Five years ago, I wrote a piece about the third leg of the race. From my time as a competitive swimmer, the lesson our coach always had for us was if you’re swimming anything more than two laps, the most important part of every race is the third leg. Everyone’s tired. Everyone’s gasping for air. Yet everyone wants to win. The question is who wants it more. And by the time you get to a decently high level, everyone’s athleticism is about the same. All that matters is the mentality you have on that third segment of four of each race.
We often say, that starting a company or a fund is a marathon, not a sprint. True in a lot of ways. But also, it’s a series of sprints within a marathon.
We put out an episode last week with the amazing Ben Choi, which I really can’t stop recommending. Just because I learn something new every time I talk with Ben, and this time especially so. But that’s my own bias, and I get it. But more interestingly, he said something that I couldn’t get out of my mind since we recorded. “The first three fundsโnot just the first two, the first threeโare that ‘working-out’ process. Most pragmatically, there’s very little performance to be seen by Fund III. So it’s actually Fund IV for us to hold up the manager as no longer emerging and now needs to earn its own place in the portfolio.” The timestamp is at 16:21 if you’re curious.
And it got me thinking… is Fund III that third leg of the race?
When most GPs raise Fund III, they’re usually four, maybe five years, out from their Fund I. And that’s assuming they started deploying as soon as they raised their fund. And within five years, not that much changes. Usually, that’s two funding rounds after your first investments. But lemons ripen early, so only a small, small subset move to Series A or B. Most have raised one or less subsequent round since the GP committed capital.
Even accounting for two funding rounds later, that’s usually too early to consider selling into the next round. And if one does (unless it’s a heavily diversified portfolio and the GP has no information rights, and somehow is so far removed from the company that no one at the company talks to the GP anymore), then there’s signaling risk. Because:
No matter what portfolio strategy you run, not staying in touch with your best performing companies is a cardinal sin. Not only can you not use those companies as references (which LPs do look for), you also can’t say your deal flow increased meaningfully over time. No senior executive or early employee knows who you are. So if they leave the company and start their own, they wouldn’t pitch you. Your network doesn’t get better over time. See my gratitude essay for more depth here.
Not having any information rights and/or visibility is another problem. Do the founders not trust you? Do you have major investor’s rights? How are you managing follow-on investment decision makingโwhether that’s through reserves or SPVs? Are the blind leading the blind?
And if you do run a diversified portfolio, where optically selling early may not be as reputationally harmful to the company, you are losing out on the power law. And for a diversified portfolio, say a 50-company portfolio. You need a 50X on an individual investment to return the fund. 150X if you want to 3X the fund. As opposed to a concentrated 20-company portfolio, where you only need 20X to return the fund and 60X to 3X. As such, selling too early meaningfully caps your upside for an asset class that is one of the few power law-driven ones. As Jamie Rhode once said, โIf youโre compounding at 25% for 12 years, that turns into a 14.9X. If youโre compounding at 14%, thatโs a 5. And the public market which is 11% gets you a 3.5X. [โฆ] If the asset is compounding at a venture-like CAGR, donโt sell out early because youโre missing out on a huge part of that ultimate multiple. For us, weโre taxable investors. I have to go pay taxes on that asset you sold out of early and go find another asset compounding at 25%.โ Taking it a step further, assuming 12-year fund cycles, and 25% IRR, โthe last 20% of time produces 46% of that return.โ And that’s just the last three years of a fund, much less sooner.
Finally, any early DPI you do get up to Fund I t+5 years is negligible. Anything under 0.5X, and for some LPs, anything sub-1X, isn’t any more inspiring to invest in than if you had absolutely no DPI.
Yet despite all of the above, the only thing you can prove to LPs are the inputs. Not the outputs. You can prove that you invested in the same number of companies as you promised. You can prove that you’re pacing in the same manner as you promised. And you can prove that founders take the same check size and offer the same ownership to you as you promised. And that is always good. As you raise from friends and family and early believers in Fund I, Fund III’s raise usually inches towards smaller institutions, but larger checks than you likely had in Fund I.
Fund-of-funds care about legibility. Logos. Outliers. Realistically, if you didn’t have any before Fund I, the likelihood of you having any while raising Fund III is slim. They need to tell a story to their LPs. A story of access and getting in on gems that no one else has heard of, but if everyone knew, they’d fight to get in.
Any person you pitch to who has any string of three to four letters (or is hired to be a professional manager) attached to their name (i.e. MBA, CAIA, CFA, CPA, etc.) has a job. For many, their incentive unless their track record speaks for itself (likely not, given how long venture funds take to fully return capital) is to “not get fired for buying IBM.” Some of their year-end bonuses are attached to that. Some lack the bandwidth and the team members to fully immerse themselves in the true craft of emerging manager investing. Many times, the incentive structure is outside of their immediate hands. For every bet they make that isn’t obvious, they risk career suicide. At least within that institution.
I’m obviously generalizing. While this may be true for 90%+ of LPs who fit in these categories, there are obviously outliers. Never judge a book by its cover. But it’s often helpful to set your expectations realistically.
As such, despite not much changing from your investment side, from the eyes of most LPs, you are graduating to larger and larger LP checks. Usually because of the need to provide more proof points towards the ultimate fund strategy you would like to deploy when you’re ‘established.’ But to each new set of LPs, prior to an institutional 8-year track record, you’re still new. On top of that, as your fund size likely grows a bit in size from Fund I, to some LPs, you are drifting from your initial strategy by no longer being participatory and now leading and co-leading. You also might have added a new partner, like Ben talks about in the afore-mentioned episode. And a new strategy and a new team requires new proof points related to on-thesis investments. So, Fund III is where you begin to need to whether the storm. For some, that may start from Fund II. Altos Ventures took four years to raise their Fund II. Many others I know struggled to do the same. But if you really want to be in VC long term, this is the third leg of the race.
And this is when a lot of GPs start tapping out. Will you?
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.
Ben Choi from Next Legacy joins David on El Pack to answer your questions on how to build a venture capital fund. We bring on 3 GPs at VC funds to ask 3 different questions.
Gilgamesh Ventures’ Miguel Armaza, also host of the incredible Fintech Leaders podcast, asks Ben what is the timing of when a GP should consider raising a Fund III.
Similarly, but not the same, Strange Ventures’ Tara Tan asks when an LP backs a Fund I, how do they know that this Fund I GP will last till Fund III.
Arkane Capital’s Arkady Kulik asks how one should think about building an LP community, especially as he brings in new and different LP archetypes into Arkane’s ecosystem.
Ben manages over $3.5B investments with premier venture capital firms as well as directly in early stage startups. He brings to Next Legacy a distinguished track record spanning three decades in the technology ecosystem.
Benโs love for technology products formed the basis for his successful venture track record, including pre-PMF investments in Marketo (acquired for $4.75B) and CourseHero (last valued at $3.6B). He previously ran product for Adobeโs Creative Cloud offerings and founded CoffeeTable, where he raised venture capital financing, built a team, and ultimately sold the company.
Ben is an alum and Board Member of the Society of Kauffman Fellows (venture capital leadership) and has also served his community on the Board of Directors for the San Francisco Chinese Culture Center, Childrenโs Health Council, Church of the Pioneers Foundation, and IVCF.
