built his investing repertoire at VMG Partners and Bertram Capital after leaving the world of consulting.
Ian studied mathematics and economics at University of Minnesota and earned his master’s degree in economics at Boston College. He’s also got his master’s in computer and information technology from University of Pennsylvania as well.
[00:00] Intro [02:26] From Boston to SF [10:58] How does Ian diligence a GP’s ability to source? [13:37] The three things Ian looks for in emerging managers [17:04] Best practices on sharing insights [26:37] A typical week at KIC and conversations with GPs [30:42] How to best approach co-investment opportunities as an LP [33:38] How does Ian get to conviction on a direct deal [39:19] What funds should you invest in if you prioritize co-investments? [43:23] What does Ian look for in a Fund II/III that’s not TVPI, DPI, or IRR? [47:26] Relationship management best practices with GPs [53:30] The good, bad, and ugly at a sovereign wealth fund [1:00:00] What is Ian investing in at Primer Sazze? [1:10:20] What has Ian learned over the years as a content creator? [1:16:57] Thank you to Alchemist Accelerator for sponsoring! [1:17:57] If you liked the episode, would greatly appreciate a like and a share!
“Regression is trying to figure out why this happened, and machine learning is more about what’s going to happen.” – Ian Park
“The three things I’m looking for in emerging managers are first, information; second, network; third, it’s more about co-investments.” – Ian Park
“VCs should publish their thoughts as soon as possible – be it on YouTube or be it on a blog. You have to tell people what you think, and you have to claim that’s your idea too, so you can get some credit.” – Ian Park
“My rule of thumb is five years for 1X [DPI] for PE funds, and seven years for VC funds.” – Ian Park
Inspired by John Felix in our recent episode together, as LPs, we often get pitches where GPs claim they’re an N of 1. That they’re the only team in the venture world who has something. Usually it’s the fact that they have brand-name co-investors. Or they run a community. Or they have an operating background, like John says below. And it isn’t that unlike the world of founders pitching VCs.
The truth is most “unfair advantages” are more commonplace than one might think. Even after one hears 50 GP pitches, one can get a pretty good grasp of the overlap.
For the purpose of this blogpost, the goal is to help the emerging LP who has yet to get to 50-100 pitches. And for the GP who hasn’t seen that many other pitches to know what the rest of the market is like. Obviously, the world of venture shifts all the time. What’s unique today is commonplace tomorrow.
For the sake of this post, and to make sure I’m not using some words too liberally, let’s define a few terms I will use quite often in this blogpost:
Product: A fully differentiated edge that an emerging manager/firm has. In other words, a must-have, if the firm is to succeed.
Feature: A partially differentiated edge, if at all, an edge. In many cases, this may just be table stakes to be an emerging manager today. In other words, a nice-to-have or expected-to-have.
Networks
Product
Feature
Differentiated community (high/consistent frequency of engagement)
Alumni network (school or company)
Downstream investors that prioritize your signals
In-person events
Keeper test
Virtual events
Co-investors
Networks, in many ways, are synonymous with your ability to source. It’s the difference in a lot of ways from co-investing versus investing before anyone else (versus investing after everyone else). The latter of which is least desirable for an LP looking for pure-play venture and risk capital.
The quickest check is simply an examination of numbers. LinkedIn or Twitter followers. Newsletter subscribers. Podcast subscribers. Community members. While it’s helpful context, it’s also simply not enough.
Here’s a simple case study. Someone who has 5,000 followers on LinkedIn with hundreds of people engaging with their content in a meaningful way is usually more interesting than beat someone who has 20,000 followers on LinkedIn, who only has 10s of engagements. Even better if one generates a substantial amount of deal flow with their content alone.
One thing that is hard to evaluate without doing an incredible amount of diligence is your founder network referring other founders to you. From one angle, it’s table stakes. From another, true referral flywheels are powerful. In the former, purely having it on your pitch deck without additional depth makes that section of the deck easily skippable.
One of my favorite culture tests is Netflix’s Keeper test. That if a team member were to get laid off or fired, would you fight to keep them or be relieved? The best folks, you would fight to keep. And as such, one of my favorite questions during diligence to ask the breakout / top founders in each GPs’ portfolios is: If, gun to head, you had to fire all your investors from your cap table and only keep three, which three would you keep and why?
Do note I differentiate breakout and top founders. They’re not mutually exclusive, but sometimes you can be brilliant and do everything right and things still might not work out. But smart people will keep at it and start a new company. And maybe it was a smaller exit the first time, but the second or third time, their business may really take off. Of course, sometimes I don’t have the same amount of time to diligence each GP as an LP with a team, so I generally ask the question: If all of your portfolio founders were to drop what they’re currently doing regardless of outcome, and start a new business, who are the top 2-3 people you would back again without hesitation?
At the end of the day, for networks, it’s all about attention. It’s not about who you know, but about how well you know them AND who you know that TRUSTS what you know. In an era, where there is more and more noise and information everywhere, a wealth of information leads to a poverty of attention. But if you have a strong foothold on founders’ and/or investors’ attention in one way or another, you have something special.
Experience/expertise
Product
Feature
Early hire at a unicorn company + Grew a key metric by many multiples
Hired top operators who’ve gone on to change the world
Experience at a larger firm where you didn’t lead rounds / fight for deals
Independent board member
Experience only matters here where there are clear differentiations that you’ve seen and can recognize excellence. In a broader sense, having an operating background is unfortunately table stakes. As John mentioned, any generalities are.
While strong experiences help you source, its main draw is that it impacts the way you pick and win deals. Only those who have experience recognizing excellence (working with or hiring) know the quality in which A-players operate. Others can only imagine what that may look like. That’s why if you’re going to brag that you’re a Xoogler (or insert any other alumni), LPs are going to care which vintage you were at Google. A 2003 Xoogler is more likely to have that discerning eye than a 2023 Xoogler. The same is true for schools. Being a college dropout from a Harvard and Stanford is different from dropping out of college at a two-year program. Not that there’s anything wrong with the latter, but you must find other ways to stand out if so.
Given a large pool of noise when it comes to titles, it’s for that reason I love questions like: “What did you do in your last role that no one else with that title has done?”
Additionally, when it comes to references, positive AND negative references are always better than neutral references. Even better is that you stay top of mind for your founders regularly. A loose proxy, while not perfect, is roughly 2-3 shoutouts per year in your founders’ monthly updates. It takes a willingness to be helpful and for the founders to recognize that you’ve been helpful.
Process
Product
Feature
Response time/speed
Some generic outline of an investment process
Evidence of a prepared mind
Doing diligence
Asking questions during diligence most others don’t know how to
Yes, response time (or speed in getting back to a founder, or anyone for that matter) is a superpower. It’s remarkably simple, but incredibly hard to execute at scale. By the time, you get to hundreds of emails per week, near impossible, without a robust process. One of my favs to this day happens to be Blake Robbins’ email workflow who’s now at Benchmark.
Now I’m not saying one should rush into a deal, or skip diligence, but making sure people aren’t ghosted in the process matter immensely. As my buddy Ian Park puts it, it’s better for a founder or an LP to know that a GP is working on it than to not feel heard.
You’ve probably heard of the “prepared mind.” The idea that one proactively looks for solutions for a given problem as a function of their lived experiences, research, and analyses over the years.
Its origin probably goes as far back as Louis Pasteur, but I first heard it popularized in venture by the folks at Accel. Anyone can say they have a prepared mind. From an LP’s perspective, we can’t prove that you do or don’t have it outside of you just saying it in a pitch meeting. That’s why a trail of breadcrumbs matter so much. Most people describe it as a function of their track record or past operating experiences. Unfortunately, there may be a large attribution to hindsight bias or revisionist’s history. Being brutally honest with yourself of what was intentional and what was lucky or accidental is a level of intellectual honesty I’ve seen many LPs really appreciate. As an example, I’d really recommend you hearing what Martin Tobias has to say on that topic.
But the best way to illustrate a prepared mind is easier than one thinks. But it also requires starting today. Content. Yes, you can tweet and post on social media or podcast. But I’d probably rank long-form content at the top.
Public long-form writing (or production in general) is arduous. The first draft is rarely perfect. Usually far from it. With the attentive eye and the cautious mind, you go back to the draft again and again until it makes sense. Sometimes, you may even get third parties to comment and revise. Long-form is like beating and refining iron until it’s ready to be made into a blade. And once it’s out, it is encased in amber. A clear record of preparation.
In closing
Pat Grady had a great line on the Invest Like the Best podcast recently. “If your value prop is unique, you should be a price setter not a price taker, meaning your gross margins should be really good. A compelling value prop is a comment on high operating margins. You shouldn’t need to spend a lot on sales and marketing. So the metrics to highlight would be good new ARR/S&M, LTV:CAC ratios, payback periods, or percent of organic to paid growth.”