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 Los Altos with his wife, Lydia, three very active sons, and a ball python.
[00:00] Intro [05:05] Ben’s 2025 Halloween costume [06:44] Jensen Huang’s leather jackets [07:24] Jensen Huang’s answer to Ben’s one question [10:05] Enter Miguel, Gilgamesh Ventures, Fintech Leaders [14:43] What are good signals an LP looks for before a GP raises a Fund III? [22:35] Why does Ben say ‘established’ starts at Fund IV? [25:08] Who’s the audience for Miguel’s podcast? [27:52] In case you want more like this… [28:32] Enter Tara and Strange Ventures [32:46] How does Ben know a Fund I will become a Fund III? [36:53] How does Ben know if a GP will want to build an enduring career? [40:58] How does Tara share a future GP she’d like to work with to Ben? [42:43] Marriage and divorce rates in America [43:34] What should a Fund I do to institutionalize? [46:28] Should you share LP updates to current or prospective LPs? [48:57] Enter Arkady and Arkane Capital [51:09] How does one think through LP-community fit? [1:01:31] What’s Arkady’s favorite board game? [1:03:08] Ben’s last piece of advice to GPs [1:09:50] My favorite Ben moment on Superclusters
โThe dance of fundraising is when you do have [your thesis], the LP has to figure out is this a rationalization of the past or is it actually what happened? Was this known at the time? Because if it was, we can have some confidence in the future going forward. But if it was just a rationalization of some randomness, then itโs hard to know if Fund IV or V or VI will benefit from the same pattern.โ โ Ben Choi
On solo GPs bringing in future partners by Fund IIIโฆ โThe future unidentified partner is the largest risk that we have to decide to accept. So there actually isnโt a moment where we decide this GP is going to be around for Fund III. Itโs actually the dominating risk we look at and we get there, but itโs a preponderance of other things that we need to build our conviction so high that weโre willing to take that risk.โ โ Ben Choi
โItโs brutal. Itโs a 30-year journey. For any GP who raises a single dollar from external LPs, itโs a 30-year journey.โ โ Tara Tan
โI donโt think anyone goes into this business to raise capital, but your ability to raise capital is ultimately what allows you to be in this business.โ โ Ben Choi
On communityโฆ โYour core question is how much diversityโin the technical term of diversityโcan you tolerate before you lose the sense of community.โ โ Ben Choi
โMost letters from a parent contain a parent’s own lost dreams disguised as good advice.โ โ Kurt Vonnegut
โFundraising is a journey of finding investors who want what you have to offer; itโs not convincing somebody to do something.โ โ Ben Choi
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.
I was talking to an emerging manager raising a $10M fund recently. He shared a comment, likely off-the-cuff, but something I’ve heard many other emerging managers echo. “This year, most of the dollars deployed into venture has concentrated in only a few big funds.”
Not this manager in particular, but I’ve heard so many other Fund I or Fund II GPs say that. Blaming their struggle with fundraising on the world. It’s not me, but the world is conspiring against me. Or frankly, woe is me. But there is no LP who ever wants to hear that. Building a firm is hard. Building a startup, likely harder. No one said it’ll be easy. So let’s not pretend it’ll be all sunshine and rainbows. If you thought so, you’re deeply misinformed. If you’re going to be an entrepreneur of any kind, you need to take matters into your own hands. You cannot change the world (at least not yet). But you can change how you approach it.
That said, the mega funds who are raising billions of dollars are raising from institutions whose minimum check size is in the tens, if not hundreds of millions. These same institutions would never invest in an emerging manager. Their team, their strategy, and their institution isn’t built for it. When they have to deploy hundreds of millions, if not billions, a year into “venture” with a team of four or less, you’re not their target audience. So as an emerging manager, those mega funds are not your competition at least when it comes to LP capital.
You’re competing against all the other funds (likely emerging managers) at your fund size. Who can take the same check size you can take. That’s who you’re competing with. So whether you like it or not, billions going to the mega funds has, from a fundraising perspective, nothing to do with you.
If you are looking for reasons to fail, you will find one.
As the great Henry Ford once said, “Whether you think you can, or you think you can’t, you’re right.”
#unfiltered is a series where I share my raw thoughts and unfiltered commentary about anything and everything. Itโs not designed to go down smoothly like the best cup of cappuccino youโve ever had (although hereโs 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.
I was chatting with a GP last week about the highlights and lowlights of having a multi-stage fund or just a VC fund as an LP via their fund-of-funds. The obvious synergies of access to downstream capital and branding, especially if the individual running the fund-of-funds is known for their institutional track record as an LP. As well as access to the GPs at those funds for mentorship reasons.
But the downsides also exist. You’re one of many of other GPs who have access to the same team. More often than not, there’s no institutional diligence. And the investment happens largely for strategic purposes. Same is true for multi-stage GPs investing through their own family office. But you also have to think through the tough conversations you need to have when you take checks from more than one of these funds. Assuming all else equal, and they write the same check size, when your portfolio companies are outperforming, do you pass them to Big Fund A or Big Fund B? Equally as true for any LP who wants co-investment opportunities. Family offices. Fund-of-funds. The classic question of: Do you like Mom or Dad more?
And there’s one more. Consider a multi-stage fund who’s an LP in your fund. You share one of your stellar portfolio companies with them, and they loved the deal so much they also invested. Not only invested, but led the following round at a much, much higher valuation. For the sake of this thought experiment, let’s say the Series A valuation is a solid nine figures. As such, they take a board seat. A year later, your portfolio company has the opportunity to exit for $800M. A phenomenal exit for everyone on the cap table, including yourself, your other co-investors, the founders, and the employees. And for you in particular, this would return meaningful multiples of your fund. But not your Series A lead, who is also your LP. The math isn’t inspiring for them. $800M would only be a shy 4-8X on their initial investment.
So, the Series A lead/your LP blocks the acquisition deal and pushes the founders to go for more. You push back on the motion as everyone else’s incentive, including the founders, is the same as yours. Whether the deal happens or not at this point is irrelevant. This Series A lead, who’s also your LP, ends up telling a number of other LPs that you’re difficult to work with. To the effect that they would also no longer re-up in your next vintage. And that makes your fundraise for the next fund even harder than you expected.
You’ve not only lost a $500-2M check (on average), but worse, you’re likely to have a tarnished reputation with prospective LPs. If they like you already, they may look beneath the surface. If they haven’t gotten to know you, they’ll likely surmise on limited information that the juice isn’t worth the squeeze.
Before you dismiss this as just a hypothetical case study, note that this is a true story.
As my buddy Thoronce told me, โCapital formation is a design principle. Fundraising is a sales process. Without true design around a customer base and a product, you will fail eventually.โ
Capital formation is thinking through the types of conversations you want to have when you’re in Fund n+1 and n+2, 5-6 years from now. As Adam Marchickonce said, “The bulk of your conversations with an LP happen negative 6 months to time of investment. The most important conversations you have with an LP are Year 2 through 6 of your investment.” These are the conversations about extending recycling periods, early distributions, fund extensions, and so on. Many of which revolve around the return incentives of your LP base (if decisions are made by majority approval) or by LPAC approval. A family office who has no immediate liquidity needs might not want early distributions and wants you to hold out. Another who’s starting a new business line or pulling completely out of venture (because they were misinformed or set the wrong expectations initially) will want early liquidity and/or someone to buy their stake. An institution with a high leadership turnover rate will likely have a new CIO who’ll want to redo the whole portfolio. So what used to be obvious re-up decisions will need to be re-underwritten altogether.