In a similar way, as a venture firm, if your value prop is truly unique, you’re a price setter. You can win greater ownership and set valuation/cap prices. If your value prop is compelling, the quality of your sourcing engine should be second to none, not just from being present online, but from the super-connectors in the industry, be it other investors, top-tier founders, or subject-matter experts.
Of course, all of the above examples are only ones that recently came to mind. The purpose of this blog is for creative construction and destruction. So if you have any other examples yourself, do let me know, and I can retroactively add to this post.
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.
Dave McClure has been a Silicon Valley entrepreneur and investor for over 25 years. He has invested in hundreds of startups around the world, including 10+ IPOs and 40+ unicorns (Credit Karma, Twilio, SendGrid, Lyft, The RealReal, Talkdesk, Grab, Intercom, Canva, Udemy, Lucid, GitLab, Reddit, Stripe, Bukalapak).
Prior to launching PVC in 2019, he was the founding partner of 500 Startups, a global VC firm with $1B AUM that has invested in over 2,500 companies and 5,000 founders across 75 countries. Dave created 20 VC funds under the 500 brand and invested in 20 other VC funds around the world.
Dave began his investing career at Founders Fund where he made seed-stage investments in 40 companies, resulting in 4 unicorns and 3 IPOs. He led the Credit Karma seed round in 2009 (acq INTU, over 400X return). His $3M portfolio returned more than $200M (~65X) in under 10 years.
Before he became an investor, Dave was Director of Marketing at PayPal from 2001-2004. He was also the founder/CEO of Aslan Computing, acquired by Servinet in 1998. Dave graduated from the Johns Hopkins University (BS, Engineering / Applied Mathematics).
[00:00] Intro [03:37] How did Narnia inspire the start of Dave’s entrepreneurship? [08:32] On the brink of bankruptcy [11:42] The lesson Dave took away from his first acquisition [13:19] What did Dave do that no one else did as a marketing director? [16:06] What do most people fail to appreciate about secondaries? [22:31] The 3 bucket method for secondaries [28:46] How much do fund returners matter for secondaries? [33:01] When do LPs typically think about selling fund secondaries? [42:04] What are two questions that Dave asks to see if a portfolio is good for a secondary? [46:10] Why is it complicated if a GP wants to buy an LP’s stake? [55:03] When do most funds return 1X? 2-3X? [57:13] Underwriting VC vs PE secondaries [1:01:49] How do institutional LPs react to VC secondaries? [1:07:01] The founding story of Practical VC [1:15:36] Closing Josh Kopelman in Fund I [1:18:47] How often does the PayPal Mafia get together? [1:23:49] What’s the most expensive lessons Dave learned over the years? [1:27:38] Thank you to Alchemist Accelerator for sponsoring! [1:28:29] If you enjoyed the episode, would deeply appreciate you sharing with one other friend!
Axios’ Dan Primack recently wrote a great update on the shifting tides of institutional LPs allocating to venture. Smaller LPs often need liquidity, given limited capital inflows. And unfortunately, cannot afford to play the long game. Those with access to additional sources of capital, as well as aren’t constrained by mandatory capital outflows, tend to have deeper desires to continue allocating to venture.
In conversations with a number of LPs who write $3-10M checks, many have learned first-hand venture’s J-curve. Something these emerging LPs have underestimated in the last few years. As such, a number of foreign LPs are holding back. Moreover, there are looming concerns of currency risk. For instance, US-based LPs who have historically invested in funds domiciled outside of the US, are now accounting for currency depreciation. Ranging from 20-30%. Which means, what normally would have been a 4X net fund based in, say, Japan, is now underwritten as a 3X net. And a 10X would be an 8X.
Early liquidity is nice. But any DPI in the first few years is almost never meaningful and often gets recycled back into the fund to make new investments.
With VC being underwritten to 15-year time horizons, as a GP, you need LPs who can afford that time horizon. Yes, most funds have 10-year fund terms, with the two-year extension. But if the 2008-2012 vintages have taught us anything, it’s that GPs will ask for extensions beyond that. Simply since the best companies stay private longer. Airbnb was private for 12 years. Klaviyo, 11 years. Reddit, 19 years.
Of course, some of these companies are outliers. But the average tech company still stays private for 9-10 years. Assuming venture’s three-year deployment period, the last (hopefully great) investment out of a fund may take till Year 13 to finally achieve a large exit, not including the lock-up period too. That’s not accounting for a growing number of funds pitching four to five-year deployment periods. Excluding emerging market funds, where emerging market companies go public faster.
Moreover, companies need double the revenue they needed back in 2018 to go public. Shoutout to Tomasz Tunguz for the graphic.
To make things even more spicy, an interesting trend right now is where we see VC firms moving into PE, and PE moving into VC. At the same time, you have some large institutions who are now investing across multiple asset classes, including public markets. Consequentially, an interesting discussion commences. Should private investors hold public assets?
I was fortunate to be in an LP discussion group recently where we debated that exact question. The general consensus was no. VCs are paid to be private market investors, not public markets. Where their expertise does not lend itself well to watching market movements closely. The only exceptions are crossover funds who build out specific public markets teams. And so when an LP invests, they know exactly what they’re getting themselves into. The expectation is to return the capital back to the LPs right after the lock-up period.
But if the narrative ever changes, prepare for an even longer haul. Good thing, most LPs also agree that evergreen funds don’t make sense for venture either. But that’s a discussion for another day.
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.
John Felix is the Head of Emerging Managers at Allocate where he leads manager diligence and product innovation within the emerging manager ecosystem. Prior to joining Allocate, John worked at Bowdoin College’s Office of Investments, helping to invest the $2.8 billion endowment across all asset classes, focusing on venture capital. Prior to Bowdoin, John worked at Edgehill Endowment Partners, a $2 billion boutique OCIO. At Edgehill, John was responsible for building out the firm’s venture capital portfolio, sourcing and leading all venture fund commitments. John started his career at Washington University’s Investment Management Company as a member of the small investment team responsible for managing the university’s now $15 billion endowment. John graduated from Washington University in St. Louis with a BSBA in Finance and Entrepreneurship.
[00:00] Intro [02:35] The band that started it all [08:43] How did a band of 3 become a band of 5? [10:39] What bands served as inspiration for John? [13:37] Lessons on building teams and trust [19:48] The mischance that led John into the endowment world [22:34] What John learned under 3 different CIOs [26:20] What does concentration mean for Washington University’s endowment? [33:53] Portfolio construction perspectives at an endowment [36:26] The flaws of GP commits [41:25] How has John’s approach to emerging managers changed over the years? [44:17] What is key person risk? [47:06] One of the biggest challenges emerging managers face [50:45] Balancing over- and under-diligencing an emerging manager [56:28] What are traits that GPs think are unique but actually aren’t? [1:03:36] What makes a great cold email? [1:08:40] As a sports fan, do the highs or lows hit harder? [1:11:53] Thank you to Alchemist Accelerator for sponsoring! [1:12:54] Let me know if you enjoyed this episode with a like, comment or share!
“Being too dogmatic about things or having too black or white views will prohibit a lot of LPs from making really, really good investments.” – John Felix
“The biggest leverage on time you can get is identifying which questions are the need-to-haves versus nice-to-haves and knowing when enough work is enough.” – John Felix
In a late night conversation with my high school friend last week, I picked up a fascinating Japanese phrase from her. Koi no yokan.
The best translation of it that I found was ‘the premonition of love.’ It serves as the antithesis to the notion of love at first sight. It’s love that takes time to grow on you. Slow, but steady. A seemingly acquired, yet inevitable sense of fate. It’s a feeling that begins when you meet someone you’ll eventually fall in love with.
It’s a remarkable concept with no direct English parallel. It sits in rarified air between words like hiraeth, hyggelig, and yūgen. All of which have inextricable meaning behind a seemingly simplistic string of letters. While I’ll leave the afore-mentioned three to your own rabbit holes, as you might imagine, I’ve been having quite a field trip across the linguistic landscape.
Koi no yokan.
It’s a concept that’s often applied to the enamor between humans. This may just be me being a sacrilegious foreigner, but I find the same linguistic beauty with passions.
In many ways, my love for the emerging GP and LP world was the same. If you told me back in college, that I’d want to spend a few decades of my life obsessed over demystifying the space, I’d have called your bluff. Might have even called you bonkers.
And while I’d been hovering like a satellite around the space for a while, it wasn’t till I started writing The Non-Obvious Emerging LP Playbook that I realized there was an inkling of a yearning there. Answers only led to more questions. Each insight I learned was always paired with another punctuated with a question mark. And it honestly was a really fun exercise. I didn’t write that blogpost for anyone else. Just myself. Like a public diary that encapsulated my intellectual expedition in the LP world. Even before I published it, even before any other feedback I got for it, it felt special. All catalyzed by an opportunity to back a first-time fund manager I’d been honored to see grow as the last check in.