So I’m not here to say, “Don’t take LP checks from fund-of-funds whose core business is being a VC.” I just want to remind you to consider the incentives of each LP you have on your cap table. Ideally, your LP base’s incentives are homogenous. Not only to themselves, but also to yours. Realistically, for the average emerging manager, it won’t be. But if you know it won’t be, prepare guardrails for future conversations. Don’t walk in blind.
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.
You are not all top quartile. Only 25% of you are.
You are not all top decile. Only 10% of you are.
I refuse to believe that I’m somehow seeing only the best in market. I’m not famous or lucky enough to have that fortune. Even the best known LPs I know are not so.
If your marks include companies held at last round valuation (LRV) for longer than two years, please consider proactive re-marks. This includes your angel portfolio.
SAFE rounds are not mark-ups. Do not conflate real marks with hypothetical marks.
If the founder doesn’t know who you are AND if you don’t know the company’s updates in the last two quarters, you don’t know the founder. Do not pretend you do. Your investment is not accretive to your future network. I dare say if I went to those founders right now, and asked them who their top five favorite investors are, you won’t come up. You’re forgettable. And that’s a cardinal sin of firm-building.
Let me caveat that firm-building means you plan to grow the firm. That where you are today is not where you want to stay forever as a GP. This matters far less if this is a one-and-done fund. That is okay. You don’t have to love venture forever. You don’t have to pretend you do.
Do not believe you are that special if you have a multi-stage GP as an LP. Many of the notable multi-stage GPs have invested in many. Some have invested in multiple dozens. Others hundreds. A handful we see in almost every deck. It is their job to see everything Or at least attempt to. The cardinal sin for a multi-stage GP is to not see the deal, worse than not picking or winning it.
Assume all your LPs will be passive LPs. I don’t care about their profile, how referenceable they are, how much they love you, how much they want to help. Give it a few months, a year at best, they will become passive. Human interest is fleeting. Especially since venture is the smallest bucket in our allocation (excluding funds-of-funds). And yes, they have day jobs. There are exceptions. For instance, someone who wants to start their own VC fund or someone who wants to be a VC themselves. That is not everyone.
When modeling, it is bold of you to assume that more than 10% of your portfolio will be outliers. It is bold of you to assume that more than 5% of your portfolio will be outliers. We are in a power law industry.
You will get diluted. More than you think. With how much longer companies are staying private, and how much capital is available in the later growth stages, you will get diluted. 80% is safe to assume if you have no reserves. Down to 65% depending on how much you have. There are very, very few cases you only have 50% dilution. Yet I see many GPs model their portfolio that way.
Pro rata is a legal right no successful capital will grant without a fight. If you get it without a fight down the road on a great company, ask yourself why you’re so lucky. And never forget to ask yourself that question.
In a market of exceptions, you are all more normal than you think. It sucks. In any other industry, most of you will have fairly little competition for greatness, but you chose one of the few industries where your competition is all exceptions.
How you react to a ‘no’ from an LP is a sobering fact and a great telltale sign of the strength of your relationships. I love chatting with other LPs who’ve passed on you. Not because I need to hear their whyโmost of our interests and mandates are different, but because I almost always ask how you react to their ‘no.’ And I am not alone here. Usually, LPs volunteer that information up quite readily. Of note, different LPs say ‘no’ differently. Most don’t. A fact I am aware of.
Many of us who do this as our primary job love you. We love venture. We love the romanticism that comes with this space. Do not play the hopeless romantic back. We need the truth.
There’s a great line that Elizabeth Gilbert credits her wife Rayya Elias. “The truth has legs. It always stands. When everything else in the room has blown up or dissolved away, the only thing left standing will always be the truth. Since thatโs where youโre gonna end up anyway, you might as well just start there.”
The best time to share the truth is in person. And immediately. The second best is a 1:1 call. If it’s not urgent, save it for the AGM. If it is, call us.
We should not learn about you or your portfolio for the first time via the news. If we are, you’ve lost our trust. Shit happens. We get it. How you respond and communicate shit is what makes or breaks a relationship.
Many of my colleagues try to be helpful even if they can’t invest. Understand because they’re human they can’t be so for everyone. So when they are, don’t take it for granted.
If you conflate any of the above, you’re either lying to yourself or you’re lying to us. The former means you’re never going to make it in this industry. The latter means we’re just not going to be good partners for you.
This is not a Bible. Do not swear by it. Do not pray to it by the bedside every night.
This is just a morning wake-up call. Some of you have already woken up. Many of you may not have.
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.
I would highly recommend watching the full video. Only two and a half minutes. But in case you choose not to, the story goes… there was a former Under Secretary of Defense giving a speech at a large conference who interrupts his own remarks while drinking out of Styrofoam cup. He smiles as he looks down and he shares an anecdote.
Last year, when he was still the Under Secretary, they flew him there business class, picked him up in a car from the airport, checked him into his hotel for him, escorted him to his room. And the next morning, there was another car waiting to pick him up from the hotel that drove him to the venue, showed him through the back entrance, then green room. In the green room, there was someone waiting for him with a hot cup of coffee in a ceramic mug.
The following year he went (the year he was giving the above speech), he was no longer the Under Secretary. He flew to the city on coach, took a taxi from the airport to the hotel, checked himself in, took another taxi to the venue the next morning, found his own way backstage after arriving at the front door. When he asked where he could get coffee, someone pointed him towards the coffee machine in the back corner and told him to serve himself in a Styrofoam cup.
The intended lesson here is that the ceramic cup was never meant for him, but the position in which he holds. He deserved the Styrofoam cups, everyone does. And that no matter how far you go in life with all the perks that come with promotions and status and power, never forget that that will last only for as long as you hold that position.
There are obviously rare exceptions. But that is also the question that us as LPs ask. Hell, I’m sure it’s what a lot of VCs ask themselves about the founders they could back. Were you successful because or in spite of your last firm/company?
For founders and founding GPs, the attribution and causation is clearer than if you were an operator or other team member at a VC firm. We begin to peel the onion with questions like: What did you do in your last job title that no one else with that job title has ever done? For operators, did you create something and meaningfully lead something that created mass societal value and/or independently change the course of the company? For non-founding GPs at VC firms, did you individually drive disproportionate returns for the overall fund at your last firm? Attribution is often harder than one would think at prior institutions since many institutions succeed as teams, as opposed to individuals. So if success came as being a core member of the team, how much of your last team are you bringing with you? If not, how can you ramp up quickly to be a top performer?
The DGQ series is a series dedicated to my process of question discovery and execution. When curiosity is the why, DGQ is the how. Itโs an inside scoop of what goes on in my nogginโ. My hope is that it offers some illumination to you, my readers, so you can tackle the world and build relationships with my best tools at your disposal. It also happens to stand for damn good questions, or dumb and garbled questions. Iโll let you decide which it falls under.