At that point, I still had neither committed to the idea of really being a capital allocator nor to the promise of more of such content.
And when that blogpost finally saw daylight, and a number of readers responded in kind, a tenured investor asked if I was going to write a book. It seemed only fitting that a non-fiction 200-page book be the successor to the 12,500 word blogpost. So pen met paper.
I revisited old and forged new relationships off the momentum of the blogpost. And around 80 pages into the manuscript, I ran out of things to write. I didn’t know how to continue. It felt both lacking and comprehensive at the same time. I could add in more examples. Case studies. Or just superfluous language. The equivalent of turning “my dad” into “my wife’s father-in-law.” The latter of which I swore to myself I wouldn’t do.
So I stopped.
Put it aside. And went on with the rest of my life.
But time and time again, I’d find myself staring at the ceiling at night, journaling, or writing on my whiteboard in the shower about the afore-mentioned topics. It became borderline annoying that my mind kept circling back to it and I was doing nothing about it.
So frick that. As I once learned from Max Nussenbaum, who I got to work with sooner after, the fastest way to test out if there’s a market for your ideas AND if one’s interests are sustained across longer periods of time is to just write about it. And I did. Here, here, here, andmore.
At one point, my buddy Erik asked if I was going to start a podcast. At first, I dismissed the idea. Didn’t think I had the skillset or the personality for one. But man, I lost even more sleep in the ensuing weeks after he seeded the idea in my head. And so I started a podcast. (Which holy hell, I can’t wait to show you Season 3 on July 1st)
I realized much later, probably a year after I stopped writing the book, that the reason I couldn’t write anymore, despite asking so many really smart LPs for help, wasn’t that there was nothing more to share, there was still a lot… Hell, even each family office had a strategy so unlike the next. And as the saying goes, if you know one family office, you really only know one family office. So no, it wasn’t because there was nothing else to write. In one world, I could have just written an encyclopedia of strategies. It was that there was so much that had yet to be written, ever, about allocating into emerging managers.
Venture as an asset class was not the Wild West, still an alternative and still risky, but there have been predecessors who’ve productized the practice. But allocating to Fund I’s and II’s without proof of a track record was a horizon most had yet to cross.
Hell, I wrote a LinkedIn post just yesterday on how I think about evaluating Fund I track records without relying on TVPI, DPI, and IRR. And why I think more funds of funds should exist.
Simply put and in summary, there’s a complexity premium on not just venture capital, but specifically on evaluating Fund Is and IIs. And I don’t mean the big firm spinouts who have a portable track record. I mean the real folks who are truly starting to build a firm (not just a fund) for the first time.
I don’t have all the answers. Sure, as hell, I hope to have more in the near future. But I’m ridiculously excited to find answers (and more nuanced questions) — putting science to art — as an emerging LP.
If you couldn’t tell yet… I think I’m in love.
And if you’re interested, I’d love to have you join me on this ride.
#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. It’s not designed to go down smoothly like the best cup of cappuccino you’ve ever had (although here‘s where I found mine), more like the lonely coffee bean still struggling to find its identity (which also may one day find its way into a more thesis-driven blogpost). Who knows? The possibilities are endless.
Stay up to date with the weekly cup of cognitive adventures inside venture capital and startups, as well as cataloging the history of tomorrow through the bookmarks of yesterday!
The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
Recently I’ve been hearing a lot of power law this, power law that. And you guessed right, that’s VC and LP talk. Definitely not founder vocabulary. Simply, that 20% of inputs lead to 80% of outputs. For instance, 20% of investments yield 80% of the returns.
Along a similar vein… what about questions? What 20% of questions lead to 80% of answers you need to make a decision? Or help you get 80% of the way to conviction in a deal?
‘Cause really, every question after those delivers only marginal and diminishing returns. And too much so, then you end up just wasting the founder’s or GP’s time. As the late Don Valentineonce said, “[VC] is all about figuring out which questions are the right questions to ask, and since we don’t have a clue what the right answer is, we’re very interested in the process by which the entrepreneur get to the conclusion that he offers.”
While I can’t speak for everyone, here are the questions that help me get to 80% conviction. For emerging GPs.