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 met an LP who told me an interesting framework, derived from something Warren Buffett once said. “Every pitch needs to have energy, intelligence, and integrity. And without the last, the first two can lead bad outcomes for the LP.”
Energy โ Why now for the world? Why now for your LPs? Why is now the time for you? Why do you have to do this and nothing else? Can your pitch get people really excited about the opportunity? About you? When they wake up the next morning, are they still thinking about your conversation, or have they moved on with their morning to focus on sending the kids to school or what their schedule looks like for the day?
Intelligence โ Do you know what you’re talking about? Have you done so much research and have so much lived experience here that you are the one of the world’s foremost experts here? Are you a thoughtful and intentional person around all aspects of your life?
Integrity โ Can I trust you? Why should I trust you? Do you have a track record of maintaining long friendships? What’s the longest friendship you’ve maintained? Do you have an strong moral compass? How is it exhibited in even the smallest actions you take? If your and my interests ever clash, what is your course of action? Where do you sit in the Maslow’s Hierarchy of Needs? What set of needs are you primarily motivated by?
Interestingly enough, just a few hours later, I was catching up with a good old friend who’s putting together a pitch for his new venture. And he was telling me one of the pieces of feedback that he got was that there wasn’t enough dopamine induced from his pitch. Which was an interesting piece of commentary. The person giving him that piece of feedback believed that all pitches should induce three types of hormones:
Dopamine โ known for joy, excitement, and motivation. To draw a parallel, “energy” under Warren Buffett’s framework.
Oxytocin โ known for building trust and empathy. Or “integrity.”
Serotonin โ known for calmness, well-being, but in the context here: optimism. I’m not sure if this draws a strict line of correlation to Warren Buffett’s framework, but nevertheless, something useful to think about. Why will the world tomorrow be better than the one today? What can I look forward to?
In my buddy’s pitch, he included a lot of facts and research, promoting oxytocin in the reader. But the pitch lacked excitement and an urgency to take action. In other words, dopamine.
Most decks charting new territory and betting in the non-obvious carry too much oxytocin, responsible for creating trust (i.e. data, information, synthesis of market trends, why the GP is legible, testimonials, track record, etc.). So much to prove factually why this should exist. A very left brain approach.
Most decks betting on a hot topic, industry or idea index heavily on dopamine. Why this is exciting? Why we have to do this now?
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 from Sapphire Partners joins David on El Pack to answer your questions on how to build a venture capital fund. We bring on four GPs at VC funds to ask four different questions.
Precursor Ventures’ Charles Hudson asks what is the one strongly held belief about emerging managers that she no longer believes is true.
NextView Ventures’ Stephanie Palmeri asks how much should an established firm evolve versus stick to their guns.
Humanrace Capital’s Suraj Mehta asks what the best way to build brand presence is.
Rackhouse Venture Capital’s Kevin Novak asks if you’ve deployed your capital faster than you expected, what’s the best path forward with the remaining capital you have left?
Beezer Clarkson leads Sapphire Partnersโ 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 bachelorโs 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 [01:22] Where does Beezer’s advice come from? [04:03] Charles and Precursor Ventures [04:47] What’s something Beezer used to believe about seed stage venture that she no longer believes in [08:04] Why did Charles choose to bet on pre-seed companies? [10:21] What did LPs push back on when Charles was starting Precursor? [12:18] Definition of early stage investing today [14:38] Steph and NextView Ventures [18:13] When do you stick your knitting or move on from the past as an established firm? [30:48] Is venture investing in AI fundamentally different than investing in other types of companies? [32:52] Does competition for a deal mean you’ve already lost it? [36:09] Suraj and Humanrace Capital [36:54] How should emerging managers build their brand? [38:38] The audience most emerging managers don’t focus on but should [40:39] How much does visible brand presence matter? [43:47] Useful or not: Media exposure in the data room [45:40] Backstreet boys [46:37] Kevin and Rackhouse Venture Capital [47:28] What Kevin is best known for [48:03] Updated fund modelling when you’re ahead on your proposed deployment period [58:00] The typical questions Beezer gets on LPACs [1:03:22] Is venture broken? [1:06:41] David’s favorite Beezer moment from Season 1
โWhatever the evolution of venture is if youโre just following someone else, the odds of you doing as well as them is just harder and that is probably a truism about life.โ โ Beezer Clarkson
โIf youโre going to get a 2X in venture over 20 years, frankly, as an LP, there are alternatives from a pure dollars in the ground perspective. But if youโre looking at trying to capture innovation, which AI is now one of the great innovations, where are you going to capture that if not playing in venture? So is venture broken is a question of who are you.โ โ Beezer Clarkson
โIf youโre competing for the deal, youโve already lost it.โ โ Beezer Clarkson
โI think the competition is more: Did I see it with enough time to build the conviction and build the relationship relative to the other people that might be coming in?โ โ Stephanie Palmeri
โRecycling is incredibly important, but incredibly hard to plan for, especially as early as youโre coming in, unless youโre seeing evidence of acqui-hires today and you know youโre going to have those dollars coming in. Obviously, really hard. So I would not bank your farm on that.โ โ Beezer Clarkson
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.
I’m fortunate enough I get to work with some of the most interesting and stellar GPs out there. It’s never been a business I’m actively trying to grow. Outside of me backing managers myself, every so often I’ll get a friend who refers their friend to me and asks me to help them out with thinking through fundraising. It’s always been opportunistic. And even when I work with folks, it’s not primarily about intros. In fact, in all my working relationships, I never offer intros as part of the agreement. But more so working with them to understand how the GPs can better tell their story and run a more institutional fundraising process. Occasionally, I would get asked to advise when a firm should bring in an investor relations professional. But that last part, a piece for the future. So, all that to say:
I’m not an expert in everything, but I do try to actively learn best practices in the market. If I don’t know something, I will find it out for you and/or put you in touch with the best practitioner on it.
I’m now overcapacity. I don’t have the bandwidth to work with every manager that comes my way. I have other things I want to do and am working on.
My primary job is still to support the GPs I back myself.
So, I’m just going to share below exactly what I do when I work with a GP, so that you don’t have to come find me for help. Because we do effectively the below. This approach has also evolved over time. And this is my current approach, circa September 2025. My job is also to help GPs better understand LPs and where they come from. So, while the saying goes as “If you know one LP, you only know one LP,” my job (and personal fascination) is to define and delineate the nuance. The only things I cannot help with if you’re only reading the below are:
Be your accountability partner. Part of my role with GPs is also making sure GPs stick to their promises. Discipline. It’s easy to plan. Hard to execute.
Debrief on LP conversations and pipeline management.
And figure out your LP-GP fit, or your ideal LP archetype as a function of your fund size, your strategy, your experience level and your story.
This might also be one of the few pieces I write that some pre-reading may help contextualize what I will write below.
Most of the time I work with folks who are mid-raise. Not always, but most of the times. So I’m stepping in where there’s already some infrastructure, but not a lot, usually bootstrapped and duct taped together. Not a bad thing. As long as it works, I don’t touch much during the raise itself. Then we work on things and cleaning up systems post-raise or in-between raises. The best time to strategize and plan for a raise is at least six months in advance. But that’s neither here nor there. So what do I do?
I ask the GP(s) to pitch me the fund. We simulate email exchanges, first meeting, second meeting, and due diligence as if I were the target LP persona. I offer no commentary. I am purely the observer. You can do this with most people who do not know your strategy well. Friendly LPs. Other GPs. But I find it most helpful if you can to do this with people who have a great attention to detail, specifically in the literary sense: lawyers, authors, therapists, podcasters, professors, editors, scriptwriters, showrunners, and so on.
Then, I share all the risks of investing in said manager that I can think of. What are the elephants in the room? What parts of the GP, the GP’s story, the strategy, the track record, and the complexity of the story would make it really hard to pass the investment committee (IC)? What might be moments of hesitation? No matter how big or small. There’s a saying that a friend once told me, “When your spouse complains about you not washing the dishes, it’s not about the dishes.”
Label and categorize each risk as a flaw, limitation, or restriction.
Flaws: Traits you need to overcome within 1-2 fundraising cycles (~2-5 years). The faster, the more measurable, the better. You can’t just say you’re going to overcome these flaws. You need to have KPIs against each of these.
Limitations: Risks that the world or that particular LP believes is true. Like being a Fund I. Or being a solo GP.
Restrictions: What you prevent yourself from doing. Think Batman’s no killing code. In GP land, it’s only investing in a particular demographic or vertical. It’s only investing in the Bay Area. And so on.
Stack rank all of them. Depending on the LP you’re pitching, figure out the minimum viable risk list that LP may be willing to accept. It’s not always obvious.
You should always address limitations as early on in the conversation. My preference is in the email exchange or at the very minimum, in the first two slides of the deck. In other words, “here are the primary reasons you shouldn’t invest in me if you don’t like…” Think of it like the elephant in the room. Make it explicit. Don’t wait for LPs to have private investment committee (IC) conversations without you in the room. Or worse, they implicitly, whether consciously or subconsciously, think of the limitations in their head. Having been in multiple LP conversations and a fly on the wall in IC meetings, sometimes an LP can’t fully describe why they’re passing, just that they are.
Next, figure out for each LP in your existing and future pipeline when are flaws also limitations. When are restrictions also limitations?
When a restriction is a limitation, there isn’t an LP-GP fit. So, you need to go find LPs, who don’t see your restrictions as limitations. Another reason you should address elephants in the room as early as possible.
When a flaw is a limitation, you need to fire yourself before the LP fires you. You need to say “No” before an LP does. Be respectful of their time, but maintain that relationship for the future. Reaching back out every 1-2 quarters to catch up is something I highly recommend. Any longer, LPs will forget about you. And no, that does not mean, “Can I add you to my monthly/quarterly LP update?” No LP will say no, but almost always will your updates die in their inbox. If you don’t care about your relationship with them, why should they?
Are you ready for an institutional fundraise? How much of the institutional data room (use this as a reference if you don’t know what that means) do you have ready? And for each flaw and restriction, do you have something in the data room (even if it’s in the FAQ/DDQ) that helps hedge against it?
All that said, you also need to figure out what your superpower is. And you usually only need just one, but you have to be god-tier in that one superpower. There cannot be a close second. Oftentimes, it’s less obvious than you think it is. With all the hedging of risks above, you also need to give an LP to be your champion. You must spike in something that impresses the LP and despite all your flaws and restrictions, that you’ll still go far. And the more closely your superpower is aligned with at least 2-3 of the five (sourcing, picking, winning, supporting, exiting), the better. And you must make sure that it is made explicit to the LP as early in your conversations as possible.
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.
Having been to a number of talks and panels, my biggest frustration with these occasions is when a moderator asks a VC: “So what do you invest in?”
And the VC would respond, “Good people, good markets.” Or “Ambitious founders tackling ambitious problems.” Or some cousin of it. Well, of course. I’m not saying they’re wrong, but no venture capitalist ever says, “I want to invest in bad people building in bad markets.” It’s the kind of advice and “insight” that’s equivalent to a large company saying their company culture is a “family.” Not wrong, but tells me nothing about what you actually want. The same is true for most advice for investors. And well, advice in the investing world is given quite liberally, without liability and responsibility most of the time.
So I made it a mission to collect pieces of advice that were actually tactical or differentiated. Advice that would make you turn your heads and actually pay attention. And under the right circumstances, actually useful. It’s why I wrote this blogpost’s predecessors:
This is the third one in this 99 series for investors. And, if by chance, you’re a founder reading this, to understand the mentality of a differentiated investor, you might also like the 99 series for founders. But I digress.
In no particular order other than the chronological order I found them, below is the third set of 99 pieces of advice for investors:
1/ “Any company that is pure execution risk without any market risk is not a suitable venture investment.” โ Chris Paik
2/ “[In the private markets,] I don’t think we’ve seen a 70% write down yet or 70% of these [private companies] worth less than the cash [they’ve spent to date].” Take public market comparables. To see how much public companies are worth as a function of the money they’ve spent to date, look at the “Cumulative Retained Earnings” (which tells you how much money they’ve burnt over their lifetime) compared to the “Enterprise Value” (or market cap minus the cash they have today). If their enterprise value is less than their cumulative retained earnings, that means they’re worth less than the money they’ve spent to date. โ David Friedberg (timestamped 4/21/2023, when he said there are 70% of public companies that are worth less than the cash they’ve spent to date, but we haven’t seen a 70% haircut to private market valuations)
3/ The first best use of any consumer product is crime. โ Pre-seed VC
4/ When looking for outliers, “Invest in companies that canโt be described in a single sentence.” โ Chris Paik
5/ “Venture investing process as a two-stage process โ the first where you ensure you avoid false negatives โ that is, you ensure that there are no errors of omission, where you unwittingly pass on meeting a potential winner. The second stage is where you avoid a false positive or errors of commission, that is, picking the wrong company.” โ Sajith Pai quoting Karthik Reddy
“How are you using AI? Is it a third-party? Let’s see those terms, contracts, etc.
How are you using customer data? Prior agreements? Prior policies in place? Subsequent policies in place? You could lose the data, the models, and the algorithms. If found in violation by the FTC. States privacy laws like Texas, California, and Virginia also should be looked at.”
7/ “When it’s cooler to be in a startup than in a band, we’re at the top of the market.” โ A fund of funds General Partner
8/ “Buy when there is blood in the streets, and sell when there are trumpets in the air.” โ A Warren Buffett attribution
9/ Does this founder have 20 years of experience of 20 one-year experiences? Depth vs breadth. Which does the industry/problem they’re building for require?
10/ While there is no one “right” way to run a partnership meeting, beware of conviction-led deals (as opposed to consensus-driven), since partners are incentivized to go into sales mode to convince the rest of the partnership and may make it harder for them to see the flaws in the deal.
11/ In early stage venture, debates on price is a lagging indicator of conviction, or more so, lack thereof.
Price also matters a lot more for big funds than small funds.
Price also matters more for Series B+ funds.
Will caveat that thereโs an ocean of difference between $10M and $25M valuation. But itโs semantics between $10M and $12M valuation. How big your slice of the pie is doesnโt matter if the pie doesnโt grow.
Not saying that itโs correlated, but it does remind me of a Kissinger quote: โThe reason that university politics is so vicious is because stakes are so small.โ
12/ โJudge me on how good my good ideas are, not how bad my bad ideas are.โ โ Ben Affleck when writing Good Will Hunting. A lot of being a VC is like that.