I’m going to exclude “What is your fund strategy?” Because you should have either asked this at the beginning or found out before the meeting. This question informs if you should even take the meeting in the first place. Is it a fit for what you’re looking for or not? There, as one would expect, you’d be looking into fund size, vertical, portfolio size, and stage largely. Simple, but necessary. At least to not waste anyone’s time from the get go.
Where are you at as a GP by Fund III? What does Fund I and II look like by Fund III?
Discipline. In the first 4 years of a fund, you’re evaluated on nothing else except for the discipline and the prepared mind that you have going in. All the small and early DPI and TVPI mean close to nothing. And it’s far too early for a GP to fall into their respective quartile. In other words, Fund I is selling that promise. The prepared mind. Fund II is selling Fund I’s strategy and discipline. Fund III, you’re selling the returns on Fund I.
Vision. Is this GP thinking about institutionalizing a firm versus just a fund? How are they thinking about creating processes and repeatability into their model? How do they think about succession and talent? And sometimes I go a few steps further. What does Fund V look like? And what does the steady state of your fund strategy look like?
What value do you bring to your portfolio companies?
This is going to help with reference calls and for you to fact check if an investor actually brings that kind of value to their portfolio companies. So, in effect, the question to portfolio companies would be: How has X investor helped you in your journey?
On the flip side, even during those reference calls, I like asking: Would you take their check if they doubled their ownership? And for me to figure out how high can they take their ownership in a company before the check is no longer worth it. There are some investors who are phenomenal $250K pre-seed/seed checks for 2.5-5% ownership (other times less), but not worth their value for $2-3M checks for the same stages. To me, that’s indicative of where the market thinks GP-market fit is at.
I also love the line of questioning that Eric Bahn once taught me. “How would you rate this GP on a scale of 1 to 10?” Oftentimes, founders will give them a rating of 6, 7, 8, or if you’re lucky 9. And the follow up question then becomes, “What would get this investor to a 10?” And that’s where meaty parts are.
Of course, it’s important to do this exercise a few times, especially with the top performers in their portfolio to truly have a decent benchmark. And the ones that didn’t do so well. After all, our brand is made by our winners. And our reputation is made by those that didn’t.
In the trifecta of sourcing, picking, and winning, this is how GPs win deals.
How do you resolve conflict or disagreement in the partnership?
This is really prescient in a partnership. Same as a co-foundership. If someone says, we never disagree, I’m running fast in the other direction. Everyone disagrees and has conflicts. Even twins and best friends do. If you don’t, you either have been sweeping things under the rug or one (or both or all) of you doesn’t care enough to give a shit. Because if you give a damn, you’re gonna have opinions. And not all humans have the same opinions. If everyone does, realistically, we only need one of you.
Hell, Jaclyn Freeman Hester even goes a step further and asks, How would you fire your partner?
Jaclyn on firing partners and team risk
Personally I think that last question yields interesting results and thought exercises, but lower on my totem pole (or higher if you want to be culturally accurate) of questions I need answers to in the initial meetings.
How are you finding companies? How are you building your pipeline?
This is always a question I get to, but especially valuable, when I ask it to spinouts. Building a repeatable and scalable sourcing pipeline is one of the cruxes of being a great fund manager. But in the age when a lot of LPs are shifting their focus to spinouts from top-tier funds, it’s an important reminder that (a) not all spinouts are created equal, and (b) most often, I find spinouts who rely largely on their existing “brand” and “network” without being able to quantify the pillars of it and how it’s repeatable.
For (a), a GP spinning out is evaluated differently than a partner or a junior investment member. A GP is one who manages the LP relationships, and knows intimately the value of what goes in an LPA, on top of her/his investing prowess. And the further you go down the food chain, the less visibility one gets of the end to end process. In many ways, the associates and analysts spinning out need the most help, but are also most willing to hustle.
Which brings me to (b). Most spinouts rely on the infrastructure and brand of their previous firm, and once they’ve left, they lose that brand within a year’s time. Meaning if they don’t find a way or have an existing way to continue to build deal flow, oftentimes, they’ll be left with the leftovers on the venture table. This question, for me, gives me a sense of whether an investor is a lean-in investor or a lean-back investor. The devil’s in the details.
What are the top 3 reasons I shouldn’t invest?
This is a test to see how much self-awareness a founder/GP has. The most dangerous answer is saying “There are no reasons not to invest.” There are always reasons not to. The question is, are you aware of them? And can you prioritize which risks to de-risk first?
In many ways, I think pitching a Fund I as illustrating the minimum viable assumption you need to get to the minimum viable product. And Fund II is getting to the minimum lovable strategy (by founders and other investors in the ecosystem). And with anything that is minimally viable, there are a bunch of holes in it.
Another way to say the above is also, “If halfway through the fund we realize the fund isn’t working, what is the most likely reason why?”
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.
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.
Chris Douvos founded Ahoy Capital in 2018 to build an intentionally right-sized firm that could pursue investment excellence while prizing a spirit of partnership with all of its constituencies. A pioneering investor in the micro-VC movement, Chris has been a fixture in venture capital for nearly two decades. Prior to Ahoy Capital, Chris spearheaded investment efforts at Venture Investment Associates, and The Investment Fund for Foundations. He learned the craft of illiquid investing at Princeton University’s endowment. Chris earned his B.A. with Distinction from Yale College in 1994 and an M.B.A. from Yale School of Management in 2001.
You can find Chris and Beezer on their socials here.
[00:00] Intro [03:07] Beezer’s childhood dream [04:29] How Chris was let go from his $4.15 job at Yale [08:09] Concentrated vs diversified portfolios [09:30] First fund that Beezer and Chris invested [11:42] Funds that CD and Beezer passed on and regret [16:07] Favorite term in the LPA? Or not? [19:18] What piece of advice did a GP in their portfolio share with them? [23:15] What’s something that Beezer/CD said to a GP that they regret saying? [28:06] What’s the most interesting fund model they’ve seen to date? [33:20] What fund invested in 2020-2021 inflated valuations that they’ve reupped on? [40:18] Events that they went to once but never again [44:24] Life lessons from CD & Beezer [54:02] The founding story of Open LP [55:02] Thank you to Alchemist Accelerator for sponsoring! [57:58] If you learned something new in this episode, it would mean a lot if you could drop a like, comment or share it with your friends!
Tom Landry (who’s actually the correct attribution for the quote: “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.”)
“If you’re overly concentrated, you better be damn good at your job ‘cause you just raised the bar too high.” – Beezer Clarkson
“Conviction drives concentration, and that you should be so concentrated as to be uncomfortable because otherwise you’re de-worsified, not diversified.” – Chris Douvos
“[David Marquardt] said, ‘You know what? You’re a well-trained institutional investor. And your decision was precisely right and exactly wrong.’ And sometimes that happens. In this business, sometimes good decisions have bad outcomes and bad decisions have good outcomes.” – Chris Douvos
“Sometimes I treat GPs like I treat my teenage children which is: Every word out of a teenager’s mouth is probably a lie designed to make them look better or to hide some malfeasance.” – Chris Douvos
“May we be blessed by a weak benchmark.” – David Swensen
“Miller Motorcars doesn’t accept relative performance for least payments on your Lamborghini.” – Chris Douvos (citing hedge fund managers)
“At the end of the day, the return on an asset is a function of the price you paid for it and the capital it consumes.” – Chris Douvos
At the end of last week, an LP told me something quite provocative. That right now in 2024, we’re in a low-risk environment.
And in all fairness, I thought he was completely bonkers. Fear is high. Investments have slowed their pace, especially in the private markets. Markets have really yet to recover. Some believe we’ve hit the bottom and will bounce around the bottom a few times. Others think we’ve yet to see the worst of it. Hell, just yesterday, Eric Bahn tweeted the below:
These articles were published by the same company within hours of each other… pic.twitter.com/k9TPc2Si5a
Wars are raging across the world. Currency is fluctuating on a global scale. Hell, even for the average person, prices are going up at a rate unfamiliar to most people’s memory.
But his next line really made me pause. “You’re right. There’s geopolitical risk, currency risk, market risk, and valuation/pricing risk. And we can identify every single one of them. In fact, the actual risk of investing today is really low, but the perceived risk is really high. Risk is highest when you can’t tell what the risk is. That was 2020 and 2021, when you couldn’t put a finger on what kinds of risk were out there.”
And that really stuck with me. To underscore again, risk is highest when you can’t tell what the risk is.
And so paved way for this blogpost. Albeit, that last line was the punchline.
He later told me that the concept wasn’t original, but that its origin traces its way back to Ken Moelis. Regardless of the attribution, it’s worth doing a double take on.
There’s that famous Peter Drucker line, “You can’t manage what you don’t measure.” And in many ways, it is just as true for risk as it is for tasks and KPIs and OKRs.