13/ We like to cite the power law a lot. Where 20% of our investments account for 80% of our returns. But if we were to apply that line of thinking two more times. Aka 4% (20 x 20%) of our investments account for 64% of our returns. Then 0.8% account for 51.2% of our returns. If you really think about it, if you invest in 100 companies, we see in a lot of great portfolios where a single investment return more than 50% of the historical returns.
14/ “Early-stage investing is NOT about mitigating the possibility of failure Itโs about discounting the probability of an outsized outcome – what is the size and likelihood of a HUGE win Investing in โsafeโ companies due to fear of failure is the surest way to a mediocre returns.” โ Rick Zullo
15/ โ[David Marquardt] said, โYou know what? Youโre a well-trained institutional investor. And your decision was precisely right and exactly wrong.โ And sometimes that happens. In this business, sometimes good decisions have bad outcomes and bad decisions have good outcomes.โ โ Chris Douvos
16/ When calling a reference and asking about someone’s weakness, “If you were to hire someone under that person, what would be the top traits you’d look for?”
17/ Give founders a blank P&L statement. Tell them that is not their P&L statement; it is their customer’s. And ask them where do they/their product sit on their customer’s P&L statement. Those who are aware of who they are and who they need to sell to do better than those who don’t.
18/ No one has a crystal ball. Well, the pessimists do. They’re right 90% of the time.
19/ “I want the guy who understands his limitations instead of the guy who doesn’t. On the other hand, I’ve learned something terribly important in life. I learned that from Howard Owens. And you know what he used to say? Never underestimate the man who overestimates himself.” โ Charlie Munger
20/ “Instead of saying, ‘This risk exists,’ we reframe the risk and ask, ‘What do I have to believe for this to work?’ Doing this transforms risk from a source of fear and unknown into a set of clear assumptions to be systematically tested and de-risked.” For example, โWe have to believe we can scale the hardware to XYZ performance metric by ABC date. What are the key engineering constraints bottlenecking that?โ โ Mike Annunziata
21/ Questions to ask investee (on-list and off-list) references by Graham Duncan:
How would you describe Jane to someone who doesnโt know her?
Whatโs your sample size of people in the role in which you knew Jane?
Who was the best person at this role that youโve ever seen?
If we call that person a โ100โ, the gold standard, whereโs Jane right now on a 1-100?
Does she remind you of anyone else you know?
If Janeโs number comes up on your caller ID, what does your brain anticipate sheโs going to be calling about? Whatโs the feeling?
Three attributes I like to keep in mind are someoneโs hunger, their humility, and how smart they are about people. If you were to force rank those for Jane from what she exhibits the most to least, how would you rank them?
What motivates Jane at this stage of her life?
If you were coaching Jane, how would you help her take her game up?
If you were going to hire someone to complement Jane doing the same activity (NOT a different role), what would they be good at to offset Janeโs strengths and weaknesses?
How strong is your endorsement of Jane on a 1-10? (If they answer 7, say actually sorry 7s are not allowed, 6 or 8? If the answer is an 8, โWhat is in that two points?โ)
22/ โNeutral references are worse than negative references.โ โ Kelli Fontaine
23/ “If someone brags about their success or happiness, assume itโs half what they claim. If someone downplays their success or happiness, assume itโs double what they claim.” โ George Mack
24/ “Historians now recognize the Roman Empire fell in 476 – but it wasn’t acknowledged by Roman society until many generations later. If you wait for the media to inform you, you’ll either be wrong or too late.” โ George Mack
25/ “Joe Rogan and Warren Buffett are both entrepreneurs. But if you switched them, both businesses would fail. Rule of thumb: If a word is so broad that you can’t switch 2 things it describes, it needs unbundling.” โ George Mack
26/ Are the founders at the same stage on the Maslow’s Hierarchy of Needs? If not, how have they come to terms with different motivations outside of the scope of the venture itself?
27/ $100K contracts take about 70 days to close. So a founder becomes interesting if they figure out how to close faster. โ Gong State of Revenue Growth 2025 report
28/ Beware of “annual curiosity revenue.” “AI companies with quick early ARR growth can lead to false positives as many are seeing massive churn rates.” โ Samir Kaji
29/ Data suggests that “never following on” beats “always following on” 63% of the time. “Outperformance for the typical portfolio is 12% better when you don’t follow on (3.52X vs 3.14X).” โ Abe Othman
30/ “A successful reserve strategy depends both the chance of picking winners and the step up value at the next round. The stock price multiple * the probably of receiving funding = 1.” If the product of your variables is more than one, you should focus primarily on increasing your check size and ownership at entry. And as such, fewer to no reserves. If you’re below one, you’re better off with more reserves. โ Clint Korver
31/ Be aware of “seed-strapping” among AI startups. Your SAFEs may never convert. “Watch for any revisions to *YC’s* SAFE or *YC’s* side letter (note: YC has a secret SAFE and side letter documentation not available on on their website, so careful with conclusions).” โ Chris Harvey
32/ In underwriting AI companies in 2025, ARR and run rate are no longer signal. Instead, look at sales efficiency (how long it takes you to implement your product; if you charge more or double the price, will customers still buy your product?), the cost to acquire that revenue, and net dollar retention (gross churn, land and expand). โ Nina Achadjian
33/ “The ‘raise very little’ strategy only works if you’re in a market that most people believe (incorrectly) is tiny or unimportant. If other people are paying attention, you have to beat the next guy.” โ Parker Conrad
34/ Instead of asking founders/references what are their weaknesses, ask for 2-3 positive words that describe them and 2-3 positive words that DO NOT describe them.
35/ โYou want to be pre-narrative. You want to position your capital in an area where the supply of capital increases over time and where those assets will be traded at a premium.โ โ Albert Azout
36/ “For Hard Tech companies, the only metric that matters before Series B is the ‘Speed of Hiring Impressive People’, aka the ‘SHIP’ rate.” โ Mike Annunziata
37/ Beware of co-CEOs and founders who used to be VCs where their past firm isn’t investing. โ Sriram Krishnan
38/ “If you donโt pay great people internally, then youโre a price taker.โ โ Ashby Monk
39/ โBuying junk at a discount is still junk.โ โ Abe Finkelstein
40/ โWhat do you do when you donโt know anything, you havenโt met anybody, you have no context, the human brain starts inventing rationale.โ โ Narayan Chowdhury
41/ โThe bigger you get, the more established you get, the more underwriting emphasis goes into how this team operates as a structure rather than is there a star?โ โ Matt Curtolo
42/ โPrice reflects the inefficiencies of the market.โ โ Albert Azout
43/ โYou want to be pre-narrative. You want to position your capital in an area where the supply of capital increases over time and where those assets will be traded at a premium.โ โ Albert Azout
44/ โWe donโt want a slow no. A slow no is bad for everybody.โ โ Sean Warrington
45/ “Todayโs world is unpredictable, and this is as stable as it will ever be again.” โ Seth Godin
46/ “Alfred is the worst e-commerce investor at Sequoia as he knows too much & I am the best biotech investor at Sequoia as I know nothing about biology.” โ Roelof Botha, quoted by Finn Murphy
47/ “Since the job is not about simple pattern-matching but about finding true outliers, seniority and experience don’t guarantee success.” โ Ian Park
48/ As your fund size grows, do be wary of investing in competing portfolio companies. While it’s always been a tradition in venture to not to, times may be changing. Be sure to be transparent and know how to separate church and state. “This is an issue where the business model for funds is at odds with what most founders want.” Ways you can do so. By Charles Hudson.
“Use a seed fund or scout strategy to meet as many promising, early-stage companies as you can.
“Focus on investing in Series A and Series B (instead of seed) rounds and pay up to get into the winners when itโs clear which companies are working.
“Buy secondary positions in the companies that matter but that you missed.
“Invest in competitors but have different investors take board seats and create firewalls to limit information spillover.”
49/ โI deeply subscribe to, โThereโs always another train leaving the station.โโ โ Wendy Li
50/ โAlphaโs three things: information asymmetry, access, and, actually, taxes.โ โ Vijen Patel
51/ The worst mistake you can make as an early-stage investor is to believe you’re the smartest person in the room.
Fundraising from LPs
52/ “If you’re at 75-80% committed and then you say there’s a single close, that will drive urgency. If you’re at 10 to 30 to 40% committed, and you say there’s a single close, you have no catalyzing power. There’s just so much dirt to hoe. When I went out, when people would ask, ‘When are you closing?’ I would say, ‘We will close on this particular date and ideally it will be a single close. And here is where I am. I’ve closed X% of the pipeline and the total value of the pipe of interested investors was this amount of money.’ The goal was to show with a relatively small conversion rate, I could get to a single close.” โ Tomasz Tunguz
53/ What to prepare for the due diligence questionnaire (DDQ) with institutional LPs. โ Chris Harvey
54/ What Minal Hasan includes in the fund diligence room (specifically for Fund IIs)
Primary materials
Due Diligence Questionnaire
Pitch Deck
Appendix to Pitch Deck
Detailed Investment Thesis & Strategy
Term Sheet
LPA
Subscription Agreement
Legal
Incorporation Documents for LP, GP, and MC
Entity Org Chart
Team
Team Bios
Prior Partner Investment Performance
Hiring Plan
List of Advisors
List of References
List of Co-investors
List of Service Providers
Portfolio
One-pager on each company
Deal Pipeline
Governance
Board/Board Observer Seats
Policies
Sample Investment Memos
Sample Quarterly Report
Sample Capital Account Statement
Sample Capital Call Notice
Sample Distribution Notice
Financial Docs
Budget
IRR Spreadsheet
IRR Benchmarking
IRR Letter certified by accountant
Marketing
Press mentions
Authored thought leadership
55/ When fundraising, don’t share which other LPs you’re talking to. Even if LPs ask who you’re talking to. Unless money is in the bank, nothing counts. Tell the other LPs that you have non-disclosures with all your other LPs, but that you have a lot of interest. If you share the marquee names, the other LPs’ will base their decision on the closing of those LPs. If they commit, great. If not, it will materially impact how the new LPs view your fund.
56/ When working with overseas LPs, you should ask for their citizenship, where their capital is domiciled at, and who is the ultimate beneficial owner if not the person you are pitching? This would help you navigate CFIUS rules and knowing who you’re actually bringing on board.
57/ You should ask prospective overseas LPs what their citizenship is and who the ultimate beneficial owner (UBO) is, if not the person you are talking to, as you are doing diligence on your prospective LPs.
58/ โGoing to see accounts before budgets are set helps get your brand and your story in the mind of the budget setter. In the case of the US, budgets are set in January and July, depending on the fiscal year. In the case of Japan, budgets are set at the end of March, early April. To get into the budget for Tokyo, you gotta be working with the client in the fall to get them ready to do it for the next fiscal year. [For] Korea, the budgets are set in January, but they donโt really get executed on till the first of April. So thereโs time in there where you can work on those things. The same thing is true with Europe. A lot of budgets are mid-year. So you develop some understanding of patterns. You need to give yourself, for better or worse if youโre raising money, two to three years of relationship-building with clients.โ โ David York
59/ โGetting an LP is like pulling a weight with a string of thread. If you pull too hard, the string snaps. If you donโt pull hard enough, you donโt pull the weight at all. Itโs this very careful balancing act of moving people along in a process.โ โ Dan Stolar
60/ “Things that break the rules have a bigger threshold to overcome to grab the reader’s attention, but once they do, they tend to have a stronger, and more dedicated following. Blandness tends to get fewer dedicated followers.” โ Brandon Sanderson on creative writing, but applies just as well to pitches
61/ In all great stories, the protagonist (in the case of a pitch, you) is proactive, capable, and relatable. Your pitch needs to show all three, but at the minimum two out of the three. โ Brandon Sanderson
62/ โData rooms are where fund-raising processes go to die.โ Prioritize in-person and live conversations. When your investor asks you for documents, ask for 15 minutes on their calendar so you can “best prepare” the information they want. If they aren’t willing to give you that 15 minutes, you’ve lost the deal already. โ Mark Suster
63/ “Funds can start with a private offering, then move to 506(c) after the prior offering is completed without a waiting periodโnew Rule 152(b) allows for a quick switch, you just can’t do them at the same time or start with Rule 506(c) then move to 506(b).” โ Chris Harvey
64/ “Set your own agenda or someone else will.” โ Melinda Gates
65/ To address key person risk if the GP, or one of the GPs, has a debilitating health condition within the fund term, include the below in the LPA, by Shahrukh Khan: Each Key Person shall, as a condition to their designation, represent and covenant to the Partners [inclusive of the GP and LPs] that, to the best of their knowledge, they are not currently experiencing any medical condition reasonably expected to materially impair their ability to perform their duties over the Term [usually 10-12 years] of the Fund. If, during the Investment Period [when the fund is actively making investments], a Key Person is diagnosed with or undergoes treatment for a condition that materially impacts their ability to fulfill their responsibilities, the General Partner shall promptly disclose to the Limited Partners that a Health-Related Key Person Event [we could define this broadly] has occurred. The specifics of the health condition need not be disclosed [maybe except to the LPAC if there is one?]. Upon such notification, the Investment Period will be suspended and cannot continue without the express approval of the Limited Partners. [I feel like this could mean that no new investments can be made until LPs review and vote on whether to proceed with the fundโs activities in light of the health-related situation.]
66/ When asking LPs what they invest in, sometimes what they don’t invest in is more helpful than what they say they invest in. Most LPs are trained to be generalists โ by sector, by stage, by asset class โ so asking what they do invest in often nets an answer like “We invest in everything” or “We only invest in the best,” which are often less helpful tells when you’re trying to figure out if you’re a good fit for them or not.
67/ If you have a 3(c)(1) fund, “if an investor owns >10% of your fund, the SEC’s look-through rule requires you to count ALL underlying beneficial owners toward your 100-investor limit.” The workaround is you create a side letter for large LPs that includes this statement: “The Investor’s Capital Commitment shall equal the lesser of [check size] or 10% of total fund commitments.” โ Chris Harvey
68/ At your AGM, talk about categories of VCs you admire. For instance, “inception funds” or “superscale funds.” And the logos you admire in each category. Then show the funds that actually follow after your capital. This builds rapport with your LPs and that you’re not just shooting from the hip, where it “just so happens” that some random awesome fund follows your capital. Inspired by Gil Dibner.