The family office for a well-known luxury brand once told me that they like to pay the complexity premium on esoteric alternatives. To them, venture is one of those esoteric alternatives. In addition, they’re also happy to overpay during bull markets. Access to a volatile and nascent asset class, to them, deserves a premium.
But taking a step back, there may be more wisdom to it than I initially thought. In bear markets, when the risk is real and discrete, there is no complexity premium to pay. After all, you can begin to manage what you do measure. On the flip side, in a bull market, where no one really knows who will win or what the macro risks are, a premium can be and often is paid as a bet on a company’s future and insurance against a margin of error that is hard to define.
Of course, one can say that the premium is often hype-driven instead of risk-driven. But really, hype is just long-term risk donned with a new set of clothes. A short-term luxury with a buy-now-pay-later tag that comes in quarterly installments of belt-tightening and regret.
While I personally have always believed that as an investor it’s better to be disciplined and to “dollar cost average” across vintages vis a vis time diversification, there are several great investors who believe price is a trap. At the top of my head, Peter Fenton and Keith Rabois. The latter shared his thoughts earlier this year on why. At least for seed and Series A. That in summary, there is no limit on how much you pay for a great company at the seed and Series A (likely the pre-seed as well) that won’t return you multiple-fold back. And that debates on price really are leading indicators on conviction or lack thereof.
The last part of which I agree to an extent.
All that to say, I think a useful exercise to go through whenever making a major (investment) decision is to take out a notepad and write down all the risks you can think of. If you can think of it, you can probably find a way to hedge against it. On the flip side, if you’re about to make a decision and you can’t think of any risks, that’s probably the biggest risk you’ll take.
As my mom told me since I was a kid, “There’s no such thing as a free lunch.”
But if you do come up with a good list, and the world around you is still scared, and you think there might be something special in the opportunity in front of you, sometimes it pays to be bullish when others are bearish.
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.
Jaclyn Freeman Hester is a Partner at Foundry. She joined in 2016 with a passion for supporting the next generation of entrepreneurs and investors. Jaclyn leads direct investments in early-stage companies, often collaborating with Foundry’s partner funds. She loves working closely with founders to solve hard problems and think about the human elements of business. She invests across B2B and consumer companies that exhibit strong end-user empathy and use technology to empower individuals, unlock potential, and improve experiences.
Jaclyn helped launch Foundry’s partner fund strategy, building the portfolio to nearly 50 managers. Bringing her unique GP + LP perspective, Jaclyn has become a go-to sounding board for emerging VCs.
Jaclyn first fell in love with entrepreneurship while earning her JD/MBA at CU Boulder (Go Buffs!). There, she served as Executive Director of Startup Colorado, where she got to know Foundry and the incredible Boulder/Denver startup community the firm helped catalyze. In her brief stint as a practicing attorney, Jaclyn advised clients in M&A transactions and early-stage financings. She also witnessed the founder journey first-hand, working closely with her husband and his family as they built a B2B SaaS company, FareHarbor (acquired by BKNG).
Jaclyn loves the Boulder lifestyle, but her heart will always be on the East Coast, having grown up a New England “beach kid.” She is the proud mother of three humans and three dogs and is a blue-groomer-on-a-sunny-day skier and 9-hole golfer. In her glimpses of free time, you can find Jaclyn enjoying live music, especially at Red Rocks and in Telluride, two of the most magical places in the world.
[00:00] Intro [03:24] The significance of Kara Nortman in Jaclyn’s life [13:59] Lesson on recognizing effort from Dan Scheinman, Board Member at Zoom [18:27] The question to disarm GPs learned from Jonathon Triest at Ludlow Ventures [23:37] The differences between being a board member and an LPAC member [32:04] Turnover within institutional LPs [33:58] The telltale signs of team risk in a partnership [41:25] How to answer “How do you fire your partner?” [44:05] Foundry’s portfolio construction [53:22] What makes Lan Xuezhao at Basis Set so special? [59:59] What does Shark Tank get right about venture? [1:03:37] Jaclyn’s Gorilla Glue story [1:05:51] What keeps Jaclyn humble today? [1:12:11] What will Jaclyn do after Foundry’s last fund? [1:16:28] Jaclyn’s closing thought for LPs [1:18:10] Thank you to Alchemist Accelerator for sponsoring! [1:20:46] If you enjoyed this episode, a like, a comment, a share will go a long way!