69/ “If an LP isnโt following up with an ask for the data room, refs and lays out a path to a potential next meeting, then itโs a pass. Hint โ donโt offer the dataroom. I always say yes.” โ Endowment Eddie
70/ “[LPs] are underwriting your ability to create signal under uncertainty. If your fund slide canโt do that, your deck is already leaking trust.” โ Thorsten Claus
71/ โIโm not here to tell you about Jesus. You already know about Jesus. He either lives in your heart or he doesnโt.โ โ Don Draper in Mad Men
72/ On GPs answering questions on operational excellenceโฆ โThe best answer I could ask from a GP is for them to be super honest and say, โThese are the people Iโve leaned on to help me understand what best practices look like.โโ โ Nicky Sugarman
73/ When reporting numbers, it’s helpful to have more than one TVPI number. One number should represent last round valuation prices. Another should be the number you believe is authentic to you, which likely includes some companies that have been proactively written down and revenue multiples that reflect where the company is currently at. Nevertheless, always explain your rationale as to why.
74/ When you’re fundraising from institutions, expect “27 months from first meeting to wire, 4.7% of prospects commit,” and “annual costs [of] $2.1M+ in infrastructure.” โ Pavel Prata
75/ โSpeed to fundraise does not always equate to a strong investor.โ โ Lisa Cawley
Fund strategy / portfolio construction / exiting
76/ If you have a follow-on strategy or a reserve strategy, track your “follow-on MOIC.” Return hurdles are 10x MOIC for initial capital. And 4-5x MOIC for follow-on capital. The more you invest in follow on, the less TVPI you’ll have. “If you’re going from pre-seed to seed, you’re tracking to a 5x MOIC. If you’re going from a seed to Series A, that goes down to 3x.” โ Anubhav Srivastava (timestamped Apr 7, 2023)
77/ The reasons Fund Iโs and IIโs outperform are likely:
Chips on shoulders mean they hustle more to find the best deals. They have to search where big funds arenโt or come in sooner than big funds do.
Small fund size is easier to return than a larger fund size.
Rarely do they have ownership targets (nor do they need significant ownership to return the fund). Meaning theyโre collaborative and friendly on the cap table, aka with most other investors, especially big lead investors.
Price matters less. Big funds really have to play the price game a little bit more since (1) likely to be investing in multiple stages with reserves, and price matters more past the Series A than before, and (2) theyโre constrained by check size, ownership targets, and therefore price in order to still have a fund returner.
78/ “Strategy is choosing what not to do.” โ Peter Rahal
79/ “We expect GPs to have 1% ownership for every $10M in fund size.” โ Large multi-billion family office
80/ โExiting a position in a company to return DPI to LPs is not a reflection of your stance on the company, but your stance on the market.โ โ Asher Siddiqui
Fund structure
81/ If you have more than $10M and are not a solo GP, consider separating your GP and management company entities. While there are about $5000-10,000 in costs per year, separating fund structures allows for more optimal tax planning, better liability protection, continuity across GP entities with future funds, and flexibility to adopt W2 employment for future employees which is hard to do under a partnership structure. โ Chris Harvey
82/ If you’re a GP at a large fund making >$1-2M in annual fees, consider two metrics: (a) AUM times management fee divided by number of GPs, and (b) NPV of potential future carry on that AUM divided by number of GPs. You never want (a) to be greater than (b).
Portfolio Support
83/ “Just because I have a front row seat at a championships [basketball game] doesn’t mean I can coach an NBA team.” โ Brian Chesky
84/ โThe thing about working with self-motivated people and driven people, on their worst day, they are pushing themselves very hard and your job is to reduce the stress in that conversation.โ โ Nakul Mandan
85/ “The median value-add is about zero. The mean is less than zero. Most things work because they just work (right set of users wanted something at the right time) and the executive team builds the right culture to hire a great team to operate in that market, not because of what a VC does. Value-added service is ‘product as marketing’ for 90% of investors who pitch it.” โ Kanyi Maqubela
86/ Get access to as many different offices of your portfolio company’s potential customers as possible. Even better if you know them so well, they give you their office keys. โ John Gleeson
87/ “I find most meetings are best scheduled for 15-20 minutes, or 2 hours. The default of 1 hour is usually wrong, and leads to a lot of wasted time.” โ Sam Altman
88/ โProcess drives repeatability.โ โ Andy Weissman
Governance/Managing LPs
89/ If you don’t know what to ask your LPAC, ask about extensions on fund length (i.e. past 10+2 years), exceeding limits on company concentration and recycling, investing in startups across funds, and early DPI. โ Hunter Walk
90/ At the annual summit… “When you speak on market/themes, I donโt want to hear from the managing partners. Bring out your young guns and the members of the team who are your ground game/first line.” โ Endowment Eddie
“First extension: 63% of funds surveyed allow GPs to authorize the first extension at its sole discretion, typically for one year.
Second extension: 42% of funds surveyed require approval from the LPAC to authorize the second extension.
Third extension: 41% of funds surveyed require consent from the fund investors to authorize the third extension. Note that further extensions can always be approved by an amendment to the fund documents, but this would require consent from at least 50% and usually 75% of investors by commitment or interest.”
92/ โToo many calls I get on, itโs a re-hash of what the strategy is. Assume if Iโm taking the call, I actually spent five minutes reminding myself of who you are and what you do.โ โ Chris Douvos
93/ โOne thing I hate is when I meet with someone, they tell me about A, B, and C. And then the next time I meet with them, itโs companies D, E, and F. โWhat happened to A, B, and C?โ So Iโve told people, โHey, weโre having serious conversations. Help me understand the arc.โ As LPs, we get snapshots in time, but what I want is enough snapshots of the whole scene to create a movie of you, like one of those picture books that you can flip. I want to see the evolution. I want to know about the hypotheses that didnโt work.โ โ Chris Douvos
94/ โEvery letter seems to say portfolios have โlimited exposure to tariffs.โ The reality is weโre seeing potentially the breakdown of the entire post-war Bretton Woods system. And thatโs going to have radical impacts on everything across the entire economy. So to say โwe have limited exposure to tariffsโ is one thing, but what they really are saying is โwe donโt understand the exposure we have to the broader economy as a whole.โโ โ Chris Douvos
95/ “Bad performance is explainable, but operational failures erode trust and your LPs aren’t going to re-up.” โ Liz Ferry
Building a team
96/ “You canโt exceed one associate per partner and expect those associates to have real influence.” โ Mike Dauber
97/ โScaling is not synonymous with increasing fund size. To me, scaling means youโre increasing in sophistication. Youโre increasing in focus. And thatโs really a sign of maturity and fund size is a byproduct of that.โ โ Lisa Cawley
Compensation
98/ In a 2024 survey, in regards to junior team members’ compensation, “AUM matters less than you think.” There’s only a 17% pay bump on base pay for associates between $1.5B funds and $156M funds. In addition, levers that can boost a GP’s take-home pay include GP staking and cashless contributions. โ Chris Harvey, with reference to Deedy Das and Venture5 Media
Miscellaneous
99/ โNever sit alone at lunch.โ โ Alan Patricof
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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.
